Malcy’s Blog – Oil price, Zephyr Energy, PetroTal Corp, Challenger Energy, Coro Energy, Tullow Oil, Angus Energy, Petro Matad & finally

WTI (Mar) $80.14 +42c, Brent (Apr) $86.61 +22c, Diff -$6.47 -20c. 

Author @mgrahamwood

USNG (Mar) $2.40 -11c, UKNG (Mar) 129.75p -0.25p, TTF (Mar) €52.3 -€0.09.

Oil price

Markets are nervous ahead of the US CPI numbers later today which will have an impact on US rates, the dollar etc. Oil was up yesterday a tickle but that was before the White House announced that they were going to sell another 26m barrels out of the SPR starting in April, to try and get gasoline down as the driving season starts.

Retail gasoline is now $3.39 a gallon on average in the US, that’s down 5.4 cents w/w, up 5.2c m/m and up 9.7c y/y.

Zephyr Energy

State 36-2 LNW-CC well update Well cased, natural fracture reservoir to be production tested

Future horizontal lateral potential remains

 Zephyr has provided an update on operations on the State 36-2 LNW-CC well at the Company’s flagship project in the Paradox Basin, Utah, U.S.  

As announced by the Company on 19 January 2023, the well intersected a major natural fracture network in the Cane Creek reservoir which led to a significant influx of hydrocarbons into the wellbore. This influx was managed and safely controlled, which subsequently allowed for the drilling of an additional 132 feet into the fractured and productive Cane Creek reservoir, at which point the Company elected to run production casing down the total depth of the well.

Operations to run 7-inch production casing were successful. The well has now been made fully safe and the CWC Ironhand 118 drilling rig has been released.  In the coming weeks and subject to service availability, the Company plans to commence production testing and potential completion of the fractured Cane Creek reservoir interval.

In addition to near-term testing, the running of the 7-inch casing string provides the Company with the optionality to return to the well (should it elect to do so) to drill an extended lateral at a later date. A subsequent lateral would enable the Company to test for further natural fracture presence at this location within the Cane Creek reservoir, and also enable the well to be completed by hydraulic stimulation across a longer lateral should Zephyr seek to increase well productivity in the future.

Initial results indicate that the well penetrated a folded and naturally fractured Cane Creek reservoir, features which have been highly productive in other Cane Creek wells.  Pore pressure analysis suggests that the well encountered very high reservoir overpressure, with formation pressures estimated at around 9,300 pounds per square inch (which is broadly consistent with previously drilled offset wells).

The well further delineates the presence of natural gas and condensate within a large structural compartment, and at a new location within Zephyr’s acreage and 3D seismic coverage – which provides additional confirmation of Zephyr’s model for hydrocarbons in place across the acreage position.

Colin Harrington, Zephyr’s Chief Executive, said:

“The State 36-2 LNW-CC well was a challenging and lengthy operation, more difficult than expected but not atypical when drilling in an immature, remote and highly over-pressured basin. Despite the challenges, we have managed to move the bar again and delivered what would appear to be another productive well on our acreage.

“It is worth noting that previous operators drilled three vertical wells on this acreage, only one of which was productive.  Zephyr has now drilled two wells in the Cane Creek reservoir, both of which appear to be productive – a fact which highlights the benefits of utilising modern 3D seismic data and drilling with modern oilfield technologies, practices and services.

“Our next step is to commence the well test which we aim to get underway in the coming weeks, subject to weather and service availability.  Production at the State 16-2 LN-CC remains ongoing as well, and the Company will update the market as soon as that test has concluded.”

This looks to be one hell of a significant, natural fracture system which has been very carefully and safely managed over a slightly longer period of time than originally expected when the intersection was made last month. 

As a result of this the company has elected to run casing with a goal to production test that zone in the coming weeks.  This gives the company the ultimate in operational flexibility, as it says above they can go back and drill out the lateral which would enable the Company to test for further natural fracture presence at this location within the Cane Creek reservoir, and also enable the well to be fracced and completed.

It’s very much about potential volumes I guess, at the moment its happening naturally and with better than expected natural flow, but the company are optimistic and at least they now know they can successfully operate a ‘highly challenging’ drill in difficult conditions. 

The next stage of this process is the well test and shareholders should be delighted to be in such a strong situation, going forward they have multiple options available to them. This means plenty of upside and my 20p target price still stands.

PetroTal Corp

PetroTal has announced that it has received final approval to list its common shares on the Toronto Stock Exchange (“TSX”).

Manuel Pablo Zuniga-Pflucker, President and Chief Executive Officer, commented:

“PetroTal has delivered considerable value for its stakeholders in a short period of time being listed on the TSX Venture Exchange.  This graduation to the TSX is an important next step that will help increase our global investor base and offers a greater platform to expand our value proposition.  We are grateful to the TSX Venture Exchange for being supportive during this initial phase of our growth and are excited to embark on this next chapter.”

Important to the US angle but I can’t seeing this making any notable difference to UK based shareholders.

Challenger Energy Group

Challenger has announced that it has entered into and simultaneously completed a transaction for the sale of its St Lucia domiciled subsidiary company, Caribbean Rex Limited.

Highlights

·    Sale of Caribbean Rex and associated assets and subsidiary entities for for a value of US$1.5m:

o immediate cash payment of US$1 million, received

o subsequent payment of US$0.2 million due in mid-March 2023, and

o US$0.3 million of third party liabilities have been assumed by the buyer

·    In addition, a three well drilling obligation at the South Erin field (at a potential cost of up to US$5 milion) will now pass from the Company to the buyer, with the Company retaining an 18-month option to repurchase a 49% interest in the South Erin field in the event of the buyer’s drilling success

Key terms of the Transaction

·    The Company has sold Caribbean Rex, an indirectly wholly-owned St Lucia incorporated subsidiary. Caribbean Rex in turn holds various assets and subsidiary entities in St Lucia and Trinidad. This includes (via interposed subsidiaries) CEG South Erin Trinidad Limited (“CSETL”), a Trinidadian company that is party to a farm-out agreement for, and is the operator of, the South Erin field, onshore Trinidad. The buyer of Caribbean Rex is a Trinidadian drilling and oil services company.

·    The transaction was entered into and completed simultaneously, and is not subject to any condition precedent. The agreed consideration is US$1.5 million, consisting of US$1.2 million payable in cash (of which US$1 million has been received by the Company and US$0.2 million is payable by 15 March 2023), and approximately US$0.3 million in third-party liabilities that have been assumed by the buyer.

·    In addition, the buyer has committed to fulfil CSETL’s 2023 drilling commitments at the South Erin field, thereby relieving the Company of these commitments (3 new wells with an estimated cost of up to US$5 million).

·    As part of the transaction, the Company has retained a back-in option, granting the Company the right to repurchase a 49% non-operating interest in the South Erin field. This back-in option may be exercised at the Company’s election, at any time in the next 18 months. Consideration payable if the Company exercises the back-in option is a fixed cash amount of US$1 million, plus 49% of all amounts spent by the buyer on South Erin field activities and new well drilling.

·    The South Erin field currently produces approximately 35 bopd (representing less than 10% of CEG’s total Trinidadian production), but new well drilling by the buyer could significantly increase production through the course of 2023 – CEG will be able to commercially assess the value of exercising the back-in option against the outcomes of the drilling campaign and the level of increased production.

·    For the year to 31 December 2021, CSETL made a loss of TT$3.5 million (or approximately US$0.5 million). As at 31 December 2021, CSETL had negative net book value (net liability position) of approximately TT$51.6 million (or approximately US$7.6 million) of which approximately TT$48.1 million (or approximately US$7.1 million) is intra-group and will be written-off as at the Completion Date. Cash received from the transaction will be used for general working capital in the Company’s operations.

Eytan Uliel, Chief Executive Officer of Challenger Energy, said:

“Through the transaction announced today we get upfront cash, we give up only a small percentage of overall production, we are relieved of various liabilities as well as the cost of a committed drilling campaign, and we retain optionality while someone else drills those wells and funds that cost. This is consistent with the structure we adopted for the previously announced transaction relating to the Cory Moruga licence, and is, generally speaking, the model for how we intend to take smaller, non-core assets in Trinidad forward: through transactions that monetise the assets and offset our operating and financial risks, yet retain upside exposure in a success case.”

Another smart move today from CEG who continue to tidy up and de-gear the portfolio. This takes away the drilling commitment costs and yet retains the exposure to any upside if the buyers make out. 

Coro Energy

Coro Energy Plc, the South East Asian energy company with a natural gas and clean energy portfolio, announces legal proceedings by the Company against an Italian contractor in relation to damages following the historical cessation of production at the Bezzecca field in Italy.  As previously announced Coro re-established production at Bezzecca in November 2022.

The Company alleges that the original construction at Bezzecca lacked an effective cathodic protection system which was required to avoid corrosion, which ultimately led to the shut-in of gas production at the Bezzecca field in March 2020 for safety and environmental reasons.

Having both filed a claim against the relevant contractor and completed an independent investigation to determine the reasons for the incident some time ago, the Company has now separately received a copy of the opinion of the expert appointed by the court assessing the merits of the Company’s claim. The Company views the expert’s opinion as strongly favourable to Coro’s claim. The Company is now claiming damages of approximately Euro 300,000 for the capital and related costs of the replacement equipment and necessary cathodic protection and a further Euro 7M for consequential losses, including both lost revenue and incurred fixed costs, during the shut in period.

Put this claim together with the potential cash from the Italian sale and a win would be deeply meaningful, however the speed at which these ships travel is hardly turbo charged so as I always say in Italy, don’t stand on one foot waiting….

Tullow Oil

 Tullow Oil plc announces that Tullow Ghana Limited (TGL) has filed requests for arbitration with the International Chamber of Commerce in London in respect of two disputed tax assessments received from the Ghana Revenue Authority (GRA).

The assessments relate to the disallowance of loan interest deductions for the fiscal years 2010 – 2020 and proceeds received by Tullow Oil plc under Tullow’s corporate Business Interruption Insurance policy. The requests for arbitration have been filed in accordance with the dispute resolution process set out in the Petroleum Agreements which govern TGL’s activities in Ghana. A copy of the Petroleum Agreements can be viewed on the website of the Ghana Petroleum Register.

Tullow considers that the two disputed tax assessments, which total $387 million plus penalties, breach TGL’s rights under its Petroleum Agreements. Tullow’s decision to file for arbitration on these matters does not result in any change to the overall exposure previously disclosed.

Tullow believes that resolution through international arbitration will bring certainty, which is in the best interest of all stakeholders. Notwithstanding this formal step, Tullow intends to continue to engage with the Government of Ghana, including the GRA, with the aim of resolving these disputes on a mutually acceptable basis.

Background to the assessments

TGL has received a revised corporate income tax assessment for $190.5 million from the GRA relating to the disallowance of loan interest for the fiscal years 2010 – 2020. Tullow has previously disclosed assessments by the GRA relating to the same issue; the revised assessment received in December 2022 supersedes all previous claims.

TGL has also received a new corporate income tax assessment and demand notice for $196.5 million from the GRA relating to proceeds received by Tullow during the fiscal years 2016 – 2019 under Tullow’s corporate Business Interruption Insurance policy, previously referred to in Tullow’s Trading Update on 25 January 2023.

Branch Profits Remittance Tax arbitration

Tullow has previously filed a request for arbitration in respect of a separate assessment for Branch Profits Remittance Tax of $320 million in 2021. A hearing in respect of this dispute is scheduled for October 2023.

Another company n…going to court of one type or another, don’t ask me to decide who’s right but surely this is a last chance saloon situation. 

Angus Energy

Angus has announced that, further to its RNS of 2 March 2021 and 2 August 2021, its appeal against the decision by West Sussex County Council to refuse permission for an extended well test at its Balcombe oil site has been upheld.

Angus Energy has a 25% interest in the Balcombe field discovery (PEDL 244) targeting the Kimmeridge limestones.  The Balcombe 2Z horizontal sidetrack was drilled in 2013 and permission for a flow test was granted in 2018.  The test evidenced a definitive oil show with high flow rates for short periods.

The planning permission expired prior to the completion of clean up operations leaving a quantity of, what the Company subsequently determined to be, left-over drilling fluids from the 2013 operation.

Hence a new planning permission was applied for in 2020 in order to complete the clean-up exercise and follow with an extended well test.

As a consequence of yesterday’s decision by the Planning Inspectorate, the Company is now capable of pursing this well test subject to satisfaction of planning conditions noted in the Appeal Decision as well as the determination of the variation to the Environmental Permit by the Environment Agency which we understand to be imminent.

A good call for Angus and the EWT should provide something very good for the company. 

Petro Matad

Petro Matad has provided the following operational update.

Key Company Updates

·    Progress being made to register Block XX Exploitation Area as special purpose land

·    High impact exploration drilling on the Velociraptor prospect scheduled for Q2 2023

·    Application submitted for a new block in Mongolia’s 2023 Exploration Tender Round with plans for more during the year

·    Joint venture established with an active and successful renewable energy project developer to pursue opportunities in Mongolia’s high potential renewables sector

·    Successfully closed a recent equity capital fundraise round totalling $6.6 million

Block XX Exploitation Licence

The Mongolian government’s process to certify Petro Matad’s Block XX Exploitation Licence area as special purpose land is progressing although more slowly than the Company was initially advised. We continue to press for rapid action at all levels and this remains our number one priority. Formal correspondence from central, provincial and district authorities has been sent to the relevant agencies as required by the legally prescribed process ahead of submission of the certification to cabinet for approval.

Contracts with the in-country well testing and completion contractors are in place for the completion work required on Heron 1. Discussions with Petro China on oil processing, export and sales are ongoing with the facilitation of industry regulator, the Mineral Resources and Petroleum Authority of Mongolia (“MRPAM”).

Negotiations with DQE Drilling (“DQE”), the main provider of drilling services in Mongolia, have been completed and the contract for a multi-well development drilling programme is with DQE’s head office for review and approval after which we plan to seek the approval of MRPAM. We have also been approached by other service providers looking to enter the oil sector in Mongolia and we are reviewing their credentials and equipment to see if they may offer a competitive solution for our needs now or in the future.

Block V Exploration

With the conclusion of our recent equity raise we are now preparing to drill the Velociraptor 1 well. With mean prospective resource potential of 200 million barrels recoverable and 380 million barrels recoverable of follow up potential in adjacent structures, the well will have a transformational impact for Mongolia as well as for the Company in the event of success.

We expect the well will be closely watched by the global E&P community as it has significance not only for the Company’s Block V but also for the many lightly explored or unexplored basins of southern and western Mongolia that constitute one of the largest remaining unexplored onshore exploration frontiers on the planet.

The rig contract has been signed with Major Drilling, an internationally active Canadian company that has been operating in Mongolia for over 20 years. Discussions with the contractor are underway to confirm a spud date during the second quarter of 2023. The well has a proposed total depth (TD) of 1500m and is expected to take c.30 days to drill. The well will be within the prospective target section from c.600m until TD and will have a suite of conventional wireline logs run. In the event of encouragement, an appraisal well will be planned and testing operations will then be conducted. With a domestic oil refinery under construction and with domestic oil production forecast to fall short of meeting the refinery’s needs, Petro Matad is seeing strong government support for its exploration efforts.

In addition, the Company is stepping up its community interaction in Block V to capitalise on the existing goodwill and to ensure that we continue to be accepted as a cooperative, constructive and trustworthy partner.

2023 Exploration Licencing Round

MRPAM’s Exploration Licencing round offering 14 blocks in prospective fairways across the southern half of Mongolia is in progress. Petro Matad has submitted an application for one of the blocks offered in Phase 1 of the process and hopes to be called to negotiate commercial terms and work programme in due course. The Company has identified three other blocks that are scheduled for release in phases 2 and 3 of the round during 2023 and will be doing the necessary technical work to determine if these blocks merit applications being submitted. Petro Matad has a significant competitive advantage as the country’s leading explorer with a skilled and experienced team and an extensive database built up over many years of activity.

Renewable Energy Opportunities in Mongolia

Following the Company’s review of the renewable energy sector in Mongolia and the recent changes in government strategy, the Company sees significant opportunity for a nimble and entrepreneurial operator to be successful in the country. The government’s energy strategy calls for an increase in the contribution of renewable energy to its overall electricity supply from c.10% now to 30% by 2030, to be fully self-sufficient and to be exporting power to its neighbours and potentially beyond by the end of the decade.

Petro Matad is forming a joint venture with a very active and successful Mongolian renewable energy project developer called SunSteppe Energy (“Sunsteppe”). The combination of SunSteppe’s expertise, contacts and track record with Petro Matad’s project execution experience and in-country support functions will give the joint venture an excellent capability to compete in the country’s growing renewables sector and to benefit from the early entrant advantages that the Company sees are on offer. Mongolia has huge renewable energy generation potential from solar and wind projects. The country has large areas of very lightly inhabited land and a firm commitment from the government to improve the environment and the wellbeing of its population, to reduce its emissions and to become an exporter of clean energy.

The joint venture being established will be called SunSteppe Renewable Energy and it is looking to develop multiple projects to construction ready status within the next 24 months. Priority projects have already been identified in solar supplied battery storage to help improve Mongolian grid efficiency and in clean energy supply to mining projects in the South Gobi region. Projects identified range in size from a few tens of megawatts to hundreds of megawatts.

Mike Buck, CEO of Petro Matad, said:

“Whilst we are pleased to see the process for special purpose certification of Block XX moving forward, we are disappointed with the pace and have made this abundantly clear to the authorities. Our recent interactions with the local authorities have given us renewed hope that we may be able to secure local land use approvals and we are pursuing these in parallel with the certification process.

We are very excited about the prospectivity in Block V and are looking forward to drilling Velociraptor 1 during the second quarter. This low cost well is targeting big resource potential and will have a huge financial impact for Petro Matad if it comes in.

We are also enthusiastic to get involved in the renewable energy sector in Mongolia through the SunSteppe Renewable Energy joint venture. Our Mongolian partners in this endeavour bring a wealth of experience and we have high hopes that it will generate attractive opportunities in the near term.

Our recent equity raise has given the Company the financial firepower it needs to maintain the Company’s operational capability, to execute a high impact exploration programme, to start production from our existing discovery once permits are secured, to pursue new acreage and to expand activities into renewables. We look forward to a busy and rewarding 2023.”

As most of the time with MATD in the last few years it has been two steps forward and one backwards. Today the step backwards is yet another delay in licencing Block XX which is disappointing.

The forward step could be a great deal more than two steps as the company is  planning to drill Velociraptor 1 during the second quarter and with a target of 200 million barrels recoverable and 380 million barrels recoverable of follow up potential in adjacent structures, ‘the well will have a transformational impact for Mongolia as well as for the Company in the event of success’.

And finally…

Tonight the Champions League is back and Spurs travel to AC Milan in the round of 16.

Last night in the Prem it was business as usual as Liverpool won the derby against Everton 2-0.

Yesterday I forgot to say, on Friday I mentioned Game Winner in the 2.30 at Kempton, despite the small  field due to the weather the horse beat all in front of him so thanks to new trainer Harry Derham and team…

Author @mgrahamwood

Disclaimer & Declaration of Interest
The information, investment views and recommendations in this article are provided for general information purposes only. Nothing in this article should be construed as a solicitation to buy or sell any financial product relating to any companies under discussion or to engage in or refrain from doing so or engaging in any other transaction. Any opinions or comments are made to the best of the knowledge and belief of the writer but no responsibility is accepted for actions based on such opinions or comments. The writer may or may not hold investments in the companies under discussion


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