Saturday, September 23rd 2023

Union Jack Oil PLC

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Looking for an opportunity to take a stake in Britain’s capacity to upgrade its native gas infrastructure? Then think Union Jack Oil 


The ongoing gas crisis has cruelly exposed Britain’s dependence on imported gas, highlighting the difficult task policymakers face in seeking to balance a long-term transition to renewables with the political imperative of keeping a lid on consumer energy prices.

Union Jack Oil (AIM:UJO) is a UK focused onshore oil and gas production, development and exploration company, aspiring to help boost native supplies. The company has stakes in a set of producing and exploratory assets around the Humber, which, with a cluster of world-scale chemical and energy operations that make it Britain’s largest energy hub, provides nearly a third of the nation’s oil refinery capacity, and contributes around £18bn towards the economy. Union Jack hopes to alleviate the region’s current dependence on oil and gas imports from overseas.

Encouraging progress at Wressle


The company has interests in three notable prospects, including a 40pc interest in the PEDL180 and PEDL182 fields at Wressle, on-trend with the producing Crosby Warren oilfield and the Broughton B-1 and Brigg-1 oil discoveries, which have performed strongly this year.

Coiled tubing operations undertaken in August at the field’s Ashover Grit reservoir has jumpstarted production that has significantly exceeded expectations, an update last month reporting flow rates of 884 bopd on a significantly restricted choke setting (30.5/64ths of an inch), and 480,000 cubic feet of gas per day. If those rates can be sustained the field would become one of the UK’s most productive, second only to the Wytch Farm field in Dorset, and would be ‘financially transformative’ for the company. Indeed Union Jack says that the full flow potential of the well, which has so far generated $480,000, has been somewhat restrained by the capacity of the gas handling equipment currently being used on site. The company is planning to upgrade the equipment to enable increased production volume and complete the testing of the well’s full potential before defining a plateau production rate. An updated Competent Person’s Report has been commissioned.

Extended well testing at West Newton


Union Jack also has a 16.665pc interest in the WNA-1, WNA-2 and WNB-1z discoveries at the PEDL183 field in West Newton (majority-owed by Reabold Resources which holds a 56pc stake). The wells are on-trend with the established offshore Hewett gas complex, targeting Permian Basin carbonates analogous to those extensively explored and produced onshore in the Netherlands, Germany and Poland. The picture at West Newton is rather cloudier than at Wressle. An Extended Well Test (EWT) is currently underway, probing a 65 metre hydrocarbon column in the prospect’s Kirkham Abbey formation which is suspected to have been subject to well bore damage, making it sensitive to fluid and water, and constraining its capacity to flow.

An update earlier this month confirmed ‘substantial hydrocarbon discoveries’ within the formation. Gas and light oil/condensate were recovered to surface from both the WNA-2 and WNB-1z wells, and multiple samples have been gathered for analysis. The update included an updated best estimate of the reservoir’s in-place oil and gas volumetrics, reporting thicknesses of 68 to 75 metres at depths of around 1,700 and 1,800 metres. The EWT has accumulated sufficient data through downhole logs, pressure geochemical and core analysis and Vertical Seismic Profile to progress a reservoir modelling study to determine an optimum production design.

Discerning Biscathorpe’s potential


Union Jack also has a 45pc interest in the PEDL253 field at Biscathorpe, situated within the proven hydrocarbon fairway of the South Humber Basin, and on-trend with the Saltfleetby gasfield, Keddington oilfield and the North Somercotes Prospect. Progress towards unlocking the field’s potential has been uneven, but the company insists ‘Biscathorpe remains one of the UK’s largest onshore un-appraised conventional hydrocarbon targets’.

There was disappointment early in 2019 when drilling and logging operations at the Biscathorpe-2 well failed to encounter the targeted Basal Westphalian sandstone formation. But ongoing analysis of samples has confirmed the presence of a 68 metre live oil column, and a full suite of gases ranging from methane through to pentane. The gross Mean Prospective Resources associated with the Basal Westphalian objective are estimated in the range of 3.95 to 6.69 million barrels of oil. A sidetrack from the main Biscathorpe-2 well is planned for next year.

Other interests


Union Jack has three other interests. It has a 55pc stake in the PEDL005(R) field at Keddington, located along the prospective East Barkwith Ridge, an east west structural high on the southern margin of the Humber Basin, and currently producing from Carboniferous Westphalian sandstone reservoirs. The company says that geological and geophysical studies indicate that potentially significant resources remain unswept at Keddington, opportunities to potentially increase production volumes by the drilling of a relatively inexpensive development well from the existing production site. The gross remaining Mean Contingent Resource is estimated at 567,000 barrels of oil (311,000 net to Union Jack). A near field exploration opportunity exists at Keddington South, which has a gross Mean Prospective Resource of 759,380 barrels of oil (417,659 barrels net).

The company also has a 50pc interest in the PEDL241 field at North Kelsey, a conventional oil prospect along trend and analogous to the Wressle oil development, which lies approximately 15 kilometres to the northwest. 3D seismic data indicates that the gross Prospective Resources range from 4.66 million barrels up to 8.47 million barrels of oil, with an aggregated Mean Resource volume of 6.47 million barrels of oil. 

Union Jack expanded its portfolio into the North Sea this year by taking a 2.5pc interest in the Claymore Piper Royalty Complex. The Complex has so far produced more than 1.8 billion barrels of oil and 262 billion cubic feet of gas. The company views the acquisition as an attractive low-risk entry strategy to the North Sea offering a reliable return without exposure to operational risk. The asset is expected to deliver a sustained cash flow for at least 10 years.

The company is financed to progress its current opportunities. It raised £3m last month for investment in Wressle’s infrastructure and the funding of the planned side-track well at Biscathorpe. Its latest half-year report stated a cash balance of £4,672,508 to 30 June 2021, and an uptick in revenues from £62,993 to £241,467.

The UK’s gas issue


The ongoing gas crisis highlights the hydrocarbon supply issues Union Jack wants to help address. Shortfalls in gas supply across Europe, with record prices being paid by suppliers, have sparked fears of an energy crisis this winter should the weather be even slightly colder than normal. Energy policy oriented towards net zero infrastructure has constrained investment in gas facilities, leaving the continent dependent on imported gas. Europe’s domestic gas supplies have declined by about a third in the past decade.

The UK’s predicament is particularly acute in some respects, its storage capacity run down during the decades in which it could rely on a ready North Sea supply. Britain now bids for some 20pc of its gas in an increasingly competitive liquefied natural gas (LNG) market. As Asia’s fast-growing economies have moved away from coal they have become rivals for the same supplies of LNG that Europe has come to rely on from countries such as the US and Qatar. British and European long-term policy is to prioritise investment in renewables, but gas remains an essential ‘bridging’ fuel, shielding consumers so far as possible from the higher prices generated by the shift to renewables.

The outlook for Union Jack Oil


Union Jack is well positioned to help ease supply pressures if it can unlock its prospects’ potential. But even if it can, the company will have to hope policymakers can navigate the political pressures that increasing native gas production would bring now that climate change is so politically sensitive. New gas projects in the UK are subject to significant drilling restrictions and licensing delays, as highlighted by Union Jack’s own experience last month, when a planning application for the expansion of a well site at West Newton was blocked by the local authority

Over the past few weeks Union Jack’s share price has fallen to its lowest level since the outset of the pandemic last year. After oscillating between 30p and 40p for most of the year the price dipped to just under 18p through September, reflecting the market’s disappointment with the operational issues at West Newton and dilution of share value through the recent placing. 

That dip, however, may prefigure a bounce. And although of course frustrating for private investors, the placing was undertaken to fund the promising developments at Wressle and side-tracking at Biscathorpe, which remains a decent longer term prospect. Like all natural resources small caps Union Jack is something of a risky play. But investors seeking opportunities to take a stake in Britain’s capacity to upgrade its native gas infrastructure may want to take a careful look at the company.