Shares in UK Oil & Gas (LSE: UKOG) perked up 6.8% in morning trading, to 1.47p apiece on the latest from the Horse Hill-1 (HH-1) exploration well on the northern side of the Weald Basin near Gatwick Airport, while partner Solo Oil (LSE: SOLO) gained 8.6% to 0.34p in the same period.

And the news? The Oil and Gas Authority has granted the final consent needed for a flow test at the well to proceed, and Horse Hill Developments Limited (owned in part by these two companies) now has permission for an extended test covering three separate oil-bearing intervals.

A tasty prospect?

UK Oil & Gas owns a 20% interest in the HH-1 well, with Solo Oil sitting on a 6.5% interest, so if earlier optimistic estimates prove accurate, shareholders in both could be on for a nice little earner. But before you consider plonking down a wedge of your cash, I must caution you on one of the risks of very low-priced penny shares — the spread.

Based on the Buy/Sell price difference, an investment in UK O&G would need to rise by 7% plus your dealing costs just to break even, while at Solo Oil you’d need a 13% rise plus costs!

But we really need to know what’s down there now, and the biggest uncertainties come from the depth of the biggest potential reservoirs and their partly unusual geological formations. An assessment by Schlumberger released in August estimated a mean oil in place quantity of nearly 11 billion barrels over a 55 square mile area, while an assessment released by Nutech in October of the Weald Basin and Wider Weald area suggested a gross best estimate of 15.7 billion barrels in the “three Jurassic shale and interbedded limestone tight oil plays“.

How much is really there?

That’s obviously a very large amount of oil, but at the moment nobody really has any idea of how much of it is actually recoverable — guesses vary widely from as little as 3% to as much as 15%. That’s where flow tests of the three intervals come in.

As of yet we don’t have a date for the commencement, and even when the flow test does take place, there will still be a lot of investment, work, and time needed before any commercial pumping can start and sales cash can begin to roll in.

A very risky investment

While the potential is possibly very significant, for me as a private investor the risks here are just too big. We have no idea how much oil and gas will be recoverable, no clue as to the timescales and costs between now and possible production, and we do not know by how much existing shareholders might be diluted when and if full funding is in place.

Add to that the risks of volatility and wide price spreads associated with penny shares in very small companies (UK O&G has a market cap of only around £28m while Solo is even smaller at approximately £17m), and it would be a pure gamble for me — and I just don’t do that, but I wish every success to those who do.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.