Is Block Energy the most active Company in its peer group?
“…The agreement with GOGL highlights the company’s proven deal-making capacities. This farm-out enables Block to combine and progress advanced exploration opportunities (800 MMBOE) with a capable and well-qualified operator…”
Block Energy (AIM:BLOE) continues to execute an evolving strategy for unlocking 800 MMboe across a now extensive portfolio of oil and gas assets in the country of Georgia, implementing a three-part plan complemented by a new farm-in agreement with the country’s largest exploration company.
Founded on the premise of bringing cutting edge drilling technology to a set of fields whose promise was proven during the Soviet era, the company’s exploration is underpinned by revenues generated from a cluster of producing wells. BLOE listed in the summer of 2018 with a set of fields on the outskirts 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 first few wells drilled by the company produced with unexpectedly high gas-to-oil ratios, prompting the company to accelerate its gas offtake strategy with a view to serving a Georgian energy market almost completely dependent on imports from neighbouring countries. Sales from the company’s West Rustavi gas facility commenced last year.
BLOE’s story commenced a new chapter early in 2020 when the company took advantage of an unexpected opportunity to acquire significant assets adjacent to West Rustavi from departing operator SLB (formerly Schlumberger). The deal multiplied BLOE’s acreage more than 30 times, granting ownership of a cluster of development opportunities including Block XIB, which during the Soviet era had been Georgia’s most prolific field, producing more than 180 million bbls of oil from the Middle Eocene reservoir, rates peaking in the 1980s at 67,000 bopd. Together the new assets increased the company’s 2P reserves of oil and gas by 64 MMboe, its 2C contingent resources by 29 million boe, and its prospective resources by 245 MMboe. The acquisition began to look better still when SLB said late last month that it had decided not to take up the option to acquire the 108 million shares in BLOE granted to the major as part of the deal, thereby removing the prospect of a significant dilution in the value of BLOE’s stock. 12 million further options have been assigned by SLB to Jindal Petroleum, due to expire 30 November 2023.
An evolving three part strategy
The company gained the time it needed to assess how best to develop its new assets through placings and the drilling of what to date remains its most successful West Rustavi well, JKT-01Z, which came online at a rate of 344 boepd and has produced a cumulative volume of 64,000 boe over 11 months of continuous production, securing an approximate 2.5 times return on capex. The company unveiled its development strategy early this year, organised into three projects designed to gradually open up the potential of its now substantial Georgian assets.
Project I, for which the company is seeking non-dilutive funding, seeks to develop the Middle Eocene layer in the West Rustavi/Krtsanisi field spanning two blocks, XIF and XIB, and envisages three sidetracks and two new wells. BLOE published a Competent Person’s Report (CPR) this summer to attract develop funding for Project I, highlighting the potential of the field’s Krtsanisi Anticline, estimated to have Gross 2P Reserves of 1.07 MMbbls and NPV10 2P Reserves of $17.95 MM. Project II, which is self-funded, focuses on the infill development of the Middle Eocene oil reservoir in the Patardzeuli oil field in Block XIB. Projected funds from Projects I and II will anchor Project III, a longer term venture to appraise and develop the extensive natural gas resources that BLOE’s analysis indicates is present in the Eocene layer under Blocks XIF and XIB.
BLOE’s investment case asks that investors take a holistic view: results from each well should be viewed in the light of its position within the overall strategy. As the company’s most recent annual report put it, ‘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.’
Progress through 2022
The company has forged ahead with the plan this year. 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 the 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 the 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 have indicated a zone of fracture corridors, a similar strategy to that employed successfully at JKT-01Z.
Project III, the evaluation and development of the natural gas resources throughout the Eocene in blocks XIF and XIB, will begin with the workover of legacy wells where past operations have recorded gas discoveries. 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 more than 300 Bcf of contingent gas resources.
A November operations update reported on further progress across all three projects. Testing operations are underway at Project II’s JSR-01DEEP, evaluating three independent intervals of the reservoir with differing fracture characteristics, and thereby accurately defining oil-productive zones. Both oil and gas have been produced to the surface, and high losses cumulative of 45,000 bbls of fluid have been recorded, ‘a positive indicator of highly transmissible natural fractures’.
Project I’s WR-B01 is being side-tracked some 500 metres to the west and up-dip of JKT-01Z, and like the earlier well targeting a fracture system identified by a high density of seismic attribute lineations but on the west side of the anticline. BLOE says the company ‘is well placed to fund WR-B01 ST from cash reserves and ongoing cashflows’ but discussions regarding non-dilutive funding ‘remain ongoing’.
While focused on developing cash flow from Project I and defining Project II’s reserves, BLOE continues to lay the foundations for Project III, pursuing a work programme including 3D seismic interpretation and correlation of seismic attribute lineations with legacy production test data. The company has upgraded its service rig to support the advancement of Project III with low-cost drilling and workover activities, and workover and retest candidates are being selected. An update will follow when operations commence.
Farm-out agreement with with Georgia Oil and Gas
On 12 December BLOE’s three-part strategy was extended to include a new Project IV, a farm-out agreement with Georgia Oil and Gas Limited (GOGL), the country’s largest exploration company, for a work programme on areas of the XIB licence not previously covered by the strategy. The agreement grants GOGL a 50pc participating interest in the Didi Lilo and South Samgori areas of XIB in return for committing to a $3m work programme that will include the acquisition and processing of 210 km of 2D seismic data and the reprocessing of 1,000 km of existing seismic data within and around Didi Lilo, South Samgori and the remainder of XIB. GOGL has assigned a risked (P50) Resource to the two areas of more than 400 MMboe.
The transaction will have no impact on BLOE’s existing production base or operator status across all existing fields, and will cap BLOE’s commitment to $50,000 until GOGL elects to acquire a 3D seismic survey over the areas and/or drill a well. BLOE will retain the optionality to either benefit from a carry, fund its share of any future 3D survey/drilling or further farm-down its interest in the licence areas. CEO Paul Haywood said: ‘This farm-out enables Block to combine and progress advanced exploration opportunities (800 MMBOE) with a capable and well-qualified operator, at de minimis cost, whilst allowing it to continue to focus on its core production and appraisal-led three Project strategy. This high-impact exploration opportunity also compliments the existing portfolio with very substantial upside which continues to attract the attention of major oil companies across the region.’
Ongoing production and revenues
While executing its strategy BLOE has recorded steady production and revenues, driven by JKT-01Z, an extensive workover programme, and high oil and gas prices. The company’s half-year report showed the company was now making a profit from continuing operations, $0.627m in H1 2022 against a loss of $2.05m for H1 2021. Total production was 93.3 Mboe, comprising 64.9 Mbbls of oil and 28.4 Mboe of gas, up from 87 Mboe for H1 2021, which comprised 55.5 Mbbls of oil and 31.5 Mboe of gas. Average daily production was up to 515 boepd from 481 boed. Revenue was generated through oil sales of 45.6 Mbbls (H1 2021: 41.9 Mbbls), raising $4.16m (H1 2021: $2.33 million), and gas sales of 106.8 MMcf (H1 2021: 103.0 MMcf), raising revenue of $0.429m (1H 2021: $0.328m).
A Q3 operations update reported gross production (including the state of Georgia’s share) of 37.1 Mboe (Q2: 47.2 Mboe), an average gross production rate of 404 boepd (Q2: 519 boepd). Average production performance through the quarter was affected by production volatility from West Rustavi well WR-38Z and greater than average pump maintenance and power supply outages. BLOE said production volatility at the well WR-38Z was ‘now under control following the implementation of a new production scheme.’ The company sold 17.9 Mbbls of oil (Q2: 21.2 Mbbls) for $1.614m, and 36.1 MMcf of gas (Q2: 58.4 MMcf) for $0.192m (Q2: $0.236m): a higher weighted average gas price of $5.31/Mcf (Q2: $4.04/Mcf) had been secured through negotiations with the buyer and an improvement in the reference price on which the contract is based. BLOE had a cash balance of $1.1m (30 June 2022: $1.4m) and 13,000 bbls of oil inventory. The company also reported that it had satisfied Georgian regulators it had completed the minimum work programmes necessary to be rewarded long-term security of title over its licences.
Georgia and Russia
BLOE has had to address inevitable questions about Georgia’s political status given ongoing tensions with Russia, exacerbated by the latter’s invasion of Ukraine. But as TMS noted in a September update on the company, the current tensions 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: the European Commission continues to affirm Georgia’s status as a key energy partner. And the country 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. Georgia 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.
Outlook
BLOE’s share price climbed steadily for most of the year, from levels of just below 1p to a peak of 2.3p early last month. The company’s value has fallen back somewhat since the Q3 operations update reflecting the communications challenge BLOE faces in convincing the market to judge it on the progress of its longer term strategy rather than the isolated performance of particular wells. The lasting value of Project II’s JSR-01DEEP, for example, for which results have yet to be reported, may consist in its capacity to inform the effectiveness of future wells rather what itself produces. The successful JKT-01Z well drew on findings from earlier West Rustavi wells with underwhelming performance. The company is funded for its continued Project II work, and for Project I’s WR-B01 ST, where results are on the horizon. Its share price started to tick up again, to 1.4p, on news of the farm-out agreement, taking the company’s market cap to £9m.
BLOE continues to be a somewhat enigmatic, but intriguing prospect. The company is seeking to open up fields in a post-Soviet geology to which contemporary drilling technology has never been applied. Nothing is guaranteed. But BLOE has accumulated a significant set of assets in its short history, and mapped out a detailed, self-funded strategy for unlocking their value, which has moved forward on all fronts this year. The company’s producing wells are holding steady, generating reliable revenues. Near term value triggers include the prospect of good results from WR-B01 ST, and news regarding funding for Project I. The agreement with GOGL highlights the company’s proven deal-making capacities, and appeal to prospective farm-in partners. But perhaps, BLOE itself proposes, the company should be best viewed as a longer term hold, working through a patient strategy to establish itself as a fixture in a dynamic Caucasian energy market.
