(Alliance News) - Volga Gas PLC on Monday said reserves at the Vostochny Makarovskoye and Dobrinskoye fields have been downgraded due to higher than expected gas to water contact.
Shares in Volga dropped 19% to 31.02 pence in London in morning trading.
The announcement that gas to water contact at Vostochny Makarovskoye, located in the Volgograd region of Russia, was higher than predicted came in July. After this, Schlumberger Ltd was appointed by Volga Gas to undertake a technical evaluation and reservoir study.
Schlumberger has now completed this study and a re-calculation of reserves has begun. Although the remaining reserves calculation has not been finalised, preliminary results have been announced.
Results so far put Volga's total proved estimates of oil and gas reserves for the end of 2019 at 9.1 million barrels of oil equivalent, 8.3 million barrels of 48% below the previous proved estimates.
This figure includes preliminary estimates of proved remaining reserves on December 31 at the Vostochny Makarovskoye field of 2.9 million barrels of oil equivalent, 7.9 million barrels of 73% below the previous figure.
Preliminary proved reserves for the Dobrinskoye field, 5 kilometres from Vostochny Makarovskoye, amount to 400,000 barrels of oil equivalent, down 600,000 barrels or 60%.
Volga said the review is not expected to result in "material revisions to the oil reserves of the group", only gas.
The revisions will, however, result in a non-cash impairment charge on the carrying value of Vostochny Makarovskoye and Dobrinskoye, in addition to significantly higher unit non-cash depletion charges on production.
This is softened somewhat by the fact that Volga Gas has been cash flow positive in 2019 and is likely remain so in 2020. At the end of 2019, Volga Gas's cash stood at USD14.1 million with no debt, providing "necessary financial resources to undertake a programme of rebuilding value".
Volga explained that the geology of of the Vostochny Makarovskoye field, where most of the hydrocarbons in place are in matrix porosity, means the rising gas to water contact is expects to crease a barrier to gas production from this matrix porosity and thus the downgrade in estimates.
"It is possible, though it cannot be assumed, that alternative production management procedures may enable a greater proportion of the hydrocarbons in place to be produced economically. This could in time lead to future upward revisions to reserves. Management will be evaluating the technical and financial effectiveness of such alternative production management regimes, including any incremental capital investment required," said Volga Gas.
Vostochny Makarovskoye and Dobrinskoye production totalled 4,062 barrels of oil equivalent per day in December 2019, which is likely to be maintained through 2020.
Looking ahead, the company is seeking two new independent non-executive directors, one of which will replace outgoing director Ronald Freeman, who retired at the end of 2019.
Volga Gas is also trying to rebuild the value of its assets, including "exploration drilling on identified potentially oil bearing prospects in the Karpenskiy licence area".
Chief Executive Andrey Zozulya said: "Management is focused on optimising the recovery of gas and condensate from the [Vostochny Makarovskoye] field and is also actively seeking opportunities to build sources of additional alternative production. Among these additional sources is the unexploited exploration potential for new oil reserves in the group's Karpenskiy licence area. To that end, the company plans to intensify its slim hole drilling activities. This technique enables oil and gas production wells to be drilled at a fraction of the cost of a conventional well. The company has seen generally promising results from the first nine slim hole wells drilled during 2019. More details on this will be provided with the full year 2019 results."
By Anna Farley; annafarley@alliancenews.com
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