Right place, right time for Union Jack Oil
“…UK focused onshore oil and gas production, development and exploration company Union Jack Oil is well positioned to take advantage of Britain’s continued – and immediate – need for fossil fuels…”
With production at a flagship field soaring as it becomes clear the energy supply crisis will be with us for some time to come, UK focused onshore oil and gas production, development and exploration company Union Jack Oil (AIM:UJO) is well positioned to take advantage of Britain’s continued – and immediate – need for fossil fuels.
Full speed ahead at Wressle
UJO has holdings in a cluster of producing and exploratory assets around the Humber, a key UK energy hub, home to a web of world-scale chemical and energy operations, and nearly a third of Britain’s oil refinery capacity. It has significant stakes in several assets operated by exploration and production independent Egdon Resources (EDR:LON), the most lucrative being 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.
Coiled tubing operations undertaken last August at the Wressle-1 well jumpstarted production that significantly exceeded pre-production expectations of 500 bopd, 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, rates indicating the Wressle’s potential to rival the UK’s most prolific wells at Wytch Farm in Dorset.
The good news has continued to roll in. Analysis by energy consultancy ERCE of the bottom hole pressure data acquired from Wressle-1, published in January, indicated that once the field’s surface facilities are optimised and a gas monetisation scheme is in place, and assuming the current reservoir pressure and a flowing tubing head pressure of 400 pounds per square inch gauge (psig), the well could flow at rates of 1,216 bopd, and at 1,543 bopd at a pressure of 300 psig.
Last month the well was flowing at a sustained rate of 760 to 800 bopd, with 304 to 320 bopd net to UJO. Instantaneous rates of more than 1,000 bopd have been achieved, but production is currently controlled by the 10 tonnes per day gas incineration boundary set by the current Environmental Agency (EA) permit. A revised field development plan, allowing for higher production, has been submitted to the North Sea Transition Authority (NSTA) – formerly known as the Oil and Gas Authority. The likely gas monetisation strategy will be to export gas through a short pipeline of approximately 600 metres from the Wressle site into the local gas distribution network. If planning and EA consents are granted work is scheduled for completion towards the end of the year, in time for gas sales next winter: environmental monitoring throughout the operations to date has shown no measurable impact on surface or groundwater quality or related seismicity, and noise levels are within the permitted levels. Work is also underway to tap Wressle’s Penistone Flags reservoir, which has gross mid-case contingent resources of 1.53 million barrels of oil and two billion cubic feet of gas.
Executive Chairman David Bramhill says ‘Wressle has effectively transformed the financial position of Union Jack’. The well has so far produced more than 150,000 barrels of oil with no formation water produced to date, earning UJO $5m. Net revenues of £2.4m have been registered to date this year, already well beyond 2021 year-end unaudited revenues of £1.8m. The company is now debt free, and ‘covered for all operational and contracted or planned CAPEX costs, including drilling’, with cash balances and short term receivables of £7.05m.
UJO has commissioned energy consultancy Gaffney Cline to undertake a reserves and resources report to further define Wressle’s potential by analysing 1P/2P/3P reserve values for the field’s Ashover Grit and Wingfield Flags reservoirs, setting an indicative 2C profile for the Penistone Flags reservoir, and highlighting any additional potential reservoirs.
Other Egdon-operated prospects
UJO also has a 45pc interest in the EDR-operated PEDL253 field at Biscathorpe, situated within the proven hydrocarbon fairway of the South Humber Basin, and on-trend with the Saltfleetby gasfield prospect. Drilling and logging operations carried out in 2019 at the field’s Biscathorpe-2 well indicated 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 targeted Basal Westphalian formation are estimated in the range of 3.95 to 6.69 million barrels of oil. The venture partners are currently seeking planning permission from Lincolnshire County Council for side-tracking operations.
UJO 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, with opportunities to potentially increase production by drilling a development well from the existing production site. A subsurface review has highlighted a viable drilling location in the east of the field targeting up to 180,000 barrels of oil: planning consent is already in place for a potential side-track from one of the field’s existing wells. There are also near-field exploration opportunities at Keddington South (mean prospective resources of 635,000 barrels of oil) and the Louth Prospect (mean prospective resources of 600,000 barrels of oil).
UJO has a 50pc interest in the PEDL241 field at North Kelsey, a conventional oil prospect along trend and analogous to the Wressle oil development. 3D seismic data indicates gross prospective resources ranging from 4.66 million barrels up to 8.47 million barrels of oil, with an aggregated mean resource volume of 6.47 million barrels. The partners were frustrated by Lincolnshire County Council’s decision earlier this year to block an application to extend the permit to drill the North Kelsey-1 exploration well, Mr Bramhill commenting that it was a ‘rather odd and disturbing decision taking into consideration current world events and the clear need for the UK to secure new indigenous energy supplies.’ An appeal is expected ‘in H2 2022’.
UJO has stakes in two other EDR prospects that may be repurposed for geothermal production. It has a 20pc interest in Fiskerton Airfield, where the current focus is on maximising oil production from existing wells, after which they may be used to manage water produced from other sites, with longer term possibilities for geothermal. UJO has a 16.67pc interest in Dukes Wood, where a programme to plug the existing oil well and recomplete it for geothermal heat production has been developed and submitted to the NSTA.
Beyond its ventures with EDR, UJO 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 with 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.
Extended well testing has reported ‘substantial hydrocarbon discoveries’ within the prospect’s Kirkham Abbey 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. Best estimates of the reservoir’s in-place oil and gas volumetrics indicate thicknesses of 68 to 75 metres at depths of around 1,700 and 1,800 metres. The venture partners have secured planning permission for drilling and production at West Newton A and a time extension allowing further exploratory drilling at West Newton B.
UJO expanded its portfolio into the North Sea last year by taking a 2.5pc interest in the Claymore Piper Royalty Complex, which has so far produced more than 1.8 billion barrels of oil and 262 billion cubic feet of gas. The company considers the acquisition an attractive 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.
Planned dividend/share repurchase programme
Earlier this year UJO reported that its strengthened financial position would allow it to develop a capital allocation and distribution policy to allow the payment of a dividend or implement a share repurchase programme. The company would maintain ‘a consistent and disciplined approach to capital allocation’ to continue to develop its operations, but would seek shareholder approval to free up capital to allow for the payment of dividends or share repurchase, in accordance with regulations specifying that such programmes can only be funded through distributable reserves. The matter will be put before stakeholders at the company’s forthcoming AGM for the year ended 31 December 2021.
Plugging the UK’s energy supply gap
Wressle has come on-stream just as the UK, along with the rest of Europe, is attempting to navigate profound energy supply issues exposed by the pandemic, and aggravated by the Ukraine conflict. Energy policy oriented towards net zero infrastructure had constrained investment in gas facilities, leaving Europe dependent on imported gas: the continent’s domestic gas supplies have fallen by a third or so 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. The phasing out of Russian supplies is an unexpected, and severe, tightening of the screw.
Last year the UK was able to meet 40pc of its gas requirements from domestic supply, but the NSTA’s most recent domestic oil and gas supply forecast suggested native production was well below what would be required to meet the Government’s Balanced Net Zero Pathway to 2050. A report by energy consultants Wood Mackenzie published earlier this year examining the levers the North Sea can pull to increase production said ‘the UK is sorely lacking in gas and will be heavily reliant on imports in all scenarios.’
The Government has put offshore wind and nuclear power at the centre of its new energy security strategy, which aims to produce 95pc of the UK’s electricity from low-carbon sources by 2030 and reduce the country’s vulnerability to highly volatile global commodity markets. But the strategy also stresses the imperative to source more fossil fuels domestically, both to meet urgent immediate demand and ensure sufficient residual gas production to meet 2050 net zero targets. This year the UK’s North Sea regulator will hold its first oil and gas licensing round since 2020.
UJO’s share price has surged since Wressle’s supercharged performance, up 75pc over the past six months to just over 28p at the time of writing, taking the company’s market cap to £32m. The present macroeconomic climate is highly favourable for the company, and production at Wressle looks solid. Further value could be unlocked through the successful implementation of the field’s gas monetisation strategy (which may tap additional reservoirs such as Penistone Flags), planning breakthroughs at Biscathorpe and North Kelsey, side-tracking at Keddington, and ongoing exploration at West Newton.
UJO seems well financed for its current plans, but prospective investors should note that the company went to the market last September to raise £3m for investment in Wressle’s infrastructure and the funding of the planned side-track well at Biscathorpe. Even so, UJO appears to offer plenty of upside, a British firm well placed to help meet the UK’s pressing demand for indigenous gas.