15th Jun 2016 10:49
LONDON (Alliance News) - Urals Energy PCL Wednesday said it has been awarded an exploration and development licence for the South Dagi oilfield on the Russian island of Sakhalin, but also warned it may not be able to prevent production declining at its main producing oilfield.
Urals shares were up 49% to 2.60 pence per share on Wednesday following the news.
The company said it secured the 25-year licence following an auction by Russian authorities, and Urals will pay RUB134.6 million, roughly USD2.1 million, in return.
The 29 square kilometre area has previously been explored and appraised since the 1970s, and work was most recently conducted on the licence in 2007. During that time, two exploratory and six appraisal wells have been drilled on South Dagi and defined Russian-registered reserves.
The C1 plus C2 reserves within South Dagi amount to 17.7 million barrels with additional C3 reserves of 9.0 million barrels. The worldwide standard for reserves require them to be JORC compliant, but C1 and C2 reserves are the equivalent of 2P, or proven plus probable, reserves.
That means the price paid for the licence averages out at 12.0 cents per barrel of proven plus probable reserves.
Urals said it plans to get a review completed on South Dagi and its other assets in Russia in order to ensure the reserves and resources meet the "appropriate standard".
"The company's plan is to design and seek approval for a development plan for the South Dagi license with the official authorities, which is expected to involve a drilling program with the objective of producing up to 2,000 barrels per day over the next five years," said Urals.
"The oil from South Dagi will be transported by road tanker to the company's refinery at Petrosakh, a distance of 400 kilometres, increasing the utilisation rate of the refinery, which will not need additional investment to process both the heavy and light oils produced at South Dagi," the company added.
The consideration for the licence has been satisfied using existing resources but the development will be financed on a project basis with a loan from unidentified local banks, with negotiations already underway.
The potential for 2,000 barrels to be produced from South Dagi per day is significant as Urals said current production from its existing Articneft and Petrosakh field is currently running at around the same level - with Articneft running at 676 barrels a day and Petrosakh at 1,317 barrels.
Operating costs at those two fields also remains low at an average of USD8.4 per barrel.
Urals warned on Wednesday that the annual shipment from Articneft that is set to occur in mid-July may be deferred until late August because it is negotiating shipping arrangements, it said.
At Petrosakh, Well 109 is still being tested but has started to produce "modest amounts of oil". Urals said further intervention will be needed to reduce the pressure water from deeper horizons flowing to the surface.
More importantly, Urals will not drill any more wells on the field until further geological investigations have been completed.
"It is therefore possible that the company will not be able to defer the natural decline of the field. It is in this context that the acquisition of the South Dagi licence will be increasingly important for the optimisation of the refinery at PSK," said Urals.
"The directors are disappointed by the further weakness of the company's share price, but believe that by continuing our strategy we are building a platform for a significant increase in the scale of the company's operations for the future, without taking undue risk in leveraging the balance sheet," said the company.
By Joshua Warner; [email protected]; @JoshAlliance
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