Falkland oil explorers got another significant boost this week as the ongoing drill programme chalked up its second discovery in a row.
It comes after the earlier Zebedee discovery last month.
Falkland Oil & Gas (LON:FOGL) and Rockhopper Exploration (LON:RKH) are partners in the well with 40% and 24% respectively, while operator Premier Oil (LON:PMO) has 36%.
Here, we take a closer at this latest success and what it means for investors in these explorers.
What’s happened?
Isobel Deep exploration well was confirmed as a new oil discovery in the North Falkland basin.
The well found around 75 feet of oil bearing reservoir, and oil was recovered to surface
The reservoir was at a higher pressure than anticipated, there was an influx into the well, and as a result the drilling was curtailed before reaching the bottom of the oil column and before the planned target depth.
Oil recovered from the well was described as being similar to the crude at the Sea Lion field which is located further north.
How big is this discovery?
It is too early to determine just how big the Isobel Deep discovery is because the drill programme was not completed fully. The full extent of the reservoir could not be measured, and more appraisal work is necessary before the explorers are likely to commit to an estimate.
Isobel Deep, like other prospects in the basin, comprises a number of ‘stacked’ prospects, and clearly more analysis and evaluation is needed to understand exactly what’s been found down the hole.
That said, there are some encouraging signs.
The reservoir was encountered ‘high to prognosis’, one analyst observed, meanwhile, another described the result as ‘bullish’.
Pre-drill estimates of the project varied. Premier Oil put the target at 55mln barrels, though the broader Isobel/Elaine fan complex as a whole was mapped at around 500mln barrels, with estimates in a range of 80 to 1.4bn barrels.
More subjectively, the prospect had been described as “potentially another Sea Lion” as the Falkland drill campaign got underway a few months ago.
For reference, Sea Lion is currently estimated to have around 400mln barrels of recoverable oil resources; of which Premier aims to commercialise 160mln barrels in the first phase of field development.
Sea Lion would, at this point, be producing at a plateau of around 50,000 to 60,000 barrels per day.
So how important is Isobel Deep? And what does it mean to the explorers?
The very fact that it is an oil discovery is in itself significant. It has the potential to add further resources to the basin.
And, in accordance with the primary aims of the current campaign, moves the region towards a critical mass of resources that will enhance the economics of developing oil fields in this isolated and logistically challenging province.
The current campaign in the North Falkland basin is now two-in-two, and that adds to a growing confidence in the broader programme.
Continued exploration success, and extra resources, also boosts Premier Oil’s hand and potentially makes a future farm-out more likely. It is anticipated that the development of Sea Lion and other new discoveries could be accelerated if a larger partner comes on board.
The new discoveries, Zebedee and Isobel, may also mean its more likely that the current drill campaign is extended.
Optional extra slots were incorporated into the contract for the Eirik Raude, when it was agreed last year, though given the intervening changes in the market following the crude price decline it is now not likely that those options will be taken up (in their current form) so there could be some negotiation over new slots.
What happens next?
Eirik Raude will shortly leave the North Falkland basin, temporarily, to deeper waters further south where it will drill the potentially high impact Humpback exploration well; for Noble Energy and FOGL.
After that the rig returns to the North basin, for three more scheduled wells.
Isobel Deep, as mentioned previously, will require further appraisal and that is anticipated to be in the form of either a side-track to the original well or by a ‘re-drill’ closeby.
What does the City reckon?
Analysts at Deutsche Bank describe Isobel as “an encouraging discovery” and said that the well result has confirms not only source and reservoir but a trapping mechanism is present at the southern extent of the North Falklands Basin.
Lucas Herrmann, Deutsche’s analyst, highlighted that Isobel Deep was seen as the ‘highest potential’ prospect in the North Falkland programme, and that prior to drilling he believed a success could establish a second hub similar in size to Sea Lion.
The incomplete outcome at Isobel Deep, thus far, was termed by Herrmann as ‘a step in the right direction’.
Elsewhere, Mark Henderson, analyst at Westhouse, said the today’s result was “clearly bullish” for all companies involved. “A lot of appraisal will be needed to ascertain whether recoverable volumes are towards the upper end of what is estimated for the complex but this is clearly bullish for all three stocks,” he said.
Sanjeev Bahl, analyst at Numis Securities, described the well results as “clearly positive” as he slightly upgraded his target price for FOGL, to 46p from 43p, and repeated a ‘buy’ recommendation.
“Due to the high reservoir pressure, oil was recovered to surface without the need for artificial lift which bodes well for future development if further drilling proves up commercial volumes.”
Canaccord Genuity analyst Charlie Sharp said it is too early to draw conclusions over the potential size of the discovery compared with the pre-drill estimates - which were in a range between 80mln and 1.4bn barrels - because the exploration well was not completed fully.
Nevertheless, he highlights that “having penetrated the reservoir high to prognosis” the results as they are were “very encouraging”.