Block Energy P. Regulatory News (BLOE)

7 April 2020

Block Energy Plc

("Block Energy" or the "Company")

Operations Update

Block Energy Plc, the exploration and production company focused on Georgia, announces an Operations Update including actions taken following the Covid-19 outbreak.

Highlights 

· Implementation of major cost-cutting measures targetted at 40% of cash expenditure.

· At 6 April 2020, cash balance of US$3.4 million and net crude oil inventory valued at US$470,000.

· Early production facility, including a gas processing unit, currently in transit to Georgia.

· Shut-in of the West Rustavi field's production at wells WR-16aZ and WR-38Z to conserve valuable gas resources until the gas sales pipeline is complete later this year.

· Prior to shut-in, West Rustavi field production remained stable at a choked-back rate of 325 boepd (155 bopd and 1MMCF/d gas).

· Early results from fully-migrated 3D seismic processing are beginning to provide insight into the full potential of the West Rustavi XIF licence area.

· Abandonment of WR-51Z due to the poor condition of the original well.

Block Energy reduces its operating and administration cost base

The safety and health of the workforce at Block Energy is a priority and the Company has put significant thought into ensuring the business continues to be run both safely and sustainably. Given the low oil price and the restrictions imposed in the UK and Georgia in response to Covid-19, the Company has postponed all new capital expenditure and has reduced the monthly cash burn in Georgia by 40% from US$107,000 to US$64,000 through a combination of cost-cutting and deferral of operating and administration expenses. Deferred salaries will be paid on receipt of proceeds from oil sales at or above US$40 per barrel Brent price.

In the UK, directors and employees have agreed a scheme in which, with effect from 1 April 2020, 40% of their salaries will be paid in nil-cost options to acquire ordinary shares in the Company, reducing monthly cash salary costs from £43,000 to £26,000. Options will be priced at a VWAP over the monthly salary period and the first options are expected to be based on the VWAP for the month of April and issued in early May 2020. As at 6 April 2020, the Company's cash balance was US$3.4 million.

West Rustavi Early Production Facility

The Company has purchased, from a supplier in Canada, an early production facility ("EPF") which has a total capacity of approximately 3MMCF/d, providing for the addition of future Middle and Lower Eocene gas production.

The EPF comprises an inlet manifold for six wells, separators, and a gas dehydration and measuring unit. Gas sales are now forecast to commence H2 2020, once the EPF is installed, the two wells are tied into the inlet manifold and Bago completes its gas sales pipeline. In the contract between the Company and Bago, the price for gas sales is US$5.24/MCF. At current flow rates, this will provide net revenue from gas sales of US$120,000 per month.

The EPF project represents our first step in converting contingent gas resources to reserves and reserves to production, monetising up to 600 BCF of 2C gross contingent gas resources, as identified in our independent Competent Persons Report. It will also give the Company valuable experience in marketing gas in Georgia, which it can apply to the 169 BCF of gross 2P gas reserves in the XIB licence.

Production update

Whilst crude oil prices remain low, the Company will suspend production from WR-38Z and WR-16aZ, which have proved to have high gas-to-oil ratios. This will conserve valuable gas resources until gas sales commence. The two wells have been flowing at a stable combined rate of 325 boepd (155 bopd and 1MMCF/d gas), breaking even at a Brent price of US$24/bbl on oil sales alone.

Depending on the oil price, the Company will continue to produce and, if necessary, store oil from its Norio and Satskhenisi licences, as the quantity of gas produced from these fields is small.

Prior to Covid-19, the Company had achieved regular oil sales, and remains in regular dialogue with additional buyers, including oil majors. These buyers remain supportive of the Company's enhanced development plans. Currently, Block Energy's net crude oil inventory is 18,000 bbls, which is valued at US$470,000 at a Brent price of US$35/bbl, and ready for sale when the Brent price improves.

Abandonment of drilling operations at WR-51Z

The Company has aborted drilling operations at the WR-51Z site owing to the discovery of poor existing well conditions. Legacy wellbore integrity issues are an inherent risk with re-entry operations and the occasional abandonment is to be expected. The Company is currently ranking and risking two additional re-entry candidates in West Rustavi and potentially a further 14 in Block XIB.

Update on West Rustavi 3D seismic

Processing of the 3D seismic data, which was acquired over the entire West Rustavi XIF permit, is nearly complete. Preliminary results exhibit good subsurface imaging of the main producing and prospective formations in the permit. 

The West Rustavi 3D seismic data extends over the existing 3D data set of 400 km2 within the Rustavi XIB permit. The overlap will aid in integrating the interpretation of the 3D datasets for both permits, resulting in a better 3D image of the subsurface structures across the region and the ability to identify and high-grade the optimal placing for new horizontal completions. The Company looks forward to updating the market on this initiative.

Acquisition of Blocks XIB and IX

Subsequent to the recently-announced acquisition of Blocks XIB and IX, as mentioned above, the Company is evaluating re-entry opportunities in Block XIB oil wells. We are also considering the potential of re-entering the recent deep Pat E-1 gas well in order to side track and complete a horizontal section in one of the Lower Eocene gas zones appraised and tested during 2018/2019.

Gas price and demand remain strong in Georgia. Based on the well results at Pat E-1, the estimated initial-gas-in-place is approximately 600 BCF for the structures penetrated by this well. Drilling a horizontal hole in the best zone has the potential of changing these resources into reserves, ready for production.

The shallower Middle and Upper Eocene formations, from which 91 BCF of gas was flared in Soviet times, offer further upside to gas development throughout Block XIB.

Block Energy Chief Executive Officer Paul Haywood said:

"These are unprecedented times for the global economy, in general, and the oil and gas sector, in particular. We have to navigate our business through a new environment of low oil prices, a slowing wider economy and countrywide lock-downs.

With the implementation of the measures announced today, we have made our business significantly more sustainable, as well as conserving our hydrocarbon assets for the future. While the abandonment of WR-51Z is clearly a disappointment, the decision taken by management is the right one. There are inherent risks when re-entering old well bores which demand a disciplined approach to cash management.

Safety of our staff remains paramount in the current situation. I'd like to thank all stakeholders for their continued support. We look forward to providing further updates as we progress our acqusisition of Blocks XIB and IX and approach gas sales.

In conclusion, your Company continues to work tirelessly on completing the purchase from Schlumberger. With a determination to achieve first gas sales and the preparation of a comprehensive exploitation plan, leaving it well positioned as the Covid-19 crisis subsides and oil prices recover". 

This announcement contains inside information which is disclosed in accordance with the Market Abuse Regulation which came into effect on 3 July 2016.

For further information please visit http://www.blockenergy.co.uk/ or contact:

Notes to editors

Block Energy is an AIM-listed independent oil and gas company focused on production and development in Georgia, applying innovative technology to realise the full potential of previously discovered fields.

The Company has a 100% working interest in the highly prospective West Rustavi onshore oil and gas field with multiple wells that have tested oil and gas from a range of geological horizons. The Field has so far produced 50 Mbbls of light sweet crude, and has 0.9 MMbbls of gross 2P oil reserves in the Middle Eocene. It also has 38 MMbbls of gross 2C contingent resources of oil and 608 BCF of gross unrisked 2C contingent resources of gas in the Middle, Upper and Lower Eocene formations (Source: CPR Gustavson Associates: 1 January 2018).

Block Energy also holds 100% and 90% working interests in the onshore oil producing Norio and Satskhenisi fields. It has recently entered into a Sale and Purchase Agreement for Georgian onshore Blocks XIB and IX.

The Company offers a clear entry point for investors to gain exposure to Georgia's growing economy and the strong regional demand for oil and gas.

Glossary

1. Block Energy is using the suffix 'Z' in a well number to indicate a horizontal sidetrack.

2. bbls and bbl/d: barrels and barrels per day. A barrel is 35 imperial gallons.

3. bopd: barrels of oil per day.

4. boepd: barrels of oil equivalent per day.

5. Mbbls: thousand barrels.

6. MMbbls: million barrels.

7. MCF: thousand cubic feet.

8. MCF/d: thousand cubic feet per day.

9. MMCF: million cubic feet.

10. MMCF/d: million cubic feet per day.

11. BCF: billion cubic feet.

12. VWAP: Volume Weighted Average Price.