Block Energy Part II : The Four projects
“…Battle-hardened with money in the bank and a clear plan, prospective investors should take the time to understand the company’s multi-tiered strategy, and be prepared to hold as the value of its assets are gradually unlocked, together – hopefully for all of the #BLOE stakeholders – with the value of its shares…”
The first in our two-part series on Block Energy (AIM:BLOE) took a close look at the economic and political environment of Georgia, the country in which the company operates. This, our second article, follows Sarah Lowther’s interview with BLOE CEO Paul Haywood in reviewing the company’s progress towards implementing a four project strategy to open up a now extensive set of assets close to the Georgian capital Tbilisi. With the completion of the drilling and testing of well WR-34Z this week, the third consecutive successful development well in its current programme, BLOE continues to illuminate the structure and potential of the country’s complex fractured subsurface.
Since joining AIM in 2018 BLOE has achieved its initial aim of becoming Georgia’s leading independent oil and gas company, having accumulated assets with a gross total 2C resources of 255 MMbbls of oil and 984 BCF of gas, including XIB, historically Georgia’s most productive block, producing more than than 180 million barrels of oil, equivalent to an estimated present value of more than $2bn in today’s world.
The company is now pursuing an ambitious strategy of rapid self-funded growth: revenues from the portfolio’s low-cost development opportunities are being reinvested to deliver the significant undeveloped gas resource across several reservoirs within the company’s fields. Gas can be exported readily to domestic and international markets through local infrastructure and the South Caucasus Pipeline (SCP) that passes through the licences.
Project I is focused on the development of the Middle Eocene reservoir of the West Rustavi/Krtsanisi field, defined by the intersection of licences XIF and XIB, to which internal estimates ascribe 27.5 MMbbls of 3C Contingent Resources.
The area had already been producing for some years from three wells, WR-16aZ, WR-38Z and JKT01Z, drilled by BLOE, and KRT39, a legacy well. But the company’s ongoing application of state-of-the-art seismic interpretation techniques – including seismic attribute analysis, ant-tracking and artificial intelligence – has allowed it to identify eight development zones targeting fractures that can be commercialised through an established infrastructure, and which are in some cases accessible through ‘donor’ wells, existing boreholes from which new wells can be deviated.
BLOE installed oil and gas processing facilities back in 2020, facilitated by Georgia’s efficient permitting and regulatory process. And, like the SCP, the oil-transporting Baku-Tbilisi-Ceyhan (BTC) Pipeline runs through the field. Project I is aiming for robust cash generation through a full field development plan targeting around 3,000 bopd.
A five well programme focused on the first of the eight development areas is well underway: the Krtsanisi Anticline area of the West Rustavi/Krtsanisi field, which has an estimated a Gross 3P Reserves, from an independent CPR by ERCE, of 3.01 MMbbl and a net present value of $57m – more than five times BLOE’s current market cap. The first three wells drilled during this Phase I of the Project have offered early vindication of BLOE’s subsurface analysis, the JKT-01Z, WR-B01Za and – this week – WR-34Z wells all intersecting the fractures they were targeting, allowing the company to report record production of an average 684 boepd and announce the near term drilling of two further side-tracks and a new well. JKT-01Z, which began producing last January, continues to perform better than the mid case defined in the ERCE reserve report, and WR-B01Za, which was brought into production this March, is performing above the report’s high case estimate.
WR-34Z, like its predecessors, horizontally tracked the upper part of the Middle Eocene formation to maximise the wellbore’s exposure to productive fractures. The well is producing at a five-day average rate of 150 boepd ‘with all produced hydrocarbons being monetised’. The next well in the programme, KRT-45Z, will target the same highly fractured regions.
Project II is focused on another of BLOE’s assets primed to yield near term drilling successes and cashflows: the Middle Eocene reservoir of the Patardzeuli field, which produced at 55,000 bopd during the Soviet era, with a 2C Gross Contingent Resource of 201 MMbbl.
Patardzeuli’s extensive stock of legacy wells offers multiple opportunities for workovers and low-cost infill side-tracks targeting the unswept oil resources that analysis suggests may be present within the largely undrained south-west end of the structure. Appraisal well JSR-01, drilled last year, offered early proof of concept. BLOE wants to target the largely undrained south-west end of the Patardzeuli structure by deepening existing wells and drilling new sidetracks. The Project’s Teleti and Samgori fields offer further potential. Located adjacent to BLOE’s XIF licence, Patardzeuli benefits from the same established processing and sales infrastructure that serves Project I.
BLOE is planning further work to significantly de-risk Project I and Project II’s contingent resources and seed further low-risk, high-impact operations on the way to the company’s next critical milestone, a daily production rate of 1,000 bopd.
Revenues from Projects I and II will fund the development of Project III, focused on what current analysis suggests to be the biggest prize in BLOE’s portfolio: the undeveloped gas-bearing natural fracture system within the Lower Eocene, Palaeocene and Upper Cretaceous reservoirs – each more than a kilometre thick – spanning the XIB and XIF blocks. A new internal resource report is being defined, which currently estimates an opportunity of more than 1 TCF of contingent gas resources. If an external auditor confirms BLOE’s internal estimates the company will market the opportunity for appraisal and development to suitable partners through a formal farmout process.
Those marketing efforts would be assisted by the government of Georgia, which has designated the prospect as a strategic asset that would open a rich new seam of energy for a country that imports nearly all of its hydrocarbons: in 2020 97.8pc of its oil products and 99.7pc of its natural gas. Earlier this year BLOE entered into a Memorandum of Understanding with Georgia’s Ministry of Economy and Sustainable Development, according to which the Ministry will support the company’s efforts to develop the Project, fostering mutual hopes of a long-term gas offtake agreement.
Having operated in Georgia since 2017, BLOE was already well integrated into the country’s energy sector prior to the MoU, most obviously through its Block Operating Company (BOC) subsidiary, a Tbilisi-based operations company, staffed entirely by Georgian nationals, with subsurface, engineering, financial, commercial and HSE expertise.
BOC ensures BLOE has full oversight over capital and operating spending, and that operations are delivered on-time and in accordance with international HSE and ESG standards. BOC has reported no serious lost time incidents since starting operations four years ago, and minimises its operational footprint by limiting gas flaring, powering wells through a local electricity grid substantially powered by hydro energy, CO2 emissions monitoring, and assessing possibilities for carbon capture and storage. BOC is further integrated into the Georgian economy and everyday life through its partnership with Tbilisi Technical University, and its contribution to local infrastructure such as playgrounds and bus-stops.
Project IV is an ongoing programme to assess the full potential of BLOE’s portfolio in partnership with Georgia Oil & Gas Limited (GOGL), the country’s largest exploration company.
Under a farmout agreement signed last year, GOGL intends to explore XIB’s (non-core) 103 km2 Dido Lilo and 148 km2 South Samgori areas, to which it has assigned a risked (P50) Resource of more than 400 MMboe. Seismic has been acquired, the processing is done, and interpretation is underway. BLOE retains a 50pc interest in the development.
Organic, self-funded growth
BLOE’s strategy has been designed in accordance with the company’s philosophy of low cost organic development, with new operations funded by revenue growth rather than market equity placings. The company’s last placing was in late 2020, and its last injection, to help kickstart Project I, was a $2m senior secured loan facility funded by long-term shareholders and members of BLOE’s management team. Speaking to TMS last month, Mr Haywood said current production ‘sits well above the breakeven mark’, allowing the company ‘to build cashflows and recycle those back into operations and continue to execute the plan’.
BLOE’s most recent annual report, for the year 2022, reported revenue from the sale of oil and gas of $8.26m, a 35pc increase over the previous 12 months. Revenue was mainly from oil sales, which were up by around $7.5m, with gas sales contributing $0.77m. Higher revenues, together with stable operating costs, allowed the company to report a significant decrease in its operating loss for 2022 of $1.8m, down from $4.7m in 2021.
BLOE has been an intriguing proposition since IPO. The company has now accumulated an extensive set of assets with proven capacity, having produced strongly through the second half of the last century even within the limitations of the drilling and production technologies deployed during the Soviet era. BLOE’s extensive technical analysis, and the success of the initial Project I wells based on it, present hard evidence for the company’s investment case.
For a small cap like BLOE, however, the incremental interpretation and development of Georgia’s complex subsurface presents inevitable financial and presentational challenges. The company’s four project strategy sets out a robust road map for the gradual realisation of its portfolio’s value through organic growth. But it is a considered proposition that can struggle to be heard in a noisy small cap market ever on the lookout for short term value.
Beyond the specifics of its elaborate programme, however, BLOE’s case is quite simple. The company is offering to unlock a significant gas reserve of strategic importance to the state of Georgia, funded through organic revenue growth. Its proprietary understanding of its assets subsurface continues to open opportunities for low-risk appraisal and development. Unlike many others in its peer group BLOE has made robust progress on the ground, recording back-to-back drilling successes without resorting to expensive and often highly dilutionary capital markets. The company is already producing from several wells and selling to a dynamic local market through an established infrastructure, and operates within a stable jurisdiction – see our last article for Georgia’s investment case.
Battle-hardened, with money in the bank, and a clear plan, BLOE seems good value for – at the time of writing – a price of just under 1.2p and market cap of £8.6m. But prospective investors should take the time to understand the company’s multi-tiered strategy, and be prepared to hold as the value of its assets are gradually unlocked, together – hopefully for all of the company’s stakeholders – with the value of its shares.