Malcy’s Blog: Zephyr Energy, Jadestone Energy.

WTI (Feb) $79.48 -70c, Brent (Mar) $84.98 -94c, Diff -$5.50 -24c.

USNG (Feb) $3.31 -27c, UKNG (Feb) 160.0p +18.0p, TTF €63.85 +€2.6.

Zephyr Energy

State 36-2 LNW-CC well update

Substantial hydrocarbons encountered – revised completion options being evaluated

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.

Drilling of the well commenced on 20 November 2022, with the prime objective to target potential production from the Cane Creek reservoir. 

Over the past week, having reached the reservoir at a depth of 9,598 feet true vertical depth, the well experienced a significant influx of hydrocarbons which consequently led to suspension of drilling operations while the well was stabilised.  The influx was caused by the well intersecting an apparent major natural fracture network in the reservoir, and the resultant flowing hydrocarbons are currently being diverted safely at surface through the drilling rig flare stack whereby they are subsequently flared.  Throughout this period, Zephyr’s operations team followed due well control procedure and stabilised the well without incident.

Zephyr’s team is analysing all options for the well’s safe completion, which may include running production casing and completing the well without drilling the remainder of the planned lateral. It is also likely that planned hydraulic stimulation will not be required for the well.

Further announcements will be made after additional analysis has been completed and once Zephyr selects the appropriate operational path forward.

Colin Harrington, Zephyr’s Chief Executive, said:

“First and foremost, I want to reiterate that the safety of our team and our contractors is our top priority, and continuing to maintain a safe operational environment is of paramount importance to us.

“While we’ve long planned to artificially stimulate the reservoir in order to achieve hydrocarbon production from the well, we’ve always known that encountering a natural fracture network was both a drilling risk and a feature that could significantly enhance the overall potential productivity of the well.  As such, all necessary procedures and precautions were in place in the event the well encountered an over-pressured natural fracture network.

“Whilst we’re in an early phase of assessment, previous wells in the Paradox Basin which successfully targeted natural fractures have historically been prolific production wells.

“I’d like to note that over the past two months, our operations team dealt with an exceedingly challenging drilling environment, which included mechanical issues and significant weather impacts from the historic atmospheric river system flowing over and from California.  While delays in isolation can be frustrating, the result is we now have confirmed hydrocarbon presence, significant reservoir over-pressure and the presence of a highly permeable natural fracture network at this location – all very encouraging signs for an economic and productive well.

“We will keep the market updated as we select the appropriate operational path forward to complete and produce the well.”

This is a great result for Zephyr, notwithstanding it came with the hitting of an apparent major natural fracture at the Cane Creek reservoir which has needed stabilisation and flaring and most importantly with the safety of the rig personnel. 

Fortunately Zephyr was fully prepared for such an outcome, the Cane Creek has form in such fractures and it also has a number of potential upside features within the options available. I understand that as mentioned above this may be a substantial well, highly productive and of course without having to drill much lateral and of course no fraccing costs. In addition, subject to being able to run production tubing, it might well flow substantial hydrocarbons safely to the surface which would be quite a result…

Whilst there is obviously no flow rate attached to this release, the rest of the RNS speaks for itself and I know that the team are delighted, historically Paradox operators have typically had large wells when they hit natural fractures. The potential here is incredible and I will add further comment when I have spoken to the team on the rig, they are a little tired right now. More tomorrow. 

Jadestone Energy

 Jadestone has announced that it has executed a sale and purchase agreement  with Salamander Energy Limited, an affiliate of PT Medco Energi Internasional Tbk, to acquire the Seller’s interest in three legal entities, which collectively own a 9.52% non-operated interest in the producing Sinphuhorm gas field and a 27.2% interest in the Dong Mun gas discovery onshore northeast Thailand. The headline cash consideration is US$32.5 million, to be funded from the Company’s cash resources.

Highlights

·    Jadestone is acquiring 4.6 mmboe[1] of 2P Reserves as at an effective date of 1 January 2022.  Based on the headline consideration of US$32.5 million[2], this represents an acquisition cost of ~ US$7.1/boe.

¡ It is anticipated that, due to the effective date of 1 January 2022, the cash consideration on completion will be approximately US$26.4 million plus working capital.

¡ Positive cash flow generation from a well-understood reservoir; stable and predictable gas production of approximately 1,600 boe/d net to Jadestone, based on current rates. 

·    Gas is contracted under a long-term high take-or-pay gas sales agreement with PTT as the buyer at a price linked to high sulphur fuel oil.  Recent gas nominations have consistently exceeded the daily contract quantity.

·    A first direct step to create significant natural gas production within Jadestone’s portfolio over the medium-term.

·    Scope 1 and 2 GHG intensity of Sinphuhorm operations is estimated at 7.5kg/boe of CO₂e, significantly lower than the upstream average, with the operator exploring plans to develop a carbon, capture and storage project at the field.

·    Establishes a low-cost platform for growth in Thailand, while re-engaging directly with PTTEP, Thailand’s National Oil Company, at the same time providing further diversification of the Company’s production base.

·    Sinphuhorm operating costs are approximately US$3/boe and will decrease the Company’s overall unit operating costs.

·    The acquired assets will be managed from Jadestone’s existing Southeast Asia offices, with no incremental G&A expense and there are very limited abandonment obligations (currently estimated at c.US$2 million net) associated with the assets.

·    The 9.52% interest in Sinphuhorm generated approximately US$20 million (unaudited) of EBITDA in 2022.

·    Jadestone estimates payback on the acquisition in circa three and a half years, with returns significantly in excess of the Company’s hurdle rates.

·    Jadestone sees potential to enhance value through further infill drilling on the Sinphuhorm field and the potential development of the Dong Mun discovery.

·    Management believes further equity in the Sinphuhorm gas field could become available in the near-term.

Paul Blakeley, President and CEO, commented:

“While modest in scale, this opportunistic tuck-in acquisition is low cost, low emissions intensity and very low decline production from the onshore Sinphuhorm gas field.  The asset is an excellent addition to our portfolio, diversifying our existing production base, and is a first important step towards building a significant natural gas position within our portfolio as part of our energy transition strategy.  Furthermore, these assets carry minimal abandonment liabilities and are administered under very attractive Thai I PSC terms with recent extensions to both the licence and the GSA. 

The asset is highly predictable and reliable, running at close to 100% uptime in 2022 and with a high take-or-pay to a regional power station for electricity generation.  We see upside from further infill drilling within Sinphuhorm, with wells planned in 2023 and 2024, and the potential development of the Dong Mun gas discovery, which is 100% owned by APICO, and which represents upside beyond the consideration paid.  Establishing a presence in Thailand, as well as re-engaging directly with PTTEP, will also leave us well-positioned to capitalise on further potential asset divestments that we see coming to market in the near-term.”

As Paul Blakeley says this is a small, add-on for the Jadestone portfolio but of high value and with plenty of upside.