IOG.L Regulatory News (IOG)

20 June 2022

IOG plc

Corporate Update

IOG plc ("IOG", or "the Company"), (AIM: IOG.L), the Net Zero UK gas and infrastructure operator focused on high return projects, provides an update on current activities and operational guidance for the remainder of 2022.

Andrew Hockey, CEO of IOG, commented:

"I am pleased to say that Saturn Banks production continues to be restored as planned, up to 54 mmscf/d gross currently from 30 mmscf/d at the start of June. We are taking the necessary actions both to improve facilities uptime and minimise restart times after any outages. Allowing for planned and unplanned downtime, we expect to produce 45-60 mmscf/d gross on average over 2H22.

UK Day-ahead gas pricing remains extremely volatile, trading in a 10p to 224p/therm range this month. Our average realised price to date is 135p/therm and forward prices for this winter are increasingly elevated, closing at over 300p/therm last Friday. We expect 2022 opex to be 10-15p/therm.

In parallel, the 24" extension of the Saturn Banks Pipeline System to Southwark has been successfully laid, while drilling of the Southwark East well is at an advanced stage. With Southwark expected onstream in Q4, we aim to exit 2022 with a higher, more diversified production stream.

This is part of an exciting growth period ahead, with the Goddard and Kelham appraisal wells following straight after Southwark, plus a Nailsworth final investment decision and seismic re-evaluation results for the Panther/Grafton area both targeted by year end.

As the government encourages reinvestment in the North Sea to support energy security, we also have a clear view of value-adding new licence targets, alongside other business development opportunities under active evaluation."

Saturn Banks Phase 1 Production

Further to the 1 June 2022 operational update, in which production was confirmed to be restored to an initial gross 30 mmscf/d, temporary modification of the second recycle compressor in the Bacton terminal condensate stabilisation unit (CSU) was completed by its operator Perenco (UK) Limited. In line with the announced plan, this has alleviated liquids constraints and enabled production to be steadily increased, reaching 54 mmscf/d gross by 17 June.

In June to date, gross production has averaged 44 mmscf/d, with uptime at 84% for Blythe and 94% for Elgood (100% for both over the past week). Factoring in the May shutdown and other previous outages, uptime has been 45% and 65% for Blythe and Elgood respectively since First Gas, giving gross average production to date of 32 mmscf/d. In addition, IOG sold 1,341 tonnes of condensate (its net share) in April and May at an average price of $882/tonne.

Forward Guidance

Significant progress has been made so far in June in improving liquids management and onshore reliability at Bacton and the remaining restriction to gas flow is expected to be fully lifted over the coming weeks. To underpin uptime, work is underway to improve the Blythe platform's electrical stability and reduce the risk of emergency shutdowns. The Company has also enhanced its helicopter and vessel access to enable faster offshore restarts in the event of any further unplanned outages. Permanent chemical injection modifications are expected to reinstate full remote restart capabilities by early Q4.

The reservoir productivity observed to date at Blythe and Elgood is consistent with the updated management estimated recoverable reserve range in the 2021 Annual Report released on 17 March 2022. These ranges are gross 1P/2P/3P 25.4/42.5/55.8 billion cubic feet (BCF) for Blythe and 9.6/14.1/18.3 BCF for Elgood.

Based on reservoir analysis and ongoing facilities optimisation, gross average 2H22 Saturn Banks gas production is projected to be in the 45-60 mmscf/d range. Average condensate production is projected to be 250-350 bbl/d over 2H22 as condensate rates are expected to decline fairly quickly. These ranges make reasonable allowances for both planned (aggregate of 15 days to complete the above works, including a Bacton terminal shutdown) and unplanned outages over 2H22.

Total unit operating costs in 2022 are projected to be in the 10-15p/therm range (c.$8-12/boe). Expected total capex net to IOG for 2022 remains within the previously guided range of £70-85 million.

Gas Market

Pricing under IOG's gas sales agreement with BP Gas Marketing Limited is directly linked to the UK NBP Day-ahead price. This has been exceptionally volatile since First Gas in mid-March, with very strong LNG supply into the UK market in conjunction with limited export and storage capacity, alongside unexpected events such as the recent Freeport LNG outage and NordStream 1 capacity issues. The NBP Day-ahead price has traded in a 10-224p/therm range this month. IOG's volume weighted average monthly realised gas prices so far have been 232p/therm for March, 161p/therm for April, 83p/therm for May and 106p/therm for June to date (135p/therm combined since First Gas).

The UK NBP forward curve priced the Winter 2022 contract at over 300p/therm and Summer 2023 over 190p/therm on 17 June, indicating an expectation of a very supply constrained market over the coming year. These levels fluctuate significantly and are not a forecast of future day-ahead prices. Whilst in principle the Company remains inclined towards commodity hedging, with such exceptionally high volatility, pricing and execution for typical structures are currently prohibitive.

Southwark

Subsea and pipelay work has gone to plan in Q2, ensuring progress continues towards Southwark First Gas in Q4. Notably, the 6km 24" extension section from the Saturn Banks Pipeline System (SBPS) to the Southwark platform was successfully installed by the Seven Borealis S-lay vessel. The Seven Kestrel diving support vessel (DSV) has also installed the necessary mechanical connectors at both ends of SBPS outer section - another important element of the programme. The Kestrel is currently installing the spools to connect the 6km extension to the Southwark platform. The final closing spools will be installed later in the hook-up and commissioning programme, which is currently underway with risers being welded on the Southwark platform.

Drilling of the Southwark East production well has continued into the reservoir section. The well has reached Total Depth at 14,330ft MD and the production liner is being prepared to be run. The Noble Hans Deul rig will then drill the Southwark West well (at which the top-hole section had already been drilled earlier in the campaign). Both wells are due to be completed by Q4.

Appraisal campaign

After Southwark, the Noble Hans Deul is contracted to drill both the Goddard and Kelham North/Central appraisal wells in direct continuation at the same attractive day-rate as the Phase 1 wells. Both the geophysical and geotechnical site survey campaigns for the Goddard and Kelham wells are complete, while planning and procurement for both wells is also well underway.

The Goddard appraisal well is intended to define the south-east extent of the main Goddard discovery and de-risk its two flank structures, thereby helping to determine the optimal field development plan, including platform location and number of wells, to maximise investment returns. 3D seismic reprocessing over the structure in 2020-21 has improved subsurface understanding and enabled a choice of well location. At a 45p/therm price deck, the internal rate of return (IRR) from final investment decision (FID) on a Goddard development is provisionally estimated to be 19-40%, depending on whether the appraisal well proves up a larger structure. This rises to 50-80% at a 75p/therm price deck. The current forward curve average out to the end of 2027 is 158p/therm. Subject to further drilling, there are also other potential tie-back opportunities to a Goddard development.

The Kelham North/Central appraisal well is intended to prove up both accumulations as part of a potential three-field "Southern Hub" gas production cluster including the Abbeydale discovery on the same P2442 licence. Again, 3D seismic reprocessing work has opened up extensive, previously unidentified resource potential on this licence, which lies well within tie-back range of the SBPS. If successfully appraised, there would be potential to fast-track into production for a quick-payback high-return investment. Based on pre-drill mid-case resource estimates, this is provisionally estimated at 33% IRR at a 45p/therm price deck, rising to 75% IRR at a 75p/therm price deck. There are also several other potential future additions to such a Southern Hub on the licence, subject to further exploration and appraisal drilling.

Based on the current drilling schedule, the two appraisal wells are expected to be completed by Q1 2023.

Phase 2 and portfolio activities

Active regulatory engagement continues for the planned Nailsworth development, with the concept select report submitted to the North Sea Transition Authority. Meanwhile an expression of interest for Front-End Engineering and Design (FEED) work has been issued. A concept select decision remains expected by the end of Q2 based on a tie-back to the Southwark platform, with FID targeted by year end 2022 leading to first gas in 2H24.

The 3D seismic reprocessing of the Panther-Grafton area (licence P2589) is expected to be completed by around the end of Q3. This will be followed by an evaluation of the newly reprocessed data to inform a new assessment of the area's potential, expected by year end, seeking a similar uplift in resource potential as with the P2442 (Kelham/Abbeydale) licence. The Panther-Grafton area lies close to the Company's Southwark, Elland and Nailsworth assets, creating potential development synergies.

IOG also intends to be active in new licensing opportunities, with the NSTA recently confirming the 33rd Offshore Round for this year. The Company has identified a clear set of value-adding priority targets that can contribute to the UK energy resilience goals laid out in the British Energy Security Strategy announced in April. Further potentially synergistic nearby business development opportunities are also being actively evaluated in collaboration with our joint venture partner CalEnergy Resources (UK) Limited.

This announcement contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) 596/2014 as it forms part of UK domestic law by virtue of the European Union (Withdrawal) Act 2018 ("MAR"), and is disclosed in accordance with the company's obligations under Article 17 of MAR.

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About IOG:

IOG is a Net Zero UK gas and infrastructure operator focused on high-return projects. The Company's operations are currently concentrated around its offshore and onshore Saturn Banks infrastructure in the UK Southern North Sea. Phase 1 of its Saturn Banks Project, which started production in March 2022, entails the commercialisation of the Blythe, Elgood and Southwark gas fields through this infrastructure. Phase 2 of the Saturn Banks Project entails the Nailsworth, Goddard and Elland gas discoveries, which are subject to future investment decisions and expected to be commercialised through the same export infrastructure. The Company also holds further licences with additional resources including the Abbeydale, Panther and Grafton gas discoveries, the Kelham North, Kelham Central, Thornbridge and Thornbridge Deep prospects, and part of the Orrell gas discovery. Currently, all IOG's licences are held 50:50 with its joint venture partner CalEnergy Resources (UK) Limited and operated by IOG. In addition, the Company continually evaluates further opportunities for accretive portfolio additions to help generate additional shareholder returns. Further details are available at www.iog.co.uk.