Oil & Gas Daily Flow
Non-Independent Research; Marketing & Sales Commentary - MiFID II exempt information – see disclaimer below
Market Update: Tuesday 8 June 2021
Petroneft Resources (AIM:PTR): Another production uplift at C-4, Cheremshanskoye field, Russia
President Energy (AIM:PPC): Farm out agreed - Pirity Concession, Paraguay
Zephyr Energy (LON:ZPHR): Plans to achieve carbon-neutrality across operational footprint by 30 September 2021
Energy Prices
Brent Oil US$70.1/bbl vs US$71.5/bbl yesterday
WTI Oil US$68.8/bbl vs US$69.3/bbl yesterday
Natural Gas US$3.11/mmbtu vs US$3.10/mmbtu yesterday
Oil Price News
- Oil prices pulled back yesterday after touching two-year highs on expectations of improved demand and OPEC producers keeping supply curbs in place
- Prices retreated on Chinese data showing crude oil imports fell to a year's low in May
- Crude has risen for two weeks, with Brent up by 38% this year and WTI rising 43%, helped by nascent recovery from pandemic-related demand disruptions and supply curbs by OPEC+
- The core reason for the slight drop stems from provisional crude oil import data for Asia’s top markets signal that physical demand is softer than what investors forecast in the paper market
- The COVID crisis in India, which peaked in early May, and the return of restrictions in several south Asian countries such as Malaysia, which is now in a third lockdown have been depressing fuel demand in many parts of Asia in recent weeks, bloating the fuel inventory glut further and hitting refining margins
- In addition, some refineries, including in the world’s top importer China, have entered planned seasonal maintenance this spring and have reduced their crude intake in the second quarter
- As a result of all those factors, imports into the Asian region are estimated to have dropped in May to the lowest monthly level so far this year
- Asia imported 23.07MMbopd of crude oil last month, down from more than 24MMbopd in each of April and March, and from 25.2MMbopd in February, according to data from Refinitiv Oil
- The Indian health crisis resulted in reduced refinery run rates, and crude oil imports likely fell to 3.9MMbopd in May, compared to 4.46MMbopd in April
Gas Price News
- After maintaining the US$3/mmbtu mark last week in the face of moderate temperatures, weather models that showed much hotter conditions in key US regions this week helped lift the July Nymex futures contract even higher, to around US$3.1/mmbtu
- However, weather data in recent runs has backed off some of the hot weather, both in terms of intensity and location.
- Yesterday, the forecast shifted a little further cooler for the next couple of weeks but maintained the “impressive heat” for this week, according to Bespoke Weather Services
- Currently, there are no tropical cyclones expected to form in the Atlantic for the next 48-hours, according to NOAA
- Natural gas production was also flat week on week
Company News
Petroneft Resources (AIM:PTR): Another production uplift at C-4, Cheremshanskoye field, Russia
Share Price: 2.8p, Market Cap: £30m
- Petroneft’s latest operations update confirms that production from the C-4 well on the Cheremshanskoye field remains strong with virtually no decline.
- The rate has also been increased from 300bopd to 320bopd by increasing the choke size to 10mm.
- Since bringing the field on stream at the end of February it has produced a total of over 27,000bbls from the C-4 well through May, whilst production in May was over 9,000bbls.
- The oil produced from this field benefits from a partial exemption of the Mineral Extraction Tax, with the continued improvement in oil price, this reduction in Mineral Extraction tax is estimated to now be over US$4/bbl in May alone.
- The forward plan is to continue to monitor reservoir performance and at an appropriate time install a pump to optimise production and further increase revenue.
- The C-4 well, which is located on the northern margin of the Cheremshanskoye field, was drilled during 2018 and tested oil at a combined 179bopd from Upper Jurassic J1-1 and J1-3 clastic reservoirs from 2,630m to 2,633m and 2,644m to 2,655m.
- The well was re-entered in Q1 2020 to perform an extended well test.
- During this test, the well flowed at various choke sizes from the same Upper Jurassic J1-1 & J1-3 clastic reservoirs and flowed naturally at up to a maximum 476bopd on a 10mm choke size.
- Elsewhere, the L-2a well is located along the northern margin of the licence at the Ledovoye field.
- The L-2a well was drilled by the Company in 2011 and was designed to twin the successful L-2 well which was drilled in 1973 and flowed oil to surface during a short open hole test recovering 34.5bbls of oil in 40 minutes, equivalent to more than 1,000bopd.
- The L-2 well suffered from operational problems that prevented a cased hole test.
- At the time of drilling of the L-2a well (2011), 5m of net oil pay was identified within the Upper Jurassic J1-1 and J1-2 reservoir intervals.
- Management has confirmed that the well was re-entered in recent weeks and a liner cemented in place.
- During several swabbing cycles the well started to flow a mixture of oil and water.
- A total of approximately 132bbls of oil was recovered with a gravity of 33 API along with 306bbls of water from 4 swab cycles.
- Inflow from the formation ranged from 100bopd to 300bopd.
- The high-water content currently precludes oil from being produced at this field as there are no separation facilities on site.
- A decision was therefore made to suspend the well until separation facilities are in place.
- In December 2020, an offtake contract was signed with the Alexandrovskoye Oil Refinery (AOR) that included a c.US$1m advance payment against future oil shipment from the C-4 well on the Cheremshanskoye field to cover infrastructure development on Licence 67.
- In 2020 AOR purchased all the oil produced from the C-4 well during the extended well test at competitive market rates.
- Due to a combination of strong performance from the C-4 well at Cheremshanskoye combined with the improving oil price, the Company did not need to call the advance payment for the Offtake Contract thereby saving financing charges.
- Nevertheless, the US$1m advance payment under the Offtake Contract remains in place should the Company decide to utilise this capital.
Our take: Another positive update from Petroneft, underlining that the ongoing rebuilding of the business is well underway. Performance at Cheremshanskoye is particularly encouraging with another production uplift from the 243bopd reported in March. Strong operational performance, combined with the improving oil price, has significantly improved the finances of the Company which has enabled it to fund construction of the road and re-entry of the Ledovoye L-2a well without the need to call down agreed financing arrangements which now remain in place should it need the capital in the future.
President Energy (AIM:PPC): Farm out agreed - Pirity Concession, Paraguay
Share Price: 2.1p, Market Cap: £42.6m
- In a positive update, President has confirmed the signing of the agreement for the farm-out of its Pirity Concession, Paraguay.
- The agreement has been signed with a “substantial Northern Hemisphere state-owned energy company” to farm in for a 50% participating interest in Pirity.
- In return, the Farminee will pay 60% of the costs of an exploration well currently scheduled to commence during H1 2022 and will also pay President US$4m in consideration of the Company agreeing to enter into its performance obligations.
- Agreement subject only to regulatory approval and prolongation of the licence for a defined period.
- The exploration well will target the Delray complex of prospects, estimated by the Company to contain in aggregate over 260MMbo of Pmean Unrisked Resources.
- Costs of the well are estimated at between US$10-15. with an estimated chance of success of 30%
- President will continue as the operator of Pirity.
Our take: A very positive update for President, adding further validation of the Company’s Paraguayan acreage position despite a frustrating historical drilling campaign. The potential cash injection of US$4m suggests that the Company could be fully carried on next years’ exploration well in the country on a low CAPEX case. Following a challenging FY20, shareholders will be encouraged by Presidents ongoing prudent approach to capital discipline, achieving material cost savings and entering into several agreements with local partners. Operationally in Argentina, it is encouraging that the LB-1001 gas well has been placed into production which is currently ahead of expectations. As no reserves had previously been logged at this interval it is positive news for the Company, more importantly it could be a sign there may be greater untapped resource potential at the field. It is further incremental improvement following similar news at EVN-x1, in the Estancia Vieja North structure where hydrocarbons have also been produced for the first time.
Zephyr Energy (LON:ZPHR): Plans to achieve carbon-neutrality across operational footprint by 30 September 2021
Share price: 3.6p, Market Cap: £44m
- Zephyr has confirmed today that the Company intends to achieve carbon-neutrality across its operational footprint by 30 September 2021.
- This is the first step towards near-term delivery of hydrocarbons produced with an operational "net-zero" carbon impact, with the Company leadership committed to this initiative.
- As part of this undertaking, Zephyr has agreed to collaborate with the Prax Group, a British multinational independent oil refining, trading, storage, distribution and retail conglomerate dealing in crude oil, petroleum products and biofuels.
- The Prax Group will work with Zephyr to measure, reduce and mitigate greenhouse gas (GHG) emissions across its businesses, with mitigation efforts primarily focused on the purchase of sustainability/decarbonisation offsets (called Verified Emission Reductions or VER) from reputable pre-vetted developers of sustainable projects.
- This exercise will include Zephyr's current corporate activity, its non-operated production assets in the Williston Basin, North Dakota, US, and its upcoming appraisal drilling project in the Paradox Basin, Utah, US.
- The cost to purchase the appropriate number of VERs to offset Zephyr's growing operational footprint is expected to average well under US$1/bbl of oil equivalent produced, although the net cost to Zephyr may be considerably less given the potential to sell oil volumes at a premium as a result of the anticipated "net-zero" operational carbon status of those volumes.
- Purchases of VERs will be staged in increments matching Zephyr's forecast production profile to facilitate effective cash management.
- Recent market-based evidence suggests that purchasers and supply chain partners of "net-zero" operated volumes are willing to absorb costs associated with the purchase of VER offsets related to oil and gas production.
- Zephyr's initial efforts will be focused on its Scope 1 GHG impacts, which cover all direct emissions from Zephyr-owned or controlled sources - from the drilling and production of operated and non-operated hydrocarbons through to transport to the refinery, as well as all other corporate emissions.
- Over the next few months, Zephyr and the Prax Group will focus on measuring, reducing and mitigating operational GHG emissions across the Company, and Zephyr's pledge to achieve carbon-neutral operations in a rapid manner is demonstrative of Zephyr's commitment to achieving sector-leading environmental standards.
Our take: In addition to the environmental benefits that will result from Zephyr's efforts to reach carbon-neutrality, it will potentially also yield economic benefits, including expanded access to a wider group of potential institutional investors given accelerating ESG requirements of public companies. Zephyr recently entered a new phase of growth and are now a cash-generating oil producer with plans for near-term development on its flagship Paradox Basin appraisal project. On this basis the Company is looking to capitalise on its high IRR potential, satisfying several ESG factors and therefore overall attractiveness of the investment opportunity to equity funds.
Research – Oil & Gas
Sam Wahab - 0203 470 0473 / 0784 385 5037
sam.wahab@spangel.co.uk
Sales
Richard Parlons – 020 3470 0472
Abigail Wayne – 020 3470 0534
Rob Rees – 020 3470 0535
Grant Barker – 020 3470 0471
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Sources of commodity prices
Oil Brent, WTI - ICE
Natural Gas - NYMEX
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