By Elias Jones
Block Energy CEO Paul Haywood Interview
TMS welcomes back guest blogger and financial commentator Elias to the platform where he shares great insight from his latest interview with Block Energy (LON:BLOE) an AIM listed exploration and production company focused on the Republic of Georgia.
Six months have passed since the first interview with the Block Energy CEO Mr Paul Haywood, at the time the company share price was at 3.5p, it is probably fair to say now as we conduct a follow-up interview that it has been a very busy and successful period for the company. Block Energy, a relative newcomer to the AIM market, recently raised £12m at 11p, mainly to progress its West Rustavi asset, this was off the back of an encouraging first horizontal sidetrack well at West Rustavi, reported as probably the best oil well seen in Georgia over the past 50 years.
Without further ado, let’s get to the questions:
Q1. We see many O&G companies underestimate the importance and often the complexity of the political, legal and social aspect of operating in different countries. Now, 12 months since IPO, how do you find that period has been in terms of local and national stakeholder cooperation and relationships?
As you say, political, legal and cultural differences make operating in a Former Soviet Union (FSU) interesting. But Georgia is now a modern democracy, with a stable fiscal and regulatory environment, well-established oil and gas infrastructure, and a solid production service agreement framework. Since our IPO in June 2018 Georgia has continued to affirm a Western-oriented economic and political outlook, strengthening ties with the European Union and NATO. We have entered into several intricate agreements with our Georgian partners, including the securing of drilling equipment on favourable terms with services company Georgia Oil and Gas (GOG), a gas offtake agreement with Bago Ltd, one of the country’s largest private gas suppliers and purchasers, and an oil storage contract with Georgia Oil and Gas Corporation (GOGC), the state-owned national oil company. We look forward to building those relationships and forging new ones as we continue to work towards our objective of becoming Georgia’s largest independent oil and gas company.
Q2. Can you give an overview of the recently drilled West Rustavi 16az and the production process, storage and distribution for this well?
As everyone who has followed our progress over the past year knows 16aZ recorded excellent oil production rates of at least 1,100 bbl/d when tested earlier this year, more than three times higher than pre-drill expectations, confirming the field’s company-making potential.
The well was flowing so strongly that we needed to quickly secure much greater storage capacity than was available onsite. So we’ve entered into an agreement with GOGC to hire up to 90,000 bbls of Oil capacity at their principal storage facility, about 30 km from West Rustavi along the Khakheti highway, one of the country’s main transport arteries. The agreement will allow 16aZ to flow at its full potential, opening the prospect of excellent netbacks of US$36/bbl at US$65/bbl Brent, and US$3.40/MCF for gas. We are also building our West Rustavi’s onsite central production facilities to a capacity of 4,000-5,000 bbl/d.
Q3. The second well projected for horizontal sidetracking at West Rustavi field is well 38, when do you foresee this well being spud? and what comes after this well?
The excellent results at West Rustavi prompted us to undertake a successful £12 million fundraise to secure the funds necessary to pursue a more aggressive work programme than originally planned, positioning us to unlock the field’s full potential more quickly. The programme includes the sidetracking of four other West Rustavi wells, beginning with well 38, which is adjacent to and analogous with 16aZ. We keenly anticipate sidetracking well 38 in Q3 this year, then moving on to the other wells in turn. We’ll test two of the wells for historic gas discoveries as well as oil. While we’re drilling we will acquire a 3D seismic survey to allow us to identify optimal locations for new gas wells and horizontal oil wells across the field. The development of West Rustavi’s own central production facilities, which as I mentioned in response to your previous question, is also part of the fundraise programme.
Q4. The gas potential at West Rustavi does seem interesting, however, would it be fair to say that this is a long time off potentially benefiting the company in terms of potential cash flow due to the limited infrastructure in place?
West Rustavi’s gas potential is certainly interesting – our Competent Person’s Report (CPR) prepared at the start of 2018 by Gustavson Associates estimates West Rustavi to have 608 BCF legacy gross unrisked 2C contingent resources of gas in the Eocene and Cretaceous layers. And it’s already set to boost our cash flow: gas has been tested at well 16aZ and an agreement for its offtake reached with Bago, which will acquire gas produced from West Rustavi and will fully finance all gas infrastructure the field requires, including pipeline tie backs to local infrastructure and gas processing plant solutions. The agreement opens up an additional annualised revenue stream of around US$1.0m for us through the sale of the well’s 14,000 m3/d of associated gas. But you are right to say that we have work to do to realise West Rustavi’s tremendous gas potential. As I’ve said, we secured £12m of new funds precisely so that we can open up the field’s assets much more quickly. Our post-fundraise programme includes the testing of historic gas discoveries at two West Rustavi wells, and the 3D seismic we’re acquiring will allow us to identify the best locations for new gas wells.
Q5. The Norio asset has been put in the shade of market focus by the recent success at West Rustavi, does this now detract company attention and resource from Norio? What can shareholders expect going forward from this asset? Has the micro-drilling perforating tool currently being deployed for operations at the Norio field made a difference?
As you say it’s understandable that all the attention so far has been on West Rustavi, but we’ve never lost our belief in the potential of our Norio and Satskhenisi assets. Norio has 2P oil reserves of 1.6 MMbbls, and gross 2C contingent oil resources of 7.2 MMbbls, and Satskhenisi 2P oil reserves of 14 Mbbls, 27.8 MMbbls gross 2C contingent oil resources, and 16.4 BCF gross 2C contingent gas resources.
Since Q4 last year we’ve undertaken several workovers across Norio, and the application of the specialist drilling tool we imported from North America – technology applied for the first time in Georgia – helped increase the field’s production from 10 bopd to an approximate 40 bopd. We will continue the field’s workover programme.
Q6. It was noted recently that Block Energy intends to acquire 3D seismic data, what are you hoping for out of this work?
Yes, acquiring a 3D seismic survey is a critical element of our post-fundraise programme. We expect the data it will provide to allow us to place and sidetrack wells as accurately as possible, greatly enhancing productivity.
Q7. The recent £12m fundraising in a short space of time did seem quite impressive, can you tell us a bit about this funding round?
The fundraise was very well supported by institutional investors for whom our success at well 16aZ provided strong support for our value proposition. We have the full support of our investor base for our aggressive development programme, which starts with intensive back-to-back drilling across West Rustavi.
Q8. Are you seeing expansion opportunities out there in Georgia to enhance the Block portfolio? Or will attention purely be over the next 12 months on current asset operations?
Yes, we have always been on the lookout for new assets in Georgia and beyond, and our fundraise really opens up the range of prospects available to us. Over the past few months we’ve had many discussions with parties interested in entering Georgia, and lots of interest regarding mergers and acquisitions. We’re a young and ambitious company ever alert to new opportunities for bringing the best production technologies and techniques to Georgia and the wider region.
Q9. It has been a fantastic first year for Block Energy on AIM, what can the shareholders expect over the next 12 to 18 months?
Thank you! Since the fundraise we’ve been working hard to put in place the elements of our £12 million programme. The oil storage agreement we’ve entered into with GOGC allows us to ramp up production from West Rustavi well 16aZ, and we look forward to updating our supporters with news of our back-to-back drilling programme, starting with the exciting well 38 prospect.
Thanks, Paul for taking the time to discuss the various business aspects and for sharing your thoughts.
Ticker code: BLOE, Shares in issue: 389m, Current SP: 13.45p, Market Cap: £52m, 52 Wk Low: 2.55p, 52 Wk High: 17.50p
Last week Andrew Scott of proactive caught up with CEO Paul Haywood here.
(The interviewer holds shares in Block Energy but was not remunerated to conduct the interview)
Oil Storage Agreement
Close of Accelerated Bookbuild
W Rustavi well 16aZ Update
As always, when looking at oil and gas exploration activity the risk element is high, and a dry or non-commercial well almost certainly results in a severe share price drop. Oil and gas exploration activity is also a very costly business, hence the future economic outlook and the ability of companies to raise future funds also needs serious consideration, alongside factors such as oil/gas price risk, political risk etc.
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