Aurelian Oil & Gas well-funded and confident

Aurelian Oil & Gas (LON:AUL) currently has two key focus areas; the development of a significant Polish 'tight gas' field, Siekierki, and the exploration of a six million acre land-bank which runs along the Carpathian basin from southern Poland, through Slovakia, Romania and Bulgaria.

A new €75 million credit facility has also just been agreed and this, when added to more than €36 million of cash and equivalents in the bank, ensures that Aurelian is sufficiently funded to develop these two areas during the busy year ahead.

What links the two areas of focus, apart from geography, is the application of technology. The tight gas field is being developed by horizontal drilling and multi-fracc techniques, which, while proven in the US and in nearby Germany, Holland and the southern North Sea, have not yet been applied in Poland. In the Carpathians, the majority of the company's land assets have not been subjected to any seismic surveying.

Explaining the company's motto, 'unlocking value through technology', CEO Rowen Bainbridge says: "The areas we are really focused on in Central Europe are countries that were locked behind the Iron Curtain, where their rich potential was overlooked by the Soviet Unions’ central planners who preferred to focus on their newly discovered super-giant finds in Siberia. This area is still largely overlooked. The amount of technological work that has been applied to the region is very small."

Polish tight gas development

In Poland, Aurelian is at the forefront of recent moves to exploit the potentially rich hydrocarbons trapped in the tough sandstone of the Southern Permian Basin. While many trillion cubic feet of gas have been discovered offshore in the southern North Sea and in Holland and Germany, Poland has lagged and remains under-explored.

With horizontal drilling and fracture stimulation or 'fraccing' – the technologies that have proved a 'game changer' in the US by creating porosity and permeability where there is virtually none – developers need to drill fewer holes to access the gas. Thus interest in shale, or 'unconventional', gas in Central Europe is mushrooming and many of the oil majors are now establishing a presence. In Poland, where industry researcher group Wood Mackenzie estimates as much as 48 trillion cubic feet of unconventional gas, ConocoPhillips launched the country's first shale gas drilling programme near Gdansk, with rivals Exxon-Mobil and Marathon not far behind on other projects.

The good news for Aurelian is that tight gas is generally easier to develop than shale, and so Siekierki has an advantage over such other projects.

Aurelian's founder, geologist Michael Seymour, had been working in the region since soon after the fall of the Berlin Wall and when the company floated on AIM in 2006, the Siekierki project near Poznan was a key part of the portfolio. This tight gas reservoir was discovered in the 1980s but efforts to develop it were restricted by technology until now.

The project is now in the execution phase, with a €75 million credit facility with Macquarie Bank agreed in September that will also fund the second well and pilot processing facility at Siekierki.

Drilling of the pilot multi-fracced horizontal well began in June and reached the point where the hole is sidetracked around to begin its horizontal drill path at the start of October towards 91 metre gas column discovered by the Trzek-1 vertical test well. The vertical section of the well encountered a 100-metre gas column in the sandstone, from which good gas readings and core have been taken.

Test results of this and the subsequent fraccing should be available in early December, says Bainbridge. "If we get a reasonable volume of gas it will prove the application of the technology works in this rock and we can continue into producing the reservoir."

The mid-case GIIP for the project is a gross 1.6 trillion cubic feet of gas (tcf), which gives a contingent resource of considerable size, with a recoverable net contingent resource for Aurelian of 346bcf. This gives Aurelian an expected monetary value of €478 million for Siekierki.

The current well plus a further one, costing €18m each, should be enough to convert the project into proven resource status, with a further 18 wells (at €14m apiece) sufficient to operate the full field. Appraisal work has also begun on two adjoining blocks.

Exploring in the Carpathians

Starting where southern Poland meets Slovakia before sweeping down into Romania and Bulgaria, the Carpathian thrust fold belt is possibly even more overlooked. Bainbridge says the company has many blocks "where there has been absolutely no seismic". However, these countries, as well as being highly gas dependent and presenting oil & gas companies with some of  the most attractive fiscal regimes in the world, are acknowledged producers of hydrocarbons from shallower wells, with technological limitations preventing the tapping of deeper sources.

Eight seismic surveys covering 900 km of 2D and 220 km² of 3D are due for interpretation soon, which are expected to throw up a number of new prospects.

An update in early October, where a well in 'non-core' Bulgaria was plugged and abandoned after proving unproductive, was only a slight blot on a relatively encouraging run of results the company has enjoyed in its exploratory drilling over the last few years – with a 50 percent success rate over 16 wells. Aurelian's prospects remain good. From now until the end of 2011, Bainbridge is two wells into an eight-well drilling programme of potential 'high-impact' prospects across the region that 'if all goes to plan will all be funded by current cash resources'.

The first is in the Bieszczady block in Southern Poland, which despite spanning the equivalent of 16 North Sea blocks and already having produced 30 million barrels has had only six seismic lines to investigate its depths. A 300km survey of 2D seismic, which will take coverage of the licence area to 40 per cent, has begun with 'good quality information' obtained so far. The well Niebieszczany-1 spudded on 15 October, targeting up to 100 million barrels (mmbbls) (gross) of oil.

Another, the Shkorpilovtci South West R-01 exploration well in Bulgaira, spudded on 17 October and is targeting gross prospective resources of 20-30 bcf. Results will be available in early November.

Finally, a strategic option review for the Romanian business is due by the end of the calendar year. This low-cost operation is producing shallow gas and should soon benefit from a recent gas discovery and seismic surveying that identified three potential 50-100 mmbbls gross oil leads.

With a good mix of a near-term development projects as well as a sizeable exploration inventory, Aurelian's busy schedule should ensure the shares, up steadily through 2010 to a recent three-year peak of 61.50 pence, retain their attraction.