Red Rock Resources Plc
("Red Rock" or the "Company")
Option to Invest in Shoats Creek Oil Project
28 October 2015
Option Agreement
Red Rock Resources plc is pleased to announce it has entered into an option agreement ("the Option") with Shoats Creek Development Corporation Inc ("SCDI"), to take a 20% Working Interest ("WI") in the planned development of the LM#21 and LM#22 wells at the Shoats Creek Field, Beauregard Parish, Louisiana. The Operator will be an affiliate of Northcote Energy plc (AIM: NCT) ("NCT").
Highlights:
o Red Rock option to take 20% WI / 14.4% Net Revenue Interest ("NRI") in LM#21 and LM#22 wells at an aggregate cost to Red Rock of up to $500,000-$600,000.
o Frio targets can be developed as low cost vertical wells relative to expensive horizontal shale plays
o Wells to be drilled at modest cost to add near-term production and reserve generation
o Robust economics project a 89% IRR and less than one year payback at $45 oil
The Option, priced at a nominal $1, offers the Company an entry to participation in the planned Lutcher More #21 and Lutcher More #22 wells that are direct offsets to the LM#20 well recently drilled for SCDI. These wells target the Frio 5030' sand multiple additional Frio formation between 4800' and 5400' depths. The work is currently planned for late 2015 and early 2016.
Additional investment in associated common tank and production facilities is also expected to be required. Subject to funding and if exercised, the Option would enable Red Rock to acquire a 20% WI and 14.4% NRI in each of the project wells, as well as interests in two salt water disposal wells. The Company has 10 days in which to decide whether to proceed with exercise and investment.
Project Background:
Located in the United States in the state of Louisiana, the Shoats Creek Field was originally discovered by Sun Oil ("Sun") in 1956. Situated on the U.S. Gulf Coast, the Shoats Creek Field has produced over 2 MBOE primarily from numerous Frio and Cockfield interval sands between 5000 and 9000 feet deep. The Frio is one of three major pay zones in the multi-reservoir field.
The Frio was not initially developed by Sun until the late 1970s when commercial quantities of oil and gas were discovered. From 1981 to 1983 Sun was producing 300 BOPD from their wells in the area. Production waned over time and investigations showed that mechanical well bore issues revolving around tubing leaks were responsible. Reduced production continued until 1984 when remaining wells were plugged and abandoned. The reservoir has subsequently sat dormant for the past 30 years.
Redevelopment:
NCT has in 2015 begun to re-develop Shoats Creek through infill drilling. The initial efforts will be followed up with exploitation and step out locations based on production results, sub-surface data, and proprietary 3-D seismic. The main risk in the effort is deemed to be mechanical rather than geological and the use of a stronger and more durable casing along with new techniques will be employed to ensure long and productive well operating lives.
In early 2015, NCT drilled and tested the first well in the redevelopment effort, the LM#20, which was a twin to the historical LM#16 that had been a strong producer until it had to shut down prematurely as a result of mechanical problems. LM#20 reported tested rates of over 250 BO and 500 MCF of gas per day. The LM#20 encountered 10'-12' of pay with an estimated 20% porosity and was perforated over a small interval from 5018-23'. Northcote has filed for an allowable daily production limit for the well of up to 250 barrels of oil per day with the Louisiana Department of Natural Resources and intends to start production in due course.
Investment Details:
The Company anticipates that its share of cased and completed LM#21 and LM#22 wells as well as related production support facilities would cost between $500k and $600k. SCDI would also have a 18.75% back-in after payout (payout being the time when the Company has received an amount in payments for oil and gas sales minus operating expenses that is equal to the investment required to drill the wells and associated facilities) so that thereafter this percentage of the Company's working interest would revert to SCDI, and Red Rock would be left with a 16.25% WI / 11.7% NRI.
As part of the investment additional wells and re-entry opportunities may from time to time be proposed in the project area with the Company having the option but not the obligation to participate.
Andrew Bell, Chairman, states: "Near-term oil production in the United States is an opportunity the Company has identified as key in implementing its pivot towards cash generative assets. The risk-return profile of the LM# 21 and LM#22 wells appears attractive following Northcote's successful drilling of the LM#20 at Shoats Creek and might give Red Rock the ability to participate in a largely de-risked asset on favourable terms in a safe jurisdiction.
By early 2016 we aim to start delivering meaningful revenue streams to Red Rock, reducing and before long eliminating the need to fund externally our much reduced costs of operation. Once the Company has the stability that will come from onshore oil and gas revenues, the undervaluation of its other assets will, we firmly believe, become more appreciated.
Red Rock wants not just one-off transactions in this space, but to form partnerships that can enable it to implement a rapid growth strategy in a low growth environment. It is with this in view that we enter into the intensive phase of our assessment of this opportunity."
The technical information that is contained in this announcement has been reviewed by Mr. Kevin Green, a Petroleum Geologist who is a suitably qualified person with over 30 years' experience in assessing hydrocarbon reserves and who has reviewed the release and consented to the inclusion of the technical information.
For further information, please contact:
Andrew Bell 0207 747 9990 Chairman Red Rock Resources Plc
Scott Kaintz 0207 747 9990 Executive Director Red Rock Resources
Roland Cornish/ Rosalind Hill Abrahams 0207 628 3396 NOMAD Beaumont Cornish Limited
Jason Robertson 0129 351 7744 Broker Dowgate Capital Stockbrokers Ltd.
Christian Pickel 0203 128 8817 Media Relations MHP Communications
Glossary:
BOE: barrels of oil equivalent, gas is converted at its energy equivalent of 6000 cubic feet per barrel of oil
BOEPD: barrels of oil equivalent per day
BOPD: barrels of oil per day, abbreviation for barrels of oil per day, a common unit of measurement for volume of crude oil. The volume of a barrel is equivalent to 42 US gallons
Choke: A wellhead choke controls the surface pressure and production rate from a well. Chokes usually are selected so that fluctuations in the line pressure downstream of the choke have no effect on the production rate.
Mcfd: Thousand Cubic Feet per Day
NRI: Net Revenue Interests
Pay or Payzone: an interval within a rock formation that contains quantities of hydrocarbons thought to be economically viable. This interval is commonly determined using various logging tools run by the operator prior to making the decision to complete a well for production.
Porosity: a measure of how much of a rock is open space. This space can be between grains or within cracks or cavities of the rock.
Permeability: is a measure of the ease with which a fluid (water in this case) can move through a porous rock.
