Block Energy Part I : The Investment case for Georgia
“…Georgia’s growing economy has generated the surging demand for energy to which BLOE wants to make an ever greater contribution. Georgia continues to forge its own path, developing a liberal economy and democracy with due sensitivity to its geographic and cultural location somewhere between east and west….”
With its latest development well reaching total depth last week, Block Energy (AIM:BLOE) continues to rollout a multi-tiered strategy to realise the full potential of extensive assets in the country of Georgia. The company has made robust progress in opening up Georgia’s complex subsurface, with successive drilling successes allowing it to report record production in Q2.
But although the potential value of BLOE’s assets dwarves the company’s market cap, commentary regarding Georgia’s security following Russia’s invasion of Ukraine has clouded some investors’ perceptions of its operational progress. Here, in the first of two articles looking at the company’s prospects, we take a close look at the investment case for Georgia, one of the more successful post-Soviet countries, in light of the ongoing conflict. The second will focus on BLOE’s current strategy, following CEO Paul Haywood’s video interview with TMS published last week.
Georgia’s continued economic liberalisation
Georgia continues to develop a liberal, trade-oriented economy, making particularly impressive progress over the last 20 years. The country is tightly woven into the global market through membership of organisations and networks including the World Trade Organisation, the Asian Development Bank, the Council of Europe, the European Bank for Reconstruction and Development, and the Organisation for Security and Co-operation in Europe. It has negotiated free trade agreements with the EU, China, Hong Kong, Turkey, the US, Canada, Japan, Norway and Switzerland, opening access to a duty-free market of 2.8 billion customers. Deals with with Israel and India are under consideration.
A consistent policy of liberalisation followed by successive governments has laid the foundations for a diversified non-commodity reliant economy with robust GDP growth. Per capita income is converging toward EU levels, the poverty rate more than halving since 2010. Georgia now has a population of 3.7 million people, earning a GDP of $24.6bn. The 2014 Liberty Act was a particularly significant reform, formalising a credible fiscal framework capping the country’s fiscal deficit at 3pc and its public debt at 60pc of GDP, earning Georgia the credibility that has facilitated strong foreign direct investment averaging 8.5pc of GDP over the last 10 years.
Georgia’s swift rebound from the pandemic and the initial shock of Russia’s invasion of Ukraine testifies to the country’s gathering economic resilience. It recorded economic growth of 10.5pc and 10.1pc in 2021 and 2022, and, against the grain of the global slowdown, has continued to expand rapidly, with preliminary growth for Q1 of 7.2pc. Fitch Ratings upgraded Georgia’s sovereign credit rating outlook from stable to positive earlier this year, attributing the country’s revised status to ‘exceptionally strong’ GDP, and rigorous fiscal and monetary discipline.
Georgia’s strong fundamentals have allowed for continued investment in the country’s infrastructure, which grew at a record 6.7pc last year. Its progress has earned it favourable ratings across a range of international indices, particularly in regard to economic transparency. Georgia ranked seventh of 190 nations in the World Bank’s 2020 ease of business index,, came in first in the 2021 Open Budget Survey published by the International Budget Partnership, and is ranked 17th in the latest Transparency in the Time of War index compiled by the European Research Centre for Anti Corruption and State-Building. The country’s ongoing liberalisation programme earned it 15th place in the Fraser Institute’s 2022 Economic Freedom Annual Report, and 21st in last year’s Heritage Foundation Index of Economic Freedom.
A thriving energy market
Georgia’s growing economy has generated the surging demand for energy to which BLOE wants to make an ever greater contribution. Since 2012 Georgia has been a net importer of electricity, and its deficit is growing, expected to reach more than 3 TWh by 2030. In 2020 the country imported 99.7pc of its natural gas and 97.8pc of its oil. Only about a third of Georgia’s renewables potential has so far been tapped, leaving the country’s grid dependent on oil and gas.
And with Georgia positioned at the heart of the Transcaucasian region that reaches from the shores of the Black Sea to the Caspian, rich in hydrocarbons from the Eocene, Cretaceous, Miocene and Oligocene eras, there is plenty of it. Soviet exploration and production planted the seeds for today’s infrastructure, now a highly developed complex of pipelines running through the Transcaucasus, notably the Baku-Tbilisi-Ceyhan Pipeline which moves Azeri crude to the Turkish Mediterranean and the Black Sea, and the South Caucasus Pipeline, which carries gas from Azerbaijan to Turkey: both pipelines run close to BLOE’s assets. Significant new projects include the Trans-Anatolian Pipeline (TANAP), inaugurated in 2019, and the Black Sea underwater electric cable project, signed-off late last year, linking Azerbaijani energy resources with Europe through Georgia and Turkey. Major export terminals are located at the Black Sea ports of Supsa and Poti.
Operations employing the full range of modern exploration and production technologies, including 3D seismic, stimulation and directional and horizontal drilling, are facilitated through a regulatory environment ensuring an open energy market and a stable framework for Production Sharing Contracts. Georgia’s untapped resources and established infrastructure have drawn increasing interest from the world’s largest energy companies. BP has been a lead investor in the Baku-Tbilisi-Ceyhan, South Caucasus, and Baku-Supsa pipelines, in the past few years committing another $2bn to the Trans-Adriatic line, Georgia’s biggest ever inward investment. ExxonMobil has signed an agreement with the Georgian government to carry out a comprehensive review of western Georgia’s hydrocarbon resource potential. And BLOE acquired its largest production and exploration blocks from SLB (then known as Schlumberger).
BLOE is integrated into the country’s energy network, both through the company’s ongoing production and a Memorandum of Understanding with the Ministry of Economy and Sustainable Development of Georgia supporting continued exploration and production, and progress towards a long-term gas offtake agreement.
Georgia after Ukraine
Since independence Georgia has pursued political as well as economic liberalisation. The country has a parliamentary system, parties exchanging power over the past 20 years through elections judged free and fair by independent observers. Long identifying with Europe, the nation has established close ties with the EU, submitting a formal application for membership after the Ukraine invasion. It is a member of the EU’s Eastern Partnership together with Armenia, Azerbaijan, Belarus, Moldova and Ukraine, and has signed an Association Agreement with Brussels, entering into a Deep and Comprehensive Free Trade Area. Georgian citizens have had free visa entrance to the Union since 2017.
Public opinion is clearly oriented to the West: 47pc of Georgians believe their country’s foreign policy should be ‘pro-Western’, and 31pc want a policy that is ‘pro-Western with good relations with Russia’. Only 7pc are ‘pro-Russian with good relations with the EU/NAT’, and just 2pc identify as ‘pro-Russian’. Polls consistently indicate three-quarters of the population support EU membership.
But these aspirations are complicated by Georgia’s relationship with its Russian neighbour, the key to understanding nuances of the country’s politics that can perplex observers. Georgia’s response to the Ukraine conflict, for example, which has been the subject of much commentary, must be understood in the context of the brief war it fought with Russia in 2008, which ended with the annexation of the Abkhazia and South Ossetia regions, populated by a significant number of Russian speakers. The rest of Georgia, though part of the former Soviet Union, has never had the same historic significance for Russia as Ukraine or Belorussia.
In many respects Georgia’s measures are aligned with the broader international response. The country has supported the UN Resolution condemning Putin’s aggression, the suspension of Russia’s membership in the Council of Europe, and the launch of the International Criminal Court’s probe into alleged war crimes in Ukraine. The Georgian National Bank has cooperated with international resolutions, and, as noted, the country followed Moldova and Ukraine in applying for EU membership. But it has also followed its own path, the ruling Georgian Dream government resisting Ukraine’s call to impose sanctions on Moscow, arguing that such ‘unproductive’ measures would merely deprive Georgians of income from Russian tourism and trade as well as remittances from relatives working in Russia.
This, then, is the complex but stable environment in which BLOE is establishing itself as a major energy supplier. Georgia continues to forge its own path, developing a liberal economy and democracy with due sensitivity to its geographic and cultural location somewhere between east and west.
Our second article will further detail the company’s strategy. To summarise, the company has a 100pc working interest in five Georgian onshore licence blocks, including IX and XIB, where production during the 1980s peaked at 67,000 bopd. BLOE is currently producing across six fields within four licenses, pursuing a four-project strategy guided by the principles of low risk development and appraisal, and high impact exploration.
Project I is focused on a region intersecting the company’s West Rustavi and XIF blocks developing 3C Contingent Resources of 27.5 MMbbls. Project II is evaluating large, undrained areas of the deeper zones of the Middle Eocene reservoir in the Patardzeuli filed on the XIB licence, testing 200 MMbbl 2C Contingent Resources. Project III is appraising the commercialisation of substantial contingent resources of gas – 984 BCF 2C Contingent Resources – in the XIB & XIF licenses, within the Lower Eocene, Paleocene and Upper Cretaceous geological formations. And Project IV is focused on exploration of extensive structures contiguous to a proven 200 M Mbbls field.
The first phase of Project I secured back-to-back drilling success through the company’s JKT-01Z and WR-B01Za wells, allowing BLOE to record Q2 production of an average 664 boepd, and to go ahead with the drilling of two further side-tracks and a new well. The latest well, WR-34Z, reached total depth last week and testing is about to commence.
Our previous coverage of BLOE has offered extensive coverage of the company’s operational progress. Look out for much more detail in our next article. At the time of writing BLOE’s price was 1.3p and its market cap £8.5m