Malcy’s Blog: Flash blog: Deltic, Prospex.

Another flash blog as we prepare to depart for pastures new and then home. 

Oil prices rallied yesterday, following the API the EIA inventory stats were also helpful although they emphasised the draw in gasoline and distillates rather than crude oil. Elsewhere in Riyadh, at the ‘Davos in the desert’ the gossip from Opec was that they won’t be bringing back those 180/- barrels at the meeting come December 1st, no surprise there then.

Finally, more on the budget later as companies work their numbers on the tax rates. But whilst initial thoughts that it wasn’t as bad as it might have been, it really does hit economics and makes it a less enticing place for potential investors. 

Indeed, the Government might have a particularly unlikely treble up, bringing forward decommissioning with all that is needed in costs to them, as well as reducing the tax take from the North Sea and then with less production having to bow and scrape to Dictators and Despots to buy their lower quality, higher carbon hydrocarbons for our own population. You couldn’t make it up and we are the laughing stock of the energy world…

Deltic Energy

Deltic has provided the following update in relation to recent drilling operations at the Selene prospect in the UK Southern North Sea:

Selene Discovery Confirmed

The Shell operated 48/8b-3Z well reached its total depth of 3,540 metres TVDSS on 17 October 2024 and proved a 160 metre thick section of Leman Sandstone. The top of the Leman Sandstone was encountered approximately 70 metres deep to prognosis with elevated mud gas readings, confirming the presence of gas, observed throughout the reservoir interval and into the underlying Carboniferous basement.

Subsequent wireline logging and fluid sampling have confirmed the presence of a live gas column above a gas-water contact at c. 3,370 metres which is in the middle of the B-Sand, the key producing interval within the overall Leman Sandstone section. Updated post-well structural maps of the Selene prospect point towards a maximum gas column of c. 100 metres.

Initial indications point towards a high-quality dry gas, typical of production from adjacent fields, with no reported H₂S.

Updated Volumetric Estimates

Based on the preliminary information available from the wellsite, Deltic has updated its volumetric model of the Selene discovery and now estimates Selene to contain gross P50 estimated ultimate recoverable (or ‘EUR’) resources of 131 BCF (P90-P10 range of 95 to 176 BCF) which is at the lower end of pre-drill estimates.

However, the bulk of the recoverable resources are concentrated in the higher quality B-Sand up-dip from the 48/8b-3Z well location which should support a simpler and cheaper development option with greater gas production per well than was envisaged pre-discovery.

The combination of a deeper structural crest and a shallower gas water contact has resulted in reduced gas column heights across the structure. The base of the B-Sand and most of the underlying C-Sand are now believed to be in the water leg across the south-eastern part of the structure, with the deeper gas readings from the well now interpreted as residual gas rather than a live gas column.

Reservoir Quality Better than Expected

The well has confirmed that the B-Sand reservoir properties at the well location were towards the high end of the ranges predicted pre-drill. The B-Sand encountered in the well was 53 metres thick (pre-drill P50 of 47 metres) with an average porosity of 12.1% (up from 11% P50 pre-drill) and a gas saturation in-line with pre-drill expectations.

These improved reservoir characteristics are supported by a downhole test, which recovered gas samples, and indicated permeabilities in the range of 1 to 5mD above the gas-water contact. These porosity and permeability attributes support the use of more favourable recovery factors for the B-Sand in the updated volumetric model.

As previously indicated, this well was not designed to accommodate a conventional surface flow test and all of the reservoir data required to support a potential future development plan and investment decision has been successfully acquired through this well.

Next Steps

Following demobilisation of the rig which is expected towards the end of next week, there will be a

period of detailed analysis of wireline data, core samples, fluid samples and pressure testing data which will further refine the geological model, volumetric estimates and the proposed development plan.

Based on the results of the well and the data collected, Deltic believes that the JV should be well placed to progress towards field development planning and a final investment decision on a future development without requiring a further appraisal well.

In addition to Selene, Deltic will re-evaluate the Endymion prospect, located on the north-eastern corner of the block, which is another low-risk Leman Sandstone opportunity that could be tied into any future Selene development.

As the JV updates the development plan Deltic will re-assess its economic models, however pre-drill modelling indicates that volumes over 100 BCF recoverable will remain economically viable, and ultimately produce material positive cash flows for the Deltic, under the fiscal regime announced in the budget on 30 October 2024.

Andrew Nunn, CEO, commented:

“Subsurface expertise lies at the heart of the Deltic equity story and remains central to the strategic approach we recently laid out for the Company. In this context, the outcome of the Selene well is a good result overall and extends Deltic’s exploration success record to two from two. Although we are predicting recoverable volumes at the lower end of pre-drill estimates, the improved quality of the B-Sand and increased resource concentration should support a simpler development with enhanced economics due to reduced CAPEX and OPEX requirements.

We are looking forward to engaging with Shell and Dana as we work through the customary post-well analysis and preparation of a plan which will move the Selene discovery towards development over the coming year. We continue to believe that the asset can create material value for our shareholders.”

It is very good news that Deltic has announced a discovery at the Selene well and whilst it is at the lower end of expectations it is a material discovery at 131 BCF and the second biggest find in recent years after Deltic’s previous success at Pensacola.  Recent wells in the SNS have been targeting much less (ie Baker prospect where drilling is ongoing is only c. 60 BCF and the Earn prospect was only c. 80 BCF pre-drill) so this still ranks highly and Selene should be considered a material and highly commercial find in anyone’s book. 

Perhaps more importantly the B-Sand reservoir quality is better than expected which is important and makes it 2/2 commercial discoveries.  This gives Deltic enormous scope as post-well analysis continues and leaves the company with a number of options going forward. 

The value of Selene will now increase as FID approaches and with 25% Deltic has a strong position to work with, don’t forget there should be no need for a further well before then. It may decide, should there be interest at a good price, to farm-down part of that interest to leave them with a decent residual stake and be carried to first gas.

As always CAPEX and OPEX are scaled in line with prospect size and reservoir quality, so with better B-Sand reservoir quality and recoverable resources concentrated in a smaller area, there will be a significantly simpler and potentially a more commercial development, for example instead of six wells being required it may be that just one or two would suffice. 

Finally, with anything more than 100 BCF of gas being a commercial discovery it is worth looking at the state of Deltic who are well placed to have much more scope to do other deals using the Selene find as currency. The shares do not reflect such a success and therefore I can see a great deal of upside once upside visibility becomes clearer.

Prospex Energy

Prospex Energy provide an update from the Selva Malvezzi production concession in Italy following the publication by Po Valley Energy Limited of its Q3 2024 activity report.  Po Valley Operations Pty Limited (“PVO”), a wholly owned subsidiary of PVE is the operator of the Selva Malvezzi production concession, which has a 63% working interest, while Prospex has the remaining 37% working interest.

Highlights

·    The Podere Maiar-1 well at Selva (“PM-1”) has continued to perform consistently during Q3 2024.

·    Average daily production for the quarter Q3 2024 was 76,910 scm/d.

·    PM-1 continues to sell the gas to BP Gas Marketing under a 12-month continuation of the offtake agreement.

·    Strong weighted average gas sales price for the quarter of €0.39/scm (~€37/MWh) an increase on the previous quarter (€0.34/scm).

·    Gross Quarterly production was 7.02 MMscm of gas (2.6 MMscm net to Prospex) and gross revenue for the quarter was €2.76 million (€1.02 million net to Prospex).

·    Routine slick line operation carried out in September 2024 with results in line with expectations and confirming an average daily production rate of 80,000 scm/day for the foreseeable future.

·    Four new drilling applications filed with the Ministry of Environment and Energy Security at the end of September 2024.  All four wells are located within the Selva Malvezzi Production Concession.

·    Environmental Impact Studies for these 4 new wells are well advanced and on track for submission in Q4-24.  Upon submission, the Ministry of Environment and Energy Security will commence their formal assessment.

·    Preparation for the 3D geophysical survey acquisition on the Selva Malvezzi Production Concession was significantly progressed during the quarter.  All environmental approvals have been received.  The geophysical campaign will commence once final sign off from the regional authority is received which is expected after the regional elections scheduled for the second half of November 2024.

Gas production and revenues from the PM-1 gas facility in the Selva Malvezzi Production Concession for the four quarters from Q4-2023 to Q3-2024 are shown in the table below:

Mark Routh, Prospex’s CEO, commented:

“I am very pleased to report that Po Valley Energy, the operator of our Selva Malvezzi Production Concession continues with sound and reliable operations ensuring consistent and increasing income from the concession as gas prices in Europe continue to rise.

“It is also very good news that the permits to drill the four further wells on the concession have been submitted to the regulatory authorities and that there has been positive progress on the permitting process for the 3D seismic survey planned to be acquired from Q4-2024.

“I have been advised by the operational team at Po Valley Energy that the recent flooding in the Emilia Romagna region in northern Italy has not affected the area of the Selva Malvezzi Concession nor the SNAM pipeline connection station.”

Decent pricing on the up has enabled Prospex to increase revenues and with more drilling upcoming I would expect more of the same. I would bet that this would continue to rise into the winter months making the company undervalued even if we don’t always know as much detail as we would like...