Drilling in Weeks to Unlock World-Class Shale Play: Months of Catalysts Ahead
PUBLISHED: 14-09-2015 10:43 a.m.
17 minute read
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Drilling is now imminent on a billion barrel plus shale prize on the North Slope of Alaska.
The rig contract has been executed – and spud date is now just a few weeks away for 88E Energy (AIM:88E; ASX:88E).
However, this well is no ‘All or nothing’ conventional well.
It’s likely to play out very differently, as the well is testing an unconventional oil play – a play with all the vital characteristics of the Eagle Ford – the biggest onshore discovery in US history.
Phased results are likely to be released over a three-month period post drilling...
It could be a roller coaster ride over the next three months for 88E investors, but with liquidity not an issue (unlike most other juniors in this market), there are multiple bites at the cherry with on / off ramps for those with an eye for trading.
If 88E can prove up the North Slope’s look-a-like potential, its current market cap of A$30M /£14M
could become a distant memory...
As well as its own exploration activities, we are watching 88E’s neighbours Great Bear, who are also gearing up to drill test the conventional potential of the area.
4 billion barrels of conventional oil have been estimated remaining recoverable on the Central North Slope of Alaska...
And we will find out how much 88E might be able to get their hands on soon enough.
Success next door will only add to the inherent value of 88E’s acreage.
No wonder we have been following this company for a while – It’s chasing a play opening Eagle Ford lookalike in one of the most prospective oil regions in the world, with an overly generous Alaskan government rebate available, with a world-class technical guru on board who’s incentivised to get drilling done in short order and without incident...
Success is no guarantee here, and like all small oil explorers, this company is a speculative investment.
However, everything appears in place for one giant Alaskan oil show to unfold over the months to come, starring:
AIM : 88E
Over the course of this article, we will be running you through exactly why 88 Energy (AIM:88E ; ASX:88E) holds so much potential for a tiny oiler – and why the next few months are going to be crucial.
Let’s start with funding.
88E’s imminent drill testing of their unconventional play is off the back of a recently bagged US$50M credit facility from the venerable Bank of America. Suffice to say the bank only gave the company the US$50M facility by looking very closely at the company’s prospects and liking what it saw...
And with A$10.5m in the bank, this company is more than fully funded for the imminent drilling.
Investors are jockeying for positions right now, and there is no reason why this stock can’t lift off from here as the spud date fast approaches.
Of course, nothing is guaranteed in this game, especially market gyrations in the lead up to a drilling event.
However, this could be a game-changing well for 88E, with the potential to unlock an unconventional play on par with the Eagle Ford – and additionally may allow information to be obtained on a new and different horizon to explore.
Multiple bites at the cherry for 88E investors
We are bringing 88E to your attention right now as it’s lined up all the ducks for a heady few months – with ever increasing interest in this stock, and anticipated strong liquidity, significant and steady catalysts are set to be unveiled.
Stick these dates in your calendar and watch this stock:
- ANY DAY NOW: Icewine #1 drill permitting secured;
- 1-2 WEEKS FROM NOW: Drill rig mobilises to site;
- MID-OCTOBER: Spudding of the Icewine #1 well – just a few weeks from now – with a drilling programme expected to last 60 days;
- LATE DECEMBER: Preliminary well results are due around Christmas – giving crucial indicators of what 88E are sitting on – the company will examine the drill cores for hydrocarbon shows, the pressure regime, the thickness of the HRZ shale layer, and other potential markers of interest;
- JANUARY 2016: Initial evaluation of the Icewine #1 core analysis and log interpretation will be made public;
- FEBRUARY / MARCH 2016: News of definitive core analysis after extensive lab analysis has taken place.
After March, the show won’t stop for 88E
Following final drill results, 88E would surely look to shop around for a farm out agreement with a JV partner.
Given their high current percentage ownership (78% post spud of first well) of a high quality project, plus the attractive Alaskan rebates at their disposal, this shouldn’t be too hard a sell.
That should give them enough horsepower to shoot 3D seismic across the project and delineate a prospective resource for conventional drilling targets...
And across that entire time, its peers on the North Slope will also be pouring exploration dollars into the North Slope – any success would translate to yet more potential uplift in 88E – we will get into those details shortly.
We are looking forward to sticking with 88E over the next six to twelve months – it’s shaping up to be a very interesting ride...
88E to test the unconventional – and let the neighbours test the conventional
The shale play at 88E’s Project Icewine was identified using the same technique used to find the Eagle Ford sweet spot – with 88E’s play centred around a similar, and possibly better, unconventional oil play.
At the moment, 88E has some tentative numbers out on the unconventional potential of its acreage in Alaska. Based on several years of extensive geotechnical work and drilling in other areas of the shale it’s looking in, the company estimates over a billion barrels of potential on its acreage.
Independent experts, Degolyer and MacNaughton are more conservative and believe the Company may have 492 million barrels of oil on its hands (gross, prospective, unrisked).
On the back of these figures, 88E has done some early number crunching and thinks the unconventional portion of its project could have a value of over US$3.2 billion, with an internal rate of return at around 80% (at US$85 oil), meaning that full-field development could see it bag over US$2.5 billion.
However, we should note that these are very early numbers and the ground needs to be tested by the drill bit before any hard numbers are firmed up.
Luckily it’s just about to do that.
Now, the numbers above don’t account for any of the likely conventional prospectivity.
Most other oil explorers in the area are focused on conventional plays which could also extend into this company’s acreage, and they are lining up to drill right now – which essentially gives the company a free look at the conventional potential of its acreage without it having to do anything.
Three to four conventional wells in the area costing a cumulative $100 million are to be drilled within the next six months on acreage adjacent to 88E
Those wells could give those doing the number crunching on this company something much meatier to chew on...
From Nothing to Drilling in 12 months: The Remarkable Progress of 88E
The Next Oil Rush has been following 88E every step of the way in the lead up to this busy few months – you can chart 88E’s progress to date here:
The company has come along way over the past year, but the next few months are shaping up to be even bigger.
The most recent news is that 88E has just executed its rig contract , with a hardened Alaskan crew has been drilling all over the North Slope for over a decade... to say they know what they’re doing would be an understatement.
Let’s take a look at the surrounding neighbourhood 88E find itself in.
Recent transactions on the North Slope give 88E investors food for thought
88E’s Project Icewine has a street address rapidly growing in stature and industry attention – just kilometres away from acreage which has seen its value skyrocket.
Fellow ASX-listed and Next Oil Rush favourite Otto Energy (ASX: OEL) decided to effectively farm into Great Bear’s acreage just north of 88E’s via a takeover of Borealis Petroleum .
The implied per acre valuation of that deal was US$342 per acre .
By comparison, 88E’s acreage has a per acre valuation of just US$122 per acre ...
The Otto / Great Bear deal gives a strong indication of the interest the region generates, and what can happen when a comparatively small company comes to town – but look what happens when a supermajor farms into the area...
Below is a chart showing what happened to the per acre valuation of a project held by private company Armstrong Oil & Gas when Spanish giant Repsol came to the North Slope:
Armstrong paid just $24/acre for its North Slope ground, then diligently went about proving up its potential, enough for Repsol to come knocking in 2011 with a US$786M deal to farm in.
Repsol’s deal valued the North Slope acreage at US$2,250/acre – 9,000% more than what Armstrong paid on an implied USD/acre...
A nice pay day for all involved there, and shows what can happen if you can be a first mover in play opening territory.
Repsol didn’t stump up that cash for nothing though – the super major went on to drill two successful wells earlier this year – confirming two large commercial discoveries...
Currently, 88E stand on the cusp of really capturing the eyes of the big oil and gas players with this upcoming well and exploration program beyond that.
We aren’t suggesting a major will farm into 88E’s ground overnight, but as 88E steadily proves up its ground, backed by the Bank of America’s $50M USD credit facility and Alaska’s 85% rebate for all exploration costs, it is gunning for an Armstrong like result...which would line the pockets of 88E investors for a long time to come...
But obviously there are absolutely no guarantees here, and 88E remains a speculative stock.
It all begins in a few weeks, with its first well.
The Icewine project – the story so far
So how did a A$30M / £14M market capped Australian oil explorer end up in Alaska with a project of this magnitude, you may ask?
Well, last year, esteemed 88E Managing Director Dave Wall drafted in a new board and started to look for a new project for the company to sink their teeth into.
The story goes that one of Wall’s contacts in the US Introduced him to Paul Basinski. Basinksi was the man at Burlington Resources who developed a model to find liquids-rich shale plays.
He brought his prediction that the Eagle Ford shale was the next big thing to the attention of his employer, and ultimately when ConocoPhillips bought Burlington, the rest became history – with ConocoPhillips now benefitting from 2.5 billion barrels of proven reserves from its current Eagle Ford position.
In Alaska, Basinski teamed up with 88E, on a project both believe could provide similar potential to the sweet spot of the Eagle Ford.
The Alaskan North Slope is home to some of the biggest oil exploration companies in the world, from Apache all the way through to Royal Dutch Shell, they’ve all chased the prolific Prudhoe Bay area (up the top of the picture):
However, not too many companies have touched the lower edge of the North Slope – understandably going after more proven oil production.
For the risk-taking investor, juniors like 88E are great because they go after the big-potential plays the majors won’t touch. Until of course they prove it up and a major buys them out.
There’s no guarantee that in this instance a major will come along and buy 88E, but it’s putting together the type of play which could lead to a major casting an eye over them...
88E is going after what is known as the HRZ shale, and it has about 100,000 acres covering it. The US Geological Survey has estimated that the HRZ and Hue Shale could hold as much as 2 billion barrels of oil.
The area, and the shale, has been lightly explored in the past.
Great Bear Petroleum, which has a position just north of Icewine, drilled two wells back in 2012 targeting the shale.
Given it’s a private company, most of the finer geotechnical details which geologists crave have been kept under wraps until recently, but what we do know is that Great Bear found the HRZ shale to be a thick condensed marine shale with an average thickness of 55m.
The two wells Great Bear drilled had oil shows over 180m through the Hue and HRZ, and the rock had total organic content of up to 8% within the HRZ shale.
The technical details also revealed that the rock mechanics have similar properties to the Bakken, Barnett and Marcellus shales – all in the Top 5 lower 48 shale plays in the US...
Crucially, the wells showed that the HRZ’s rocks were brittle in nature, meaning that they are easily frackable and showed porosity peaking at a whopping 18.4%. This is an exceptional figure, and its an indication of how easily oil can be accessed by a well bore – the higher the porosity, the easier it is to suck the oil out.
In fact the porosity 88E are looking at with the HRZ shale is estimated to be over 50% better than the Eagle Ford sweet spot! This lowers well operating costs considerably, and potentially allows hundreds of millions more barrels to be extracted.
Three major catalysts to unravel in quick succession for 88E
Lets go into a little more detail on the key parts of 88E’s next few months of work, and what it might mean for the company – it will give investors a whole lot more info on just how big 88E is thinking...
Remember – 88E is not a one shot wonder with the upcoming drill – it’s just the beginning for the company’s intense exploration programme.
88E is planning to drill the vertical well now, shoot seismic and then determine whether they want to go back and drill a horizontal well with a multi-stage fracture stimulation, or go after a large conventional target – if the neighbours can offer up any clues there...
Icewine-1 – the unconventional well
First on the slate is Icewine-1, which is due to spud in the coming weeks and is being drilled as a vertical hole.
The plan is for the well to essentially de-risk the HRZ shale play – we know its there somewhere as Great Bear found it – by taking cores and conducting extensive wireline logging.
At this stage, the plan is for 88E to drill down to 11,400 feet (3,474.7m) enabling it to drill right through the primary HRZ shale oil target.
Once it’s done that, it will start crunching the numbers – and we will be looking out for results to be unveiled over a three month period after drilling.
The planned path of Icewine-1
The early technical work done by joint venture partner Burlington suggests that the shale could have porosity as high as 18.4%, which is virtually unheard of for shale plays.
3D seismic acquisition
In conjunction with the data gained from Icewine-1, it will conduct 3D seismic in the area to get a better understanding of the broader geological play underneath its feet.
It’s only fairly recently that 3D seismic technology has been good enough to get through the permafrost in Alaska to give drillers a clearer picture of what’s there.
The 88E program is being read as crucial to unlocking the potential of conventional oil plays at Icewine, but it may also get a bit of a kick along from fellow explorers in the area.
But more on that later...
Icewine-2 – unconventional or conventional? Let’s wait and see
This well is contingent on results from Icewine-1, but if 88E see oil shows or liquids shows from the HRZ shale oil target – then it’s show time. It’s time to go horizontal through the shale and see what it’s really made of.
But of course if the Icewine-1 results and Great Bear drilling results indicate stronger conventional potential, then Icewine-2 may end up being a conventional well which can be drilled for cheaper and could offer shareholders more immediate returns...
But let’s get back to the unconventional potential.
The vast majority of shale plays in the US are horizontal rather than vertical, as in recent years advances in drilling technology and economies of scale have allowed drillers to get well and truly more bang for their buck.
The above video from ConocoPhillips shows you why the oil and gas industry loves its horizontal wells.
They cost more, but they give you far more in-situ access than vertical wells.
The indicative plan from 88E is to drill for 6,000ft within the shale, and then get cracking on that fracking.
Here is the budget for that work programme – it shouldn’t pose to many problems though, given 88E is cashed up to the tune of $10M, is backed by the Bank of America with a $50M USD credit facility, and those Alaskan government rebates which slash costs by up to 85%...
The important figures to note above are the post rebate figures – extraordinary low numbers for such intense, potentially game changing exploration...
Getting a free kick
There have been two major conventional drilling campaigns in the region which have caught the eyes of those watching 88E, including one well due to be spud which is just 4 miles from the border of 88E’s acreage.
Back in June we reported on the conventional drilling being done to the north west of 88E’s acreage, 50 miles away, by Spanish supermajor Repsol.
It has spent about five years in the area, originally spending up to $768 million on its acreage, so sure was it that the prolific North Slope wasn’t just an offshore play but rather an onshore one too.
After all, the North Slope offshore play is a conventional play above the unconventional potential 88E is hoping to tap, but the oil has to migrate from somewhere...
While information on Repsol’s drilling program has been hard on the ground, all the noises it has been making have been “positive” and are pushing Repsol forward on greater exploration in the area.
You don’t hang around for five years if you don’t get some red hot signs of success, especially in days when major oil and gas companies are trying to batten down the hatches due to sub-$50 crude.
Of particular interest to 88E is the disclosure from Repsol’s partner Armstrong Oil & Gas that seven wells drilled into the Nanushuk reservoir have:
“proven an oil pool that covers more than 25,000 acres, at a depth of 4,100 feet, with an oil column of 650-plus feet, and up to 150 feet of net pay with an average porosity of 22 percent.”
The Nanushuk Reservoir is the exact same reservoir 88E is looking at for conventional potential.
There’s absolutely no guarantee the oil could also be under 88E’s acreage, but news that the reservoir can generate oil is just enough to whet the appetite of 88E investors...
Meanwhile, private company Great Bear Exploration is even more secretive about its drilling results to date, but it is slated to drill a well early next year just 4km from Icewine-2 which will well and truly give 88E a free look at the conventional potential of its acreage.
It’s drilled the Alakaid-1 well, and while it’s been a bit secretive about whether or not the well has been a success, Next Oil Rush understands that the well has been plugged.
But not abandoned – just suspended.
This means it plans to come back later and drill through the plug to finalise testing.
Companies can find areas of interest in drilling which require more follow-up, but be hamstrung by equipment availability. Hence the decision to come back later when it has the equipment.
There is every chance there is something of real interest there, that Great Bear aren’t telling us...
Great Bear has announced that they are appraising existing discoveries that were overlooked in the old wells – this should mean a better chance of success – especially given the amount spent on high res 3D to date.
However, it is understood that early next year Talitha-1, the well to the southern edge of Great Bear’s acreage a little over 4 miles from 88E’s lands, will spud.
Talitha-1 will hit the same conventional horizons that are likely prospective on 88E’s acreage – It could essentially de-risk the conventional play for 88E, without 88E having to lift a finger...
The Final Word
We love it when a plucky junior has the potential to make a discovery right under the noses of the supermajors.
88E is playing in a playground which hosts the crème de la crème of supermajors including BP, ConocoPhillips and Eni to name just a few.
While they’ve been looking offshore, production from the offshore Alaskan North Slope is drying up just a touch, with capacity in the TAPS pipeline increasing. It’s the reason why the Alaskan government is throwing the kitchen sink (in the form of general tax rebates) at junior explorers to prove up the next big thing.
88E is hoping to be the junior which proves up the commercial potential of the HRZ shale to the big boys who are too busy playing with their big rigs offshore to notice the potential of the underlying shales.
It’s a play which was identified as an Eagle Ford look a like – using the same method that picked the best part of the Eagle Ford shale, and we all know what happened in the Eagle Ford.
It is now the biggest onshore discovery in US history.
Can 88E’s unlock an Eagle Ford repeat in Alaska?
Even with a number of positive indicators, it is way too early to be calling the HRZ sequence a definitive Eagle Ford – but if it does end up being a lookalike of similar size, 88E investors are in for quite the journey indeed...