Block Energy’s plans as it increases stake at West Rustavi and awaits significant well test results
The last few weeks have seen Block Energy build upon its robust start to the year by delivering strong newsflow from its highly prospective West Rustavi asset as well as its other fields in Georgia. With shares now sitting close to an all-time high at 4p, chief executive Paul Haywood talks us through his strategy for taking the business to the next level.
Block took a significant operational step forward at the end of February when it agreed to take a 100pc stake in West Rustavi, its most prospective asset. The prospect contains an estimated 38MMbbls of 2C oil resources and a legacy gas discovery. Meanwhile, one of its discovery wells flowed at rates up to 29,000 m3/d when initially tested in 1988.
Block said the new deal represents a 152Bcf increase in its attributable net 2C gas resources and a 9.5MMBbl rise in net 2C oil resources. It replaces the company’s original earn-in agreement, which stated that the firm’s interest would grow to 75pc once it had completed a workover and sidetracking programme.
Under the new agreement, Block no longer has to undertake specified workovers, preparations of wells for sidetracks, or specified sidetracks within determined periods. This would have required an aggregate expenditure of at least $4m. Nor will it have to purchase productions facilities up to a maximum amount of $1m, with the firm stating that current production facilities are fit for purpose.
Instead, its new agreement with current partner Georgian Oil & Gas (GOG) will be settled in three stages. The first stage, which has now completed, saw Block’s interest in West Rustavi grow to 71.5pc on the payment of $250,000 cash as well as a further $500,000 in shares. The second stage will see its hold rise to 90pc by paying another $250,000 in cash by August 31 this year or earlier. The final phase will see Block take full ownership of the asset by paying GOG another $500,000 in cash. GOG will then use this to subscribe for shares in Block.
To meet its initial requirements under the first stage of the agreement, Block issued nearly 10m shares to GOG earlier this month. A week or so later, the firm issued a TR1 notification showing that major institutional backer Miton’s position in its share capital had fallen from 3.1pc to below 3pc. Haywood highlights that this arose naturally because the City stalwart had been diluted slightly by Block’s equity raise:
‘Miton is invested in us through two or three funds. Following the West Rustavi transaction, we have issued more equity which has obviously diluted down all of our investors slightly, including major shareholders. So, Miton has not been selling; its holding is the same.’
Elsewhere, Block has been taking significant steps forward in its workover and sidetrack programme at West Rustavi. Earlier this month, the business announced that it had reached a total drilled depth of 2,659m at well 16a following successful horizontal sidetracking operations. Through this work, it identified significant oil and gas shows in the Upper and Middle Eocene formations. The company is aiming for a gross initial flow rate of 325bopd at the well, which would generate an annual free cash flow of $3.6m and payback well costs in less than six months at $60/bbl Brent.
Given the trouble that some other firms have had in drilling Georgia’s geology, Haywood tells us that the results at 16a have surpassed expectations:
‘The biggest tick in the box at this stage was that we were able to drill the well. There was a fair amount of scepticism in the market around our ability to do this, so getting the well completed was a great achievement in itself. The fact that we had live oil and gas shows while drilling as we had hoped is even better. Honestly, we couldn’t have expected cleaner or better results from our first drill at West Rustavi.’
The well is now undergoing testing, which is expected to take two weeks. Haywood said that proof of commercial production here could be a major boon for Block’s shares. Indeed, if it achieves its forecast 325bopd production rate, Block would move well above its corporate production breakeven rate by generating total free cash flow across its portfolio of $4.5m a year.
In a success case, the organisation will also begin preparations for sidetracking at a neighbouring well called 38, potentially boosting free cash flow further. As it stands, Haywood is optimistic about the outcome of testing at 16a:
‘We cannot predict if 16a will be commercial and we will know more when we begin to test. However, we think we have a great well on our hands here and look forward to continuing work at West Rustavi.’
Elsewhere, Block has also been taking steps forward across the remainder of its portfolio in Georgia. This includes the Norio and Satskhenisi fields, where the company is implementing a multi-well workover programme using a specialist micro-drilling tool. This has been chosen by Block to meet specific challenges presented by oil-bearing formations on its ground in Georgia.
Earlier this month, Block said production at a well called Norio 44 had increased significantly over a five-day period to reach 21bopd, above initial forecasts of 15bopd. The tool has also been used at another well called Norio 27, which has tested at 26bopd. This exceeds initial forecasts of 17bopd. Finally, it has been applied to a well called Norio 39. This is yet to be put on production but is targeting a rate of 10bopd.
All-in-all, Block’s work at wells 44 and 27 moves its current production rates across the two fields towards 60bopd. This represents a four-fold increase that takes Block to 60pc of its breakeven target of 100bopd at $60/bbl Brent.
Aside from testing 16a on West Rustavi, Haywood says another critical catalyst for Block’s shares could stem from work being undertaken by neighbour Schlumberger. The oil major is using its vast financial resources to target the same high impact gas play as West Rustavi, potentially helping to de-risk Block’s most prospective asset.
Haywood says Schlumberger is coming towards the tail-end of its current work programme, which has seen it drill a well and appraise a significant gas discovery on their permit. If it was to announce success, he says this could be a considerable coup for Block.
‘If Schlumberger were to announce a successful well sometime soon is a massive tick in the box for Georgia. Two, it would be a huge well on a discovery that has not been chased for some time. That would be massive, and would have a huge read across for us,’ he said.
With this in mind, Haywood adds that any success from Schlumberger could see Block begin appraising some additional gas discoveries at West Rustavi:
‘A tailwind from the Schlumberger operations next door would help us to appraise one or two discoveries then look at converting contingent resources to reserves and getting into development straight away. That could add significant value to our asset base.’
Doc recently spoke to Paul Haywood CEO about recent news, click here
Catch up with Paul who spoke to Bonnie Hughes in the studio recently here
The author does not hold shares but was remunerated for the article