Hurricane Energy (LSE:HUR) leapt to 55.5p this morning after unveiling a major farm-in to its Greater Warwick Area (GWA) assets intended to eventually unlock initial reserves of half a billion barrels. It said Centrica-backed independent exploration and production operator Spirit Energy has agreed to farm-in to 50pc of the Lincoln and Warwick licences that make up the GWA, committing up to $387m in carry.
Hurricane said the farm-in opens up a new work programme that will see the firms target first oil on the GWA by 2020 and final investment decision (FID) on the first phase of a full field development by 2021. It added that, without the agreement, it would not be able to undertake the work without hurting the progress of its additional licences in the Greater Lancaster Area, which it expects to benefit from the Spirit tie-up.
RPS Energy Consultants Limited attributed 2C contingent resources of 604MMboe to Lincoln after Hurricane drilled a successful discovery well at the site in 2016, indicating an active permeable fracture network. Meanwhile, it has assigned best case prospective resources of 935MM stock tank barrels of oil to the undrilled Warwick prospect.
The first phase of the programme will see Spirit entirely carry Hurricane through a $180.6m plan to drill, log and test three wells to accelerate appraisal of Lincoln and exploration of Warwick. In exchange for funding this phase, Spirit will be granted a 50pc interest across the licences covering the GWA.
Assuming phase one is successful, the second phase will involve Spirit carrying Hurricane through 75pc of an estimated $187.5m programme to tie-back one GWA well to its Aoka Mizu oil tanker. This phase will also see the firms tie the Aoka Mizu into the West of Shetland Pipeline system for gas export, allowing first oil from an early production system on the GWA in Q4 2020. This single well tie-back is expected to provide a daily production rate of 10,000bopd and associated reserves of more than 20MMbbls.
In phase three, the firms plan to share the costs of three appraisal wells in 2020, which are expected to provide the required well stock for the first phase of a full field development. Taking FID on the first phase of a full field development is expected to unlock reserves of half a billion barrels. Assuming the businesses reach this stage, phase four comprises the front-end engineering and design necessary for full field development.
Finally, phase five will see Spirit Energy carry between $150-250m of Hurricane’s costs through the first phase of full field development, dependent on the size of 2P reserves at FID. Any development of up to 300MMboe would result in a contingent carry of $150m. For each barrel above this level, the contingent carry would increase by $0.50, up to a maximum of $250m for a development of 500MMboe or more.
Hurricane will be operator of the GWA through phases one to three of the programme, but plan for Spirit to take over operatorship for stages four and five. Robert Trice, chief executive of Hurricane, said:
‘This transaction allows us to accelerate monetisation of our GWA resource base through a work programme designed to target significant reserve growth. The initial phases include three wells, one of which is anticipated to be tied-back to the Aoka Mizu in 2020. At this point Hurricane will have two significant accumulations developed to Early Production System stage, providing long-term production data – critical to the realisation of value from fractured basement fields – as well as generating significant cash flows.
‘We are already planning for three further GWA wells and commencement of full field development FEED during 2020, allowing us to aim for development sanction in 2021. As a result of the GWA Farm-in, Lancaster EPS cash flows have been freed up to focus on appraisal of the Greater Lancaster Area. As we approach first oil on Lancaster, which remains on track for 1H 2019, we have increased financial flexibility and two parallel work programmes to drive our Rona Ridge resources towards monetisation.’
Chris Cox, chief executive of Spirit Energy, added: ‘Appraising the Lincoln discovery and exploring for new reserves in Warwick offers a tremendous opportunity for Spirit Energy to participate in the early phases of resource maturation in one of the last known world-class oil development opportunities in the UK, and we are looking forward to partnering with Hurricane Energy to progress these two West of Shetland licences.’