Right place, right time, right commodity for Block
“…The company’s share price has ticked upwards over the summer, buoyed by solid revenues and the prospect of a new drilling campaign. Is there more good news to come?…”
Block Energy (AIM:BLOE), the Caucasus-focused oil and gas production and development company, seems to be on the market’s radar again after a period of consolidation during which it evolved a strategy for realising the potential of its now extensive portfolio of Georgian assets. The company’s share price has ticked upwards over the summer, buoyed by solid revenues and the prospect of new drilling campaign. Is there more good news to come?
BLOE listed in the summer of 2018 with a set of fields a few miles south east of Georgia’s capital city Tbilisi, notably West Rustavi which produced 50 Mbbls of light sweet crude during the Soviet era, with contingent resources of 38 MMbbls oil and 608 BCF gas in the Middle, Upper and Lower Eocene formations. The company was founded on the premise of bringing cutting edge drilling technology to Georgia’s intriguing but complex subsurface geology.
Despite test results that briefly set BLOE’s share price alight early in 2019, the company recorded only modest results from initial drilling at West Rustavi. But those early ventures were sufficient to indicate unexpectedly high gas-to-oil ratios, prompting the company to accelerate its gas offtake strategy. An agreement was struck with a local gas supply company for the offtake of West Rustavi gas with a view to serving a Georgian energy market almost completely dependent on imports from neighbouring countries. BLOE’s gas facility at West Rustavi came online last February.
Early in 2020 the company dramatically increased its footprint in the country by acquiring assets adjacent to West Rustavi through a cash-free deal granting previous operator Schlumberger 23.3pc of BLOE’s shares. The potentially transformative acquisition multiplied BLOE’s acreage more than 30 times, and opened several new development opportunities, including Block XIB, which prior to Schlumberger’s ownership had produced more than 180 million bbls of oil from the Middle Eocene, rates peaking in the 1980s at 67,000 bopd. The new assets increased the company’s 2P reserves of oil and gas by 64 MMboe, 2C contingent resources by 29 million boe, and prospective resources by 245 MMboe.
BLOE kept a relatively low profile through 2021, assessing the potential of the company’s accumulated assets through a two-well drilling programme and analysis of data inherited from Schlumberger and previous operators, including a 3D seismic survey. The first well, WR-B01a, which targeted an area of the reservoir less prone to fractures, disappointed, the results indicating that ‘the limited extent of the fracture networks adversely affected the overall well productivity’. But those insights informed the drilling of a successful second well, JKT-01Z, which after spudding late last year produced at a rate of 344 boepd, and has continued to make a solid contribution to the company’s overall production and cash flow profile.
A multi-well strategy
BLOE set out a new development strategy this year, organised into three projects designed to gradually unlock the potential of the company’s assets. Project I, for which the company is seeking non-dilutive funding, is designed to develop the Middle Eocene oil reservoir in the West Rustavi/Krtsanisi field that spans Blocks XIF and XIB, envisioning the drilling of five oil wells in the Krtsanisi anticline. Project II, which is being financed through existing cash flow, focuses on the infill development of the Middle Eocene oil reservoir in the Patardzeuli oil field in Block XIB. Project III will appraise and develop the natural gas resources throughout the Eocene in Blocks XIF and XIB.
BLOE’s most recent annual results offer a useful summary of the strategy: ‘Projects I and II will provide additional cash flow in the short to medium term from the sale of crude oil and natural gas while Project III promises to add significant value by better defining and ultimately monetising the extensive natural gas resources that lie under our portfolio of leases.’ The company acknowledges the uncertainties inherent in seeking to open up a relatively unexplored geology: ‘We appreciate that the risk relating to individual development wells is significant when compared to many other regions of the world where reservoirs are simpler. We think the best way to look at Block Energy is to consider the totality of the opportunities in the planned portfolio of wells, rather than on a well-by-well basis … providing each portfolio of new wells is successful as a whole in adding to production … shareholders … will see material returns on the investments made and our strategy going forward is to increase the number and frequency of wells that we drill.’
As the company began implementing the strategy this summer it published a Competent Person’s Report (CPR) as the basis for development funding for Project I. Focused on the Krtsanisi Anticline part of the West Rustavi and Krtsanisi oil field, the CPR stated Gross 2P Reserves of 1.07 MMbbls and NPV10 2P Reserves of $17.95 MM. In July BLOE reported that preparations for the first Project I sidetrack, WR-B01, were complete, including the connection of a gathering line from the well to the company’s gas facility, allowing for t he offtake and rapid monetisation of gas produced from the sidetrack. Discussions with potential lenders were at ‘an advanced stage’.
BLOE got Project II underway in July, with advanced preparation for the self-funded drilling of well JSR-01DEEP, planned as ‘the first of a series of wells in a wide range of … opportunities designed to evaluate large, undrained areas of the deeper zones of the Middle Eocene reservoir and test contingent resources of over 200 MMbbls’. The project involves the deepening of the existing well JSR-01, which was drilled by a previous operator in Block XIB’s Patardzeuli oil field. The original JSR-01 well penetrated only the upper 55 metres of the Middle Eocene reservoir, which is over 600 metres thick in Patardzeuli and has produced over 100 MMbbls oil. JSR-01DEEP’s well-path will be guided by 3D-seismic data attributes that indicate a zone of fracture corridors, the strategy was employed successfully at JKT-01Z in the West Rustavi-Krtsanisi field. BLOE confirmed drilling was underway earlier this month. Project III, the evaluation and development of the natural gas resources throughout the Eocene in blocks XIF and XIB, will commence ‘later this year’ with the workover of legacy wells where gas was discovered. Operations will include the potential sidetrack of the PAT-E1 discovery well, engineered for a 1000 metre horizontal section through the Lower Eocene and designed to evaluate over 300 Bcf of contingent gas resources.
After being obliged to undertake a series of placings during the company’s first couple of years, the stable production levels secured over the past 18 months, and the sharp increase in oil and gas prices, has allowed BLOE to record consistent financial returns. The company’s results for the year to 31 December 2021 stated revenue of $6,114,000, up from $1,255,000 for the previous 12 months. 86,700 barrels had been sold over the period, up from 34,421 barrels for 2020, at an average revenue of $63.65, as against $36.45. The company was still reporting a loss, but this was down from $5,512,000 to $4,783,000.
BLOE’s Q2 operations update reported further financial progress. Average gross production rate for Q2 increased slightly to 519 boepd (Q1: 512 boepd), generating revenue of $2,228,000, just down from a Q1 figure of $2,361,000. The company continued to benefit from higher prices. BLOE sold 21.2 Mbbls of oil in Q2 (Q1: 24.4 Mbbls) for $1,992,000 (Q1: $2,168,000), resulting in a weighted average price of approximately $94 per barrel (Q1: $89 per barrel), a 6pc increase in the realised price in Q2 compared with Q1. BLOE sold 58.4 MMcf of gas in Q2, (Q1: 48.4 MMcf) for $236,000 (Q1: $193,000), resulting in a weighted average price of approximately $4.04/Mcf (Q1: $4.00/Mcf). Cash at 30 June 2022 was $1.4m (31 March 2022: $1.2m).
Georgia after Ukraine
The company has to address inevitable questions about Georgia’s political status since Russia invaded Ukraine: Russia still holds two Georgian regions seized during the conflict between the countries in 2008. Concerns remain about the susceptibility of the ruling Georgian Dream party, which has governed the country over the past 10 years, to Russian influence: a contentious election last November was bitterly contested by opposition parties.
But though Russia’s aggression this year renewed tensions, they should be put in perspective. Although 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: ties with the EU were affirmed earlier this year. And 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. The country 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 have a stake in the country through its holding in BLOE.
Outlook
BLOE has come a long way since 2019, when tumultuous movements in the company’s share price reflected investor uncertainty over the value of its assets. Its stock hit highs of around 18p when one of the first West Rustavi wells recorded high flow rates that were not sustained. When the oil and gas market collapsed at the height of the pandemic the BLOE’s price fell all the way down to 1p. It is still below 2p, but is up nearly 65pc over the past six months, standing at 1.85p at the time of writing, taking the company’s market cap to £12.25m.
Since the Schlumberger deal BLOE has worked hard to assess how they can best be brought into production, laying down robust foundations for future growth. The company is cash flow positive, and is implementing a carefully considered strategy for developing its resources without going back to the market. It continues to benefit from robust domestic and regional demand for gas, and unrestricted direct access to European markets. Project II drilling is underway, and discussions are at an advanced stage for the funding for the Project I programme. Recent increases in the company’s share price notwithstanding, BLOE may still be in value territory.
