Preliminary results are out from first well to be drilled in the Falkland Islands since 1998.
Discussion board regular Hallucigenia continues his series on oil investing.
Desire Petroleum (LSE: DES) and Rockhopper Exploration (LSE: RKH) were bounced into making an announcement on Monday by rumours in The Sunday Times that "Desire Petroleum well flops". It's never good when news leaks out like this but modern communications makes it increasingly difficult to keep a "tight hole".
Liz has flopped – or has she?
If you remember the drilling plan, the current well had two main targets, Liz and Beth. If you studied Desire's Competent Person's Report, you'll know that Liz was forecast to lie at about 2,700m, and Beth at about 2,800m. A recent presentation gave more details.
They originally said that they'd drill down to around 3,500m, which implied they were going to drill all the way down to the bottom of the sediments in the rift valley. You'll notice from the overview of the well in that presentation that the well would just tickle the top of the syn-rift sediments that fill most of the bottom of the rift -- this represents a huge volume of rock that was not drilled by any of the previous wells in the region.
Monday's announcement stated that they'd drilled down to 3,570 metres, but had not finished analysing the rocks in the well. The first thing this tells you is that their seismic interpretation was pretty good -- ending at 3,570m when you'd estimated around 3,500m is well within the normal margin of error for these things, translating seismic into depths of rock is a notoriously difficult thing to do.
Liz contains oil
They appear to have encountered Liz in about the place they were expecting, but there were two problems -- the reservoir was thinner than they hoped, and it was hard for oil to move through the reservoir rock.
These things happen, and there's no real way of predicting them in advance of drilling, although you may remember my worries about reservoir quality in a previous article. It's particularly hard to predict reservoir quality in a non-uniform structure like a river bed such as Liz and Beth, where small differences in water flow can make a big difference to the sediments deposited.
On the bright side, this is the sort of failure that doesn't have much effect on the chances of success in other structures. It is encouraging that they found oil in the reservoir despite it being so difficult to flow through. In fact the geological team appear to have done a good job in modelling the behaviour of hydrocarbons in the basin, and in the structure of the prospects, which gives encouragement that Desire's next five wells are not targeting figments of a geophysicist's imagination!
A possible gas discovery
It's important to emphasise that today's announcement was rushed out before the well could be fully characterised and that final judgement should wait until all the tests have been completed. However there was no reference to Beth and it appears that, at best, Beth may have a bit of gas but nothing significant.
The reference to "deeper gas shows, particularly below 3,400 metres" suggests that they may have a gas discovery in the syn-rift sediments. If this is representative of the whole of the syn-rift, this could represent a very large gas resource -- or it could just be a small pocket of gas within that large volume of rock.
Unfortunately such reservoirs tend to be crushed by the two miles of rock on top of them, and it's often difficult to get the gas flowing from them economically. A flow test will be critical in proving the commerciality of gas in the syn-rift, but my hopes are not high. However if there is gas down there, it would benefit prospects Dawn and Ernest which rely on this deep rock for their source of hydrocarbons.
Updated valuation
My fair value for Desire before drilling results were known, was 94p/share. That didn't include anything for Beth or the syn-rift, but Liz represented about 30% of the risked resource and so without Liz my grumpy valuation of Desire is 65p.
I should add in a little bit for the syn-rift potential, but for the moment I will round it up to the 70p placing price. So today's fall to 51p represents something of an over-reaction, but it brings Desire's valuation more in line with that of Rockhopper Exploration, which has 100% of the next well to be drilled and will be the subject of my next article.
More on the Falklands:
The author has a beneficial interest in Desire Petroleum.
