TIDMZPHR
RNS Number : 9039U
Zephyr Energy PLC
08 December 2021
Prior to publication, the information contained within this
announcement was deemed by the Company to constitute inside
information as stipulated under the UK Market Abuse Regulation.
With the publication of this announcement, this information is now
considered to be in the public domain.
8 December2021
Zephyr Energy plc
("Zephyr" or the "Company")
Extensive State 16-2LN-CC production test successfully
concluded;
Proven rate-constrained production high of 1,083 barrels of oil
equivalent per day;
Simulation modelling indicates potential rates of 2,100 barrels
of oil equivalent per day;
Highly successful appraisal suggests large hydrocarbon
resource
Zephyr Energy plc (AIM: ZPHR) (OTCQB: ZPHRF), the Rocky Mountain
oil and gas company focused on responsible resource development
from carbon-neutral operations, is pleased to provide an update on
the production testing of the State 16-2LN-CC well at its Paradox
Basin project in Utah.
The Company is delighted to announce the completion of a safe
and highly successful well test. After 23 days of production
testing, the well has demonstrated the potential to drain a larger
hydrocarbon resource and with stronger economics than initially
forecast. Zephyr is now proceeding with plans to equip the well and
facilitate the export and/or sale of hydrocarbons.
The State 16-2LN-CC well was the first in the Northern Paradox
Basin to flow hydrocarbons from a horizontal well with a modern
hydraulically stimulated completion design, and the Company's Board
of Directors (the "Board") believes the results of the production
test provide substantial justification for wider development of
Zephyr's Paradox project.
Overview
-- During the test, the well averaged rate-constrained daily
rates of 716 barrels of oil equivalent per day ("boepd"), with
rate-constrained highs of 1,083 boepd achieved with limited
pressure drawdown.
-- Initial simulation modelling suggests possible plateau rates
of 2,100 boepd are possible when the well is fully equipped and no
longer rate-constrained.
o The test was rate-constrained to minimise flow assurance
issues from salt deposition in the well bore. Future flow assurance
issues are expected to be mitigated when the well's final
completion equipment is installed.
-- Gas rates are substantially higher than expected, with
modelling suggesting the well is capable of production plateau
rates of 10 million square cubic feet of gas per day and 500 boepd
of liquids.
-- Initial data from the production test suggests the State
16-2LN-CC has a single well potential Estimated Ultimate Recovery
("EUR") of 2.65 million barrels of oil equivalent ("mmboe"),
significantly higher than the
Company's pre-drill estimates of up to 0.85 mmboe.
-- The test indicates a highly successful appraisal of a
substantial new gas condensate resource and one which the Company
forecasts will deliver strong single well economics. Using updated
production forecasts and realised prices of US$3.00 per thousand
cubic feet ("mcf") of gas and US$65 per barrel of oil ("boe"), the
Company estimates that the well will pay out in under seven months
and have a net present value at a ten per cent. discount rate
(NPV-10) of US$12.5 million.
-- Zephyr is currently evaluating well equip and export options
in order to put the well on full production as soon as practicable.
The Company is also appraising a number of potential profitable
solutions for selling the substantial volumes of natural gas
expected to be produced from the well. These solutions, detailed
below, include the sale of gas into nearby existing infrastructure,
as well as the potential to co-locate a cryptocurrency mining
facility onsite in a similar manner to other nearby operators in
the Paradox and Williston Basins.
-- The Board remains highly encouraged by the implications of
the test results as related to the wider development of the Paradox
project. Following the completion of the production testing, Zephyr
has commissioned the independent reserve consulting firm Sproule
Incorporated ("Sproule") to complete a Competent Persons Report
("CPR") to assess the Company's reserves across both the Cane Creek
reservoir and the eight overlying reservoirs. The CPR is expected
to be finalised over the next 60 days.
Colin Harrington, Zephyr's Chief Executive, said: "I am
incredibly excited about the production test results announced
today, and even more so about the significant implications for
further drilling and potential full field development of our
Paradox project.
"The well test data, modelled production volumes and potential
EURs exceed our pre-drill estimates and all indications point to
the State 16-2LN-CC as a well which can generate significant
Shareholder returns.
"Not only does this successful production test indicate the
potential for a highly profitable single well, but we also believe
the test will lead to a substantial reduction in development risk
across our acreage while allowing for a future systematic
development of the project - one with relatively predictable well
distribution within both the Cane Creek reservoir as well as across
the multiple overlying reservoirs .
"We are also excited to have several options to monetise the
significant gas potential of the well. Given the potential scale of
gas volumes, we have already entered into detailed conversations
regarding selling produced gas into the nearby pre-existing gas
infrastructure. Alternatively, we've also been impressed with the
return potential related to the co-location of a cryptocurrency
mining facility on site with shared economics - and we've seen
other forward-looking operators in the Paradox and Williston Basins
benefit from such arrangements. We have therefore formed a
first-class advisory board to help guide our deliberations in this
area of considerable growth, and foresee a future in which both
alternatives are weighed from a value perspective, potentially even
in tandem. We aim to have a path forward by the end of the first
quarter 2022 and look forward to providing updates as progress is
made and the well is equipped.
"In conclusion, we are delighted to be able to report that we
appear to have a large and profitable first well on our Paradox
asset - one which has far exceeded our expectations and which has
validated the Board's decision to utilise hydraulic stimulation.
The Board believes that the results add considerable weight to the
view that the Paradox asset has the potential to be a project of
substantial scale and profitability, one which can be developed to
maximise resource efficiency while minimising surface disruptions
and offsetting Scope 1 emissions. Our mission, as always, is to be
responsible stewards of investors' capital while also being
responsible stewards of the environment and I'm delighted that the
results to date are a strong confirmation of that focus."
Further Detail
The successful completion of the State 16-2LN-CC well production
test has served as a "proof of concept" for the wider potential
development of Zephyr's Paradox asset base as a hydraulically
stimulated resource play ("HSRP").
During the production test, the State 16-2LN-CC well
demonstrated very high reservoir pressures and likely higher than
expected reservoir permeabilities. Should sufficient reservoir
volume be connected, these conditions signify significant potential
for additional highly productive wells in the Cane Creek reservoir
across Zephyr's 25,000-acre White Sands Unit ("WSU").
The combination of favourable geologic conditions and excellent
financial returns forecasted by the production test has now led
Zephyr's team to accelerate planning for further drilling. The team
is currently integrating the well test results with reservoir and
simulation models and field mapping. To date, Zephyr has identified
dozens of Cane Creek reservoir well targets within Zephyr's WSU
acreage and in the Company's 12,613-acre position outside of the
WSU in the wider Paradox Basin. Additional locations are being
analysed and will be included in a future CPR.
Beyond the Cane Creek reservoir, the State 16-2 LN-CC well also
provided a successful proof of concept well which can be applied to
test the exploration potential from eight overlying zones that show
similar petrophysical responses and have sampled moveable
hydrocarbons from the side wall cores acquired in State 16-2 well.
Each of these overlying zones may have the potential for a similar
number of wells as the Cane Creek reservoir but currently are less
well understood with unknown reservoir pressures or hydrocarbon
fluid type - they represent an exciting exploration opportunity
that could add significantly to the Company's overall reservoir
potential.
The Company has commissioned the independent reserve consulting
firm Sproule Incorporated ("Sproule") to complete a CPR to assess
the Company's reserves across the WSU and additional acreage in
both the Cane Creek reservoir and the eight overlying reservoirs.
The CPR is expected to be finalised over the next 60 days.
The State 16-2LN-CC well test data covered 23 days of production
history which, although highly valuable, is still a limited period
of time to fully evaluate this new play potential and the team
continues to evaluate project risks such as any potential formation
water production and upsides such as higher condensate yields over
time. PVT (pressure-volume-time) properties of the fluid remain
under evaluation and will be integrated to understand how liquid
yield will vary over time as reservoir pressure is dropped.
To date, the liquid yield from the State 16-2LN-CC well is a
high API condensate (approximately 60 API) with condensate yield of
more than 50 barrels of condensate per million standard cubic feet
("mmscf") - a highly attractive light barrel which is sought after
for blending with the heavy and waxy oil produced elsewhere in the
state of Utah (particularly the oil from the nearby Uinta Basin).
Initial pricing indications received from potential end users are
that State 16-2LN-CC liquids barrels will receive a premium over
the West Texas Intermediate ("WTI") benchmark price at the
refinery, although with transportation costs factored in, liquids
volume pricing is expected to average the WTI price per barrel
minus US$5 per barrel for transportation and marketing, which is
better than expected pre-drill. It is expected that many future
wells will have a higher liquid yield comparable to the offset
Federal 28-11, a well sited less than one and a half miles from the
State 16-2LN-CC well.
During the production test, daily average rate-constrained rates
from the production test were 716 boepd (3.6 mmscf per day
("mmscf/d") and liquids of 160 boepd), with rate-constrained high
rates of 1,083 boepd (with peak liquid rates of 432 boepd and peak
gas rates of 5 mmscf/d). In addition to hydrocarbon rates, water
rates during the test averaged 1,000 barrels of water per day with
water rates declining at the end of the test as additional
completion fluids were recovered, although to date it is unclear if
a percentage of water volumes were comprised of formation water.
The test was rate constrained, with limited pressure drawdown and
maximum rates not fully tested, in order to avoid excess salt
deposition in the well bore. Future flow assurance issues are
expected to be mitigated when the well's final completion equipment
is installed.
Gas Commercialisation Alternatives
Given the demonstrated and substantial reserve potential, Zephyr
is assessing multiple options to commercialise the State 16-2LN-CC
gas resource, including by tying into existing nearby gas export
infrastructure.
In addition, a growing number of U.S. upstream oil and gas
operators (including an immediately adjacent Paradox Basin oil and
gas operator) have chosen to co-locate and sell produced natural
gas to cryptocurrency mining facilities in order to benefit from
current demand for natural gas from which dedicated sources of
power can be generated.
By way of illustration, from May to July of 2021 (following a
crackdown on Chinese bitcoin producers), the U.S. has gone from
hosting 18% of Bitcoin miners to hosting 35% of all Bitcoin mining
operations. Even prior to producing gas from the State 16-2LN-CC
well, over the past year Zephyr was approached by multiple parties
wishing to use future natural gas production to create power on
site for use with power-intensive Bitcoin mining activities. Given
the nationwide trend to limit gas flaring and reduce methane
production, combined with a surge in crypto mining operations in
the Western U.S., Zephyr has undertaken a detailed review of the
potential to partner with a co-located mining facility.
As part of the process to responsibly assess the viability of
this market, Zephyr has established an advisory board of
cryptocurrency operation, technology and regulatory specialists.
Members of the advisory board include:
-- Jacinda Brown: CEO, CryptoKnight Energy, a company formed to
bring value to stranded and undervalued natural gas resources by
providing a viable alternative to pipelines and which can be scaled
up or down in line with gas production. Jacinda has 20 years'
experience as a geologist, including significant experience in the
Paradox Basin, and has spent the last four years pursuing the
development and co-location of Rocky Mountain well-pad crypto-mine
facilities.
-- Zachary Fallon: Partner and Co-Founder of Ketsal PLLC, a
financial technology legal and consulting firm. Zach was formerly a
Senior Special Counsel in the U.S. Securities and Exchange
Commission's Division of Corporation Finance, and a staff attorney
in the Office of the General Counsel. Prior to joining the SEC Mr.
Fallon practiced securities and corporate law in the London and San
Francisco offices of Latham & Watkins LLP.
-- William Mapp: Noted author, technologist and cryptocurrency
developer. Will was the founder of BA Systems and Studio Codeworks,
has worked for NASA, IBM and Lockheed Martin, and has architected
software and systems that are running in more than 23
countries.
Initial indications suggest the State 16-2LN-CC production
profile is ideally suited for the co-location of a cryptocurrency
mining facility, and the Company is considering a near term test of
a beta facility on site. Long term, both traditional gas export and
co-location uses appear as viable alternatives (either separately
or in tandem) for commercialising the substantial gas resource, and
Zephyr will carefully weigh the potential financial returns offered
by both alternatives.
Contacts:
Zephyr Energy plc Tel: +44 (0)20 7225
Colin Harrington (CEO) 4590
Chris Eadie (CFO)
Allenby Capital Limited - AIM Nominated Tel: +44 (0)20 3328
Adviser 5656
Jeremy Porter / Liz Kirchner
Turner Pope Investments - Broker Tel: +44 (0)20 3657
James Pope / Andy Thacker 0050
Flagstaff Strategic and Investor Communications
- PR Tel: +44 (0) 20 7129
Tim Thompson / Mark Edwards / Fergus 1474
Mellon
Dr Gregor Maxwell, BSc Hons. Geology and Petroleum Geology, PhD,
Technical Adviser to the Board of Zephyr Energy plc, who meets the
criteria of a qualified person under the AIM Note for Mining and
Oil & Gas Companies - June 2009, has reviewed and approved the
technical information contained within this announcement.
Estimates of resources and reserves contained within this
announcement have been prepared according to the standards of the
Society of Petroleum Engineers. All estimates are internally
generated and subject to third party review and verification.
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