Member Info for Exploration

Mole - I got the commitment slightly wrong, sorry - Deltic has to acquire new 3D, and then drill or drop on 43/11.

Here is OGA’s list of commitments for 32nd Round by block.

https://www.ogauthority.co.uk/media/6674/32nd-round-winner-by-block.pdf

Yes, on Breagh. It’s a ‘wet gas’ field where well streams are piped As multiphase fluids for separation at Teeside, whereas dry gas further east is exported with no need for separation. The string of prospects from Breagh to Pegasus are likely to be wet gas.

Moleinahole

Deltic bid ‘drill or drop’ to secure their best new licenses - 43/11 in particular. Means drilling a well within the first license term. They first secured their portfolio, including 43/11 in the 28th Round in 2014 using the ‘Promote’ licencing, and since then Pegasus and Andromeda have been discovered in 43/12 and 43/13 on trend and, with a 43/11 discovery, could form after hub with exports via Cygnus or Breagh.

The Deltic team has never operated a seismic survey or drilled a well and shareholders would prefer to see some action after 8 years since the company was established. Rather than pay more for Deltic shares, a winning strategy for IOG would be to pay the market price and sweeten the deal with a proposal to pay for a well on 43/11 and perhaps cover Shell’s spend cap on the forthcoming well on Selene in 48/8.

Mike 007

If IOG’s approach moves to a merger of some kind the combination of Deltic’s subsurface understanding and IOG’s operational and project track record would be a good result for all.

If the two fail to realize the benefits of a merger, we’ll be waiting for years for Shell to call the shots and moving towards potential developments will drag on and on. IOG - with their support from CalEnergy - has demonstrated they are a low cost operator who will get Shell’s support. So part of the value creation could be to bring forward much needed drilling in the 43/11 area to create a new multi-tcf hub and control it.

Let’s face it - the Deltic team has never ‘kicked steel’ or even drilled a well or operated a seismic survey in 8 years since CLNR was founded. Yes, share price is important, but I’d rather hold an interest in a ‘real’ petroleum company with production and a plan.

If a transaction materializes perhaps a lower offer could be sweetened by a commitment from IOG to drill at least one exploration well and carry Deltic through appraisal and development of a discovery.

While BP tries to convert itself into a new type of energy company Warren Buffett decided to construct a new type of energy company aiming to compete in the post transition world. It’s being done by stealth without many people noticing.

It’s now worth $24 billion and growing while majors like BP are shrinking. Berkshire Hathaway Energy is growing, has a 100-year strategic outlook, accepts that gas is still a premium fuel for a couple of decades and customers matter.

BHE aims;

“To be the best energy company in serving our customers, while delivering sustainable energy solutions”.

Where have I heard that before? Probably an old flip-chart from a BP management away-day in a fancy country hotel.

Take a look at BHE’s corporate brochure - link below. It’s about time BP came out with similar, clear communications, but I’m not sure they have the vision, capabilities or the passionate leadership team to compete.

C’mon Bernard - get your act together.

https://www.brkenergy.com/assets/pdf/corporate-brochure.pdf

FD

Remember, BHE has never over-paid for an asset which is one reason for their success. On the other hand, exploration risk has never featured in their portfolio and IOG retail shareholders are starting to worry about that.

An analogy for BHE’s strategy is John D Rockefeller’s approach. He cornered the market in transportation, offered producers a pittance for their crude and bought them out when they went bust. Of course it was so successful that the US government broke it up. Obviously this is an extreme case and won’t happen here - but the principle is the same.

But making money in declining industries has a simple business model. Take, for example, spare parts for BSA motorcycles. There used to be 100’s of dealers with shops. Then, as BSA went bust, some enterprising people bought all the spare parts from the factory and dealers, doubled the price of parts by controlling the market and did very nicely.

There will be a ‘human factor’ too. Will Mssrs Swindells and Nunn put themselves first with high salaries etc, or will they follow theIr fiduciary duty to represent shareholders? I expect Michael Spencer will tell them the answer!

FD

Superficially, the choice dilemma facing investors seems to boil down to short-term price for a transaction.

On the buy side, the scandal sheets are saying 2.5p to 3.0p. On the sell side it’s 4.0p to 5.0p with some dreamers looking for >10p.

So, could there be a ‘bidding war’ for Deltic?

Maybe, but - there are other considerations;

Competitors; The only one I can see in SNS which is infrastructure-driven is Shell, who will be looking to maximize value of their infrastructure. But in a declining petroleum province? Perhaps not and they’ll be looking to dispose of non-material ventures - unless they try to compete with BHE. Paradoxically, Shell would probably create more value by co-operating with BHE.

Energy transition; BHE is streaks ahead of the majors in recognizing what customers want. They saw this coming ~10 years ago and created an energy company to rival the majors - not by discovering huge oil & gas fields, but rather by coming from the opposite direction and integrating tens of millions customers who pay the bills via gas and power grids etc.

Legislation; BHE is providing precisely what governments like UK are aiming for, namely a bridge to net zero. Foreseeing the pause/end of UKCS license rounds they aim to align with OGA’s net zero by 2050 agenda. And their strategic time span is measured in decades, rather than months common in many AIM-listed companies.

If an offer materialises, Deltic investors can take the money and get out, or perhaps settle in for another type of investment in energy which has sizable, long term growth potential. It’s the future.

FD

Some comments on IOG’s intentions on its possible offer.

IOG has plenty of cash. Behind the scenes there may be a bigger plan. I suggest Deltic shareholders wake up and understand what is going on.

First of all, you have to realise IOG isn’t like the run-of-the-mill AIM companies. Their management team builds projects with real steel and pipelines - quite unlike pure exploration in Deltic’s team.

Last year IOG sold 50% of the company to CalEnergy. CalEnergy Resources Limited is a subsidiary of Berkshire Hathaway Energy Company.

https://www.calenergyresources.com/#calenergy-intro

Berkshire Hathaway Energy Company is a huge songlomerate with interests in power grids, renewables, oil and gas etc. Total equity $24 billion. That’s ~25% of BP - it’s big.

https://en.wikipedia.org/wiki/Berkshire_Hathaway_Energy

CalEnergy’s strategy is to gather up fragmented interests in mature areas like the Southern North Sea and control an integrated approach to organising profitable ventures without having to argue with minor actors without hope of ever producing a molecule of methane.

IOG was paid an initial cash consideration of £40 million on completion of the CalEnergy deal, which also applies to the Thames Pipeline and reception facilities at Bacton.

CalEnergy will also pay for up to £125 million of IOG’s development costs for phases one and two of its ‘core’ project.

The core project comprises the development of 410 billion cubic feet of gas reserves across six discovered southern North Sea gas fields.

Phase one involves the development of Southwark, Blythe and Elgood, and phase two covers Goddard, Nailsworth and Elland.
IOG, which will retain operatorship, will pay CalEnergy a royalty of 20.2% of its net revenues from phase one.

Exploration risk does not feature in CalEnergy’s portfolio, but its pretty clear that a relatively small amount of money by CalEnergy’s standards could accelerate drilling in Deltic’s areas.

FD

Yes, they do. But I suspect to reach 2050 Net Zero target we may never see another Round covering the whole UKCS, but might see patchy offers in some areas.

The problem OGA is trying to solve is the fragmentation of interests where licencees are reluctant/can’t afford co-operation. It’s like ‘herding cats’. So by cutting off new licencing, companies will be forced to work with what exists rather than wait for licencing rounds.

The licence terms are unchanged, so that provides for ‘hangers on’ to vacate their licences or do the work.

Mike 007

OGA has announced a pause in licencing rounds. It’s designed to encourage licences to cooperate and do deals to get wells drilled, fallow areas relinquished and so on. It follows that companies holding near-term drilling opportunities near infrastructure will benefit by farming out. Puts Deltic in good position in Carboniferous play fairway.

Mike 007

I agree there are grounds for optimism on share price. One feature of Deltic's history is that they tell the truth to investors and avoid hype common in competitors.

The 2017 economic evaluation used gas price outlooks between 40p and 50p per therm with historic winter peaks of 80p during 'Beast from East'. Rough storage has been retired and there is enough line-pack to compensate.

But right now, there is abundant gas from Norway and via the two inter-connectors. Combined with climate change/warmer winters NBP gas prices are in the 30p to 40p range for day ahead delivery.

That's not to say newly discovered gas in Deltic's blocks will not find a market - on the contrary it will - but we need to keep an eye on future prices because warmer weather and gas-on-gas competition is creating a downward trend.

Primula

Might be a better idea to save money and abandon Loxley (hardly enough gas for a BBQ), cancel Arreton (2 dry holes in exactly same place already including one with DSTs in all prospective zones with no flow) and shut down the Kimmeridge venture at Horse Hill. There really is no return for investors in these Weald/Wessex Basin companies in my opinion.

Well in Turkey promised by year-end won’t happen - there’ll be 3 ft of snow and sub-zero temperatures in eastern Anatolia in the winter.

Mike 007

Spirit may want it, but they are 69% owned by Centrica who have constrained their exploration ambitions in favour of spending money on developments. Neptune has curtailed exploration too but is getting roped into the Darach appraisal/development in 42/4.

Mike 007

Here's the economic evaluation of the P2248 area done a few years back.

https://www.cluffnaturalresources.com/wp-content/uploads/2017/04/P2248-Economic-Feasibility.pdf

Since then we've seen Pegasus (43/13) move toward development and Andrmeda (43/12) drilled.

We'd all like to see a well on 43/11 soon, but I'd prefer to use other people's money to pay for it. So I hope Deltic can find a partner quickly.

FD

Yes, 43/11 (P2248) has numerous prospects and is classic UKCS candidate for a cluster of gas developments. Along with Deltic's adjacent blocks we should soon see a multi-well drilling programme - probably with export via Cygnus or Breagh, both of which have spare capacity soon.

With unrisked prospective resources totalling > 2 tcf it's a good block.

Note also that Deltic has a 'drill or drop' commitment and this requires demonstration of financial capability and capacity to qualify such an award. In plain English, OGA requires cash in bank + track record of some years of activity. So the 'cash in bank' is quite important.

https://www.cluffnaturalresources.com/wp-content/uploads/2016/10/CPR-of-Southern-North-Sea-Licence-P2248-CNR.pdf

Mirasol

Fellow posters - let’s remember Mr Howard was Nutech's Chief Commercial Officer when the first estimates of oil-in-place were assessed 5 years ago. Recognized as the experts in drilling and completions in low permeability, fractured reservoirs these guys bring experience from analogue petroleum systems where 1000s of wells have been drilled in Texas and Louisiana.

Anyone who has experience of oil production from the Austin Chalk is more than welcome to try to solve the problem of how to drill and complete production wells in the Kimmeridge Micrites.

The Austin Chalk petroleum system has lots in common with the Kimmeridge Micrite play and literally $100s of millions have been wasted by industry finding the secret to commercial production.

For the Kimmeridge Micrites the basic physics of draining the oil-wet, low permeability matrix into the producing fractures is working against us. Indeed, it may never work in a predictable manner. I’d welcome a presentation by UKOG to explain what is happening before any more money is wasted on trying to commercialize this play.

Here's the car for block Block 43/11 which Cluff had earlier as a promote licence, but expired.

Good news they've re-licenced it.

https://www.delticenergy.com/wp-content/uploads/2016/10/CPR-on-P2248.pdf

https://adx-energy.com/documents/romania-well-flow-test-operations-update-6.pdf

Phoebus

Check out the Corallian website. It reveals the ‘cunning plan’ and shows how Victory is ‘development ready’ in short term using local infrastructure.

Victory was discovered >40 years ago in the drilling frenzy following discovery of Clair in 206/8 in 1976.

It’s 250 - 350 bcf (say ~ 50 mmboe). Mainly gas, but also some heavy oil around 20 API, in Lower Cretaceous sandstones.

This area dominated by BP and Shell, so Corallian may have ‘cunning plan’ to make it commercial. Either that, or its just an opportunistic punt hoping to link with local infrastructure.

Meanwhile Deltic has consolidated its position east of Breagh and re-licenced 43/11 to create a single unit with low risk Bunter, Permian and Carboniferous prospects.

FD

Nation Grid forecasts supply abundance from Norway and via BBL and Interconnector to Bacton, and from Russia and, soon, the Caspian. For year ahead. UK gas consumption is slowly declining, especially for domestic heating, ironically due to climate change. When there is a long-range cold snap forecast LNG easily makes up any shortfall at competitive price. Same applies to Western Europe.

So looks to me we're waiting on infrastructure/export availability before Shell makes a move to drill..