The company behind oil drilling at Horse Hill in Surrey said this morning it had taken a licence stake in south east Turkey in the hope of “rapid monetisation” of reserves.
UK Oil & Gas plc (UKOG) announced it had signed an agreement with an American firm for a 50% working interest in the Resan Licence in the south east Anatolian basin.
UKOG said it would take “an active technical role” in a five-well oil appraisal and step-out exploration drilling programme, due to start this year. The costs of the first well and a seismic survey would be fully paid by UKOG.
The company predicted the licence could be put to permanent production within months of a well test.
It said two target areas were “as good as, if not better” than its proposals at Loxley/Dunsfold in Surrey or Arreton on the Isle of Wight.
The venture offered “the realistic potential of adding significant net recoverable reserves greater than those within its current UK portfolio”, the company said.
If successful, UKOG’s chief executive, Stephen Sanderson, said a “near continuous drilling programme” was planned. These words were previously used by Mr Sanderson in January 2019 about operations at Horse Hill in Surrey.
So far, UKOG has failed to generate significant revenues from English production against which to borrow.
In June 2019, it failed to get planning permission to drill for gas at Dunsfold. An appeal is expected.
The Arreton application has so far attracted more than 1,000 objections, including from the MP, highways officials, a parish council and the chair of the Isle of Wight Area of Outstanding Natural Beauty.
This month (July 2019), UKOG’s Broadford Bridge site in West Sussex was granted an extension to planning permission of two years. But no further drilling or testing can be carried out at the site without another application.
Mr Sanderson said of today’s announcement:
“Whilst we remain committed to growing our core UK business, this was an irresistible opportunity to expand our horizons and to expose the company to potentially transformational recoverable oil reserves that can be rapidly monetised.”
UKOG shares opened up sharply on the news but have since fallen back. At the time of writing, they were up 6.35% at 0.18p.
“Major oil producing area”
The Resan licence is held by Aladdin Middle East Ltd, which describes itself as an independent American oil and gas exploration and production company, founded in 1961.
UKOG said the Resan licence was a “geological continuation” of the Zagros petroleum system. This is in the foothills of the Taurus-Zagros mountains of Iraq, Iran Turkey and described by UKOG as one of the Middle East’s major oil producing areas.
The company said two geological targets, the Basur oil discovery and the Resan oil pay opportunity, had potentially significant moveable oil in naturally-fractured limestones that had been overlooked by previous operators.
A report by Xodus in June 2020 estimated that the targets had 253m barrels unrisked gross mean oil in place or oil in the ground before extraction. The high case was 495m barrels.
The Basur discovery, made in 1964, produced 500 barrels of oil over a six-hour test period, UKOG said. Both Basur and Resan were geological look-alikes for Aladdin’s East Sadak field, 20km away. This had initial well rates of up to 1,300 barrels of oil per day, it said.
UKOG said a successful oil well in Resan could be put to long-term production from a flow test within months, rather than the three-five years it said was often taken in the UK.
The company described the Turkish petroleum fiscal regime as “amongst the most globally competitive”. It said Turkish law guaranteed that any domestically produced oil must be accepted by Turkish refineries and purchased at market price. Drilling costs were also lower than in the UK, it said.
Costs and plans
UKOG said it had committed to paying 100% of the cost of the first of five wells in the licence, as well as a 2D seismic survey. This was expected to be $1-1.5m but capped at US$5 million.
After this, UKOG said it would pay for 50% of the share of future work, estimated at $1.5m per well.
The deal has to be agreed by the Turkish government, expected to take about two months, UKOG said.
At current oil prices, UKOG said a successful initial well could fund further drilling. But it added:
“It may be necessary at some stage for the company to raise future working capital to bring the project to fruition.”
UKOG said the Resan licence exploration phase ends in under two years, in June 2023 but could be extended. The first well, due to be in the Basur oil discovery, must start drilling before 27 June 2021.
Mr Sanderson said:
“The Basur and Resan appraisal opportunities compare well with our Loxley and Arreton projects.
“However, they offer significantly larger upside potential, are much cheaper to drill and can be monetised far more quickly than any of our UK projects. The overall post-tax share of gross revenues is also marginally better than in the UK.
“The low cost of drilling compared to the UK also means that, in the success case, we plan to have a near continuous drilling programme, hopefully commencing this year, Covid and weather permitting.”