Malcy’s Blog – Oil price, IOG, Union Jack Oil, Egdon, Capricorn, Trinity Exploration, President, Block Energy & finally

WTI $83.31-$1.83, Brent $86.27 -$1.62, Diff -$2.96 +21c, NG $4.03 +3c, UKNG 217.78p +17.78p

By Malcolm Graham-Wood

Oil price

As I noted in the late blog yesterday oil fell as markets panicked ahead of recessionary worries at tomorrows Fed meeting. Today markets are still panicking but oil isn’t.

IOG

IOG the Net Zero UK gas and infrastructure operator focused on high return projects, provides a further update on Phase 1 operations.

Saturn Banks Reception Facilities (SBRF) at Bacton Gas Terminal

SBRF construction and pre-commissioning works, which are controlled by Bacton Gas Terminal operator Perenco UK Limited (PUK) on behalf of IOG, were 93% complete by Sunday 23 January. IOG senior management is in continuous dialogue with their PUK counterparts to expedite onshore completion as fast as possible. Work continued throughout the year end 2021 period and the on-site team has been expanded, albeit total personnel numbers are limited by the terminal operator’s safety limits and have also been affected by Covid-19 related absences.

However, progress is being made and full readiness for commencement of back-gassing of the offshore pipeline system is targeted for mid-February. First Gas from both Blythe and Elgood is expected approximately a week thereafter. An important recent milestone was the handover of Blythe platform communications and Elgood subsea controls to the Bacton control room following successful testing of the integrated control and safety systems. The remaining work to complete primarily consists of the final electrical and instrumentation, construction and pre-commissioning, and system leak testing, all of which are being executed on both day and night shifts.

Southwark

As previously announced, earlier this month the Noble Hans Deul rig was obliged to suspend drilling operations at Southwark as seabed conditions were causing excessive movement relative to the platform. Since then, the Company and its drilling contractors, assisted by technical experts experienced in similar situations, have been working constructively together to urgently investigate a range of potential solutions. Meanwhile, on 15 January the rig was moved to a safe location in the Elgood 500m zone where routine inspections are underway. Initial indications are that the rig remains fully serviceable.

Data from a new Southwark seabed survey is now being analysed to inform relocation and remediation options. The optimal plan would potentially enable the rig to safely resume Southwark drilling in the next 4-6 weeks, with scour protection applied after arrival. However, this remains subject to further investigation and an alternative plan may be required. Next steps and timing are likely to be clearer once survey data analysis is completed this week.

Further updates will be made as appropriate on SBRF completion at Bacton, Blythe/Elgood start-up and resumption of Southwark drilling.

Capital expenditure

The Company previously indicated that the gross outturn total Phase 1 capital expenditure was anticipated to exceed the original £305.5 million Field Development Plan (FDP) budget by up to 10%. Unplanned interruptions to the drilling campaign, additional requirements for offshore pre-operating activities and the need for an expanded scope of subsea and pipeline installations over recent months have now increased the anticipated gross outturn total Phase 1 capital expenditure to up to 20-25% over the FDP budget once the Southwark wells have been completed. However, based upon our revised project schedule no additional financing requirement is currently expected to be required to bring all three Phase 1 fields onstream. As a prudent additional measure, the Company also recently signed a €5 million working capital facility with a recognised international bank. Meanwhile, despite recent volatility, the UK NBP gas forward curve currently remains significantly above its long-term historical annual average. Further guidance will be issued in due course.

Andrew Hockey, CEO of IOG, commented: 

“I am on site again today at Bacton onshore terminal reviewing the latest progress, which is now 93% complete. Although it is very frustrating that it has been slower than planned, we are making every effort with the terminal operator Perenco to facilitate the fastest possible resolution. An expanded team is working days and nights aiming to be ready for back-gassing in mid-February, with First Gas expected approximately a week later.

Meanwhile, working with our drilling contractors and expert consultants, we have also been proactively engineering several options to resume safe drilling operations at Southwark. The timeline is expected to become clearer once we have analysed newly acquired seabed survey data this week.

We will keep shareholders regularly updated through these important final steps in bringing Phase 1 onstream.”

IOG are having some final teething troubles with the Phase 1 operations but to be fair all operations within the Bacton Gas Terminal where their reception facilities sit are operated by Perenco. The very slight delay is obviously frustrating but they have as many operatives on site as is permitted by safety limits and current Covid issues.

There is a huge amount of kit that needs to be tested from control loops to all the instrumentation and associated paperwork doesn’t help the speed of the process but needs to be done all the same. Having said that it is now 93% complete and the back-gassing of the offshore pipeline system is targeted for mid-February and from then it should be just a week to first gas from Blythe and Elgood. If the forward curve of the gas price at the moment is anything to go by then returns will be immediate.

So, we are clearly nearly at the final point at which delivery of gas from Phase 1 is imminent. The last steps of this ‘long journey’ may feel like the longest but is often what one might expect on such a project, when you look back at where it has come from the team deserves credit for its delivery which is not far away. At that stage it will be a profitable manifestation of being able to deliver gas into the grid from fields in UK waters, something that politicians should be able to realise is of massive economic and also symbolic gain for the country.

Union Jack Oil/Egdon Resources

Egdon as operator, has advised of its intention to submit an appeal against the refusal of planning permission by Lincolnshire County Council (LCC) on 1 November 2021, for a side-track drilling operation, associated testing and long-term oil production at the Biscathorpe site, held under licence PEDL253. Egdon holds a 35.8% interest in the licence, Union Jack Oil holds a 45%.

The decision has been made after reviewing LCC’s Decision Notice, which was received on 6 December 2021, taking advice from our planning and legal advisors and agreement with our joint venture partners.

The appeal documentation is currently in preparation and is expected to be submitted during Q1 2022.

Nothing to add, save that what does it take to link the shortage and high cost of imported gas and oil to looking at safely operated, in the national interest supplies?

Capricorn Energy

Ahead of announcing its preliminary results for the year to 31 December 2021 on 8 March 2022, Capricorn today provides an update on its operations and trading performance together with guidance for 2022. This information is unaudited and subject to further review.

Production Highlights

Egypt

Ø 2021 production following completion of the acquisition in September, averaged 36,300 boepd net to Capricorn’s working interest (WI)

Ø Production from the Egyptian assets increased ~8% during the period from completion of the acquisition to 31 December 2021

Ø 2022 Capricorn WI production is anticipated to average 37,000-43,000 boepd with production growing throughout the year and 2022 exit rates forecast to exceed the top end of guidance range

o  Oil and condensate are expected to comprise 35-40% of the production mix in 2022, with an increased focus on liquids rich opportunities

o  Production costs are forecast to be US$4.5 – US$5.5 per boe

UK

Ø Earn-out consideration on the disposal of the UK Catcher and Kraken interests in relation to 2021 production and oil prices will be ~US$76m, payable in Q2 2022. Uncapped further earn-out consideration will be payable in respect of calendar years 2022 to 2025, based on meeting minimum production volumes and average oil prices.

Tax refund from Government of India

The Company has concluded all necessary steps under the rules of the India Taxation (Amendment) Act 2021 required for payment by the Government of India of a tax refund of approximately INR 79bn (US$1.06bn). Payment is expected to be made in early 2022.

Corporate and Finance Highlights

Ø Group net cash at year end was US$133m, comprising US$314m cash and US$181m debt drawn to fund the Egypt acquisition

Ø Special dividend of US$257m paid following completion of Senegal sale

Ø Net cash outflow in year of US$133m on acquisition of Egypt with a further US$21m to be settled in Q1 2022

Ø Oil and gas revenue in Egypt from acquisition completion on 23 September to 31 December was US$56m, from net entitlement production of 1.5 mmboe of which ~38% was liquids. Oil sales averaged US$77.5/boe and gas sales averaged US$2.9/mcf. Production costs over the period were ~US$22m, or ~US$6/boe (on a WI basis)

Ø Group capital expenditure on continuing operations during the year was ~US$75m, below guidance, including US$20m post acquisition expenditure in Egypt

Ø Net cash inflow from UK producing assets of US$296m, comprising US$213m net cashflow generated during the year, US$53m received on completion of sale and US$30m realised on sale of bonds issued by the purchaser as consideration

Ø Cash outflows in respect of capital activity totalled US$65m (producing assets ~US$25m, exploration and appraisal activities ~US$40m)

Ø Current estimates of 2022 capital expenditure total approximately US$200m, including:

o  Egypt production and development expenditure of US$90-110m targeted at delivering substantial production growth during 2022

o  Egypt exploration expenditure of US$30-35m to sustain the resource base over time

o  UK infrastructure-led exploration expenditure of ~US$40m, predominantly on the Jaws and Diadem wells, with no further well commitments beyond 2022

o  Other international exploration of US$30-35m, principally in Mexico, with no further commitments beyond 2022 and any further investment contingent on farm-downs

Planned return of capital to shareholders

With the tax refund from the Government of India due and active management of the asset portfolio in recent years, Capricorn is well positioned to continue delivery of its differentiated business model of returning value to shareholders whilst building sustainable cashflow generation and growth. As previously announced, Capricorn plans to return up to US$700 million of the India tax refund proceeds to shareholders. Having consulted with shareholders on the capital return options, Capricorn has determined that, to provide flexibility to its shareholders, US$500m will be returned by way of tender offer, whereby shareholders will be invited to tender some or all of their shareholding for purchase on terms that will be set out in a Circular to be posted to shareholders. It is intended that the remaining sum of up to US$200m will be returned by way of an ongoing share repurchase programme to provide a continuing value-accretive return of capital to shareholders. Each of these returns is subject to shareholder approval.

On 15 November, it was announced that the Company would commence a buyback programme of an initial amount of up to £20m out of the planned US$200m programme. This was due to end on 31 January 2022 and has now been extended to run until the end of February 2022.

Simon Thomson, Chief Executive, Capricorn Energy PLC said:

“We are very encouraged by the initial operating performance of our newly acquired Western Desert Assets in Egypt, with production growth ahead of expectations. We look forward to accelerating cash flows from the assets whilst reducing their emissions profile.

We are actively pursuing opportunities to grow our producing asset base within our strict capital allocation criteria.

With balance sheet strength and financial flexibility, Capricorn enters 2022 positioned to make another significant capital return to shareholders with the company having concluded all required steps to enable payment of the India tax refund.”

Capricorn is looking in a good, if low beta place right now, partly due to the substantial buy-back provisions and the production from Egypt. These should lead to Capricorn being one of the more defensive plays in the sector right now.     

Trinity Exploration & Production

Trinity has provided an update on its operations for the three-month period ended 31 December 2021 (“Q4 2021”). 

Q4 2021 Summary

With production levels maintained and continuing strong operating cash generation demonstrating the strength of its core producing asset base, Trinity made good progress on a number of key initiatives to achieve a step change in scale.

Production volumes averaged 3,103 bopd (Q3 2021: 3,018), yielding a full year 2021 average of 3,069 bopd, in-line with guidance provided at the beginning of the year. The Group’s unaudited cash balance was US$18.3 million as at 31 December 2021 (US$20.4 million (unaudited) as at 30 September 2021) with continuing strong operating cash generation over the quarter offset by the payment due on completion of the PS-4 acquisition.

The completion of the PS-4 acquisition, which is contiguous to Trinity’s largest and most prolific onshore Block, WD-5/6, significantly enhances the Group’s onshore acreage.  In addition, approval of the Field Development Plan (“FDP”) for the Galeota Asset Development (“GAD”) Project, which provides a suitably matured development concept for review by potential funding partners, has enabled the farm-down process to commence.

Outlook

Onshore, Trinity continues to be well placed to deliver growth with the recommencement of onshore drilling now targeted for H2 2022.  This is likely, initially, to comprise two infill wells at the under-exploited PS-4 Block, and Trinity is also working up a potential appraisal well targeting deeper horizons identified by the ongoing seismic interpretation. Trinity is also well funded to further grow its onshore portfolio as it bids for new blocks that are being made available as part of the Government of Trinidad & Tobago’s  onshore licensing round, designed to stimulate onshore activity.  To this end, Trinity has submitted an Expression of Interest for six onshore blocks being made available as part of this process; and has made a further EOI to enter into additional sub-licences with a focus on improved / enhanced oil recovery  in certain Heritage onshore acreage.  Trinity is also continuing to work with its partner, Capricorn Energy PLC, to evaluate the North West District opportunity with bids due at the end of Q1 2022.

Offshore, the focus will be on continuing to progress the GAD Project and the farm-down process. Trinity is encouraged by the interest being shown in the farm-down process at this early stage, and will provide further updates as progress is made. Trinity also intends to review the opportunities becoming available as part of the upcoming shallow water bid round.

Trinity now has c.50% of its expected 2022 production hedged, ensuring it can execute its investment plans under a wide range of oil price environments.  Confidence in the future is further enhanced by the GORTT’s intention, stated in Q4 2021, to stimulate higher levels of activity and investment in the energy sector, with a comprehensive review of Trinidad and Tobago’s taxation regime underway with outcomes expected during H1 2022.

Jeremy Bridglalsingh, Chief Executive Officer, commented:

“Trinity’s robust performance during 2021, particularly against the backdrop of the continuing COVID-19 pandemic, highlights the strength and resilience of our business.  As well as delivering a strong operating performance, we have completed the PS-4 acquisition and commenced the search for a partner at Galeota, a potentially significant near term value catalyst, with initial interest levels being encouraging.  The relationship with Capricorn Energy PLC continues to develop, and we are working together on the evaluation of opportunities within the T&T jurisdiction, with the most advanced of these being the NWD opportunity. We have also registered our interest in six onshore blocks and expect further opportunities to be presented by the shallow water bid round commencing shortly.  Finally, the anticipated reform of the taxation regime should create a more attractive environment in which to deploy investment capital.  We believe the strong foundation we have created over the past few years positions us well to participate in the growing opportunity set which is ahead of us.”

Trinity is putting in the building blocks for a significant growth surge in years to come and has produced a highly creditable performance in 2021. Should that longer term plan develop as hoped for then Trinity looks attractive but there may be some time to wait for this to happen.  

President Energy

President has provided an update on its operations in Salta and Paraguay. 

Operational update

The new well DP-2001 at the Puesto Guardian, Salta, Argentina, has now been successfully tested with oil to surface from the two expected formation intervals that are also flowing in other parts of the Dos Puntitas field. The well will be placed on stream in approximately one week using the same jet pump as the other wells. Steady state production rates will be advised in due course.

Further analysis of all the DP-2003 logs now obtained from the second well drilled in the sequence including latterly obtained through casing, have shown interesting possibilities including in the deeper interval drilled below the original target depth. Whilst it serves no purpose to speculate at this stage as the Company only has electric and mud log analysis with petrophysical review, the workover rig currently finishing DP-2001 will be mobilised this coming week to DP-2003 to conduct flow tests. During that time the drilling rig will be temporarily laid down in an adjacent location in the field.

 If those tests suggest a further well at the DP-2003 location is appropriate then a further well from that well pad will be drilled as DP-2002. The workover rig will be moved off for this purpose as it is not possible to drill from the same pad and have the well completed at the same time due to area constraints. In such case after drilling the well DP-2002, the workover rig will come back on to site and complete the DP-2003 and test and complete DP-2002.

After that well, there is a further well to drill at the Puesto Guardian Concession in the Puesto Guardian field itself, 45 kms away from the Dos puntitas wells which will in that case be the fourth well in the sequence. The well will be near the former producing well PG-13 which was originally drilled by the state company YPF 40 years ago. It produced successfully until it was suspended 10 years ago due to a difficult fish in the hole (failed packer), which could not at that stage re retrieved. Whilst there is no question that the high production levels over the years have depleted the reservoir of oil and the pressure, there was clearly still oil in the structure and that is the target as well as newfound production with modern logging and completion techniques. Target initial production rate is 30 m3/day.

In the event that after consideration of the testing of DP-2003 it is deemed that there is no benefit from drilling a well from the same pad, i.e. such that they will be draining the same part of the structure and effectively “thieving” from each other, then the drilling rig will move off that pad and workover rig will immediately complete DP-2003. The drilling rig will then move to drill the new well in the Puesto Guardian field.

 The Company is cautiously optimistic that the Puesto Guardian field well will be the fourth well sequence to this drilling campaign and not the third but in managing expectations it is appropriate to repeat it is down to the testing. Patience is therefore required and the facts will out in due course.

Paraguay

President is pleased to announce that its partners in the new exploration well to be drilled, OPIC Paraguay, the wholly owned subsidiary of the Taiwanese state owned energy company, CPC, have approved the budget and work programme for 2022 as laid out by President and accordingly initial cash calls have now been made to initialise the project. President’s Paraguayan subsidiary is the operator of the venture. 

All going to plan at President and shareholders will be able to look forward to the Paraguay well being drilled before long. Elsewhere operationally it is business as usual for the company in Argentina, the shares should appreciate to catch up with the success. 

Block Energy

Yesterday Block announced the JKT-01Z Well and Operations Update, good progress has been made with testing at JKT-01Z, with initial production rates of 344 boepd (comprising 241 bopd and 17,500 m3 of gas per day)

·    Rapid monetisation of gas and oil production is expected to make Block’s monthly cashflow positive

·    Nearly $500,000 additional cash revenue per month, based on current production rates and sales prices

·    No LTIs, with time and cost to drill beating forecast by 20% and 10% respectively

·    Over 30 per cent higher gas price achieved in Georgia, effective from 1 January 2022

·    Success at JKT-01Z significantly de-risks and enhances optimisation of future drilling

·    Twelve further side-tracks, analogous to the JKT-01Z, being assessed, including re-completion of the WR-B1 well

Block Energy plc’s Chief Executive Officer, Paul Haywood, said:

“Well JKT-01Z sets a new standard on time and cost for such a side-track in our Georgian operation. It has also been delivered with an exceptional safety record. The success of this well represents a milestone for the Company, with Block becoming cashflow positive, opening the opportunity to create and deliver additional value to shareholders. Our strategy remains to drive value through organic growth, converting contingent resources to proven reserves and production, which, given our asset base and today’s commodity prices, makes a compelling business case. On the back of the success of JKT-01Z, the team are evaluating twelve further side-track candidates. The Board would like to thank all shareholders for their continued support and look forward to providing further updates in due course”.

Block have come up with a fantastic result for this well and made better with constrained production and a good gas pricing deal. The opportunities give plenty of upside if flow rates are maintained, if they do then this is most exciting for shareholders.

And finally…

It looks like the Hornets have signed ‘Woy’ Hodgson as their new manager after sacking Ranieri yesterday.

I didnt have time for the American football write-up yesterday but have to comment as seasoned observers say that it may go down as the best weekend ever…The Rams beat the Buccaneers 30-27 proving you have to watch Mr Brady and the Chiefs beat the Bills in overtime which is hard beans. With the 49ers seeing off the Packers 13-10 and the Bengals beat the Titans 19-16, another desperately close game.

The opinions expressed here are those of the author

Malcolm Graham-Wood

Disclaimer: Malcy’s Blog is provided for general information about the international oil and gas industry and the companies that operate within it. It does not constitute investment advice and Malcy does not buy or sell shares, warrants or bonds in any company written about within the blog. Information is taken from publicly available sources and any comment is that of the author who does not take any third party comment in the blog


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