UK Oil & Gas PLC (London AIM: UKOG) is pleased to announce that further to its 23 July release, it has now successfully executed the participation agreement (i.e. farmin agreement) and the joint operating agreement with Aladdin Middle East Ltd (“AME”) for its 50% interest in the 305 km² Turkish Resan Licence (“Licence”) and the respective oil appraisal and exploration programme.
Further to its successful 02 October equity raise, UKOG will now fund its agreed share of key initial preparatory operations so that the first oil appraisal well, currently planned as Basur-3, a surface location for which has now been chosen, can be drilled as soon as practicable in early 2021.
Resan Licence: material overlooked recoverable oil volumes
As reported on 23 July, Xodus Group Ltd’s (“Xodus”)June 2020 report calculates the Licence to contain materially significant recoverable discovered and undiscovered prospective resource volumes (see glossary definitions), with calculated aggregate mean and high gross cases of 43.4 million barrels (UKOG net 21.7 “mmbbl”) and 84 mmbbl (UKOG net 42 mmbbl) respectively, details of which are shown in table 1 below:
Table 1: Total Licence aggregate discovered and undiscovered prospective resources (mmbbl)
Notes: 1. Table 1 shows an arithmetic sum of Xodus’ June 2020 Basur and Resan discovered resources and Prospect A undiscovered resources (see glossary definition). 2. Xodus report states that in the high case, 20% of OIP could reasonably expected to be recovered, however, tabulated P10 volumes show only c. 13.8% recovery. A 20% high case recovery would equate to a P10 recoverable volume of 120 mmbbl (60 mmbbl UKOG net).
Of the total resources shown in Table 1, the majority lies within the known Basur-Resan accumulation which is estimated to contain aggregate mean and high case discovered recoverable volumes of 37.2 mmbbl (UKOG net 18.6 mmbbl) and 67 mmbbl (UKOG net 33.5 mmbbl), respectively. The remainder, classified as undiscovered prospective resources, lies within undrilled prospect A.
The following summarises the key points made in the Company’s 23 July 2020 release and highlights why the board views the Licence to present a compelling and material growth opportunity for the Company:
· Overlooked material discovered resource and “oil-play”:
The Licence holds the significant 50 km² Basur-Resan geological feature tested at its western end by the 1964 Basur-1 oil discovery. Basur-1 flowed 500 bbl to surface over a 6-hour period from naturally fractured and dolomitised Cretaceous age Mardin limestones, an extrapolated rate equivalent to 2,000 bbl of oil per day. Basur-Resan is a geological lookalike to AME’s proven producing E. Sadak field, 20 km south west, and sits within the continuation of the same geological fold and thrust feature. E. Sadak is the first Turkish field to demonstrate the commerciality of the deeper Mardin play in the area. Prior to the E. Sadak discovery in 2014, exploration in the area focussed primarily upon shallower traditional Cretaceous objectives.
· Rapid success case monetisation possible – months versus years in UK:
E. Sadak was discovered and put into production in the same year, 2014, and has seen a total of 10 wells drilled to date. Unlike UK, which requires numerous planning and regulatory steps before production can commence, Turkish petroleum law Article 6 (10) states that licensees are obliged to develop the field and commence production following a discovery. E. Sadak thus demonstrates that licensees are able to transition a successful well test directly into long-term production with minimal delay. For comparison, the Company’s Horse Hill field was granted production status in March 2020, over 4 years after its first flow test in 2016, albeit a relatively quick process in UK terms.
· Greater recoverable resources than current UK projects:
(see table 1 above and tables 1 and 2 on page 15 of UKOG’s 2019 Annual Report).
· Similar chance of success to UK appraisal projects:
Moveable hydrocarbons to surface have been demonstrated by the Basur-1 flow test, as is the case for UKOG’s Loxley gas discovery. Greatest geological uncertainty in all UKOG’s appraisal projects is, therefore, the respective reservoir’s ability to deliver sustained commercial rates and volumes, a typical appraisal stage uncertainty.
· Significantly lower cost operations than UK:
Basur-3 well and flow test gross costs are estimated by AME at $3 million (£2.4 million) vs $7.5 million (£6 million) for a UK equivalent depth well e.g. UKOG’s recent Horse Hill-2.
· Modest project and country entry cost:
UKOG pays first $5 million of drilling and seismic costs, which equates to $0.115 per Xodus recoverable mean case net barrel.
· AME are a highly credible and successful Turkish operator with a 60-year in-country history. Possess key strategic knowledge as operator of first producing Mardin field, E. Sadak.
· Good benchmark crude price and guaranteed oil sales:
Produced crude is expected to be of Arab medium to light quality, which currently realises prices of c. $46/bbl, marginally above the $41/bbl current Brent price. Oil can be readily exported on existing roads to the Batman refinery 80 kms to the west. Turkish petroleum law states that a Turkish refinery must accept all indigenous oil and pay market price.
· Prime geological address, overlooked petroleum system:
AME’s nearby E. Sadak field firmly establishes the licence area to contain an extension of the prolific ‘naturally fractured’ limestone fold and thrust petroleum system of the Kurdistan region of Iraq (“KRI”), 80 km to the south, which, in turn, is part of the wider Iraq-Iran Zagros petroleum system, one of the world’s most important. The KRI system was itself only proven relatively recently after Iraq war 2, long after original Basur-Resan drilling between 1954 and 1970.
Stephen Sanderson UKOG’s Chief Executive commented:
“When compared to our material Loxley and Arreton appraisal projects, Resan offers even greater upside for similar risk, significantly lower operational costs and, more critically, given success, a far quicker route to production and cash flow. Resan is therefore a compelling and material growth opportunity that could provide potentially transformational reserves growth in the short term. It is a valuable addition to UKOG’s portfolio.
We look forward to the imminent start of preparations to drill the first Basur-Resan appraisal well and to a long and successful relationship with our new partner AME.”
Qualified Person’s Statement
Matt Cartwright, UKOG’s Commercial Director, who has over 36 years of relevant experience in the global oil industry, has approved the information contained in this announcement. Mr Cartwright is a Chartered Engineer and member of the Society of Petroleum Engineers.