With Block Energy (LSE:BLOE) gearing up for a major drilling programme aimed at realising the full potential of its West Rustavi field following strong test flow results earlier this year, it is all to play for at the business. Here, Block’s chief executive Paul Haywood updates us on the company’s preparations for workover operations at Well 38Z as well as its plans to generate future shareholder value.
Share price explosion
West Rustavi is based near Georgia’s capital city Tbilisi and contains an estimated gross contingent resource of 38MMbbls oil that Block hopes to mature to 2P reserves. It also holds legacy gas discoveries supporting a total contingent resource of 608bcf. Meanwhile, from this prospective resource, the field boasts impressive netbacks of just $36/bbl at $65bbl/ Brent and $3.40/mcf gas.
In July, Block announced that it had increased its working interest in West Rustavi from 71.5pc to 100pc, reflecting its belief in the field’s potential. The firm’s move came after announcing that its first well on the ground, 16aZ, had delivered substantially higher flow rates than originally forecast.
Unsurprisingly, the news led Block’s shares to soar, and in the weeks that followed, the business moved quickly to accommodate its higher-than-expected flow rates. Firstly, the company entered an oil storage leasing agreement with the state-backed Georgian Oil and Gas Corporation. The deal secured access to up to 90,000bbls of capacity. Then, it secured an agreement with its Georgian partners for the hire of the drilling equipment it needs to undertake its drilling programme. Finally, the business has also confirmed that it would sell associated gas production from the well to Bago, one of the largest private gas suppliers and purchasers in Georgia.
At the end of July, Block announced that production had resumed at 16aZ, producing at a lower average rate than test rates. However, the firm added that it was adopting a ‘prudent approach’ to the field. Indeed, it said it would gradually increase production to establish a sustainable flow rate as the well cleaned up.
Building on success
Following its success at Well 16aZ, Block is now embarking on a wider drilling programme at West Rustavi. Its efforts are supported by a £12m placing undertaken in May at 11p a share – a 15.7pc discount to market prices at the time.
Within this work, Block is acquiring 3D seismic to find optimal locations for horizontal wells, appraising two gas discoveries, and drilling one new well to target the field’s 608bcf gross contingent 2C gas resource. Critically, the company plans to drill up to four horizontal sidetracks back-to-back throughout 2019 and 2020 to scale up West Rustavi’s production and fund future capital programmes.
Haywood told us that Block is designing completion techniques for each of the wells in its workover campaign tailored to their specific requirements. The organisation hopes this will avoid or at least minimise any formation damage suffered in the past through the use of legacy techniques. Haywood highlighted the firm’s recent use of a similar method at its 100pc-owned Norio field in Georgia, where it increased production rates through the use of a specialist micro-drilling tool:
‘[The tool] had not been employed in the Former Soviet Union before, but has proved well suited to the particular challenges presented by Georgia’s formations,’ he said. ‘We will also acquire a 3D seismic survey to pinpoint the location and orientation of the field’s natural fracture systems, which are so vital for new well placement and well productivity.’
Haywood also said the company intends to upgrade its estimates of West Rustavi’s potential once drilling has completed.
‘Our current Competent Person’s Report (CPR) reports that the field has an estimated 0.9 MMbbls 2P oil reserves, 38 MMbbls of gross unrisked 2C contingent resources of oil in the Middle, Upper and Lower Eocene, and 608 BCF of legacy gross unrisked 2C contingent resources of gas in the Eocene and Cretaceous,’ he said. ‘We anticipate upgrading the CPR next year in light of progress made with our drilling programme.’
With West Rustavi fully primed to handle additional capacity in the wake of 16aZ’s success, Block announced in July that it had secured the necessary workover equipment to begin its planned sidetracks. The first target in the organisation’s follow-up drilling campaign will be Well 38Z, which is a neighbour and analogue to well 16aZ. The well will target the same Middle Eocene formation as 16aZ and its development will be informed by information gathered by this year’s successful drilling, testing, and completion at West Rustavi.
Earlier this month, Block announced that it had started to prepare the field for the drilling of Well 38Z. Haywood told us that these preparations are now ‘well advanced’. As well as securing the drilling equipment needed from its Georgian partners, Haywood said Block has ordered materials, upgraded the well site and mobilised an A50 service rig to the well site for workover operations. Once these preparations are complete, the business will move a ZJ40 rig to sidetrack the well in Q3.
‘The advanced preparations at 38Z and the resumption of production at 16aZ mark important progress in our £12 million multi-well back-to-back drilling programme designed to realise the promise of our flagship West Rustavi field, in which we now have a 100% working interest,’ said Haywood.’
Alongside its busy work programme at West Rustavi, Haywood tells us that Block will continue to produce oil at Norio as well as its Satskhenisi licence, where it holds a 90pc licence. Haywood also said the company plans to make further progress in its aim to secure additional licences in Georgia and the broader region over the medium term.
‘We also remain open to opportunities beyond our existing assets: our £12m fundraise includes an allowance to investigate and evaluate additional projects. But we remain very much focused on realising the full value of our existing assets,’ he said.
Block may struggle to replicate the impressive reaction to Well 16aZ’s success overnight. However, with several sidetracks on the way, profitable production in the bag, and ambitious plans for the future, a few strong updates could see its share price creep back towards April’s high over coming months.