State 16-2 well successfully plugged for future re-entry;
data evaluation ongoing;
planning and permitting underway for a potential horizontal lateral; and,
corporate outlook regarding the new U.S. Administration
Zephyr Energy plc (AIM: ZPHR), the Rocky Mountain oil and gas company focused on responsible resource development, provides an update on its project in the Paradox Basin, Utah, U.S. (the “Paradox” or the “Paradox project”) and other matters .
As previously announced, the State 16-2 well was drilled successfully and safely to a total depth (“TD”) of 9,745 feet in less than 19 days, a record performance versus historical drilling in the northern part of the Paradox Basin. In addition:
· The data acquisition programme secured 113 feet of continuous core from the Cane Creek reservoir.
· 31 sidewall cores were secured from 11 overlying secondary reservoirs, an increase over the initial goal of 20 cores from 7 overlying reservoirs.
· Open hole logs were run across the bulk of the Paradox Formation, and these logs are now being integrated with existing log data from the neighbouring State 16-42 well co-located on the same pad.
· Initial indications showed similar log responses to offset wells, suggesting the presence of hydrocarbons in multiple reservoir intervals.
· Data analysis is underway, and the Company expects to announce initial results on 29 January.
The Company now announces that following the completion of drilling and data acquisition activity, the State 16-2 well was plugged safely at 6,437 feet TD, and Cyclone Drilling’s Rig #34 was formally released shortly thereafter. The State 16-2 wellbore is stable and readily available for re-use as a host from which a future side track lateral appraisal well may be drilled.
The Cane Creek core and overlying reservoir sidewall cores have been transported to a laboratory in Houston for detailed analysis. Zephyr expects to receive detailed results from this analysis of reservoir data over the coming weeks and plans to give an initial report to Shareholders later this week as outlined above.
A decision on whether to drill the side track lateral will be made after Zephyr has full results from all of the data acquired, and the Board currently expects to make a decision by the end of March.
In order to assist and expedite that decision, Zephyr’s team has commenced the related detailed well design and planning work. The Company has also contracted to retain the services of the same experienced drilling operations team which successfully completed the vertical portion of the well. A draft Authorization for Expenditure (“AFE”) for the lateral well has been prepared, with total costs forecast at $3.5 million – this total includes both drilling costs and costs to equip the well for production. On a related front, over the coming weeks the Company will evaluate a number of possible funding sources for the lateral well, with alternatives that include strategic and industry partnerships.
In addition, the Company can also report it has applied for the necessary permits required to drill the horizontal lateral leg of the well. The State 16-2LN Application to Drill (“APD”), once granted, would allow Zephyr to fully test the commerciality of the Cane Creek reservoir with a goal of achieving near term oil and natural gas production.
Well and Project Economics
Zephyr has previously highlighted its economic forecast for the Paradox project, most recently in its presentation of November 2020 which is available on the Company’s website.
Updated for current commodity prices and reduced drilling costs as demonstrated by the State 16-2 well, the Company’s Paradox acreage is estimated to hold the following:
· Net 2C contingent recoverable resources of over 12 million barrels of oil equivalent (“mmboe”) from 30 wells; and
· Net present value of approximately US$93 million (pre-Federal Income Tax), using a flat oil price of US$50 per barrel and a ten percent discount rate (“NPV -10”).
Both estimates are solely for the Cane Creek reservoir and do not include the significant upside potential from additional overlying reservoirs. The estimates were calculated in accordance with the Company’s Competent Persons Report (“CPR”) prepared by Gaffney Cline & Associates (“Gaffney Cline”) in June 2018, and will be revised further once all data from the State 16-2 well has been processed.
A potential side track lateral on the State 16-2 well (the “State 16-2LN-CC”) is individually forecast to have strong economics as a standalone investment. Utilising production profiles generated from Gaffney Cline’s CPR, and updated with a $50 per barrel oil price and reduced capital expenditure estimates, the Board estimates the lateral side track could generate the following on a 2C basis:
Initial gross oil production rate: 780 barrels of oil per day
Estimated Ultimate Recovery: 550,000 barrels of oil and 1.8 billion cubic feet of gas
Return on Invested Capital: 169%
Single well net NPV-10: $4.6 million
The Board further believes that the overall Paradox project has potential to be a project of considerable scale versus Zephyr’s current market capitalisation, and the drilling of the State 16-2LN-CC side track lateral would be a major step forward as Zephyr seeks to unlock the considerable potential value of the project.
Corporate outlook regarding the new U.S Administration
The Company notes the Biden Administration’s new directive to grant temporary decision-making powers for federal land leasing and permitting decisions to senior personnel within the Department of Interior.
Zephyr has long anticipated the potential for a slowdown on federal lease sales and permitting under a new Administration, and welcomes the Biden Administration’s efforts to undertake a responsible review of current practices. The Board believes Zephyr’s core mission – to develop resources economically and responsibly, with the utmost care and minimal environmental impact – is well aligned with the aims of the new Administration.
The temporary senior-level review on new federal leasing does not impact Zephyr’s current leases, as the Company dedicated significant resources over the last eighteen months to solidify all existing federal leases across the entirety of its acreage within its 3D seismic position.
Similarly, the Board does not expect the temporary slowing of new federal drilling permits to have an impact on the Company’s planned potential drilling activities – the State 16-2 well is located on Utah state land, and permits for drilling within state lease boundaries are unaffected by the temporary federal permit review.
Zephyr also holds two fully approved federal drilling permits for wells on the Paradox which have not yet been drilled. With the potential drilling of the State 16-2LN-CC side track lateral, multiple additional state lease drilling targets and two existing federal permits, Zephyr has solid inventory through which to work should the federal permitting process be delayed longer than the 60-day period of the Administration order.
In addition, Zephyr’s larger business development and asset acquisition strategy is centered around Rocky Mountain basins in which a majority of land is under private rather than federal ownership.
Colin Harrington, Zephyr’s Chief Executive, said “We are thrilled with the results of the State 16-2 drilling campaign, and we eagerly await more detailed analysis from the data acquired. We expect to receive multiple rounds of reservoir information, and we look forward to updating Shareholders with our initial findings later this week.
“In the meantime, in order to maintain our significant momentum, we are moving full steam ahead with preparations for the potential horizontal lateral. Detailed planning and permitting is well underway – and in the event we elect to undertake the next phase of drilling, we will be well positioned to move forward on an expedited basis.
“Finally, I’d like to again reiterate my thanks to our partners, and for the incredible collaboration between our federal, state, academic and industry project teams. We very much look forward to the continuation of our joint efforts to unlock the significant economic value of the Paradox Basin while always minimising the impact on the environment in which we work.”
