Malcy’s Blog – Oil price, Petro Matad, Orcadian Energy & finally

WTI $69.49 +$3.23, Brent $73.08 +$3.20, Diff -$3.59 -3c, NG $3.66 -48c, UKNG 230.08p +8.65p

By Malcolm Graham-Wood

Oil price

After yesterday’s rise crude is better again today and by a decent two dollars taking Brent back up to $75. This is because there are two ways of assessing the current Omicron news, bears are saying that it travels more quickly that the Delta variant but others including Dr Fauci suggest that it is ‘not so severe as other variants’. Indeed Glaxo say that their drug does work against Omicron which if confirmed by other manufacturers certainly bounce the market.

Among other news Chinese crude imports rose last month and of course the Saudi price increase yesterday is important. Indeed the Aramco boss speaking at the World Petroleum Conference in Houston suggested that the world should continue to invest in fossil fuels to avoid shortages.

In the US retail gasoline prices are already falling despite the SPR sales, a gallon of gas will cost you $3.341 which is down  3.9c w/w, a fall of 6.9c m/m but of course still a rise of $1.185 y/y.

Indeed Michael Wirth, Chairman and CEO of Chevron in an interview with CNBC from the WPC said that there would still be oil in 30 years time as world population goes from  7.5bn to 9.5bn including a strong middle class. He also said that gasoline is now above pre-pandemic levels but that jet fuel  is  a touch behind. With ‘substantial’ growth in 2022 he remains confident about energy for next year.

Next up was Patrick Pouyanné CEO of Total Energies who unsurprisingly is also positive, he sees a growth in the electricity market and thus is bullish on gas, TE is the biggest exporter of LNG out of the US. He also points out that since 2014 industry capex has fallen from $750bn to $300bn which echoes with everything I keep saying about lack of investment.

Petro Matad

Petro Matad has provided the following operational update. In Block XX Exploitation Area The Mineral Resources and Petroleum Authority of Mongolia (MRPAM) and Petro Matad held the first Exploitation Meeting at which it was agreed that the technical details of the benchmarking and pricing of Heron crude should be finalised between the Company and MRPAM by year-end. This will then allow for contract negotiations with potential buyers to begin. Mongolian crudes have been priced benchmarked to both Brent and Daqing crudes over the years. The Heron 1 assay is Brent-like in its chemistry and so Petro Matad is pushing for benchmarking to Brent in discussions with MRPAM and, once agreed, plans to do so in the follow up negotiations with potential crude oil buyers early in the New Year.

Contracting negotiations with drilling, well completion and infrastructure services providers are at an advanced stage with contract awards anticipated in good time for the start of the operational season in Q2 2022. Operations will focus on the completion of the Heron-1 discovery as a production well and the drilling of additional production wells within the current 3D seismic footprint.

The Company received a good response to its invitation to tender for 3D seismic and favourable terms were negotiated with the winning contractor. However, current Covid-19 restrictions ruled out being able to mobilise quickly for a winter 21/22 shoot. The winning bidder’s tender is valid through 2022 and as such, depending on progress with the drilling programme, Petro Matad will review the timing of 3D seismic operations in the second half of the coming year. All development well locations short listed for Heron phase 1 development drilling are within the area covered by existing 3D seismic so the timing of the acquisition of the new survey is not critical.

A number of administrational requirements to register the new Exploitation Area have been completed with the cooperation of various government ministries. Petro Matad has also led an industry effort in cooperation with other operators in country to submit proposed changes to the laws and regulations governing the petroleum sector with a view to improving the investment climate. In addition, Petro Matad is working with Mongolia’s Professional Inspection Agency to revise the check lists used for signing off on any new upstream oil and gas installations. Petro Matad has also made firm proposals to central government on how best to resolve the conflicts within Mongolian law on land access and usage. Whilst it is hoped these will generate workable changes to the legislation, in parallel Petro Matad is working with local government to guarantee access to all the sites that could possibly be used by the Company in 2022.

The Block V exploration PSC in central Mongolia remains a keen focus of the Company with a number of very attractive, low cost, high impact prospects identified. Petro Matad is in discussion with drilling contractors to determine the potential timing and costs of drilling operations on the Velociraptor trend. The Company is also progressing the final stage of its environmental impact assessment in order to be able to operate on Block V in 2022 and beyond. This work had been held up due to Mongolia’s restrictions on meetings being held during the pandemic, but a pragmatic work around has been agreed by all parties and the Company hopes to submit its documentation to the Ministry of Environment before year end with the expectation of approval of the environmental impact assessment in Q1 2022.

Petro Matad’s efforts to partner with local and/or foreign companies on development and exploration activities in Mongolia continue and the Company has a virtual data room running at the moment. Whilst the Company is pushing the receiving parties to act quickly in completing their evaluations, Petro Matad continues to make 2022 operational preparations in parallel which will be executed with or without partners.

Petro Matad is also pursuing a strategy to work up and sign new exploration/appraisal areas in Mongolia and has high graded two areas of interest to date for which the Company plans to submit acreage applications.

The Board of Petro Matad has taken the decision to seek to expand the Company’s activities in Mongolia into sustainable and renewable energy in addition to its ongoing work in the oil and gas sector.

Work has been done this year to determine the status of the renewable energy sector in country, as Mongolia has substantial potential for both wind and solar power generation. A number of projects that have government support to execute have been identified and are being evaluated for accessibility and commercial potential.

In addition, Petro Matad is looking at renewable energy possibilities to deploy in its Heron oilfield development. The area around Heron is well suited to both wind and solar power generation. Petro Matad is also studying the potential to use CO2 injection as an enhanced oil recovery mechanism for the Heron development. This technique has been widely used around the world for many years and has proven particularly successful in some of the larger oil field developments onshore in northern China. It has not been deployed in Mongolia where water injection has traditionally been used for reservoir pressure maintenance. Southern Mongolia is effectively covered by desert steppe and water is an increasingly precious resource. As such, an alternative to large scale water usage in oil production operations is considered a goal worth pursuing. Technical studies are now underway to determine the potential effectiveness of CO2 injection into the reservoirs of the Tamsag Basin.

Mike Buck, CEO of Petro Matad, said:

“We are delighted to have concluded our first Exploitation Meeting and are looking forward to beginning contract negotiations with potential buyers for Heron production. Additionally our recent decision to expand our activities into sustainable and renewable energy is an exciting new frontier for us that we look forward to updating investors on in the coming months.

The Company is on target to be ready for an active operational programme in 2022 focused on achieving the start of production from the Heron discovery. A lot of progress has been made over the last few months despite the challenges of the ongoing pandemic and the efforts of our dedicated staff are very much appreciated.”

Petro Matad are turning the corner in Mongolia and this extended and detailed update today certainly gives scope for optimism in a number of key areas. Whilst the market had been hoping to see some drilling by now I think that has always been a rather optimistic shout for obvious reasons but clearly there is a wall of complications before first production in Q2 2022. 

The raise in July of this year took all the wind and more out of the share price and that is not likely to change until either of a farm-out or Heron production is underway. As for expanding into sustainable and renewable energy I think that the jury will be out until we hear the promised investor update in coming months, I’m not for one minute suggesting they are not up to it but shareholders will want to be persuaded. Either way MATD management is high quality and 2022 will be shaped by what they say in the spring. 

Orcadian Energy

Orcadian has announced that following a competitive process it has been selected by the Oil and Gas Authority to evaluate an approach to the electrification of North Sea oil and gas platforms which will dramatically cut carbon emissions.

Orcadian has been awarded £466,667 by the OGA to evaluate a new concept for the electrification of key producing oil and gas fields initially focussing on Central Graben area fields owned and operated by others

Orcadian will also produce an Industry White Paper which describes this approach to electrification of offshore oil and gas platforms

Orcadian’s concept would use renewable energy, generated from local wind farms, for the bulk of the electricity required; with back-up power generated from gas or net zero fuels, supported by batteries for a fast response

Orcadian is working with Crondall Energy, Enertechnos, Petrofac, North Sea Midstream Partners (“NSMP”) and Wartsila; together the working group will undertake an evaluation of this concept and deliver a report to the OGA and Central Graben Operators by the end of March 2022

The evaluation will include a commercial proposal for the delivery of electrical power to Central Graben and Central North Sea Operators interested in rapidly implementing electrification of their platforms

OGA Competition

The OGA launched a £1 million decarbonisation competition to explore the electrification of offshore oil and gas installations on 23 September 2021. The OGA was looking for studies (technical, engineering, and/or commercial) that would bring electrification projects a step closer to reality. On behalf of the working group, Orcadian submitted an entry to the competition, and has undertaken to evaluate this concept and deliver a report, and an Industry White Paper, to the OGA and the Central Graben operators by the end of March 2022.

Orcadian Electrification Concept

Orcadian has been an active participant in the Central North Sea Accelerated Energy Transition Plan (CNS AETP) working group and has selected a floating wind turbine as a key means of reducing emissions from the Pilot field development. Operators in the CNS AETP have largely focussed on power-from-shore as a means of electrifying the CNS.

Orcadian’s proposal is to utilise renewable energy, generated in local wind farms, for the bulk of the electricity required on the fields; with back-up power generated efficiently from gas or net zero fuels, supported by batteries for a fast response. It is, taken together, one of the most effective and practical ways to lower emissions in the oil and gas production process.

This approach would dispense with the requirement for a cable to shore, be significantly less costly, and the project could be implemented on a faster timescale, with simpler brownfield modifications on the existing platforms and less disruption to supply from these critical assets, which supply about a quarter of UK gas production. In addition, the Directors believe the UK’s energy supplies would be much more secure using this approach when compared with relying on a single high voltage direct current (HVDC) cable from shore to support production of oil and gas from the area.

Orcadian submitted this proposal on 25 October 2021 and was one of three winners. Orcadian will utilise the funds from this competition to engage the working group to prepare and deliver this report on an accelerated timescale.

Commercial Opportunity

The Directors believe that this opportunity presents an additional commercial benefit to the Company and its investors. Orcadian plans, with support from North Sea Midstream Partners (NSMP), Petrofac as EPC (Engineering, Procurement and Construction) and O&M (Operations & Maintenance) contractor, and Wärtsilä as a potential key supplier, alongside Crondall and Enertechnos, to develop a commercial proposal for the delivery of electrical power to Central Graben and any North Sea Operators interested in rapidly implementing electrification of their platforms.

Carlo Procaccini, OGA Head of Technology, said:

“Decarbonisation of oil and gas operations is an industry imperative over the next decade, and platform electrification from renewable sources will be an effective way to achieve that.   We were delighted with the strong industry interest in the £1m BEIS / OGA electrification competition and the quality of the winners’ submissions.  Orcadian Energy’s study, alongside the two other selected projects, will assess innovative solutions to kickstart O&G electrification on the UKCS”

Steve Brown, Orcadian’s CEO, said:

“We are delighted with this news, which is a vote of confidence in the sustainable production methods Orcadian has helped to identify. From our perspective, minimising the cost of Net Zero is of paramount importance, the lower we make the cost of abatement, the more we can afford to do. Industry and Government have both committed to electrification of North Sea platforms – which will be vital in the energy transition. We intend that our contribution be to radically reduce the cost of implementing electrification.

“We had worked very closely with our consulting engineers, Crondall Energy, to minimise emissions on Pilot, and together we had learned a lot about how best to integrate renewable energy generation with oil and gas production facilities. In terms of emissions reduction, maximising renewable energy usage compared very well with the alternative of “onshoring” the responsibility for decarbonisation to the national grid, and, in the case of Pilot at least, was much less costly.

“We have identified a new, but well advanced, enabling technology which minimises power losses associated with transmitting medium voltage alternating current over miles of cable. We understand the cable designer, Enertechnos, is planning to install a 28km cable in Wales in 2022, to prove the concept in a real-world setting.

“As part of the evaluation of this alternative concept, we intend to select the very best renewable energy system to provide the bulk of the power to the platforms; we have already entered into discussions with both Floating Power Plant A/S and Wind Catching Systems AS, and we intend to listen to what every potential wind technology provider has to offer.

“Backing up the system with highly efficient gas reciprocating engines is a practical and proven method to provide a reliable power supply and enables implementation of the project on an accelerated time scale.

“Since we conceived this approach in early October 2021, we have been delighted with the enthusiastic response of all of the companies with whom we have shared our conceptual solution. We are excited to work with North Sea Midstream Partners, Petrofac and Wärtsilä to develop a commercial offering to CNS Operators which we believe will be truly compelling.”

Orcadian are a really smart outfit and since I first met them recently I have been most impressed by their approach. Given the future of our energy business, specifically in the North Sea the fact that their expertise has been recognised by such an award I see big things upcoming for the Orcadian team…

And finally…

Last night in the Prem the Toffees beat the Gooners 2-1 with a couple of late strikes, but then some of the fans left after 27 minutes as it is 27 years since they won anything…

Tonight its Champions League night with the Noisy Neighbours at RB Leipzig and Liverpool at AC Milan.

And at long last The Ashes are back and at midnight tonight England start the first test against Australia at The Gabba. England’s record in Australia lately is atrocious and there is no reason to think that without several front line fast bowlers that much can change. Steve Smith is like a rock and as long as he and Warner are batting they are in it.

But England do have match winners and may play Leach to use some spin although Jimmy Anderson is rested for this one,  Stokes and Root are world class, let battle commence,

The opinions expressed here are those of the author

Malcolm Graham-Wood

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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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