Hurricane’s billion barrel bonus
Monday, Apr 03, 2017
Hurricane Energy’s Halifax probe has identified the largest undeveloped resource on the UK Continental Shelf (UKCS), writes Callum Cyrus in Edinburgh
What: The latest well could suggest the existence of a billion barrel plus oil deposit.
Why: Drilling at the Halifax prospect suggests it is connected to the nearby Lancaster discovery.
What Next: The company is likely to turn to the capital markets to fund development, though it might also be subject to M&A interest.
Hurricane Energy has announced that its Halifax well West of Shetland (WoS) could have identified the largest undeveloped resource on the UK Continental Shelf (UKCS).
The Halifax probe was completed at a vertical depth of 1,179 metres after encountering an oil column measuring “at least” 1,156 metres and extending “well below” the targeted closure at 1,040 metres.
This means the find is highly likely to form a continuous deposit with nearby Lancaster, where the firm has already booked 207 million boe in 2C contingent resources.
The news comes as Hurricane, which specialises in targeting fractured basement reservoirs, prepares for first oil from Lancaster in early 2019.
“This has certainly enhanced Hurricane’s understanding of the Greater Lancaster area,” a company spokesperson told NewsBase Intelligence (NBI). “The primary goal of drilling was to demonstrate that Lancaster extends all the way into the Halifax, and that’s what it did.”
The Halifax well provided evidence of a pervasive fracturing network, a basement drilling system that holds hydrocarbons, as opposed to the pore space geology targeted at conventional depths.
“The key which was more specific to the basement was evidence of a pervasive fracture network,” Cenkos Securities analyst Ashley Kelty told NBI. “This showed the fractures are connected – certainly there was no evidence of water coming through or anything like that.”
Drilling at Lancaster, which is located in Blocks 205/21a, 205/22a and 205/26b, had already encountered Hurricane’s first basement discovery in 2009.
A subsequent sidetrack pumped light oil from the basement to the surface.
The 205 21-a7Z sidetrack tested at 14,500 stock tank bpd of oil in September with an electrical submersible pump (ESP).
This led Finncapp analyst Dougie Youngson to estimate Lancaster’s pilot output in 2019 could reach 17,000 bpd after capital expenditure of US$300 million.
“Hurricane expanded the [Lancaster] licence to capture the Halifax prospect,” Youngson told NBI. “Originally it was meant to drill a prospect to the south called Warwick, but that would have been a standalone prospect. So realistically it made sense for the company to chase Halifax.”
Halifax’s oil down to (ODT) level of 1,846 metres stretches below the oil water contact (OWC) of 1,678 metres observed at Lancaster. Hurricane said this suggested an OWC that panned downward from Lancaster towards Halifax. Kelty said this could make Hurricane’s find even larger than the 1 billion barrels of oil in place (OIP) that has been touted. He pointed to Royal Dutch Shell’s experience at the Pierce field in Blocks 23/22a and 23/27, where the tilted OWC raised reserve estimates by around 30%.
“[People seem to have been thrown by] the tilted OWC, but in some respects it is more encouraging because it gives scope to increase the resource base,” he said. “These are relatively common features, most people assume that the OWC is going to be level [as with a] hydrostatic well, but if it’s a hydrodynamic one it can be tilted.”
In light of the technical challenges surrounding basement fracturing, there was some disappointment that Hurricane had failed to conduct testing at Halifax.
Only traces of formation oil were retrieved, which the company attributed to safety, budget and time constraints.
Tudor, Pickering, Holt and Co. (TPH), an energy investment bank, said the testing situation was “disappointing”, while arguing that “long term sustained flow rates remain the main uncertainty”.
Other analysts said Hurricane’s decision was understandable given the challenge of cleaning up so far below the surface.
“They tried to do the [test] but then bad weather closed in so they had to unhook and move away. When they came back it wasn’t cleaning up particularly well,” Kelty said. “It would have been nice to have, but it wasn’t an essential because the aim of the well was to determine the depth of the oil.”
Youngson said there were always likely to be challenges encountered at some point during Greater Lancaster’s development.
“It was a little disappointing, but having said that, all of the other wells have gone so fantastically well. Sometimes it’s not worth pursuing something like a test if time is against you really.”
The industry does not usually view testing of an exploration well as standard, instead treating it as an added bonus when it does happen.
Hurricane has suspended the well for potential tests in the future, though NBI understands there are currently no plans in place to do any testing.
Proving the link between Lancaster and Halifax implies that fewer development wells would be needed to produce oil from a common reservoir. This is further good news as Hurricane seeks additional financing to reach first oil from the early production system (EPS) at Lancaster.
Hurricane carried out a GBP52 million (US$65 million) share placement in April 2016, which encouraged it to suspend farm-out talks in June. It decided that with enough money to complete appraisals, there was little reason to offer a stake in Lancaster to outside partners until its geological assessment was proven.
“The [April 2016 funding] was essentially a cheeky raise on the back of the first two Lancaster wells and the successful flow test,” Kelty said. “It allowed the firm to hold onto the rig [and] it made sense because rig rates were so low, and you don’t have to wait and pay for mobilisation and demobilisation.”
The Halifax hit means Hurricane has a handful of options as it ponders the EPS development. It can either re-open farm-in negotiations, raise debt or turn to the capital markets again.
In terms of the farm-in option, Cantor Fitzgerald analyst Sam Wahab told NBI: “If you look at the likes of BP, they’ve got huge of infrastructure and assets in the UK North Sea. They’ve also got alot of acreage in Southeast Asia, where they’ve got experience tapping basement reservoirs, so they would be an ideal partner.”
But equity or debt still looks like a more obvious play at this stage.
“This is a development proposition now, so one can probably see some depth going into the company, in one form or another,” said Finncapp’s Youngson.
“If the farm-out process doesn’t feel like it’s going to happen quickly, then I think they’re more likely to go for equity or debt.”
Hurricane has some time on its side, however, having provisionally booked Bluewater Energy Services’ Aoka Mizu FPSO for pilot production under a heads of terms signed in November.
Considerable subsurface work must now be carried out in order to get the EPS ready.
NBI’s view is that Hurricane will hold off on concluding a farm-out agreement. Instead, the company is likely to opt for another share placement, but with an improved value proposition this time owing to the single resource base.
There seems little reason to accrue debt just now and risk burdening its balance sheet should the Lancaster development run into unforeseen difficulties. There is also likely to be renewed interest in Hurricane from majors that are looking to replenish their UK North Sea reserves after a period of belt tightening. Firms such as ExxonMobil and Statoil participated in the UK’s latest frontier licensing round (see next story), so the time seems ripe for an acquisition that would bring with it a substantial hydrocarbon resource. But negotiations could become stuck on price if Hurricane pushes to finalise a funding arrangement before Lancaster’s EPS launch in 2019.
Hurricane appears to be staring up the value curve with its enlarged discovery, while many of the majors are still nervously glancing down the other side.
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