This note discusses DGAs Resource Evaluation of Shaikan a.k.a. “The Discovery Report”. It presents mostly good news and recognises upside but could have gone further in revealing the full upside potential of the structure which is arguably now in the range 15 BBO – 20 BBO plus significant condensate and gas. I will also comment on the market reaction to the report from the standpoint of the resource additions and provide some thoughts about issues to be investigated going forward.
1 MARKET REACTION
It was an open secret that the Shaikan structure has a significant probability of containing more than the mean estimate of 2.8 BBO in the prelim DGA report. On reflection I think it is not surprising that there was a muted reaction in share price to an increase in the mean resources to 4.2 BBO presented in the Discovery Report. The upward revision was due to about a 10% increase in the zones previously evaluated and ¾ BBO of untested and unknown, but likely heavy oil in the Sarmord which, until it is tested, will carry a risk that it can’t produce at good rates. On the face of it the news was not transformational. We might have hoped for 30-50% increase in share price but the OIP increase was not enough to overcome market concern about the political situation.
But dig a little deeper and there is cause for considerable optimism that Mean OIP will head so far upwards during 2010 that there will be intense interest in being a part of this investment opportunity. There comes a point that the potential rewards are so high that it is difficult to remain an outsider (as the DES share price illustrates).
2 UPSIDE HIGHLIGHTED BY DISCOVERY REPORT
DGA rightly pointed out (p37) that “Significant upside potential exists for the structure. This upside includes additional pay that was not identified due to” (a) “poor log responses over rugose zones and an interval not logged (1000 to 1313 m MD) and” (b) “from deeper formations still in structural closure that were not penetrated by the well.”
a) Upside in the Drilled Section
Consider point (a) above carefully. DGA is saying that there are intervals other than the interval not logged in which there may be additional pay. This is discussed more fully in the introduction and caveats to the petrophysical section on p 17-18. The degree of conservatism cannot be quantified at present but this will become clearer if GKP collects substantially more core in Sh-2. The amount of core collected in Sh-1 was rather limited but understandable given the uncertainties in reservoir depths prior to drilling the well.
The interval not logged is mainly the Garagu formation. Is there oil in the Cretaceous Garagu formation and will it flow?
In the Sh-1 pre-drill prognosis shown in the April 09 Oil Barrel presentation, GKP attributed oil reserves to the Garugu. Of course the well has turned out different to that prognosis as the Butmah was shown there as a seal whereas we now know it is a formation with low N:G but which nevertheless contains a reservoir interval with >1 BBO. However consider this:
1.Oil shows were encountered whilst drilling the Garagu.
2.The Tawke Field flows from the Cretaceous (and Pliocene) so this may be a good sign but note that its oil is a higher API gravity (27o) than is likely to be encountered in Sh-1 and may flow more readily.
3.The Garagu is described as a limestone. EVERY other limestone formation in the well above and below contains oil or gas.
4.The Garagu has a similar gross thickness (197m) to the Sarmord. If the net:gross ratio is similar then there could be another ¾ BBO to add using DGA’s current analysis methodology and considerably more if full to spill (discussed later).
Note that the Sarmord and Garagu are behind two strings of casing and cement in Sh-1. GKP will not want to destroy the pressure integrity of these strings to test them given that a long term test of the other more important oil zones is to be conducted and that the well will ultimately be a development well for the Jurassic reservoirs. The Sarmond and Garagu are more likely to be tested in Sh-2 or Sh-3.
b) Upside in the Deeper Undrilled Sections
Turning to point (b), the gas condensate upside in the undrilled Triassic and gas in the Permian, I was surprised that they quantified the upside at the levels they did. It was a giant leap to go from a mean resource estimate based on well results of 690BCF and 200 MMBO in the Upper Kurra Chine A and B and Lower Kurra Chine to 5-14TCF and 1-5BBO including the Permian. They have estimated an additional 200m of net pay in the undrilled section. This is almost as much pay as has been identified so far in the drilled section!
Perhaps they have used local and regional information e.g. the Jabal Kand-1 well to estimate the net reservoir quality rock likely in the undrilled section. Look again at the GKP version of the pressure plot (Macquarie slide 15) showing the presence of permeable zones throughout a 700m interval commencing at 3050 m SS in JK-1. Are these points from the Butmah are or they from the Triassic? Slide 15 is entitled Jurassic Pressure Data. Strictly speaking those points below 3050m SS should not be on the plot if they are not from the Jurassic in JK-1. However they may have been Triassic and included to support why the JK-1 water gradient line was drawn where it was. We know the Triassic Kurra Chine is 1150m thick in JK-1 so these points could be from this formation.
We also know drilling was terminated due to the higher reservoir pressure encountered. Note how the Kurre Chine B gas pressure is well to the right of the water gradient in JK-1 in Fig 16 on p24. The higher pressure could be the result of a very tall column of gas condensate. Pressure increases above the normal aquifer pressure by roughly 0.7 psi for every m of gas column below.
The gas condensate is extremely rich in liquids. The condensate will be valuable. Pricing condensate is a bit of a specialist subject but to give you an indication Australian NW shelf condensate has traded at only a $2 discount to Brent. There may be complications with this one. It may have a high sulphur content; I am not sure if sulphur attaches itself to condensate or only to longer chain HCs in crude oil.
3 UPSIDE ONLY PARTIALLY REVEALED BY DISCOVERY REPORT
If you remember in my first post I mentioned to check whether there would be a change in the underlying assumptions regarding reservoir area used in the preliminary report versus the final discovery report. This was all about the distribution of reservoir area in the Monte Carlo simulations of the Jurassic oil reservoirs. In the preliminary report the reservoir area was set equal to the spill point area in only 1 in 100 iterations of the models. However, the Jurassic test pressures in Sh-1 indicated, by comparison with JK-1 aquifer pressures, that the downdip oil water contact could be coincident (give or take inherent depth uncertainties) with the spill point.
It was encouraging to see the pressure plot in the Discovery Report (p24) and acknowledgement of its potential significance “If the oil gradient line is extrapolated down to where it intersects the area water gradient line, a possible oil-water contact can be inferred at -2375 m subsea.” However the frequency with which reservoir area is set to spill point area remains 1 in 100 iterations in the Discovery Report.
I won’t reiterate the entire discussion from my 4th January post (check out here if you wish <
a) Assuming the pressure data is telling us the Jurassic reservoirs are full to spill leads to a Jurassic OIP estimate of 13.5BBO (Barsarin thro Mus 8.4BBO and Butmah 5.1 BBO).
b) Should the Sarmord also be full to spill it would contain 3.2 BBO. This is more speculative as no pressure data is available.
So there is a potential 16.7 BBO in the Jurassic and Cretaceous Sarmord. As discussed earlier the Garagu is likely to be oil bearing and hence it could contain another 2-3 BBO. So there is a potential OIP in the 15 – 20 BBO range EXCLUDING the 1-5 BB condensate and 6 to 16 TCF estimate supplied by DGA.
Wait it doesn’t stop there. This may have been mentioned in a post last year but the Discovery Report maps and slide 16 of the Macquarie presentation reaffirmed that there is closure to the north west of Sh-1 on the downthrown side of the Northern fault in multiple horizons. The figure showing the appraisal/early dev well targets has a well in this closure. This area is outside those used to develop the OIP estimates.
OK, this all sounds great but remember that most of the OIP is still potential, albeit with reasonable justification, and future well results could be disappointing.
4 DOWNSIDES/AREAS OF CONCERN
a) Look at slides 11 and 16 of the Macquarie presentation. The terrain is very rugged. Hopefully there will be sufficient suitable places to locate development rigs. Otherwise there will be numerous difficult trajectory wells to drill. Whilst costs are recoverable well durations could be long and this will extend the period to achieve plateau production which will affect NPV estimates. Note also that Sh-1 was deviated. I don’t know the well history but it is called Sh-1B possibly indicating a sidetrack. Are there drilling concerns?
b) There is lots of H2S and CO2 in the associated gas and the Triassic gas discovery is very sour. 20% of the gas is not saleable so reduce GIP estimates by 20% to obtain useable gas. Have that H2S come out of your cooker and you would be dead in seconds! GKP will have had to take strict precautions when testing the well (breathing apparatus etc). The H2S/CO2 will have cost implications but more importantly the crude is probably high in sulphur so expect a sizeable discount to Brent crude price, possibly about 8-10%.
c) The rich condensate has a downside. Producing a rich gas condensate normally leads to drop out of the condensate in the reservoir and in the area around the wellbore. This causes a severe reduction in gas production rates and in the ratio of condensate to gas (CGR) and hence condensate rates. It would be necessary to re-inject the gas to maximise condensate recovery and sell the gas later when most of the condensate has been extracted.
d) As Sh-1 left us with so many questions, Sh-2 has numerous unknowns and uncertainties to resolve. Expect the well to take a long time if GKP do it right. There should be numerous cores to take which involves tripping in and out of the hole (pulling the drill string out and rerunning it) far more frequently than conventional drilling. The well will be 1500 – 2000 m deeper than Sh-1 and drilling will be slower as depths increase. Patience will be required! Hopefully TK will authorise a steady stream of news as hole intervals are drilled and logged.
The release of news revealing the growth in the OIP potential is being managed by GKP. They don’t want to run the risk of disappointing the market by declaring they have 10+ BBO mean OIP discovery and then having to retrace when the independent reports are released.
BACK TO POLITICS
The disappointment that the SP did not rise significantly is understandable. My reaction is to be patient and wait until the political situation is sorted and the discovery is sufficiently appraised to reveal its full potential. Shaikan on its own would make a significant contribution to helping Kurdistan reach its desired aim of reaching 1 MM bbl/d production (durby’s post “Latest Development .... “ of 17/1/10) and would provide insurance for Iraq regarding its desired aim of increasing oil revenues by raising production levels to 12 MM bbl/d. In assessing success case field value I will be modelling the field with a number of production scenarios to include peak production rates between 300 – 800 kbbl/d. Shaikan should increase the probability of everyone achieving their targets and its early development should therefore be supported by all parties.
CONCLUSION
In conclusion loads of good news to be encouraged by, some concerns but nothing to get too worried about. Roll on testing, an AB update and most of all Sh-2. That will be the most eagerly anticipated well in the industry!
As ever if you require any clarifications let me know.
All the best,
Gramacho
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