Malcy’s Blog – Oil price, Scirocco Energy, Serica Energy & finally

WTI $72.36 +31c, Brent $75.82 +38c, Diff -$3.46 +7c, NG $3.82 +11c, UKNG 261.39p +12.15p

By Malcolm Graham-Wood

Oil price

Another modest rise yesterday in what was a volatile day, the EIA inventory stats were read differently dependent on your point of view. The crude headline was a draw of only 241/- bbls but a build of 2.4m at Cushing disappointed some as did the add of 3.9m b’s of gasoline and 2.7m of distillates.

Elsewhere there appears to be a continued feeling of confidence that Omicron will be beatable, yesterday Pfizer said that they thought that three hits of its vaccine would be enough to see off this one. In the UK Plan ‘B’ has been put into play which is mainly mask related.

Scirocco Energy

Scirocco has announced that, its subsidiary, SEUK has signed an exclusivity agreement with leading sustainability technology provider, SEM. This exclusivity will be for the benefit of SEUK, its affiliates and its investee company Energy Acquisitions Group Limited.

SEM (https://sem.world/), is a leading developer of technologies within the circular economy sector. It is anticipated that SEM will provide EAG with digestate management and nutrient recovery technology, known as H₂OPE System.

The system processes digestate, a by-product of the biogas process, into nutrient dense, high-quality fertiliser, nutritionally balanced growth media and a sustainable peat substitute which can be used within a range of growing environments across the sector. It also produces re-usable water, and significantly reduces CO₂ emissions compared to traditional practices. Trials are also taking place for the use of the material to make biodegradable plant pots for nurseries and growers, removing the reliance on single use plastic.

Key terms of the agreement:

·    SEM will exclusively supply to SEUK, its Affiliates, EAG (the “Scirocco Parties”), the H₂OPE System for the application to digestate generated from AD plants within the UK and Ireland;

·    The exclusive period runs until end June 2023, unless extended by the parties in accordance with the agreement;

·    SEUK will use reasonable endeavours to purchase or procure that the Scirocco Parties purchase a minimum of five units of the H₂OPE System within the exclusivity period;

·    If Scirocco Parties do not meet certain order requirements during the exclusivity period, the exclusivity may fall away, but Scirocco Parties are still able to order units of the H₂OPE System from SEM during the term on a non-exclusive basis.

EAG intends to apply the technology to its operating plant at Greenan, as well as working with other owners of other operational AD plants to assess the potential benefits of funding the installation of a ‘bolt-on’ nutrient recovery system on a merchant basis.

The addition of the H₂OPE System technology to existing AD plants has the potential to deliver an additional revenue stream through the creation of high value co-product, depending on the level of refinement required for a specific market sector while simultaneously reducing the carbon intensity of the process.

Commenting on the agreement, Scirocco CEO Tom Reynolds said:

“This represents the next step in our investment strategy supporting investment in ‘Circular’ within the agricultural sector, alongside our existing investment in EAG.  The application of this kind of technology will help optimise the operational and environmental performance of our current and expected future AD plants, as well as providing a new revenue stream that can be scaled in line with our portfolio. The exclusive nature of the agreement provides Scirocco Energy and its investee company, EAG, with a valuable head start in deploying a value adding technology to its asset base as it grows.”

Chris Kerr, MD of EAG added:

“Firstly, this technology enables EAG to implement its active optimisation programme for its current assets, driving value through each of the businesses, and also solves the issue of digestate spreading to land, which in some cases is already saturated with nutrients. Recovery of nutrients from the biogas process is the perfect opportunity to provide growers and their customers in the fresh produce sector with a sustainable and effective alternative to fossil fuel derived fertilisers.  

“Reducing carbon through the food chain is something we have been focussed on for a number of years now, and we believe the end-to-end nature of the SEM technology will provide the entire fresh produce sector in the UK and Ireland the opportunity to introduce a genuinely circular economy into their business models.”

John Jones, CEO and Founder of SEM Ltd added:

“Our engagement with EAG and Scirocco Energy is fantastic news for SEM. Their understanding of what the market needs are, and exactly where our technology fits within that space has made the deal straightforward. It has been really exciting working up the plans for the new plants at which the technology is expected to be deployed throughout 2022.

“At SEM we have a vision of a waste-free circular economy both now and in the future, securing our planet’s health and wealth for generations to come. Our H₂OPE technology is set to have a hugely positive impact on the environment, as well as on the agriculture industry, by maximising the conversion of waste co-products into valuable by-products, while significantly cutting CO₂ emissions.

“Both EAG and Scirocco Energy share this vision – a common alignment which will ensure our strong future working relationship gets off to the best possible start. We can’t wait to see where the next part of the journey takes us all.”

This looks to be an interesting move within the investment in the agriculture industry. Whilst I will probably need a teach-in on this and other potential moves there is little doubt that digestate is rapidly becoming a go-to product which uses existing processes to become fertiliser. It also, as commented on by the CEO, adds to the Scirocco investment in AD plants. 

More importantly it looks like Scirocco has identified the technology component which has the potential to add significant value to add to existing AD investments. This is the start of a portfolio here and one they can generate returns from previously poor paybacks. Its a chance to generate revenue and cash and will hopefully be self-fulfilling and build rapidly. 

Serica Energy

Serica has provided the following operations update. As previously announced, hydrocarbons from the C1z development well started flowing into the Arran subsea system on 24 November. The commingled Arran and Columbus production streams are now being exported to the Shearwater platform for processing and onward export to the gas and liquid sales points.

Early production has been constrained due to a temporary unavailability of full capacity in the export system, however during the first 14 days of production, average gross Columbus production rates of 6,300 boe/d have been achieved of which over 80% is gas. Full capacity in the export system is expected to be available to Columbus by mid-January 2022.

Production performance in the second half of 2021 is benefitting from the investment in the Rhum R3 well reintervention and the Columbus development project which were undertaken during 2020 and 2021. Serica’s net production is as follows:

Since the R3 well has come online, Rhum production makes up a larger proportion of Serica’s total production and so now over 85% of group net production is gas.

Commodity Prices and Hedging, commodity prices, particularly gas, have reached increasingly high levels over the second half of 2021. Market prices have been as follows:

Serica continues to maintain a modest gas price hedging programme with approximately 20% of retained gas and liquids production covered in the second half of 2021, thereby allowing the company to benefit from full market prices on around 80% of its production. A similar percentage of gas hedging is projected for 2022.

 Forward Programme, the BKR net cash flow sharing arrangements come to an end on 31 December 2021. From 1 January 2022, we enter a new phase for the Company where we will be retaining 100% (2021: 60%) of the net cash flow from the BKR fields, benefitting fully from the increase in production levels.

Serica intends to continue with its programme of investing in its portfolio of assets. A rig has now been contracted for the drilling of the high-impact North Eigg exploration well in the summer of 2022. North Eigg is a gas prospect located close to Serica’s BKR fields and it is expected that a successful discovery could be tied back to existing infrastructure in a carbon neutral manner.

Plans are also in place for a Well Intervention campaign to take place in 2022 to improve the production potential of several Bruce and Keith wells during subsequent years.

Growing cash balances offer increasing options for further investment, acquisition, and distributions. Serica’s Board continues to evaluate the optimum balance between these elements to deliver further shareholder returns. 

Mitch Flegg, Chief Executive of Serica Energy, commented:

“Serica has made significant progress during the second half of 2021. The impact of the substantial investment programmes undertaken in 2020 and 2021 has been increased production levels providing responsibly sourced gas to the UK domestic market, protecting security of supply, and reducing reliance on imports as part of the transition to a lower carbon future.

Commodity prices have been exceptionally strong during the period with a resulting positive impact on income. Additionally, from 1 January 2022 Serica will retain 100% of the cashflow from its BKR assets (2021: 60%) and so will benefit further from the increased production levels. Serica has no debt, limited decommissioning liabilities, growing cash reserves and so is well positioned to continue to invest in further projects (including North Eigg) and other opportunities to add shareholder value.”

Serica continues to deliver and operationally is in very good shape. Obviously the market for gas is a huge plus but even on more sanguine numbers, which I don’t believe we will see much of in the short to medium term, Serica is in very good shape. This is partly due to its exceptional team at all levels of the business and whilst they will look beyond North Eigg for M&A opportunities they are not needed unless they show significant accretion to the existing business. A star of the Bucket List which is about to be updated I can only see it staying in its regular position there. 

And finally…

A good day for Australia in the first test and at close of play were 343-7, a very healthy 196 runs ahead

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