Corporate Update (inc. State 16-2 well)

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.

 

25 January 2021

Zephyr Energy plc

(the "Company" or "Zephyr")

 

Corporate Update:

State 16-2 well successfully plugged for future re-entry;

data evaluation ongoing;

planning and permitting underway for a potential horizontal lateral; and,

corporate outlook regarding the new U.S. Administration

 

 

Zephyr Energy plc (AIM: ZPHR), the Rocky Mountain oil and gas company focused on responsible resource development, provides an update on its project in the Paradox Basin, Utah, U.S. (the "Paradox" or the "Paradox project") and other matters.

 

As previously announced, the State 16-2 well was drilled successfully and safely to a total depth ("TD") of 9,745 feet in less than 19 days, a record performance versus historical drilling in the northern part of the Paradox Basin. In addition:

 

·    The data acquisition programme secured 113 feet of continuous core from the Cane Creek reservoir. 

·    31 sidewall cores were secured from 11 overlying secondary reservoirs, an increase over the initial goal of 20 cores from 7 overlying reservoirs.

·   Open hole logs were run across the bulk of the Paradox Formation, and these logs are now being integrated with existing log data from the neighbouring State 16-42 well co-located on the same pad.

·    Initial indications showed similar log responses to offset wells, suggesting the presence of hydrocarbons in multiple reservoir intervals.

·    Data analysis is underway, and the Company expects to announce initial results on 29 January.

 

The Company now announces that following the completion of drilling and data acquisition activity, the State 16-2 well was plugged safely at 6,437 feet TD, and Cyclone Drilling's Rig #34 was formally released shortly thereafter.  The State 16-2 wellbore is stable and readily available for re-use as a host from which a future side track lateral appraisal well may be drilled.

 

The Cane Creek core and overlying reservoir sidewall cores have been transported to a laboratory in Houston for detailed analysis.  Zephyr expects to receive detailed results from this analysis of reservoir data over the coming weeks and plans to give an initial report to Shareholders later this week as outlined above. 

 

A decision on whether to drill the side track lateral will be made after Zephyr has full results from all of the data acquired, and the Board currently expects to make a decision by the end of March.

 

In order to assist and expedite that decision, Zephyr's team has commenced the related detailed well design and planning work.  The Company has also contracted to retain the services of the same experienced drilling operations team which successfully completed the vertical portion of the well. A draft Authorization for Expenditure ("AFE") for the lateral well has been prepared, with total costs forecast at $3.5 million - this total includes both drilling costs and costs to equip the well for production. On a related front, over the coming weeks the Company will evaluate a number of possible funding sources for the lateral well, with alternatives that include strategic and industry partnerships.

 

In addition, the Company can also report it has applied for the necessary permits required to drill the horizontal lateral leg of the well. The State 16-2LN Application to Drill ("APD"), once granted, would allow Zephyr to fully test the commerciality of the Cane Creek reservoir with a goal of achieving near term oil and natural gas production.

 

Well and Project Economics

 

Zephyr has previously highlighted its economic forecast for the Paradox project, most recently in its presentation of November 2020 which is available on the Company's website.

 

Updated for current commodity prices and reduced drilling costs as demonstrated by the State 16-2 well, the Company's Paradox acreage is estimated to hold the following:

 

·    Net 2C contingent recoverable resources of over 12 million barrels of oil equivalent ("mmboe") from 30 wells; and

·  Net present value of approximately US$93 million (pre-Federal Income Tax), using a flat oil price of US$50 per barrel and a ten percent discount rate ("NPV -10").

 

Both estimates are solely for the Cane Creek reservoir and do not include the significant upside potential from additional overlying reservoirs.  The estimates were calculated in accordance with the Company's Competent Persons Report ("CPR") prepared by Gaffney Cline & Associates ("Gaffney Cline") in June 2018, and will be revised further once all data from the State 16-2 well has been processed.

 

A potential side track lateral on the State 16-2 well (the "State 16-2LN-CC") is individually forecast to have strong economics as a standalone investment. Utilising production profiles generated from Gaffney Cline's CPR, and updated with a $50 per barrel oil price and reduced capital expenditure estimates, the Board estimates the lateral side track could generate the following on a 2C basis:

 

Initial gross oil production rate:  780 barrels of oil per day

Estimated Ultimate Recovery:     550,000 barrels of oil and 1.8 billion cubic feet of gas

Return on Invested Capital:          169%

Single well net NPV-10:                 $4.6 million

 

The Board further believes that the overall Paradox project has potential to be a project of considerable scale versus Zephyr's current market capitalisation, and the drilling of the State 16-2LN-CC side track lateral would be a major step forward as Zephyr seeks to unlock the considerable potential value of the project.

 

 

Corporate outlook regarding the new U.S Administration

 

The Company notes the Biden Administration's new directive to grant temporary decision-making powers for federal land leasing and permitting decisions to senior personnel within the Department of Interior.

 

Zephyr has long anticipated the potential for a slowdown on federal lease sales and permitting under a new Administration, and welcomes the Biden Administration's efforts to undertake a responsible review of current practices.  The Board believes Zephyr's core mission - to develop resources economically and responsibly, with the utmost care and minimal environmental impact - is well aligned with the aims of the new Administration.

 

The temporary senior-level review on new federal leasing does not impact Zephyr's current leases, as the Company dedicated significant resources over the last eighteen months to solidify all existing federal leases across the entirety of its acreage within its 3D seismic position.

 

Similarly, the Board does not expect the temporary slowing of new federal drilling permits to have an impact on the Company's planned potential drilling activities - the State 16-2 well is located on Utah state land, and permits for drilling within state lease boundaries are unaffected by the temporary federal permit review. 

 

Zephyr also holds two fully approved federal drilling permits for wells on the Paradox which have not yet been drilled.  With the potential drilling of the State 16-2LN-CC side track lateral, multiple additional state lease drilling targets and two existing federal permits, Zephyr has solid inventory through which to work should the federal permitting process be delayed longer than the 60-day period of the Administration order.  

 

In addition, Zephyr's larger business development and asset acquisition strategy is centered around Rocky Mountain basins in which a majority of land is under private rather than federal ownership.

 

 

Colin Harrington, Zephyr's Chief Executive, said "We are thrilled with the results of the State 16-2 drilling campaign, and we eagerly await more detailed analysis from the data acquired.  We expect to receive multiple rounds of reservoir information, and we look forward to updating Shareholders with our initial findings later this week.

 

"In the meantime, in order to maintain our significant momentum, we are moving full steam ahead with preparations for the potential horizontal lateral.  Detailed planning and permitting is well underway - and in the event we elect to undertake the next phase of drilling, we will be well positioned to move forward on an expedited basis.

 

"Finally, I'd like to again reiterate my thanks to our partners, and for the incredible collaboration between our federal, state, academic and industry project teams.  We very much look forward to the continuation of our joint efforts to unlock the significant economic value of the Paradox Basin while always minimising the impact on the environment in which we work."

 

 

 

Contacts:

 

Zephyr Energy plc Colin Harrington (CEO) Chris Eadie (CFO)	Tel: +44 (0)20 7225 4590
Allenby Capital Limited - AIM Nominated Adviser Jeremy Porter / Liz Kirchner	Tel: +44 (0)20 3328 5656
Turner Pope Investments - Broker Andy Thacker / Zoe Alexander   Flagstaff Strategic and Investor Communications Tim Thompson / Mark Edwards / Fergus Mellon	Tel: +44 (0)20 3657 0050     Tel: +44 (0) 20 7129 1474

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.

 

Glossary of Terms and Definitions

1C Low Estimate of Contingent Resources

2C Best Estimate of Contingent Resources

3C High Estimate of Contingent Resources

 CONTINGENT RESOURCES

Those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations by application of development projects, but which are not currently considered to be commercially recoverable due to one or more contingencies.

Contingent Resources may include, for example, projects for which there are currently no viable markets, or where commercial recovery is dependent on technology under development, or where evaluation of the accumulation is insufficient to clearly assess commerciality. Contingent Resources are further categorized in accordance with the level of certainty associated with the estimates and may be sub-classified based on project maturity and/or characterized by their economic status.

 

Background to the 16-2 well

 

As previously announced, Zephyr has been working with a project team led by the University of Utah's Energy & Geoscience Institute ("EGI"), in collaboration with the Utah Geological Survey (the "UGS") and other Utah-based partners.  The project is sponsored by the U.S. Department of Energy and its National Energy Technology Laboratory (the "DOE").

 

Entitled "Improving Production in Utah's Emerging Northern Paradox Unconventional Oil Play," the project's goal is to assess and perform optimisation analyses for more focused, efficient and less environmentally-impactful oil production strategies in the northern Paradox Basin, particularly in the Pennsylvanian Paradox Formation's Cane Creek shale and adjacent clastic zones.

 

As part of this study, the EGI and UGS originally planned to drill a vertical stratigraphic test well to gather data to improve the understanding of the Paradox Basin play. It was planned that the proposed well would target the Cane Creek and potentially the C18/19 reservoirs, acquiring both core data and a comprehensive well log suite in order to provide valuable new basin data.

 

Over a period of several months, the project team analysed multiple potential well locations across the Paradox Basin, and the Company was delighted that the EGI and UGS selected Zephyr's Paradox acreage as the location on which to drill the well.

 

The Company's location was selected for a number of reasons, including the quality of the Group's underlying 3D seismic data (which can be tied into the well results to build a stronger integrated predictive model) as well as a favourable surface location which will be sited on a pre-existing pad.

 

After Zephyr's Paradox acreage was selected as the location for the test well, Zephyr worked with its project partners to construct a project plan that maximised opportunity for all parties.

 

A key part of this plan was to design the well in such a way that it could not only be used to obtain all the data required by the research project, but so that it could also be re-used by the Company in the future as the host for a lateral appraisal well. This approach not only reduces environmental impact but will also significantly reduce future lateral well costs for the Company.