A multi-tiered strategy for Block Energy
“…Those looking to take a shorter term position in Block Energy might want to pay close attention to developments at Projects I and II, where work continues to seek to maximise returns from WR-B01Za and new wells have been earmarked…”
Block Energy’s (AIM:BLOE) unfolding strategy to unlock the full potential of a now extensive portfolio of oil and gas assets in the country of Georgia took another step forward this week with initial results from keenly anticipated well WR-B01Za indicating oil and ‘significant’ gas. With exploration underway across several fields, underpinned by a cluster of producing wells, 2023 is shaping up to be a busy year for this ambitious small cap.
BLOE was founded on the premise of bringing cutting edge drilling technology to a geology that has offered rich indications of its potential since the Soviet era, and thereby serving a Georgian energy market almost completely dependent on imports from neighbouring countries. The company joined AIM five years ago 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 late 20th century, with contingent resources of 38 MMbbls oil and 608 BCF gas in the Middle, Upper and Lower Eocene formations. In 2020 BLOE’s acreage multiplied more than 30 times, when the company acquired assets adjacent to West Rustavi from departing operator SLB, opening new development opportunities including Block XIB, a prolific producer which has yielded 180 million bbls of oil from the Middle Eocene reservoir, 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, its 2C contingent resources by 29 MMboe, and its prospective resources by 245 MMboe.
A multi-tiered strategy
BLOE’s strategy for realising the potential of its greatly expanded set of assets is organised into four projects. Project I seeks to develop the Middle Eocene layer in the West Rustavi/Krtsanisi field: a Competent Person’s Report (CPR) published last year estimated the prospect’s Krtsanisi Anticline as having Gross 2P Reserves of 1.07 MMbbls and NPV10 2P Reserves of $17.95m. Like all of BLOE’s projects Project I is underpinned by production revenue and other sources of non-dilutive funding. Last month the company announced a senior secured loan facility of $1.06m arranged with a group of existing shareholders and members of BLOE’s management team, to support current operations at WR-B01Za and accelerate the project’s development programme, opening the way for ‘additional wells and side-tracks’ following completion of the well.
Project II focuses on infill development at 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 the former SLB Blocks XIF and XIB. Late last year announced 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 XIB’s Didi Lilo and South Samgori areas in return for committing to a $3m work programme: 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 retains options to benefit from a carry, fund its share of any future 3D survey/drilling, or further farm-down of its interest in the licence areas.
Progress over the past 12 months
Progress is being made across all four projects. Project II got underway last summer with the drilling of well JSR-01DEEP in Block XIB’s Patardzeuli oil field, 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, drilled by a previous operator, penetrated only the upper 55 metres of the Middle Eocene reservoir, which, in Patardzeuli, is more than 600 metres thick and has produced over 100 MMbbls oil.
In December the JSR-01DEEP testing programme, designed to evaluate fluid levels and prove commercially productive oil zones, concluded that there is ‘unswept commercial oil’ in the Middle Eocene of the Patardzeuli field. The well was flowing at a rate of 45 bopd during final testing prior to the commencement of production. The JSR-01 DEEP results are being incorporated into the subsurface model to allow the updating of Patardzeuli’s contingent resources and the design of redevelopment plans focused on the deepening of existing vertical wells and the design and execution of horizontal wells. 15 existing vertical wells are being ranked to define optimal deepening candidates for low-cost drilling techniques, after which BLOE plans horizontal drilling to sweep larger undrained areas and deliver superior productivity.
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. Operations to evaluate the natural gas resources throughout the Eocene in blocks XIF and XIB 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.
Progress at WR-B01Za
But the primary focus in recent months has been progress at Project I’s WR-B01Za well, located just 500 metres to the west and up-dip from BLOE’ most successful well to date, JKT-01Z, a consistent performer that has given significant returns on investment. Operations got underway in December, targeting high density of oil-bearing natural fractures on the west side of the Krtsanisi anticline on the West Rustavi field.
Earlier this week BLOE was able to report initial results confirming ‘a good reservoir containing oil with significant gas’. The well was drilled into the Middle Eocene reservoir at the planned trajectory consisting of a long horizontal reservoir section intersecting the fault/fracture system. Total Depth was called at 2,372 metres Measured Depth (MD) instead of the intended 2,682 metres MD due to unstable wellbore conditions across a suspected fault, which was causing escalating tool failure and lost-in-hole risk.
Nonetheless ‘significant drilling fluid losses and gas and oil shows were observed while drilling beyond the problem zone, indicating a potentially productive well,’ and intermittent testing had produced ‘some dry oil with zero water cut and high gas volumes’. The well will now enter an extended test period during which oil and gas will be sold whilst data is acquired to optimise the completion design. Further low-cost drilling operations may be required to remedy or by-pass the wellbore failure and improve connectivity to the productive zones. Noting that hole stability issues present a common risk when drilling six inch holes over such long distances, BLOE CEO Paul Haywood said: ‘Drilling data indicates a good reservoir containing oil with significant gas. The extended test will provide the data required to optimise the completion design whilst monetising both oil and gas produced. Production results and forward plans will be communicated once the extended test is complete and production rates have stabilised.’ Mr Haywood added that data accumulated being from operations at WR-B01Za is being used to optimise preparations for a second Project I development well. Elsewhere BLOE ‘continues to work on Projects II, III, and IV, and we look forward to updating shareholders as we progress.’
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 results for H1 2022 reported its move into profit from continuing operations, recording $0.627m in H1 2022 against a loss of $2.05m for the previous year. BLOE’s Q4 2022 update reported gross production for the year (including the State of Georgia’s share) of 183 Mboe (2021: 156 Mboe), comprising 120 Mbbls of oil (2021: 101 Mbbls) and 63 Mboe of gas (2021: 55 Mboe). During 2022, the company sold 84.9 Mbbls of oil (2021: 86.7 Mbbls) for $7,492,600 (2021: US$ 5,519,000), resulting in a weighted average price of approximately $89 per barrel (2021: $64 per barrel), a 39pc increase in the realised price in 2022 compared with 2021. And 170 MMcf of gas (2021: 191 MMcf) was sold for $769,620 (2021: $596,000) at a weighted average price of $4.52/Mcf (2021: US$ 3.11). The average gross production rate for Q4 was 374 boepd (Q3: 404 boepd).
BLOE’s layered strategy is something of a slow burner, presenting a continual communications challenge in a small cap commodities market focused on immediate results. The company’s stock has hovered around 1p – its price at the time of writing – to 2p for the past three years, leaving its market cap at around £6.75m. BLOE’s investment case asks that investors take a holistic view, setting results from each programme in the context of the execution of the company’s wider strategy. As BLOE’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.’
With work across all four projects underway this year longer term investors might be advised to hold. Those looking to take a shorter term position – BLOE was trading at 2.3p as recently as October – might want to pay close attention to developments at Projects I and II, where work continues to seek to maximise returns from WR-B01Za, and new wells have been earmarked.