Is Europa Oil & Gas likely to get any cheaper than this?
“…with a range of interests across the UK and the Atlantic EOG would still seem to be well positioned to contribute to Britain’s urgent need for hydrocarbons…”
Exploration and production company Europa Oil & Gas (AIM:EOG) suffered a significant setback earlier this month when a potentially transformative appraisal well at the North Sea Serenity field, to which the company had committed £7m, failed to find the targeted horizon. But with a range of interests across the UK and the Atlantic EOG would still seem to be well positioned to contribute to Britain’s urgent need for hydrocarbons. What are the prospects for the company regaining its momentum?
Exploring the Humber and beyond
EOG balances exploration with a cluster of wholly or partly owned interests in producing onshore UK wells in the Humber basin, the most significant being a 30pc stake in the highly productive Wressle licence, where the Wressle-1 well has recorded one of the strongest flow rates in the UK since a hugely successful workover last year. The well is expected to easily exceed its current rate of around 800bopd once current production restrictions are removed. The venture partners are currently focused on advancing a development plan to enable production from Wressle’s Penistone Flags reservoir, where gross mid-case contingent resources of 1.53 million barrels of oil and 2 billion cubic feet of gas are estimated.
The company’s 100pc owned West Firsby licence is also notable. Alhough only producing around 40bopd, and late in its productive life, the field has been identified as an ideal candidate for geothermal production. EOG has entered into a Memorandum of Understanding with Causeway Geothermal to assess West Firby’s potential as a geothermal test and commercial deployment project. The company also has a pair of wholly-owned wells at Crosby Warren, producing around 30bopd, and a 65pc non-operated interest in the Whisby W4 well, which produces about 50bopd, 30bopd net to EOG.
EOG also has exploration interest in the east Midlands. The company has a 50pc interest in PEDL181, and a 30pc stake in Broughton North, a fault block immediately to the northwest of Wressle, which a CPR rates as having a high geological chance of success of between 40pc to 49pc, and gross mean unrisked prospective resources of 0.6 million boe. It has a 25pc stake in Hardstoft, adjacent to the UK’s first ever exploration well in a historic field first drilled back in 1919. A CPR has identified gross 2C contingent resources of 3.1MMboe and gross 3C contingent resources of 18.5MMboe that the application of contemporary drilling technology may be able to unlock. EOG also has a 35pc stake in Cloughton, a gas appraisal opportunity in the Cleveland Basin on the coast north of Scarborough.
The company also has a pair of significant prospects beyond the UK, notably its 100pc owned Inishkea prospect in the Irish Atlantic Margin, a Triassic gas hydrocarbon play estimated as having gross un-risked prospective resources of a mean 1,528 billion cubic feet (high estimate 3,606). Water depths are comparatively shallow at around 400 to 600 metres, and do not require harsh environment sixth generation drillships – the estimated cost of drilling is £37m. Gas infrastructure is already present at the nearby Corrib gas field, opening possibilities for a fast track path to commercialisation. The licence includes the Corrib North structure containing the 18/20-7 gas discovery well drilled by Shell in 2010, where a wide range of gas initially in place has been identified.
EOG also has a 75pc interest in the Inezgane Permit, offshore Morocco, covering an area of 11,228km2 in the Agadir Basin, lying in water depths of 600 to 2,000m. A commercial discovery has yet to be made, but one of the licence’s 10 wells has encountered 14m of gas condensate in Albian sandstones. The company says it has identified the key elements required for a working hydrocarbon system: source, reservoir and seal within the licence area, and a series of structural traps each of which with the potential to hold up to 250 million barrels of oil. EOG plans a low cost work programme including seismic reprocessing to mature these potentially large stacked structures to drillable status over the next two years, with a view to attracting partners to carry the company for an exploration well. The farm out process got underway last August.
Stressing over Serenity
Though EOG continues to develop the full range of its interests, the company’s news this year has been dominated by the tantalising prospect of a transformative appraisal well at Serenity, a North Sea field in which it acquired a 25pc interest this April,raising £7m to pay for its share of the cost of funding the £14m well, a big commitment for a company with an £11m market cap. But the prospect is undeniable. A discovery well in 2019 drilled by operator i3 Energy found 31.7o API oil, matching the oil from the Tain, Blake and Liberator fields, allowing i3 to publish a P50 estimate of 197MMbbls STOIIP (Stock-Tank Oil Initially In Place). The appraisal well was drilled this summer, designed to prove up additional volumes of hydrocarbons beyond those encountered in the original discovery well, which EOG estimated as having a gross value of more than $1bn, assuming a 35pc recovery factor.
So there was big disappointment when the well failed to fulfil that promise, EOG announcing that the well had been drilled to a total depth of 5,630 foot, but that the ‘targeted Lower Cretaceous Captain sand, which contained hydrocarbons in the 13/23c-10 well, was not present at this location. Over 100 feet of other Captain sands in various sequences were encountered but these were found to be water wet and as such a decision has been made not to run wireline logs.’ The one silver lining was that the expense was considerably lower than anticipated, costing £10.4m, with EOG’s share £4.8m. EOG said that although it was ‘a disappointing result the data gathered during the drilling of SA02 has improved our understanding of the Serenity field and we continue to interpret the well data which will help us establish a suitable development plan to maximise the value of the already discovered resources within the eastern area of the Serenity field.’ EOG’s ‘financially strong position’ would allow the company to push ahead with that plan, and continue with ongoing exploration and production across the rest of its assets.
That financial cushion is in large part due to ongoing strong performance at Wressle. An April operations update reported that production continued to far exceed the planned 500bopd: instantaneous rates of more than 1,000bopd had been achieved and the well was producing at permit constrained rates of 760 to 800bopd, production being limited by the 10 tonnes per day gas incineration limit imposed by the Environmental Permit. Pressure test analysis has indicated that unconstrained, Wressle-1 could produce approximately 1,200 and 1,500bopd. Regulators have granted permission for a revised Field Development Plan to allow export of the gas into the local gas distribution network, thereby allowing the well to flow at unrestricted rates.
EOG’s most recent interims, for the six-month period ending 31 January 2022, showed Wressle had helped the company to post its strongest interim financial performance since 2014. Revenue had quadrupled, up to £2.2m from £0.5m for H1 2021, and a pre-tax profit of £0.7m was recorded against a £0.7m loss for H1 2021. Net cash from operating activities was £0.9m (H1 2021: £0.2m), and the company’s cash balance stood at £0.6m. Average daily H1 2022 production was 208boepd compared to 86boepd in H1 2021. EOG was also benefiting from a 75pc increase in average realised oil price to $77.84 per barrel (H1 2021: $44.45). Last month the company said it had further strengthened its financial position through a £1m loan facility with Union Jack Oil, secured against an unencumbered 10pc interest in the Wressle field.
Unsurprisingly EOG’s share price has been knocked back by the anticlimax at Serenity, standing at 1.12p at the time of writing, down from around 3p prior to the announcement. EOG’s bold bet on Serenity has yet to be vindicated. The failure of the appraisal well rather exposes the company’s dependence on Wressle’s continued performance. It also denies EOG a new source of revenue that might expedite its suite of exploration prospects, particularly those offshore Ireland and Morocco.
That said, with wise marshalling of its resources, and a bit of luck, EOG is in a good position to help meet the UK’s urgent need for indigenous fossil fuels, confirmed by the North Sea Transition Authority’s award of a new round of North Sea licences: the regulator is expected to grant more than 100 permits to companies by the end of June 2022 as the Government seeks to bolster Britain’s self-sufficiency in energy following Russia’s invasion of Ukraine and the production choke points highlighted by the pandemic. The mooted lifting of the ban of fracking is fraught with political difficulty, but it is a further signal of the change in sentiment towards the production of home-based oil and gas.
EOG’s big investment in Serenity has left this small company somewhat stretched. But the move signalled its commitment to positioning itself as a significant provider of native hydrocarbons. The company continues to work with its partners to realise Serenity’s potential, the disappointment with the appraisal well not withstanding. Priced just over 1p, EOG is unlikely to get much cheaper than this.