88E to Drill One of The Biggest Oil Wells in The World in 2020
88 Energy (ASX:88E | AIM: 88E) is gearing up to drill one of the biggest oil wells in the world in 2020.
In one drilling event in February 2020, no less than seven stacked targets will be pierced by the Charlie-1 well, and a total of 1.6 billion barrels of potential will be tested – 480 million barrels net to 88E.
Drilling is expected to take just 30 days. Given conventional targets are being tested here, results will be almost immediate.
This is not a pure exploration drill – it's appraisal drilling for the most part.
In the vicinity of Charlie-1’s location, BP Exploration drilled the Malguk-1 well in 1991 which encountered oil shows over multiple horizons during drilling. However, these shows were not properly tested due to complications at the end of drilling operations.
Fast forward 30 years, with significant leaps in technology along the way, and 88E has undertaken a revised petrophysical analysis, which has identified bypassed pay in the Malguk-1 well. 88E also acquired modern 3D seismic to determine the extent of the discovered oil accumulations.
Consequently, four out of the seven stacked prospects Charlie-1 will intersect have been interpreted as oil bearing in Malguk-1 and are considered appraisal targets.
So while still risky, 88E’s upcoming well has a much lower relative risk compared to previous wells the company has drilled in the past.
And if you have been following 88E for some time you would recall the very large share price uplifts for those wells at drilling time...
Share Price: A$0.012 (ASX) | £0.69 (LON)
Market Capitalisation: A$82.5 million
Here’s why I like 88 Energy:
88 Energy (ASX:88E, AIM:88E) is currently in preparations to drill the Charlie-1 (Malguk-1 appraisal) well at its conventional Icewine Project in the proven Alaska North Slope basin — what will be a pivotal moment for the company as it seeks to unlock the large potential of the conventional plays on the acreage.
As mentioned, 88E will be fully carried with Charlie-1 funded up to US$23M by Premier Oil Plc, a highly credentialed partner that has recently farmed in.
The background leading to today’s position can be found in my last article on August 23, 88E Partner with $1B Premier Oil in North Slope Farmout: Drilling Q1 2020.
Further explanation has been provided on the Vox Markets Podcast, where Dave Wall, managing director of 88 Energy, answered some key shareholder questions...
Alaska North Slope Basin
For those new to 88E, it’s important to know that Alaska’s North Slope basin is littered with success when it comes to oil discoveries and has seen renewed industry interest of late.
The North Slope is home to North America's largest oil field, Prudhoe Bay, which was discovered in 1969 and originally contained over 25 billion barrels of oil.
It is surrounded by several other large oilfields, and together these fields have produced over 17 billion barrels of oil since 1977 through the Trans Alaska Pipeline System that transports oil from the North Slope to the port of Valdez, 800 miles away.
Driven by exploration incentives and new technology, a renaissance has taken place resulting in new large discoveries — including the two largest conventional oil discoveries onshore North America in over 40 years.
These discoveries have been made in a new play called the Brookian Sequence. Over the last six years, more than four billion barrels of oil have been discovered in the Brookian play — a staggering amount for one small corner of the world.
88 Energy is pursuing both conventional and unconventional oil opportunities in the Brookian play.
After entering Alaska in late 2014, 88E now has an extensive 500,000+ acre position across four active exploration projects. The company has drilled two unconventional test wells, which have de-risked and improved understanding of the large shale potential at the project.
Recent industry interest at the North Alaska Slope has been driven by technological advancements, enabling these once stranded resources to be commercialised. While the historical focus was mainly on the deeper Jurassic/Triassic Ellesmerian Play, the under-explored conventional Cretaceous Brookian play has been unlocked through technological advances and associated discoveries.
Operators including ConocoPhillips, ENI, Repsol and Oil Search have several developments underway — at various levels of maturity — that are not unlike that of 88E’s.
The following map is a snapshot of the hive of activity that surrounds the Project Icewine territory, highlighting the presence of big players such as Conoco Phillips, Armstrong Energy and Australia’s Oil Search (ASX:OSH).
The Charlie-1 Appraisal Well – a step out well
As announced today, 88 Energy Ltd, via its 100% owned subsidiary Accumulate Energy Alaska Inc., has executed a rig contract with Nordic-Callista Services to utilise Rig-3 for the upcoming drilling of the Charlie-1 appraisal well.
Accumulate used Rig-3 to drill the Winx-1 well in March 2019 and was reportedly extremely pleased with its safe and efficient performance throughout the course of operations.
The Charlie-1 appraisal well has been designed as a step out appraisal of a well drilled back in 1991 by BP Exploration called Malguk-1.
At that time Malguk-1 encountered oil shows with elevated resistivity and mud gas readings over multiple horizons during drilling but was not tested due to complications towards the end of operations, which resulted in lack of time before the close of the winter drilling season.
It was also drilled using vintage 2D seismic, which was insufficient to adequately determine the extent of any of the prospective targets encountered.
88 Energy has since undertaken revised petrophysical analysis, which identified what is interpreted as bypassed pay in the Malguk-1 well.
In order to determine the extent of the discovered oil accumulations, 88E also completed acquisition of modern 3D seismic in 2018.
88E has been able to utilise this 3D seismic to map large extents for several of the oil bearing intervals intersected by Malguk, as well as undertake reservoir engineering work that indicates that the quality in these reservoirs is likely to yield commercial flow rates using today’s much improved completion technology.
In addition the seismic operations, substantial petrophysical analysis has been undertaken on key historic wells on the acreage. This has resulted in identification of bypassed pay — oil that was left behind by previous owners who didn’t have the technology to quantify the potential that been discovered.
Malguk-1, drilled by BP in 1991, was one of these key wells. The well had significant oil shows over multiple sections along with increased resistivity and mud gas readings, which are indicative of oil saturation.
There was no 3D seismic at the time of drilling so extent of the accumulations could not be delineated and reservoir quality was deemed at the lower end of the scale for what was considered viable with the extraction technology of the day.
Seven stacked targets – 1.6 billion barrels gross prospective resource
Drilling of the Charlie-1 (Malguk-1 appraisal) well will test multiple stacked conventional targets, as well as the HRZ shale in February.
As I mentioned above, Charlie-1 will intersect seven stacked prospects, four of which are interpreted as oil bearing in Malguk‐1 and are therefore considered appraisal targets.
Charlie-1 will intersect seven stacked targets that have all been identified using the same modern technology used to make the most recent Brookian discoveries.
Each target could be a potential standalone development in its own right and when combined the aggregate gross mean prospective resource potential is 1.6 billion barrels of oil, 480 million barrels of which is net to 88E's retained 30% interest.
The primary targets are three stacked objectives in the Torok formation, called Upper, Middle and Lower Stellar. These sit directly above the HRZ shale, which is the source rock for much of the oil generated on the North Slope. All three of these are interpreted as oil bearing, based on the analysis of Malguk-1.
Higher up in the well, in the Schrader Bluffs formation, are two prospects Indigo and Charlie. Indigo was intersected sub optimally by Malguk-1 but had good oil shows and indications of potentially commercial oil saturation and Charlie has never been drilled through. These are considered highly prospective secondary targets.
Finally, the last of the conventional targets, in the Seabee formation, is Upper and Lower Lima. Charlie-1 has not been designed with these targets in mind, yet crucial data in these prospects will be collected as an added bonus.
In addition to the rig contract, significant progress has been made on the permitting front — only two key permits are outstanding, both of which are being finalised and approved. Tendering and finalisation of contracts for equipment and services for Charlie-1 are also advancing as planned.
Additionally, tendering and finalising contracts for equipment and services required for Charlie-1 are advancing as planned.
Construction of an ice road is scheduled for December, then the drill rig will be mobilised to site in mid to late January. Drilling is scheduled to commence in February 2020 with flow testing anticipated to conclude in April 2020.
Once drilling at Charlie-1 is completed, there will be wire-line logging, then a frack and flow test in the best of the primary Torok targets. Being a vertical well and future development would be via horizontal wells, the flow rate required to give confidence of commerciality is only around 100 barrels of oil per day.
Premier Oil to Fund the Charlie-1 Well up to US$23M
88 Energy will operate Charlie-1 via its 100% owned subsidiary Accumulate Energy Alaska Inc, with the cost funded by Premier Oil Plc, up to US$23 million, under a recent farm-out agreement.
This farm-out with Premier Oil Plc is expected to be finalised shortly as the farm-out’s conditions precedent are being completed according to schedule — all conditions should be met by the end of November 2019.
Terms of the farm-out agreement were signed in late August, giving Premier a 60% interest in the precinct known as Area A, with 88 Energy retaining a 30% holding. The remaining 10% will be held by 88 Energy’s joint-venture partner, Houston-based Burgundy Xploration.
The farm-out gives 88E full carry on a US$23 million well, which will test seven prospects totalling 1.6 billion barrels – 480 million barrels net to 88E at its 30% working interest.
Partnering with Premier Oil, rather than going with an industry major, was a strategic decision by 88E.
While a major would be able to commit to spending more money and entering options to drill more wells, they would likely have wanted to delay drilling, possibly until 2021 rather than within six months.
Plus, a major would most likely want a larger working interest and not want to split the project areas, unlike with Premier where the project was split into areas A, B, or C. Plus, and the HRZ would likely have to be thrown in as well.
The deal with Premier suited 88E perfectly, as Premier is really only interested in the conventional oil, meaning 88E retain the rights to the HRZ shale.
They are also proven oil finders, but they don’t have unlimited resources, so they have to be picky about what they enter into. Being smaller, it means Premier is also a bit more flexible, letting 88E retain operational control for the first well, and wanting to get drilling done quickly and to 88E’s timeline.
88 Energy say that finding such as good match would be difficult if limited to a major and this partnership is ideal, despite that fact not being widely recognised by the market and reflected in the share price.
While drilling success at the Charlie-1 well would represent the most immediate catalyst for a rerating, that’s not all it has going for it. Other conventional targets, including in the adjacent Area B and Area C, provide future exploration opportunities, with Premier Oil already lining up for a stake.
Should Charlie-1 be successful, Premier has the option to take a 50% interest in Area B or C by spending US$15 million.
And we haven’t even mentioned the multi-billion barrel unconventional prospective resources yet either.
Additional $6.75M of funding secured
Since my last update, and as announced on 13 September, 88E has banked $6.75 million from a successful capital raising.
Together with existing cash reserves, proceeds will fund 88E’s ongoing evaluation of its extensive acreage on the North Slope region of Alaska. It also means that the company won’t need any more cash prior to drilling in the first quarter.
Although the farm-out will see Premier Oil fund drilling, the deal provided minimal cash up front, meaning there was need for a small capital top up.
The $6.75 million capital raising was priced at 1.25 cents per share (£0.007), and involved the issuance of 540 million ordinary shares, bringing the total number on issue to 6,871,540,324.
Together with existing cash reserves, which stood at $6.7 million at the end of the June quarter, the proceeds will fund 88E’s ongoing evaluation of its extensive acreage on the North Slope region of Alaska.
Hinting at further resource acquisitions, the company says the capital raising will provide it with enough cash to identify and exploit new opportunities on the North Slope of Alaska.
88 Energy has earmarked some of the funds raised as a contingency for the Charlie-1 well should costs exceed Premier Oil’s US$23 million commitment, in addition to chasing new exploration opportunities in the region.
The announcement was covered by Finfeed.com:
Hartleys rate 88E a speculative buy
Hartleys maintains a ‘speculative buy’ rating on 88 Energy, saying the most likely trigger to move the share price upwards will come from upcoming developments in the company’s conventional resources.
The broker has recently lifted its valuation from 2.4 cents to 2.8 cents per share, as compared to the current share price of just 1.2 cents.
The broker also provided a chart outlining the valuation upside of various outcomes, suggesting that significant potential for value creation exists:
Given that potential upside, it concludes that 88 Energy should be rated as one of the more interesting small energy plays listed on the ASX. Of course, it is a small company operating in a foreign jurisdiction, and investors need to understand (and be comfortable) with the risks of the junior oil and gas sector.
Unconventional resources – further upside, not farmed out yet
Further upside potential remains from the 0.8 to 2 billion barrel prospective HRZ shale resources at the 475,000 acre Project Icewine.
This is another multi-billion barrel opportunity, however work including horizontal appraisal drilling still needs to be done.
88 Energy will get a free kick in the upcoming Charlie-1 well – as the well location will facilitate sophisticated logging data and sidewall cores to be collected across the HRZ shale.
This program is designed to enhance understanding of the extent of the HRZ play to assist with a planned farm-out in 2020.
The upside being that 88E hasn’t had to give away anything for that privilege.
It’s all happening with in the next four months, with the Charlie-1 well scheduled for February 2020.
All is going to plan — a rig has been contracted, while funding is secured and major permits have been approved.
Drilling is anticipated to take approximately 30 days, after which the well will be stimulated and flow tested in the best of the primary Torok targets.
Charlie-1 is shaping up to be one of the largest onshore targets to be drilled around the world in 2020 and given 88 Energy's large net resource potential, success could be transformational for the company and its shareholders.