TIDMUKOG
RNS Number : 8205T
UK Oil & Gas PLC
23 July 2020
UK Oil & Gas PLC
("UKOG" or the "Company")
Entry into potential high-impact Turkish oil appraisal and
exploration project
UK Oil & Gas PLC (London AIM: UKOG) is pleased to announce
that it has signed a binding heads of agreement with Aladdin Middle
East Ltd ("AME"), an independent oil company with 60 years of
operational experience in Turkey, to take a 50% non-operated
working interest in the 305 km(2) Resan Licence ("Licence"). UKOG
will take an active technical role in a 5-well oil appraisal and
step-out exploration drilling programme, which, Covid and weather
permitting, is expected to commence this year.
The Licence lies within the SE Anatolian basin, a geological
continuation of the prolific Zagros "fold-belt" petroleum system
within the foothills of the Taurus-Zagros mountains in Iraq, Iran
and Turkey, one of the Middle East's major oil producing areas.
Multiple producing oil fields lie to the immediate west and south
east of the Licence, containing significant proven recoverable
reserves.
Material discovered resource potential
A June 2020 report prepared by Xodus Group Ltd ("Xodus") for AME
calculates that two identified geological targets within the
Licence's Cretaceous Mardin limestones, the undeveloped Basur oil
discovery and the Resan "missed" oil pay opportunity contain an
aggregate unrisked gross mean oil in place, or oil in the ground
before extraction ("OIP"), of approximately 253 million barrels
("mmbbl"), with a significant high case (P10) gross aggregate OIP
of 495 mmbbl.
The Company's and AME's evaluations of the available 1950s and
1960s well and geological data conclude that potentially
significant moveable oil within the naturally fractured Mardin has
been overlooked by prior operators in both Basur and Resan (i.e.
missed oil pay).
An undrilled exploration target in the shallower Garzan
limestones, Prospect A, adds further unrisked upside OIP potential
of between 68-112 mmbbl in the mean and high case (P10),
respectively.
Note that UKOG's internal evaluation sees further upside
resource potential than is currently identified by Xodus.
The Basur discovery, made in 1964, whose primary target was the
shallow Cretaceous age Garzan reefal limestones, recovered 600 bbl
of oil to surface from deeper naturally-fractured and dolomitised
Cretaceous Mardin limestones. Core and cuttings contained live oil.
Of the oil to surface, 500 bbl were produced over a 6-hour test
period, equating to an extrapolated rate of 2,000 barrels of oil
per day ("bopd").
Similarly, wells drilled in the 1950s at Resan originally
targeted the overlying shallower Garzan but found good oil shows
within the Mardin, although short tests were inconclusive. As the
Mardin's natural fracture potential was largely unrecognised at the
time, it is AME's and the Company's view that the Resan wells were
not adequately tested.
Both Basur and Resan were drilled before the potential of
naturally fractured Cretaceous limestone oil reservoirs was fully
demonstrated by the giant fractured Cretaceous limestone field
discoveries made in the same petroleum system within the Kurdistan
region of Iraq including Taq Taq, Tawke, Peshkabir. The giant
Kurdistan discoveries were made after 2002.
Basur and Resan are also both geological look-alikes to AME's
producing East Sadak field, discovered and put on production in
2014, some 20 km to the south east. East Sadak lies directly along
the same folded elongated anticlinal (dome shaped) geological
feature containing Basur and Resan and produces light 42deg API oil
from the Mardin limestones, with initial well rates of up to 1,300
bopd.
Based upon East Sadak field performance and geologically similar
producing fracture-enhanced oil fields, including those in the
Kurdistan region of Iraq, Xodus cite that, in the success case, the
percentage of OIP that can reasonably be expected to be recovered
to surface over field life will likely range between 10-20%.
The Company believes the occurrence of moveable oil in Basur and
Resan has been reasonably demonstrated by prior wells and,
therefore, the greatest remaining technical uncertainty is whether
the Mardin reservoir can deliver oil at commercial rates and
volumes i.e. the usual uncertainty associated with appraisal
drilling. Both the Basur-1 well test and East Sadak field
performance give confidence in this respect.
Should Basur and Resan prove successful, the Licence therefore
offers UKOG the realistic potential of adding significant net
recoverable reserves greater than those within its current UK
portfolio.
Rapid success case monetisation
Turkey, which has a c. 91% oil import dependency, actively
encourages its domestic oil sector. The right to produce any
commercially viable discovered hydrocarbons is enshrined in Turkish
Petroleum law. It is a licensee's obligation to produce such
discovered hydrocarbons and the law gives an "explorer" the same
right to produce during the 5-year exploration phase as if the
Licence were in a production phase.
Monetising a successful oil well in Turkey is therefore
potentially rapid and largely in the control of the operator, as
the completed well can be put on long-term production directly from
a flow test and well completion. Permanent production can therefore
be accomplished as soon as practicable, taking months rather than
the 3-5 years it takes in the UK onshore.
The Turkish petroleum fiscal regime is also amongst the most
globally competitive, giving a licensee a post-tax share of
production revenues of around 60.5% (inclusive of a 5% withholding
tax for repatriated profits to a foreign parent company). The
comparable UK post-tax share is 60%.
Turkish petroleum law also guarantees that any domestically
produced oil must be accepted by Turkish refineries and purchased
at market price. Crude prices are benchmarked to Arab Medium or
Arab Heavy, dependent on oil density/API gravity and are
approximately equivalent to or marginally higher than Brent crude,
the UK benchmark.
Drilling costs are also forecast to be significantly lower than
for a comparable well in the UK. AME's cost estimates for a 1500 m
depth well in the Licence are around $3 million gross. The
equivalent well in the UK would cost the Company GBP5-6+ million
gross.
Any future oil production is therefore expected to be
economically robust at current $40/bbl oil prices as front end
capital costs per barrel are relatively low and expected operating
costs, derived from those at AME's nearby East Sadak field, are
forecast to be comparable with UKOG's Horse Hill field operating
costs at around $15/bbl. An equivalent production stream in Turkey
will therefore pay back far quicker than in the UK.
As per nearby fields, any future oil production will be exported
via road tanker to the nearest oil refinery at Batman,
approximately 50 miles (80 km) from the Licence, around half the
distance of UKOG's Horse Hill field's export route to Perenco's
Hamble facility.
Likelihood of success
In terms of the likelihood of success, the Company believes the
Licence's discovered and "missed pay" opportunities are as good as,
if not better than its similar Loxley and Arreton appraisal
projects in the UK. Basur has brought oil to surface at good rates
and Resan oil shows and electric log data are at a comparable level
of supporting evidence for the presence of moveable oil as the
Company's Arreton discovery data.
However, Basur and Resan have the distinct advantage of
considerably higher recoverable resource upside, the projected
drilling costs are under half those of equivalent wells in the UK
and perhaps most importantly, success can be monetised far
quicker.
Transaction structure
To earn its 50% interest in the Licence, the Company has agreed
to fund 100% of the first of 5 commitment wells in the Licence's
5-year exploration term, together with a small 2D seismic survey
with an expected cost of $1-$1.5 million. UKOG's net expenditure
for the one well plus seismic programme is capped at USD$5 million
maximum expenditure. Thereafter, the Company will fund its 50%
interest share expected to be c. $1.5 million per well.
The exploration phase expires in June 2023 but can either be
extended for a further 2-years, or in the success case converted
directly into a 20-year production lease. The Licence's 5 well
commitment to the Turkish government has a gross monetary
equivalent of $7.66 million (UKOG $3.83 million), however UKOG
understands that should any of the commitment wells not be drilled,
a modest penalty of c. $30-50,000 is payable to the government.
The assignment of the 50% interest from AME to UKOG is subject
to Turkish governmental approval, which is expected to take around
2 months from submittal of the necessary standard documentation. It
is expected that these documents will be submitted over the next
few weeks whilst the formal agreements between UKOG and AME are
finalised.
There was no attributable profit or loss in relation to the
licence interest in the last year as it incurred no exploration
expenditure.
Whilst the Company believes that at current oil prices a
successful initial programme can likely self-fund further
production drilling, it may be necessary at some stage for the
Company to raise future working capital to bring the project to
fruition.
Forward Plans
The first commitment well, currently planned to appraise and
flow test the Basur oil discovery, must commence drilling before 27
June 2021. Drilling and seismic are therefore expected to commence
before the end of this year, Covid, weather and Turkish
governmental transaction approval permitting.
Given the relatively modest well costs, it is expected that a
near continuous drilling campaign could be undertaken to ensure the
Licence is fully evaluated and that oil recovered to surface can be
monetised as rapidly as possible.
About AME
AME is a private E&P company that has operated successfully
in Turkey for almost sixty years. It holds 7 production leases and
3 exploration licences in Turkey, with a gross licenced area of
around 3,000 km (2) . AME owns and operates drilling and workover
rigs, testing and cementing units, enabling quick and low cost well
operations. Headquartered in Wichita Kansas, its operational base
is in Ankara, Turkey and is managed by an experienced,
predominantly Turkish, team. More information can be found at
www.aladdinmiddleeast.com.
Stephen Sanderson, UKOG's Chief Executive, commented:
"Whilst we remain committed to growing our core UK business,
this was an irresistible opportunity to expand our horizons and to
expose the company to potentially transformational recoverable oil
reserves that can be rapidly monetised.
The quality of the Licence's geological address and opportunity
is compelling, the targets being directly on trend with the
geological look-alike East Sadak field and located within the same
petroleum system as the major oil producing Kurdistan region of
Iraq.
The Basur and Resan appraisal opportunities compare well with
our Loxley and Arreton projects. However, they offer significantly
larger upside potential, are much cheaper to drill and can be
monetised far more quickly than any of our UK projects. The overall
post-tax share of gross revenues is also marginally better than in
the UK.
The low cost of drilling compared to the UK also means that, in
the success case, we plan to have a near continuous drilling
programme, hopefully commencing this year, Covid and weather
permitting. We expect this programme will provide a regular stream
of newsflow.
Our new partners, AME, are a proven leading Turkish operator,
oil producer and successful Turkish explorer. We will undoubtedly
benefit greatly from their unrivalled Turkish knowledge and
experience."
Qualified Person's Statement
Matt Cartwright, UKOG's Commercial Director, who has 37 years of
relevant experience in the global oil industry, has approved the
information contained in this announcement. Mr Cartwright is a
Chartered Engineer and member of the Society of Petroleum
Engineers.
For further information, please contact:
UK Oil & Gas PLC
Stephen Sanderson / Kiran Morzaria Tel: 01483 941493
WH Ireland Ltd (Nominated Adviser
and Broker)
James Joyce / James Sinclair-Ford Tel: 020 7220 1666
Cenkos Securities PLC (Joint Broker)
Joe Nally / Neil McDonald Tel: 020 7397 8919
Novum Securities (Joint Broker)
John Belliss Tel: 020 7399 9400
Communications
Brian Alexander Tel: 01483 941493
Glossary
deg API a measure of the density of crude oil, as defined
by the American Petroleum Institute
dolomite/dolomitisation a crystalline form of calcium carbonate or
lime. The geological process of turning the
more common calcite crystalline form of calcium
carbonate into dolomite . increases the pore
space in the rock by approximately 13% thus
improving the rocks ability to store oil and
improve potential oil flow
----------------------------------------------------
limestone a sedimentary rock predominantly composed of
calcite (a crystalline mineral form of calcium
carbonate or lime) of organic, chemical or
detrital origin. Minor amounts of dolomite,
chert and clay are common in limestones. Chalk
is a form of fine-grained limestone
----------------------------------------------------
mean value the expected or average outcome of a defined
probability distribution, in this case the
calculated distribution of oil in place
----------------------------------------------------
o il discovery an o il accumulation for which one or several
exploratory wells have established through
testing, sampling and/or electric logging the
existence of a significant quantity of potentially
moveable hydrocarbons
----------------------------------------------------
o il field an accumulation, pool or group of pools of
o il in the subsurface that produces o il to
surface
----------------------------------------------------
O IP or o il in the quantity of o il that is estimated to exist
place in naturally occurring accumulations within
the ground before any extraction to surface
via production
----------------------------------------------------
prospect a project associated with a potential accumulation
that is sufficiently well defined to represent
a viable drilling target
----------------------------------------------------
P10 value high case scenario with a 10% probability that
a stated volume will be equalled or exceeded
----------------------------------------------------
recoverable volumes those quantities of petroleum (oil in this
& recovery factor case) estimated, as of a given date, to be
potentially recoverable from known accumulations.
The recovery factor represents the percentage
of the OIP that can be recovered to surface
via production
----------------------------------------------------
reserves reserves are those quantities of hydrocarbons
which are anticipated to be
commercially recovered from known accumulations
from a given date forward
----------------------------------------------------
oil show the presence of visible live oil in drill
cuttings and or core at surface and or as a
fluorescent liquid under UV light
----------------------------------------------------
well test, flow involves testing a well by flowing hydrocarbons
test to surface, typically through a test separator
over a flowing period. Key measured parameters
are gas flow rates, downhole pressure and surface
pressure. The overall objective is to identify
the well's capacity to produce hydrocarbons
at a commercial flow rate and volumes.
----------------------------------------------------
UKOG Licence Interests
The Company has interests in the following UK licences:
Asset Licence UKOG Licence Operator Area Status
Interest Holder (km
(2)
)
Field currently
UKOG (GB) IGas Energy temporarily
Avington (1) PEDL070 5% Limited Plc 18.3 shut in
------------------------------- ---------- -------------- -------------- ------ -------------------
BB-1/1z oil
discovery,
Broadford Bridge/Loxley/Godley Loxley/Godley
Bridge (2, UKOG (234) UKOG (234) Bridge gas
3, 8) PEDL234 100% Ltd (4) Ltd (4) 300.0 discovery
------------------------------- ---------- -------------- -------------- ------ -------------------
Finalising
new site
selection
to drill
Portland
and Kimmeridge
A24 (3) PEDL143 67.5% UKOG UKOG (7) 91.8 prospects
------------------------------- ---------- -------------- -------------- ------ -------------------
UKOG (GB) IGas Energy Field in
Horndean (1) PL211 10% Limited Plc 27.3 stable production
------------------------------- ---------- -------------- -------------- ------ -------------------
Horse Hill Horse Hill
Horse Hill Developments Developments Field in
(1) PEDL137 85.635% Ltd Ltd 99.3 stable production
------------------------------- ---------- -------------- -------------- ------ -------------------
Horse Hill Horse Hill
Horse Hill Developments Developments Field in
(1) PEDL246 85.635% Ltd Ltd 43.6 stable production
------------------------------- ---------- -------------- -------------- ------ -------------------
Planning
application
submitted
Isle of Wight for Arreton
(Onshore) (2, oil appraisal
3) PEDL331 95% UKOG UKOG 200.0 well
------------------------------- ---------- -------------- -------------- ------ -------------------
Notes:
1. Oil field currently in stable production.
2. Oil discovery pending development and/or appraisal
drilling.
3. Exploration asset with drillable prospects and leads.
4. Contains the Loxley Portland gas accumulation, the Broadford
Bridge-1/1z Kimmeridge oil discovery, plus further undrilled
Kimmeridge exploration prospects.
5. Portland and Kimmeridge oil field with productive and
commercially viable zones, HH-1 in stable oil production, HH-2z EWT
ongoing, production planning consent granted in September 2019,
long term Production consent granted March 2020.
6. UKOG has a direct 77.9% interest in HHDL, which has a 65% interest in PEDL137 and PEDL246.
7. OGA consent received for the transfer of operatorship from Europa to UKOG
8. Gas discovery pending appraisal drilling and development with underlying Kimmeridge potential
The information contained within this announcement is deemed by
the Company to constitute inside information under the Market Abuse
Regulation (EU) No. 596/2014
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
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of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
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