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Block Energy continues sure and steady progress at West Rustavi

A keenly anticipated market update published by AIM-listed Block Energy in late December shows the company continues to make encouraging progress with the second well drilled at its flagship West Rustavi field in the Republic of Georgia.

According to the update the conditions for a productive well are in place: WR-38Z is flowing naturally following clean up operations, and is primed for production testing. New test equipment has been commissioned and installed for a multi-rate production test expected to take several weeks.

The announcement indicated progress on other aspects of the company’s drilling programme. The 3D seismic survey of West Rustavi conducted over the autumn has been completed on schedule, a significant operation in which several vibroseis trucks and an team of more than 100 contractors surveyed an area of around 100 square kilometres to ensure the 36.5 square kilometre field was fully covered. The company will now interpret the survey data to identify optimal locations for future drilling. And preparations for the workover of West Rustavi’s next sidetrack candidate, well WR-51, are underway: civil works have been completed and the wellbore prepared.

The update indicates the company is continuing to move on from a difficult summer when it struggled to manage expectations for the first well drilled at West Rustavi, WR-16aZ. The well seemed set to be a stellar performer when test results announced in April reported flow rates of around 1,100 bbl/d against a forecast of 325 bbl/d. The results allowed Block to conclude a whirlwind placing the following month, during which £12m was raised for the rapid escalation of its West Rustavi programme to include the sidetracking of multiple wells, the appraisal of the field’s gas potential, and the 3D seismic survey. The company’s share price, which had previously been hovering around its IPO level of 4p, quickly rose to levels touching 20p. Here, it seemed, was an ambitious young company that was succeeding in a tough former Soviet Union environment in which other start-ups had failed.

However, Block was brought back down to earth when the well-performed below (the then revised) expectations when it was reopened in July, with flow rates of around 360 boepd. Investor frustration was compounded by the time the company had to wait before it could report why the resumption rate was so much lower than the test flow. A detailed September update explained that water incursion from zones outside the targeted Middle Eocene formation had delayed Block’s ability to establish a stable production rate. Equipment failure during operations to cement the wellbore had left it open to flows from other formations.

With that announcement Block began to work towards restoring trust in its assets, operations and communications. Since then the company has published a stream of announcements ticking off steady progress through its programme. A gas offtake agreement with a Georgian partner has been signed. The planned 3D seismic survey has been commissioned and completed. An already experienced operations team has been further strengthened. A Georgian-based operations subsidiary, the Block Operating Company, has been set up. And milestones in the drilling of WR-38Z have been reached, informed by the lessons learned from operations at WR-16aZ.

Block has a long road ahead to meet its objective of establishing itself as a regional oil and gas producer. WR-38Z and subsequent wells in its drilling programme need to perform steadily to demonstrate the commercial viability of West Rustavi’s Middle Eocene formation. And it would be helpful if WR-16aZ turned into a reliable, even if modest, producer: the company is working to increase its net oil production by isolating and reducing the water the well is producing. The well has been temporarily shut-in while West Rustavi’s production facility is being upgraded, and is scheduled to return to production next month.

But the company’s fundamentals are sound. Following its placing Block has the funds for a substantial drilling programme: at its October AGM the company reported a cash balance to June 2019 of £10m. The company’s market cap is £20m. Georgia is one of the most stable of the former Soviet Union nations, with a parliamentary democracy, consistently strong economic growth, and a modest but established oil and gas infrastructure. The company has a strong operations team with deep knowledge of Georgia’s geology and hydrocarbons infrastructure, and a highly ambitious management team blending relative youth and experience, open to new opportunities in the Caucasus and beyond.

Block has had to learn quickly during an eventful first year during which it has withstood the challenges of the AIM and Georgian environments. But the steady progress the company has made over the past few months, consolidated by its latest operations update, indicate that is learning how to weather and overcome the storms that will inevitably accompany its growth. On this basis, we see Block Energy as good value, backed by a strong balance sheet and operational outlook.

Block Energy completes a critical phase of WR-38Z sidetrack

The author holds shares and was remunerated to write the article 

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