Member Info for Exploration

Isthatgas and Oil Trader,

You are both right.

Two perspectives are quite normal on AIM. One is driven by Fundamental Analysis and the other by Technical Analysis.

Institutional Investors tend to prefer the Fundamental approach whereas PIs are often caught up in Technical Analysis – especially with AIM energy stocks. But for many of us, a mixture is used before buying or selling.

There is gas in the Tagi reservoir in all wells where it is penetrated in the Tendrara Contract Area, so we should not get carried away when gas shows appear at TE9, although we all know it will be encouraging. Indeed, NOT finding gas in the Tagi TE9 would be quite an achievement! Whether it will flow or respond to stimulation is the big unknown.

And me? I guess I use both approaches. The latent value in Sound is the possible production capacity from Tagi wells, although more volume from exploration will be welcome. For example, a potential buyer of Sound Energy capable of implementing well stimulation will gamble they can deliver the proposed 60 mmscfd from 3 or 4 producers on theTE5 horst (using TE-7 numbers) rather than, say the current plan of 12 to 16 producers. That would reduce the ‘reservoir risk’ in a depletion gas sales contract and make the upstream part much more valuable since drilling costs tend to dominate the capex stream.

GozoMike

I think success includes 2 simple steps. First, drill the vertical wells to calibrate seismic and gather as much data as possible. Second, an appraisal programme to demonstrate well productivity using latest drilling and stimulation technology - possibly by re-entering the vertical exploration well.

A great example of how drilling and completion technology has advanced is the Carboniferous reservoir in the Breagh gas field in the North Sea. Similar rocks to Tendrara ‘palaeozoic’. Breagh is a 600 bcf field but it took more than 40 years to optimise the well design.

Each new advance in well design at Breagh more or less doubled well productivity. Sound, or its successor, can leapfrog all that in quick time and go for gold. The Deep Dive was downbeat on reservoir effectiveness, especially in terms of predicting the best areas in Tendrara but no upbeat aspects were mentioned.

Breagh history

• 42/13-­‐1 was drilled by BP in 1968 to test a shallow Triassic prospect
• 42/13-­‐2 was drilled by Mobil in 1997, found gas in Carboniferous which flowed at sub‐commercial rate of 3 mmscfd due to formation damage.
• 42/13-­‐3 was drilled by Sterling using oil­‐based mud with minimum overbalance. Flowed 17 mmscfd. AOF estimated at 30 mmscfd
• 2009; 42/13-­‐5z drilled with 1200’ horizontal section. Flowed 26 mmscfd
• 2014; A08 Platform well fracked – on production at 42 mmscfd.

There is a nice graphic on page 11 relating the geology to the Breagh A08 well.

http://edg1.precisionir.com/companyspotlight/NA018056/AGM%20Master%202014-05-30.pdf

Although the presentation is by Sterling Resources, the “brains” behind the stimulation came from their partners, RWE (Rheinisch-Westfälisches Elektrizitätswerk AG, is a German electric utilities company based in Essen).

RWE’s expertise comes from years of in the German gas fields which produce from sandstones of Upper Rotliegendes age - same as Tagi in Morocco. The Upper Rotliegend is a sequence of sandstones, siltstones and shales. Most of the gas fields produce from low permeability layers (mainly 0.1-20mD). Hydraulic fracture stimulation in Germany has been developed as a routine completion concept in the last 15 years. Fracture stimulations, if applicable, are planned in all new drilling projects in Germany as a standard procedure to enhance the productivity of a well.

Just like the Tagi vertical permeability in the German Rotliegendes is about 10% of the horizontal permeability. Hydraulic fracture stimulations, in comparison to simple perforations, have proven to bridge vertical flow barriers within sandstone/ siltstone sequences as well as to improve the connectivity of the stimulated layers horizontally.

The Palaeozoic in Tendrara is Westphlalian age (Carboniferous) and there is >300m of net pay in OSD-1 Carboniferous with porosity around 10%. So this bodes well for Sound, especially with some clever drilling and completions.

Riddlers

Try this one. Of course it does not account for Sound's breakthrough in te6 and 7, or the Palaeozoic play.

https://www.edisoninvestmentresearch.com/?ACT=18&ID=10782&LANG=

ddboy

6 or 7 years ago when Tendrara was operated by Fastnet, they realised drilling and completions were critical to success in the Tagi reservoirs. Fastnet commissioned a couple of studies to address drilling and development issues. The current development scheme is pretty much same as the one done by John Tingas. The drilling work was done by Dennis Krahnne who you might know. See link below.

https://markets.ft.com/data/announce/detail?dockey=1323-11770722-1S3QB33N9EK1EC8EGFJSODSIPH

After all this time Sound has delivered 'proof of concept' about how to overcome the reservoir compartmentalisation issue which has plagued the Tagi in Morocco and now we have a credible development project.

Doubler

See link below. Onhym commissioned a study on how to develop the TE5 area recently. It envisaged around 12 producers with multi-stage fracs to deliver 60 mmscfd on plateau.

http://ao.onhym.com/Documents/CDC%2014-2017%20-%20CERTIFICATION%20DES%20RESERVES%20DE%20TENDRARA_CPS.pdf

See page 14 for Sidi Moktar structure map at Tagi level

https://no0ilcanarias.files.wordpress.com/2013/01/longreach_investor_presentation_10-01-2013.pdf

Yoghurt

The 'black horizon' is the widespread basaltic lava flows which overlie the Lower Salt Formation and are associated with the initial rifting of the Central Atlantic Ocean. It is a prominent seismic event. The basalts are overlain by the Upper Salt sequence. The basalts have hydrocarbon shows in SBK-1. The lower, more weathered part of the basalt interval contains interbeds of tuffaceous sandston. This unit had the best shows in SBK-1. The main seal is the thick Upper Salt sequence. Is it a reservoir at TE9 - probably not, but might be a lost circulation zone for drillers to look out for.

SC, That's partly correct.

But there will be no GSA for the Tendrara Concession in the short term and it certainly will not be measured in simple dollars per mcf.

Check out the link.

http://ashokkumarbansal.com/understanding-natural-gas-sales-purchase-contracts-principal-contractual-terms/

Trellis35

Based on information coming from Onhym’s CPR for the TE5 Horst gas field it suggests the GSA will be what is known as a “Depletion Contract” for production from the Tendrara Contract Area defined in the Exploitation Agreement with Onhym and approved by the Minister. Any future discoveries will have to go through the same process, including appraisal drilling, which might involve 2 or 3 more wells on the A1 structure being tested by TE9.

If another company buys Sound and assumes all Sound’s contracts the various agreements, including the GSA, can be assigned according to the Petroleum Law with the approval of the Energy Minister. So that is the easy bit.

Generally, gas sales contracts are for long duration, often 15-25 years. During such a long period, there will almost certainly be significant economic commercial and technological changes which have a bearing on the contracts. Gas contracts are structured so they will be able to survive such changes.

Gas Contracts can be divided broadly into two categories; Depletion Contracts and Supply Contracts. In addition, various other types of contracts are also available based on market requirement which are mainly of short duration. A good example of a Supply Contract is SDX’s arrangement to supply gas to the potteries and tile factories in Kenitra.

- Depletion contract: all the gas produced from the reserves attributable to the seller’s specified interest is committed to sale under one contract alone for the term of that contract. This is also called a reserve commitment. The seller takes the 'reservoir risk'

- Supply contracts: the seller promises to deliver a specified volume of gas at a delivery point without any commitment about the source of the gas. The quantity and any requirements about time of delivery are clearly stated. The buyer takes the market risk.

Negotiating gas contracts requires an unusual amount of transparency, with review periods, because seller and buyer must co-operate to sustain the venture. It follows that Sound, Enagas, ONEE etc must allocate the rent across the value chain according to respective risk. The price of electricity for end users in Morocco is about $0.13/kwh, so working backwards through the value chain everyone needs to meet their own commercial thresholds.

This means a GSA requires reasonably accurate cost estimates from the FEED work to enable all participants to arrive at a price formula (i.e. not a fixed price) which satisfies everyone. It follows that a GSA for the Tendrara Concession will likely be finalised after FEED is complete in November.

Trellis

Despite the previous 'denials' about signatures it is 10 out of 10 for predicting date of approval by Ministers.

Firstly, I think we should take heart on proof Sound is sufficiently tuned in to the Moroccan system to correctly anticipate the date of approval by the Finance and Energy ministries. In terms of what JP could say over past couple of weeks he handled it with equanimity aplomb. He can report to shareholders agreements with Onhym, but protocol dictates he should comment on issues beyond his control, such as what goes on between the Ministries and Onhym. The Arabic and French versions of the approval will be published in the Gazette on Thursday, 18th.

Secondly, we should be very encouraged that the Tendrara approval sailed through the Moroccan ‘makhzen’ with minimal hassle. Makhzen means the ‘government’ in Morocco. But government includes many points of view. In Morocco is centred on the king and includes well-connected members of the establishment. In other words, Sound has an influential 'fan club' in Morocco.

Partridge

The timing of the spud date is probably related to the slow-motion government schedule. My estimation is spud on October 18th

Why?

There has been some recent discussion about ‘sign offs’ about Tendrara on this BB. The Moroccan bureaucracy takes its time but is always correct. If the Greater Tendrara licence is working its way through the system at the normal pace we can expect an “arrêté” on October 18th. In practice project work goes ahead in anticipation on an arrêté which is what Sound has done.

An “arrêté” is legal order or ruling by a government official imposing certain conditions on a company. There can be an arrêté from just the Energy Minister or joint signature when two or more ministries are involved. The arrêté is effectively a mini law which enables the start of petroleum operations.

In the case of TE-9 Sound could have gone ahead under the original Tendrara licence. But the decision to expand to the Greater Tendrara contract area means it is taking a little longer than the statutory 60-day period to finalise after Onhym’s submission of the new Petroleum Agreement to the Minister. Usually big deals like Tendrara also do the rounds in the makhzen before a Minister dares to sign them off.

After the “arrêté” is signed it is published in the official gazette which is the public record of the government. UK has similar gazette and dates back to the 17th century.

Morocco’s Official Gazette is published every 2 weeks. The next edition is due on October 18th.

Below are links for anyone interested to previous publications on Sidi Moktar Petroleum Agreement and the Tendrara Exploitation Concession.

1) Official Gazette – approval of Sidi Moktar Exploration Agreement; see page 1316

http://www.sgg.gov.ma/BO/fr/2018/BO_6684_Fr.pdf

2) Official Gazette – approval of Tendrara Exploitation Concession; see page 1636

Decree No. 2-18-634 of 1st hija 1439 (13 August 2018) granting the National Office of Hydrocarbons and Mining and the companies "Sound Energy Meridja Limited" and "Sound Energy Morocco East Limited" the exploitation concession of natural gas called "TENDRARA”

http://www.sgg.gov.ma/BO/fr/2018/BO_6706_Fr.pdf

Thanks 250SWB

The Shell/Repsol Petroleum Agreement covers 9990 km2. Coincidence?

Anyway, the area limitation is not a show stopper in law, but it was for Fastnet.

JP has been careful to declare all drilling-related sign-offs under Sounds control are complete. In terms of protocol Sound really cannot comment on the minister's role and progress. Sound's interface is with Onhym.

M6 was away on holiday in the Seychelles last month and there is a lot going on, what with re-introduction of conscription and other affairs of state.

250SWB

The energy ministry may be taking their time to issue the Greater Tendrara licence. The civil servants insist on attention to detail. It could be related to Sound’s huge position in Morocco which exceeds limits set out in the Petroleum Code.

The new Greater Tendrara Petroleum Agreement covers an area of approximately 14,500km2. Sidi Moktar covers 4,499 square kilometres

According to the 2003 Petroleum Code there is a limit to areas licenced by a single entity of 10,000 km2. While Tendrara and Sidi Moktar add up to a shade under 19,000 km2, to finalise the approval by the Minister of Greater Tendrara requires a derogation of the law which is not an obstacle, but is another step in the process.

Fastnet ran into a similar problem in 2010 when they tried to add another onshore block to their holding in Tendrara.

These limits are common in other jurisdictions, especially the USA where ‘chargeability’ rules prevent a single company monopolising the best acreage.

Morocco Petroleum Code

SECTION 25

The surface area of an exploration permit may not be less than 200 square kilometers nor greater than 2,000 square kilometers.

A legal entity may not, subject to rights acquired before the coming into force of this Law, directly or indirectly hold exploration rights relating to a surface area greater than 10,000 km2 in the land sector and 20,000 km2 in the maritime sector, except as a derogation* granted by the administration with regard to permits located in sectors not greatly explored.

SECTION 26

In the event that a legal entity should come to hold rights over areas greater than those authorized by Section 25 above, it shall be formally notified by the administration to reduce these areas. If this has not taken place within one (1) month following such notification, the administration shall automatically proceed with the reduction of the areas to the limits stipulated in Section 25.

*Derogation; an exemption from or relaxation of a rule or law.

Partridge

On ‘delays’, the bureaucracy required came up earlier this week. We went through same process on Sidi Moktar. There were two announcements on Sidi Moktar. The first was a Petroleum Agreement with Onhym. The second was the Ministerial approval which took 4 months.

According to the law Ministerial approval should take no more than 60 days from when Onhym submitted the Tendrara agreement to the Minister of Energy. That 60 days takes us to end October. Accordingly we should expect a similar RNS announcing Ministerial approval in the coming days.

Ministers in Rabat generally wait for a thumbs up from the royal palace for big commercial deal. Deficiencies of the royal cabinet tend to slow things down too. M6 has been out of the country for 100 days so far this year and its unclear if energy minister has support needed while this weeks priorities have been to re-open talks with Algeria.

Rig; It would be prudent and comply with the law to avoid triggering the ‘Operational Rate’ for the drilling contract until the Licence is in effect. There is still a lot to do to move to Operational Rate as far as I can see. Quite rightly Sound has gone ahead with site prep and mobilisation which are low cost operations.

Here are the RNS announcements by Sound on Sidi Moktar.

1. Agreement with Onhym

RNS Number : 5128E
Sound Energy PLC
12 February 2018

Sidi Moktar: Award of New Petroleum Agreement

Sound Energy, the Morocco focussed upstream gas company, is pleased to announce the award of an 8 year petroleum agreement relating to the area currently covered by the Sidi Moktar onshore exploration permits in the Essaouira Basin, central Morocco ("Sidi Moktar").

2. Ministry Approval

Sidi Moktar: Ministry Approval & Farm Out Process
RNS Number : 2622Q
Sound Energy PLC
05 June 2018

("Sound Energy" or the "Company")

Sidi Moktar : Receipt of Ministerial Approval and Initiation of Farm Out Process

Sound Energy, the Moroccan focused upstream gas company, is pleased to announce receipt of Ministerial approval of the Sidi Moktar Onshore Petroleum Agreement awarded to the Company in February 2018 and that, following completion of further subsurface evaluation and significant inbound third party interest, the Company has now initiated a formal farm out process for its Sidi Moktar Onshore licence, Central Morocco.

Yobbo

In oil trading it is not supply, demand or the cost of production which affect price. Yes, these variables are the foundation of the market, but rather, what matters is the mere perception of a potential shortage or surplus.

Check out this link from an old FT article and republished on letterone’s website.

https://www.letterone.com/insight/tricks-of-the-mind-turned-oil-into-gold-mikhail-fridman-for-the-ft/

Limited

Although HALO is not currently listed its LSE BB is still working.

Here is the link.

http://www.lse.co.uk/ShareChat.asp?ShareTicker=HNL&page=2

When you track through the various interests on the productive/prospective trend starting at Cygnus which operated by Neptunes with Spirit as non-operating partner. HALO now has Barclays aboard due to their interest in Third Energy.

So its "game on" starting with Pegasus and I am sure CLNR is perfectly positioned to participate in this chess game at minimal cost. Lets see if the market has a similar view tomorrow.

Draft et al

Third Energy has transferred its offshore interests to Hague and London - HALO a couple of weeks ago. This puts HALO into play in 43/13 Pegasus discovery and 43/12 Andromeda prospect - both on trend with CLNR 43/11 and 42/15.

According to HALO' blurb a well on Andromeda is due in 2019, but unlikely to happen until an investment decision on Pegasus. Assuming the CLNR, HALO, Spirit Energy group can work together and with OGA we may expect to see some movement on CLNR price.

See link below

http://haloil.co.uk/wp-content/uploads/2018/09/HALO-Operational-Update-19SEPT2018.pdf

Ducati - just to add a bit on the Carboniferous play. The poor quality of the Tagi in Tendrara has been known about for many years, although Sound has demonstrated it will flow gas at commercial rates. It is similar story to the Leman Sandstone in the Central North Sea and similar Triassic reservoirs in Germany where RWE demonstrated mechanical stimulation worked.

OSD 1 did recover promising evidence of mainly Type III source rocks in the Westphalian. In its pure form, it is composed of vitrinite, a material formed from land plant wood. The Jerada coal mine 50km north of Tendrara shows plenty of similar Westphalian gas prone source rocks with a few marine bands including Type II oil source rocks.

The discovery of successively deeper plays is common. In the last two decades the industry has discovered and developed a multi-tcf Carboniferous gas play in Quads 42, 43 and 44 in the UKCS.

A good example is the Cygnus was first drilled in 1988 by well 44/12-1, which encountered gas shows in sandstones in the Leman Sandstone Formation – broadly equivalent to the Tagi sandsone in N Africa and sealed by Zechstein salt - whilst targeting a Carboniferous objective. The initial evaluation indicated the presence of poor-quality Leman reservoir with conventional log analysis indicating high water saturations. Further appraisal activity ceased until 2002 when another group recognized the missed pay potential. Through appraisal drilling, a second reservoir (the Carboniferous Ketch Formation) was discovered and the Leman Sandstone Formation was proven to be capable of achieving stabilized flow rates greater than 30 MMscf/d.

This link should connect to graphics about Cygnus. The technology breakthrough was the use of ‘broadband’ 3D seismic which enabled explorers to see below the Hercynian unconformity. i.e. below the Leman Sandstone. I am hoping Sounds new seismic enables mapping below the Tagi.

https://www.google.co.uk/search?q=cygnus+gas+seismic&tbm=isch&source=iu&ictx=1&fir=8T_FVlSUPvlfBM%253A%252CV2cJeISITemWfM%252C_&usg=AI4_-kQm9SAJykEHOvpUmT0P63HpvbFiGg&sa=X&ved=2ahUKEwitrpD-huDdAhUGWsAKHVgvBckQ9QEwAnoECAYQCA#imgrc=8T_FVlSUPvlfBM:

regional 3D would have been wonderful in Tendrara although there is some over the TE5 horst area but onshore it is very expensive, requires masses of equipment and Schlumberger could only provide a simple 2D crew.

Over the last 20 years ‘sparse 3D’ has evolved. Recent technical innovation associated with sparse 3D design has resulted in acquisition costs that are substantially lower than both traditional 3D and comparable 2D seismic acquisition. No doubt Shell with have considered this.

https://csegrecorder.com/articles/view/sparse-3d-whats-in-a-name

cannae216 et al

Below is a link to a video on satellite remote sensing.

Looks like it was made 30 years ago. That’s when a desktop computer was size of a small suitcase and mobile phones were as big as bricks. Today there are 100s of videos and papers available, but this one links the computer boffin with a field geologist.

Anyway, it touches on the technology of the day in a fun kind of way.

I recall BP made several other videos about onshore and offshore petroleum seepage but cannot find the links.

https://www.bpvideolibrary.com/record/580

Blade

AGIP and BRPM drilled TE-1 and TE-2) in 1966 and 1967. The locations were based on surface geological mapping. I am assuming Sound has acquired new seismic to put TE-2 in context.

Maghreb Petroleum re-interpreted the logs for the early TE wells in 2002 for their farm out process which led to Fastnet joining the venture. Their re-evaluation of the TE-1, TE-2, TE–3 and TE-4 showed the TAGI sands are gas bearing with possible production potential.

TE1 and TE2 both found about 1000m of Upper Tagi and about 400m of Lower Tagi separated by 100m of basalt. Both wells bottomed in Carboniferous.

TE-2 had net pay in Tagi of about 40m with 9 percent porosity which is quite good compared to TE5 which is about 6 percent. The general idea is that Tagi reservoir quality improves regionally towards to north east of Tendrara where TE-2 was drilled.

There was no gas market in Morocco at the time and attention switched to the SBK area where Lone Star did find minor oil + gas.