Tuesday’s update from Eco Atlantic Oil & Gas Ltd (LON:ECO, CVE:EOG) put a number next to what the company’s backers have long thought … that the explorer is in a potentially very valuable but unproven position offshore Guyana.
A new third-party estimate, provided by consultant Gustavson Associates, saw the best part of 3bn barrels of possible resources across early stage prospects and ‘leads’ (in other words early-stage ‘pre-drill’ exploration targets).
READ: Eco Atlantic Oil & Gas “absolutely delighted” as Total triggers Guyana farm-out four months ahead of schedule
For those less familiar with the sector, such estimations are not uncommon.
Most exploration projects essentially start with big ideas and unchartered territory. Any early estimates are always unfounded, at least to some degree.
The thousands, millions or even billions of barrels oil crude written up in stock market statements and investor presentations are not yet real, they may only possibly be there (based on whatever geological understanding and ‘marketing licence’ allows).
A quick segue into the dynamics of exploration stocks
To borrow, or indeed bastardise, a pseudo-scientific vocabulary, these estimates are ‘quantum’ resources. Until a well is drilled down to test the target, they could essentially be considered to be both there and not there.
There are practical ways for investors and analysts to deal with this possible - future value.
This is where pre-drill resource estimation becomes an important part of the exploration process, though naturally when pricing in the ‘resource’, it is appropriate to liberally apply discounts to what the asset could be worth.
Whilst at the risk of labouring a point, it is worth noting that this is where the opportunity lies for many investors in oil and gas exploration companies – the market price doesn’t reflect the actuality that a discovery is made; that a discovery will be commercially viable; or that the company will have the wherewithal to deliver any such discovery into profitable production.
Buying shares at this risky juncture creates the possibility that investors will capture all the upside as exploration milestones are achieved and projects advance.
That said, more explorers fail than succeed – guessing something might be there and then spending millions of dollars finding whether you’re right, is an inherently tricky business.
Investors naturally seek reassurance and look for opportunities to assuage the high risks.
Eco is more than just an example of ‘nearology’
Looking for new discoveries in the vicinity of existing discoveries would seem like a good place to start, and, indeed, it often proves to be popular from an investor’s perspective.
Nearby successes mean that pre-drill assumptions come with greater actual insights, and, at least in theory, a slightly lower risk may be associated with the unproven resource estimates.
This is why there’s a lot of attention on Eco Atlantic and the Orinduik block (albeit, the AIM-quoted firm’s blue-chip exploration partners also add further credence).
Orinduik is immediately adjacent to the exploration waters that have hosted a total of nine new major discoveries for US giant ExxonMobil Corp. (NYSE:XOM).
Exxon has so far estimated more than 4bn barrels of ‘real’ (well, at least drill-tested) and ‘recoverable’ resources across what’s known as the Stabroek Block.
The fact that Exxon has already greenlighted development of Liza, the first and most advanced of the Stabroek Block, provides further encouragement that this project could be the start of a new South American hydrocarbon frontier.
Why Hammerhead might be particularly significant
Hammerhead, which in August became Exxon’s most recent find, is arguably most significant for onlookers also following Eco.
Orinduik operator Tullow Oil PLC (LON:TLW) last year completed a 3D seismic programme across a portion of the block and, whilst the programme’s final findings are awaited, the exploration partners have already noted that the Hammerhead feature was visible within the captured seismic data.
That, in layman's terms, is interesting because it creates a potential point of comparison to the untested prospects within the Orinduik area. Put even more simply, it means that the overall exploration project is less risky.
French oil major Total SA quickly exercised an option to acquire a 25% stake in Orinduik following the CPR.
At the same time, Tullow will use the data to further de-risk and progress the prospect inventory until it is ‘drill-ready’ – at some point thereafter, a well will likely be sunk and we will all see how good this week’s 2.9bn barrel estimate really was.