U.S. Oil & Gas: pure play on a high impact geological conundrum

Although it is listed on the tertiary exchange of PLUS, Nevada-focused US Oil & Gas (PLUS: USOP) should not be discounted by possible investors for lack of potential or ambition. The company, which owns plots in Nevada only a few miles from two considerable oil-producing fields, says everything is clicking into place so that an exploratory drilling programme can begin this autumn.

Nevada has been a relatively undeveloped US state in terms of oil and gas. This is despite sitting on the American Cordillera mountain range, which runs from Alaska down into South America and has produced hydrocarbons all the way along it. While plenty of oil has spouted in Alaska, California, New Mexico and further south, in Nevada it was inconsistent, an exception. While the area has produced oil, many million barrels of it, discovering new targets is made difficult by the geological irregularity of the area.

US Oil & Gas owns 5,600 acres in Hot Creek Valley, situated in the 400 square mile Sevier Thrust fold-and-thrust belt, which straddles East Nevada and West Utah. The fold-and-thrust belt and foreland basins are found where the western Cordillera coincides with organic-rich hydrocarbon source rocks of ‘chainman’ shale. This formation means that while oil seeps typically occur above the giant structures they don’t in Nevada.

However, only recently has a geological map of the wider area become available, which has confirmed the view that a blanket of Oligocene volcanic rocks and detritus have buried and sealed the oil seeps in the Great Basin on which eastern Nevada and western Utah sit, preventing conventional 2D and 3D seismic from working effectively. The ensuing lack of accurate mapping has meant that Nevada has not been attractive to oil explorers and until recently little significant drilling had been completed in the Great Basin.

However, a recent oil discovery changed the picture. Privately owned Wolverine Gas and Oil discovered the 1.2 billion barrel Covenant Field just over the border in Utah but within the Sevier Thrust. Recent surveying indicates the region holds an estimated 30-40 billion barrels and understandably prompted a wild land grab.

USOP’s management – led by managing director Brian McDonnell and fellow Irishman Jimmy Guiry, who is chairman – were looking at Hot Creek Valley when Covenant was discovered and quickly snapped it up. As well as being in the same thrust as the Wolverines find, Hot Creek is only 20 miles from Railroad Valley, where a pair of wells have produced over 21 million barrels of oil over 15 years but had not been developed further due to the complexity of technical data and uncertain geology.

With another oil producing field slightly further away to the north in Pine Valley, USOP was also encouraged that prospects looked good as Hot Creek was also sitting on the same rich chainman shale. USOP employed the same geologist who worked on Railroad Valley, Richard Gibson, to do the surveying of Hot Creek.

With seismic surveys proving ineffective, USOP in February announced results of its ‘Geospectra Infrasonic Passive Differential Spectroscopy’ (IPDS) survey, which McDonnell describes as "a revolution". He adds: "Passive tells you exactly what you've got. It sees through the volcanic debris on the surface and right down into our geology and implies we've got a substantial column of oil. We brought the technology to Nevada for the first time, but it’s been used in the Middle East a lot by the Abu Dhabi Company for Onshore Operations (ADCO) to size up major oil finds. We got a reading of 0.96 out of 1, which is tremendously strong - a find in the Middle East could be less than that."

The findings were indeed very encouraging. McDonnell explains: "The chainman shale is 10,000 feet thick on our land (and 300 feet think on Covenant) has total organic content of 5-6% (at Covenant it is no more than 1%), with 2.6g of oil per tonne of rock which is very high so we have good source rock. Also our oil is seeping out of shale higher into reservoir rock, which is Mississippian sandstone, which is thousands of feet thick and is holding our oil."

He points out both porosity (good porosity holds more oil) and permeability (good permeability allows oil to flow through your rock) of the reservoir rock are good. "Our porosity is 30%, where Covenant is at 14% and for permeability Mississippian sandstone is a classic. Also our drive mechanism, to force the oil up to the surface, is water, which is the best as it drives the oil at the perfect pressure for years and years so you don't have to spend any money."

In June, USOP received the results of geochemical tests that confirmed the presence of oil. Seepage of hydrocarbons from the subsurface at both targets has now also been confirmed, correlating highly with IPDS and gravity/magnetic survey results. The full analysis of Section 3 geochemical results will be released shortly.
 
"We have all the elements needed for a top quality oil find. Our 96/100 result of the passive survey is one," says McDonnell. The land has been staked for drilling and USOP has identified and agreed the pricing with a drilling company and is making progress on the application for a permit to drill. "All elements to drill in the autumn are being processed at the moment. Also a Competent Person's Report is planned, we're just deciding whether it's the right time to do it just before or after the drilling programme."

Having raised £239,000 when it floated on PLUS in January this year at 5p, USO raised another £280,255 in June but intends to spend approximately US$2m on the first phase of a two-well drilling programme.

McDonnell, who points out that the shares are very tightly held, says: "We are confident that the funding for the autumn well drilling programme has been secured."

If the company strikes lucky, as many signs point to, it could deliver considerable upside to the lowly share price. However, with no other projects advanced to this early-stage level, it is all or nothing for now.