Time to build a stake in Block Energy?
“…With a healthy balance sheet, and a significantly larger technical and operations team at its disposal, Block has every opportunity to show that Georgia does indeed have energy potential waiting to be unlocked through state-of-the-art technology…”
Block Energy (AIM:BLOE), an oil and gas production and development company focused on the former Soviet country of Georgia, looks set for a busy summer and autumn after a relatively quiet twelve months.
From 82 km2 to 2,622 km2 acreage
Block listed nearly three years ago with a cluster of assets a few miles south east of Georgia’s capital city Tbilisi, notably the West Rustavi field, which produced 50 Mbbls of light sweet crude during the Soviet era. The company’s founding premise was to bring contemporary drilling technology to proven Georgia fields, the immediate objective being to open up West Rustavi’s contingent resources of 38 MMbbls oil and 608 BCF gas in the Middle, Upper and Lower Eocene formations.
The company achieved only modest results from the first three wells it drilled at West Rustavi through 2019 and early last year, but the unexpectedly high gas-to-oil ratio offered tantalising indications of the field’s gas potential, prompting Block to accelerate its gas offtake strategy. An agreement was struck with a local gas supply company for the offtake of West Rustavi gas at $5.24/MCF, with a view to serving Georgia’s growing energy market: the country relies on gas for 40pc of its total energy use and is almost completely dependent on imports from neighbouring countries, local gas production currently accounting for less than 0.5pc of annual consumption.
One of the company’s early marketing plays was Schlumberger’s ownership of the Block XIB and exploration Block IX fields adjacent to West Rustavi, which was presented as proof of confidence by oil majors in the region’s potential. Last March Block took the market by surprise by announcing an agreement with Schlumberger to acquire the two fields. Finalised in November, the cash-free deal grants Block 100pc ownership through the offer of 23.3pc of the company’s share capital. The potentially transformative acquisition increases Block’s acreage more than 30 times, from 82 km2 to 2,622 km2, and opens several new development opportunities.
Block XIB is Georgia’s most productive block, having produced more than 180 million bbls of oil from the Middle Eocene, rates peaking in the 1980s at 67,000 bopd. Only four wells have been drilled in the field since 2009. Block’s new assets increase the company’s 2P reserves of oil and gas by 64 million boe, its 2C contingent resources by 29 million boe, and its prospective resources by 245 million boe.
Block’s current programme
A placing last December raised £5.28m to fund the first phase of a new two-phase development strategy. ln the first phase, to be implemented this year, Block will seek to increase production at its two existing West Rustavi wells, WR-38Z and WR-16aZ, drill at least one new West Rustavi well, begin a workover programme across the ex-Schlumberger fields, and continue to roll out gas production and sales. An indicated second phase will drill a further four wells through 2022 across all fields.
In February Block announced its first gas sales from an Early Production Facility (EPF) at West Rustavi. 38.4 MMcf of gas was sold for $125,000 at a weighted average price of $3.26/Mcf from mid February 2021 to the end of March. The EPF has capacity to produce up to 7 Mcf a day.
A major operations update earlier this month elaborated Block’s 2021 plans, and reported on Q1 sales. The company is aiming to drill two new wells, both at West Rustavi, and both targeting initial production of 600 boepd. The first, WR-BA, will be the first new horizontal well identified by a $1m 3D seismic survey undertaken in 2019. The well, which will target the top of the Middle Eocene reservoir, is close to the field’s EPF. If successful a second well, WR-BB, will be drilled targeting the same formation. Locations for further drilling in this area have been worked up. The scheduled Block XIB workover programme is also underway.
Block is currently producing at a (30-day average) production rate across all its licences of 555 boepd. The average production rate for February and March 2021 was 573 boepd, a rate generating sufficient revenue, at current oil and gas prices, to cover more than 95pc of the company’s operating and administration costs, preserving its existing cash for new wells and facilities. Those figures exclude WR-16aZ which is currently suspended for maintenance: the well has had persistent water damage issues since the summer of 2019.
During Q1 the company sold 26.3 Mbbls of oil for $1.37m at a weighted average price of approximately $52 per barrel, and since the Schlumberger acquisition has sold 30,603 bbls of processed Block XIB crude oil, netting $1.54m. As of 31 March 2021, the company had $6.8m cash.
Since the deal Block has also undertaken significant organisational change, integrating the staff and infrastructure inherited from Schlumberger. Just over half of the ex-Schlumberger workforce have been integrated into Block’s team, and all of the company’s 120 Georgian staff now work at a single base located in Block XIB, making for a more collaborative working environment. A reorganised technical team, including veterans of earlier Georgian drilling programmes with other operators, with expertise in well design, construction, intervention, integrity, and life extension, has been assembled, working from Block’s offices in Georgia and London.
Oil prices and Georgian politics
Like all oil and gas producers Block’s fortunes this year will depend somewhat on oil demand and prices, which have have been rising as the market anticipates renewed economic growth. After a bruising 2020 the majors have been performing better, BP (LON:BP) for example returning strong quarter earnings in March, hitting its net debt target a year ahead of schedule and achieving $4.7bn in asset sales. The International Energy Agency continues to revise its oil demand forecasts upwards, noting that the massive overhang in global oil inventories that built up during last year’s Covid-19 demand shock is being worked off, vaccine campaigns are gathering pace, and the global economy is beginning to move through the gears. The Agency forecasts world oil demand to expand by 5.7m barrels a day in 2021 – an upward revision of 230,000 b/d – with total consumption at 96.7m b/d Last year demand fell by 8.7m b/d. But it has ‘lingering concerns’ over the strength of the recovery in consumption: coronavirus cases are rising in Europe as well as India and Brazil, and global oil producers in the Opec+ alliance are expected to increase production in the coming months to meet a growing supply gap, putting prices under renewed pressure. Energy consultancy Wood Mackenzie is more bullish, expecting global demand to increase by 6.3 million b/d year on year in 2021, and that oil prices may reach $70-$75 per barrel.
An issue rather more specific to Block is investor confidence in Georgia’s economic and political stability. There has been political unrest since the country’s contentious election last November, the victory of the ruling Georgian Dream party, which has governed the country since 2012, was bitterly contested by opposition parties, the tension culminating in the arrest of the opposition leader following a police raid on the party’s headquarters. The EU has stepped in to help mediate the dispute.
There are also concerns over the ruling party’s susceptibility to Russian influence. Georgian Dream has intervened in two major infrastructure projects backed by Western investors – and opposed by the Kremlin – over the past year. In January a project to build what would be the country’s first deep-sea port, at Anaklia on the Black Sea, was cancelled, and the government has repeatedly intervened in a major project to build a planned fibreoptic network connecting Europe and Asia through Georgia and Azerbaijan, the digital equivalent of the Baku-Tbilisi-Ceyhan oil pipeline that became operational in 2006, sending Caspian Sea oil to western markets.
The current unrest should be viewed in context. Though there have been periodic flare-ups, since the Rose Revolution in the early 2000s all major political parties, including Georgian Dream, have repeatedly confirmed alignment with the EU, the US, and NATO. Georgia is tightly bound into the global community through its membership of organisations and networks including the World Trade Organisation, the Council of Europe, and the Organisation for Security and Co-operation in Europe. It remains a robust jurisdiction for oil and gas exploration, its continued appeal to the oil majors illustrated last summer when the country’s oil and gas agency announced that Austrian oil giant OMV had won an international tender to explore licences off the Black Sea coast. BP has been a lead investor in the Baku-Tbilisi-Ceyhan, South Caucasus, and Baku-Supsa pipelines. And in 2018 ExxonMobil signed an agreement with the Georgian government to carry out a comprehensive review of western Georgia’s hydrocarbon resource potential. Schlumberger, of course, continues to hold a stake in the country through its holding in Block.
The stars aligned for Block?
For the most part Block’s fortunes are in its own hands. The oil price seems set to hold at a decent level for the rest of the year, and the company has a well defined target market. Its challenge is to prove the long-term potential of its now considerable Georgian assets. With a healthy balance sheet, and a significantly larger technical and operations team at its disposal, Block has every opportunity to show that Georgia does indeed have energy potential waiting to be unlocked through state-of-the-art technology. If 2021 proves to be the year Block proves itself as a viable long term producer its current share price, which has hovered between 2.5p and 3p for some time now, could begin to look very cheap.
