Borders & Southern confirms rig deal for Falklands drilling in 2011

From Cannacord

"...........................The overall structure is large and the seismic anomaly covers 26km2, so the company believes Darwin East is likely to contain significant volumes.

The well will be shortly plugged and abandoned and the rig will then move to the Stebbing location for the second well in the programme, which we expect to take 45- 60 days to drill.

The discovery of hydrocarbons to the south of the Falkland Islands is a very positive step. However, there is clearly much to do to understand the liquids content of the samples and this find, and then to extrapoloate that information to the other nearby prospects and leads. That process is likely to take several months. In the meantime, the market can only speculate on the possibility of Darwin being a commercial discovery. What is certain, is that the company will seek to expand its exploration campaign (perhaps this year, but certainly next) and will likely need to appraise the Darwin East discovery. That would imply additional financing will be required. Investors may want to wait for that, or at least greater clarity on the find.

Valuation at present is nearly impossible. However, given the potential of Darwin and the remaining portfolio, we believe a revised and increased target price of 150p/share is reasonable (previously 100p/share). That equates to around 225 mmbbls contingent liquids resources based on the current market rating for Rockhopper (US$4.5/bbl)."

http://www.proactiveinvestors.co.uk/companies/news/41796/borders-southern-finds-gas-rather-than-oil-in-falklands-well-shares-slide-41796.html?utm_source=twitterfeed&utm_medium=twitter

“Borders share price has seen a massive increase over the past week in anticipation of a positive result from this well. We feel that the market will be disappointed by the fact that Darwin is not an oil discovery,” Seymour Pierce analyst Dr Dougie Youngson said in a note to clients.

“Commercialisation of a gas asset will be very difficult with liquefied natural gas (LNG) being the only real possibility given the limited size of a domestic gas market on the Falkland Islands.

From Merchant Securities, and I agree very much with the last part ref-FOGL


Borders & Southern Petroleum (BOR.L) Oil & Gas
UNDER REVIEW

Darwin well makes gas condensate discovery

Borders & Southern announced a “significant gas condensate discovery”. Good hydrocarbon shows were encountered from 4,633m down to 4,810m. Net pay of 67.8m was encountered (above the 55m pre-drill estimate). Average porosity is 22%. The company will be able to comment on the liquid content of the reservoir after fluid samples are analysed.

The question now becomes one of assessing whether the liquid content in the gas will be sufficient for the reservoir to be commercially viable on a liquids-only basis. We are very cautious about arriving too early at a positive conclusion for the commerciality of the condensates. At present, we are reluctant to ascribe value to the gas discovery. We keep an open mind for this eventuality, especially given the excellent quality of the reservoir (high recovery rates) and the liquids rich nature of the gas.

; The presence of condensate confirms that the South Falkland basin is conducive to the generation of liquid hydrocarbons. However, due to the close proximity of the Darwin and Stebbing prospects we believe that the probability of finding gas condensate at Stebbing has increased and the probability of finding black oil has decreased.

The read across for Falkland Oil & Gas is somewhat more positive to the extent that the larger scale prospects of Falkland Oil & Gas would make a liquefied natural gas project more viable. We also note that Falkland Oil & Gas has prospects which are deeper into the area that is conducive to oil generation. .

Hydrocarbons from 4633M to 4810M = 177 meters of hydrocarbons.

MAIN reservoir was 84.5 meters thick with net pay of 67.8 meters.

So what about the other 92.5 meters........ is there going to be another RNS when wireline is complete with a secondary reservoir ? And what does that contain ?? Is there a "Sun" second reservoir ?

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...........Borders & Southern (AIM: BOR) is pleased to announce a significant gas condensate discovery.

Well 61/17-1 was drilled to a total depth of 4876m and came in very close to prognosis. As predicted, the strong AVO anomaly represented a porous sandstone reservoir containing hydrocarbons.

Whilst drilling, the well encountered good hydrocarbon shows from 4633m down to 4810m. The main reservoir interval, comprising good quality massive sandstone, was found to be 84.5m thick with net pay of 67.8m. Average porosity for this interval is 22%, with maximum values reaching 30%.

Fluid samples from the reservoir have been recovered and will be brought back to the UK for analysis. Once the lab analysis is complete and the results integrated with other data collected from the well, the Company will be able to comment on the liquid content of the reservoir.............

I have put the locations on to a map.

As you can see Darwin is mature for gas, Stebbing more so for oil. Loligo and Scotia (FOGL drills) are prime oil window.

http://www.moneyam.com/InvestorsRoom/posts.php?tid=16040&from=384

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BOR is the sideshow until the main event happens.

I cannot complain though. Buy in price averaged low 60's - long spreads closed over 110's - 75% shares sold in high 90's av yesterday and now purchased some back late yesterday at 87p.

My profits from the BOR sideshow are 5 figure ones - so I really cannot complain. Thats what stock markets are about, making money - not being nice to people or following them around with stupid posts or getting recommendations for posts.

With FOGL and BOR I have been suggesting to people to buy months ago and just be patient and wait. BOR managed a 100% rise and is still, today 50% up for those buying a few months back.

From todays price for FOGL I expect it to over double before the Loligo prospect results are known.

Lets not forget, Loligo is in "prime oil window" - it has over 15 billions barrels of oil in place (for GKP holders) potential with recoverable barrels of potentially 4.7 billion (bigger than Shaikan). And that is just P50 numbers. BOR has proven today that massively thick sandstones are possible in the South, Darwin beat pre-drill estimates for thickness. Loligo on P10 figures is bigger than all of GKP. And that is just one prospect from an inventory of over a hundred in a place where seismic has not been done over all the licenses areas.


To put it into context :

Darwin is the smallest drill.

Stebbing (next up) to be drilled by BOR is 4 times the size of Darwin.

Loligo (next) to be drilled by FOGL is 16 times the size of Darwin.

Scotia (greatly derisked again in terms of sandstone from the Darwin drill) to be drilled by FOGL is just under 4 times the size of Darwin.


Darwin - prime for gas

Stebbing - borderline, potentially more chance of oil than gas.

Loligo - prime for oil in the top 4 reservoirs, could be gas in the bottom reservoir.

Scotia - prime for oil.



So why did I buy back at 87p on BOR ?


1/ Wireline is not complete - there is more news to come. The RNS is clear that wireline has not been completed yet on this Darwin East well.

2/ There is 92.5 meters of hydrocarbon shows that have not been accounted for yet - the only reference so far is to a "main" reservoir thickness. The lack of info maybe due to wireline has not been complete as per item 1.

3/ Oil shows potential below 4776 meters in a separate structure. I am very interested in what they have found from 4776m to 4810m. Darwin was said to have potential for stacked reservoirs.

4/ Fluid samples from "main" reservoir have been sent to the UK for testing - its only after these results will there be given a volumetric update for Darwin - to let everyone know just how much is in there - and do they think that Darwin East is linked to the Darwin West (presently not drilled) structure - and how much could be in Darwin West based on Darwin East results.

5/ Stebbing has the same source rock - so we are assured there should be hydrocarbons there. However Stebbing is 1000 metres shallower and is just in the oil mature window where as Darwin is in the gas mature window. Given the same source rock but Stebbing being shallower and in the oil window - well - at the very worst Stebbing will perhaps be a condensate discovery of 4 times the size of Darwin, whatever that ends up to be - at best it will be circa 25 API oil (target for Stebbing)

6/ BOR had predicted pre-drill that in the event of oil - Darwin would be 32API oil and Stebbing would be 25API oil - sharing the same source rock.


Even without more news when wireline is complete and waiting for news from the fluid samples that does not come - I suspect 87p will also be cheap when the Stebbing drill results near in about 7 weeks time and if not so be it, I now cannot lose more on BOR than what I have already taken in profits, and that is the name of the game.

With regards to LNG.

Chile is desperate for more LNG and is actively building more and more terminals as it has had supply problems with Argentina for a long time.

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........Mejillones LNG Terminal, Chile

Key Data

Natural gas is fast becoming the preferred fuel of the future. With a supposed cleaner reputation than coal or oil as fuel for domestic use and power generation, countries around the world are fast constructing LNG regasification terminals so that they have the facilities to provide for their energy needs over the next 25 to 50 years.

Chile is no exception and with its previous reliance on Argentinean gas is now equipping itself to receive gas imports from further afield. Chile has other LNG projects under construction such as Quintero Bay and now there is also a project in Mejillones, Antofagasta (northern Chile). Northern Chile is still under severe gas supply restrictions from Argentina. Mejillones is also the area chosen for a new super port that will be completed by 2030..........

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Here is a presentation of where Chile is today with gas/LNG.

http://www.gnlm.cl/documentos/GNLM_Platts_10th_Feb_2011.pdf


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Even a few days ago it was announced yet another LNG regasification plant would be built in Chile, and as you can see, they are buying gas from Europe and US to ship to Chile - now would an LNG plant on the Falklands be much more efficient than shipping LNG from Europe and the Middle East all the way to South America ??

http://www.bnamericas.com/story.xsql?id_sector=9&id_noticia=583687&Tx_idioma=I&source=


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Globally it was recently discussed that from 2016 there will be a big shortage in LNG worldwide, becoming a critical shortage from 2020 unless a lot more LNG projects get started and get into production.

If I were BOR now, and condensate levels are high at Darwin, I would start to discuss with the Falklands Government about adjusting the tax and royalty levels to make building an LNG plant onshore Falklands a very viable project. For the FIG its better to have something as opposed to nothing - and with only 3000 population and billions of dollars of potential oil and gas revenues coming in - I am sure they can be very generous. Unlike the UK where a massive welfare state hanging around the neck of the government, they must try to increase tax all the time to pay for freebies given out all the time.

Scotsman reporting 2 billion pound gas discovery, samples to be tested in Aberdeen.

http://www.scotsman.com/the-scotsman/international/significant-gas-find-discovered-near-falkland-islands-1-2251058

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As some people seem to struggle to understand what gas condensate is, I have put the following together quickly, apologies for errors in advance - this is just a simple way of giving an idea of what "gas condensate" is.


The most interesting question is what is the bngl/mmscf for the gas condensate ?

The company has said, in effect, this is not a "wet gas" find, they have said this is a "gas condensate" discovery.


"Wet gas" is as it says, its gas with fluids in it. Wet gas can be anything from tea cup of Natural Gas Liquids per MMSCF to around 10 barrels of NGL/MMSCF.

BNGL/MMSCF is Barrels of Natural Gas Liquids / Million SCF of gas.


Now, gas condensate discoveries, as opposed to wet gas discoveries, tend to have a value for bngl/mmscf from 10 barrels of NGL/MMSCF up to around 500 barrels of NGL per MMSCF at which point above 500 its into the realms of "volatile oil" before becoming "black liquid oil" at around 1000 BNGL/MMSCF equivalent values.

So

Up to 10 BNGL/MMSCF is "wet gas"
>10 BNGL/MMSCF up to 500 BNGL/MMSCF is "gas condensate".
>500 BGNL/MMSCF up to 1000 BNGL/MMSCF is "volatile oil".
>1000 BNGL/MMSCF equivalent is liquid black oil


To put that into perspective - if lets say the Darwin East + Darwin West structure is joined and has 5 Tcf of gas equivalent value and that "Gas Condensate" has a BNGL/MMSCF value of 100.

You would get :

5,000,000 MMSCF x 100 BNGL = 500 million barrels of condensate.

If its 2 Tcf and 200 BNGL = 400 million barrels of condensate.

If its 2 Tcf and 20 BNGL = 40 million barrels of condensate.


This is why at the moment its very hard to value this "gas condensate" discovery, but its certainly not a "wet gas" discovery as per RNS is clear, this is into the realms of gas condensate.

We await the fluid samples and therefore a value for the BNGL/MMSCF of the fluid recovered from Darwin.

If they recovered fluid from the reservoir it is possible this is actually in the borderline between gas condensate and volatile oil - if the BNGL/MMSCF were to be 500 then it would be fluid like, on the borderline state between condensate and volatile oil.

Stebbing is green area so more likely oil, as are Loligo and Scotia for FOGL - BUT the area where Darwin was drilled is distinctly in the small red area there - gas.






As you can see Darwin is prime for gas (red area). Stebbing is more likely to be oil (green area)

Loligo and Scotia targets for FOGL are in the oil window (green) - much more likely to be oil



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Here is all the explo blocks.



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Goldman Sachs Research

Published 25 Apr 2012 5:51:54 am WEST

Borders & Southern (BSTH.L): Updating for Darwin East discovery, maintain Neutral rating
Christophor Jost, Ruth Brooker, Peter Hackworth, CFA -

We update our estimates for Borders & Southern for the Darwin East discovery. We increase our price target from 85p to 157p and maintain our Neutral rating on the stock.

Great news that BOR got their placing away with ease it seems, and at a good price.

http://www.investegate.co.uk/Article.aspx?id=201204260700240965C

There are a number of things to consider here. Firstly that the South Falklands is now going to come into everyones radar as a potential "final massive frontier".

Before the Toroa drill (a 3.7% CoS well) it was not believed by many that thick high quality sandstones were present in the South, as fabled by BOR and FOGL and many geo's. It seemed to good to be true that huge thick sandstones were down there and so there were many billion and multi-billion recoverable size prospects there.

Well, the huge thick sandstones got proven beyond a doubt with Darwin. Tick that box.

The bigger point of the skeptics was that there was no proven working hydrocarbon system there in the south - Toroa a 3.7% CoS well drilled in what would be the edge swampy area helped their case - ignoring the small CoS this well had and it was the only one possible to drill with the shallow water Ocean Guardian rig back then.

Well, the proven hydrocarbon system was proven beyond a doubt with Darwin. Tick that box.

With proven huge sandstone reservoirs with good porosity and with a proven working hydrocarbon system there its easy to see why BOR got the placing done with ease, and its easy to see going forward that those that once dismissed it as all fantasy are now going to appreciate that the South Falklands is potentially an area with many "world class" size prospects there.


The downside of the placing, for some, will be that it highlights the lack of interest in the North Falklands Basin. ARG and DES have been unable to raise funds and yet BOR do so with ease. FOGL has raised money in 2012, but DES and ARG have not seen the interest.

A major thing to consider here is, taking for example Liz and Sea Lion - what you see in the North Falklands is lots of thin stacked sands. If you look into the net pay figure of Sea Lion you will see lots of 1m, 3m, 6m, 2m, 4m, 1m sands that together make the net pay figure, but in reality are lots and lots of thin sands. The problem with that is that it makes development much more expensive, firstly as you have to drill a lot more wells to capture all the thin sands in their best places - so wells to be drilled goes upwards - and secondly it make EOR (Enhanced Oil Recovery) much more difficult - if you can imagine trying to inject each of these thin sands with water and trying not to make them leak into each other and all over the place. Compare that to the South where you have hugely thick sandstone - which makes production drilling very simple and as well as EOR.

RKH should secure their farm out, but I think DES and ARG will have to sit back and just wait until at some time their potential might become attractive - but it could be a long time away - or they have to offer it and cut price levels to get someone else interested.

The world will soon wake up and smell the coffee with regards to the South Falklands Basin potential - and expect BOR and FOGL to become very hot sought after things.

Enjoy :) !!

Merchant Securities comment :

.......Borders & Southern has placed 55.3 million new ordinary shares at £0.84. The shares represent circa 11.4% of the post-money shares outstanding.  The public equity market is still not aware if the gas condensate discovered at Darwin is lean (uncommercial) or condensate rich (extremely valuable).

We believe that the difficulty in evaluating the condensate content of the reservoir fluid is in obtaining a high quality sample downhole.

Once the sample is bottled, determining the liquid content requires nothing more than the release of the gas at atmospheric conditions (natural gasoline for example does not evaporate at atmospheric conditions).

We do not know the content of the natural gasoline in the fluid recovered, but we believe that Borders & Southern should have performed a simple preliminary assessment by now......

For those looking at the economics, the minimum size field for dry gas is 5 Tcf, thats a dry gas target for BOR for Darwin (E+W). Of course, if its very rich in condensates that 5 Tcf will come downwards.

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Numis: Borders & Southern (Buy, TP: 175p)

Opening up the South Falkland Basin

In our view, Borders and Southern's Darwin exploration well has proven a working hydrocarbon system in the South Falkland Basin, confirming the existence of an extensive marine source previously known to exist to the East and West of the company's acreage. The Darwin well appears to have hit high quality Lower Cretaceous reservoir, in-line with prognosis, with a thick, homogeneous gas condensate bearing interval.

Clearly, understanding the liquid content of the discovery will be key in determining its value. Based on the aerial extent, net pay and reservoir quality of the Darwin discovery we believe that a commercial stand-alone discovery remains a possibility.
We raise our target price from 86p/share to 175p/share, adjusting our valuation for the possibility of a commercial rich gas discovery at Darwin and a partially de-risked EMV for Stebbing.

• Opening up the South Falkland Basin: In our view, the Darwin well result helps de-risk the South Falkland Basin, confirming the existence of source rock, thick high quality sands and robust play types. Next steps in the SFB exploration programme include two important catalysts: 1) Determination of liquid content at Darwin (expected in approximately five weeks) 2) Testing the fold belt play type. Stebbing is the next prospect in the drilling schedule (expected to spud within one week) - a prospect for which the company estimates a P50 recoverable resource of 1280mmboe.

• Darwin - a potential stand-alone development: In our view, it would be wrong to rule out Darwin as a commercial stand-alone development. Detail released on aerial extent and net pay suggest a material discovery and we estimate recoverable gas at 2.3 to 3.7tcf. In our view, if the gas is sufficiently rich, a >200mmbbl condensate development remains a possibility and could be commercialised. Given the location of Darwin, we believe the most likely stand-alone development concept would involve condensate recovery with 100% of lean gas recycled back in to the reservoir - a development concept analogous to the Bayu-Undan phase I field development in the Timor Sea.

• Valuation: We have adjusted our NAV to include a rich gas discovery for Darwin risked at 50% commercial COS, and included an EMV valuation for Stebbing which now assumes a 30% commercial COS (10% oil case, 10% rich gas, 10% dry gas case). Please see note for full details. Our 175p/share target price stands at a 50% discount to NAV (350p/share) in order to pre-empt the dilutive effect of future share placings and farm-downs.

http://en.mercopress.com/2012/05/02/with-oil-development-in-mind-falklands-trade-delegation-visits-aberdeen-and-shetlands

Definitely Stebbing next it seems. FOGL paperwork still in process, but all in hand.


http://www.falklandnews.com/public/story.cfm?get=6231&source=3


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Rig is now on its way to Stebbing 3 location, will ETA later today, so spud of Stebbing should be over the weekend.


And for anyone interested :

Stebbing is shallower water than Darwin (around 1.5km against 2km for Darwin)

Vertical depth of the well is about 1km less than Darwin - its a shallower drill, the target is higher up.

Drilling days allocated is TD estimated at 34 and the rig is estimated to be on site for 45 days from today.

Target is 25 API oil. Being shallower and in the mature oil window one could suggest Stebbing is more likely to be oil than gas.

The Leiv Eiriksson rig is now en route to Stebbing.
At current speed it should reach the proposed 61/25-1 well location in 2 hours from now.

Gramacho's BOR AGM notes below :


.......A lively AGM and a very good presentation from BOR on Friday.

Summary/Key Points
• If Darwin alone contains insufficient liquids on which to base a development several other prospects are within subsea tieback distance offering IMO the opportunity to aggregate further gas condensate discoveries into one development.

• Reservoir continuity on seismic and good trap definition suggests Darwin will require few appraisal wells. IMO rock properties suggest well deliverability will be extremely high and gas condensate well spacing is typically much larger than that of oil fields this will also assist commerciality.

• BOR has the MDT pressure gradient across the main Darwin sand and will have a sense as to whether Darwin is a relatively lean gas condensate with modest liquids yield or a relatively rich gas condensate with a high liquids yield. However it will not be drawn into estimating the likely range because there is significant uncertainty in any such estimate and prefers to wait until definitive numbers are obtained from the lab tests.

• Further work is required to understand the source rock and migration story. Based on the information obtained from the well to date BOR retains the belief that the source rock immediately underneath Darwin is in the oil window despite gas condensate having been found. It believes the acreage in the vicinity of Darwin may yet contain oil fields.

• The well did not encounter a gas water contact and therefore we still don’t know for sure that Darwin doesn’t contain an oil leg. Apparently there is room between the flat spot depth and the highest known water in a lower sand to house an oil column. However would there be sufficient contrast between a gas condensate and oil leg to generate the observed flat spot?

• Stebbing is being drilled as a tight hole and it was extremely difficult to get a read on what the well has found to date. I could speculate but it would be without much technical justification so I am not comfortable doing so.

• Management is extremely confident they will be able to conduct a significant appraisal and exploration program once further 3D seismic has been obtained and the existing 3D seismic has been reprocessed to incorporate the well results.

DISCUSSION
1. BORs Communication Strategy and “that” Condensate Yield
BOR’s communication strategy remains unchanged. fadilz’s note of 16:14 on Friday 29th sums it up well. Hence once again you had to be present to see the seismic and well logs and several slides have been omitted from the web version of the presentation. It was nevertheless very pleasing to see Howard and his team open up with more information about the high potential of this acreage.

Clearly BOR are guarding their interpretation of this fairway to secure a competitive advantage in any future application for open acreage nearby. The company demonstrating the best understanding of the play and how it works in the open acreage will be the front runner to obtain the licence. One would also hope that the F.I. government would recognise BOR for having opened up the play (and its shareholders for taking the investment risk) and reward it with some or all of the remaining acreage into which the play extends.

The concern for PIs is, given that Darwin is a gas condensate discovery, BOR may not have done enough by way of release of information to retain the market’s interest and thereby support the sp, particularly in these difficult times. Hence will funds be raised for additional drilling at the optimal sp? Certainly Friday’s presentation goes some way towards revealing some of the potential but until the Darwin condensate yield and Stebbing results are released we don’t know how critical selling the potential will be.

BOR pointed out that having 100% W.I gives them other options such as bringing in a partner. Harry Dobson pointed out he and his team have a long track record over many years of securing funding for businesses and certainly the track record to date with BOR is impeccable. He pointed out that the IIs have seen more information via confidentiality agreements and the IIs have backed the company to date. Perhaps the private investors just feel the pressure more as it is our own money on the table. Harry mentioned the board’s substantial holding and he believed they had as much if not more of an interest in making this work than most of the shareholders in attendance.

There was an impassioned plea by one shareholder, an ex CEO or Chairman of a public company, for BOR to indicate the likely range of condensate yields at Darwin to go along with the range GIP estimates. This received a lot of support in the room and the temperature rose a few degrees!

The GIIP estimate is 2.44 TCF +18% or -23% which is a rather tight range considering only one well has been drilled. (Definitely a function of the great trap definition afforded by the seismic and the flat spot.) The possible range in condensate yield is multiple times that of the GIIP range so it is not surprising that BOR is unwilling to quote a probable range at present.


Without any well specific information the range of condensate yields varies by a factor of 10+, i.e. 20 to 200+ bbl/MMCF (equal to 20 to 200+MMbbl/TCF, could even be as high as 300+) as has been discussed here previously.

As mentioned in the summary of key points I believe it is possible to get a sense of how rich or lean the condensate is from the MDT pressure gradient but it would not be definitive and would leave room for significant error. It wasn’t clear that BOR had asked specialists to estimate the range using the pressure gradient information. What they did say was that the possibility of a gas condensate reservoir had not been on their minds before drilling (gas or oil being the more obvious outcomes they had focused on).

fadilz commented “a chap who has consulted for both BOR and now FOGL was willing in conversation to put it at 50m to 150m barrels per TCF, but most likely around 80-100...” Whilst the 50 bbl/MM is easy to rationalise the case for 80-100 ML and 150 High is not clear. It would have been interesting to share in that conversation. Certainly other elements of FOGLs understanding of what BOR had encountered have proven incorrect so IMO we just have to wait for the lab results.

It is worth noting that BOR consider they will struggle to commercialise Darwin if the yield is 50 bbl/MM but may have a commercial project “if it is in the hundreds”. Whether this meant 100+ or 200+ was not clear. In any event BOR has not yet done the necessary work yet to show the value range for a specific CGR.

The complete work scope to analyse the condensate samples is 10 weeks but Howard did promise to release yield information prior to then if it becomes available. BOR took a comprehensive set of samples from four depths so they have good coverage and will be able to detect any variation of yield with depth.

2. Darwin Results
Slide 9 shows the reservoir properties which are very favourable (see later comments on well spacing and deliverability). It was particularly interesting to learn that the well did not encounter reservoir at the depth of the flat spot. BOR did not select a drilling location where it was present. There is a thick shale section separating the main reservoir package from an underlying water bearing sand interval. As I understand it the flat spot is located elsewhere on the structure within the depth interval encompassed by this shale section.

Hence whilst the flat spot is probably a gas condensate-water level, that is not yet proven and there is room between the highest known water in the lower sand and the flat spot depth to house an oil column down dip of the well. BOR will have MDT pressure points in the main gas sand and in the underlying sand and can determine whether the intersection of the two gradients agrees with the flat spot depth. If it does then this would suggest there is a gas condensate – water contact down dip of the discovery well. However that technique is only valid if the lower sand is in pressure communication with the main gas bearing sand and BOR did not confirm that the two sands are in pressure communication. (In fact in the post presentation chat they pointed out the limitations of the technique if they are not. Bit of a tease there lol!). We have seen examples in the Sea Lion wells of sands on different pressure profiles and this may be another example.

The continued potential for an oil leg is not an outcome that BOR pushed at the AGM although of course this was considered to be very possible prior to the drill. A gas condensate contains a broader spectrum of components found in oil than would a gas cap. Would there still be sufficient contrast to generate a flat spot at the contact between gas condensate and oil? It is still in the gas phase in the reservoir so perhaps it would.

The presence of an additional Lwr Cretaceous sand will be of interest to BOR because it may be present elsewhere in conjunction with a valid trap. It wasn’t clear whether this is a sand that is being targeted in the other prospects such as Sulivan and Stokes. The well TD’d in sand and BOR believe there are additional sands deeper in Darwin. BOR did not offer an explanation why this sand is not charged. Is there sand to sand contact across the fault at this level or is it not on the migration path? As usual at this stage lots of questions yet to be answered.

Apart from the condensate yield one of the more interesting outcomes of the lab work will be the reservoir fluid viscosity. Hopefully Howard will publish it because it would, along with the excellent permeability and apparent reservoir continuity from seismic, support the case for very high well deliverabilities. We could be looking at a well spacing of 2.5km2 and only 8-10 producers with say 4 gas recycle wells which would assist in lowering development drilling costs.

Drilling costs were a concern going into the meeting given how long Darwin took to drill. Darwin cost about $95MM. The rig equipment problems were responsible for about 1/3 of the $40MM overrun which puts the well cost at $82MM without this one off event. (The rig was on zero rate whilst the problem continued so the $13MM represents the remainder of the spread costs.) The majority of the overrun appears to be due to drilling issues including hole instability due to tectonic stress. An extra string of casing was run at one stage to stabilise the hole. BOR appear very confident this can be overcome by change of mud type. In addition a multi well campaign would see fixed costs shared over more wells so, together with the benefit of the usual learning curve, drilling costs should reduce as more wells are drilled. Apart from the equipment problems the rig has performed extremely well with only about 2 days lost due to weather.


3. The Lower Cretaceous Play Fairway
Prospects
This acreage is target rich. BOR showed us 4 further prospects (Covington, Chaffers, Burgess and Bute) plus what appeared to be an unnamed lead/prospect and 2 deeper prospects Sulivan and Stokes. BOR showed a blob map of the prospect outlines to scale. IMO you could draw a 15km radius from a central point that would encompass most of the prospective resources shown. Hence, IF this turns out to be a gas condensate play, any further successes have the potential to be aggregated into one development as they are all within subsea tieback distance.

This is important because it is not yet clear whether Darwin alone contains sufficient liquids on which to base a development. If it doesn’t a single central processing facility could handle condensate from multiple discoveries.

Slide 18 of the web presentation is striking in that all the prospects are much larger than Darwin emphasising again how BOR stuck to their principle of drilling the highest COS prospect first even though that could and indeed has lead to questions about commerciality. The key to this strategy will be how Darwin success and the ability to reprocess the 3D and calibrate the AVO response will affect the COS of the rest of the portfolio.

Covington is an amplitude supported prospect which is particularly interesting as it appears to be up dip from Darwin and could have received oil displaced from Darwin by a later gas condensate charge. It has an area almost 50% larger than Darwin so there is potential for a larger accumulation. However it is currently defined on the 2D and needs maturing with new 3D before BOR will drill it. I expect this to have a very high pre drill COS. Chaffers has some data quality issues and requires 3D reprocessing.

Source Rock Maturity
Howard said that the thermal gradient is very close to what was predicted. IMO this is good news because had temperatures been much higher than predicted this would have invalidated the source rock maturity map in the CPR. This was drawn based on the Aptian (Lwr Cretaceous) source rock top oil window being at 3000m below the seabed and the top gas window at 4150m below seabed. A higher temp gradient would have placed much more of the source rock in the gas window than predicted.

61/17-1 TD was 4876m which would be about 2838m below mudline. Hence any potential source rocks encountered in the well are expected to be immature or in the early oil window and therefore not responsible for the gas condensate. Howard said they don’t believe a source rock was encountered but final confirmation will come from geochemical analysis of the cuttings.

BOR thinks it knows where the Aptian source rock is deeper in the section below Darwin. We did not ask if BOR are planning to verify the pick by finding the source rock. It seems fairly fundamental to know the source rock depth to confirm another part of the source rock story. The question of drilling deeper came up in the context of there being more sands deeper in the Lower Cretaceous that could be hydrocarbon bearing. Howard indicated they may well drill deeper in a later well such as Covington.

The Aptian is one of the youngest age periods of the Lower Cretaceous so it is not necessary to drill through the entire LC to find the source and hence it would seem there would not be too much of a cost penalty to drill the source. The Stebbing lower target is in the Upper Cretaceous so it doesn’t offer the opportunity to confirm the pick.

There are three other areas of uncertainty regarding the source rock:
a) The type of source rock i.e. whether it is oil prone, gas prone or mixed. The source rock is believed to be oil prone based on DSDP wells but these are hundreds of miles from Darwin.
b) The thermal history i.e. in the past has the source rock been subject to higher temperatures than associated with the present day burial?
c) Is there a migration path that links Darwin with a deeper part of the basin where the source is in the gas window?

If these areas of uncertainty can be addressed then BOR will have a good handle on the source rock and the distribution of oil versus gas condensate. Drilling the source rock would answer a) and b) although I suspect b) can be answered by analysing samples from the well. c) may be something that BOR looks at in the post well review.


4. Stebbing and the Tertiary Fold Belt Play
It was so hard to get a read on Stebbing due to the tight hole status. BOR advised in the spud RNS that the drilling time estimate was subject to “geological challenges” that might cause variation from the estimate. I suspect this was a recognition that the hole problems encountered in Darwin could again be present in Stebbing. The wells are less than 50 km apart and Stebbing will encounter most of the formations encountered by Darwin. In addition Stebbing will encounter rocks that have been subject to tectonic stresses associated with folding. It is unlikely BOR would have been in a position to switch to a different mud system (e.g. an oil based mud system) if the cuttings handling equipment was not on board. Hence IMO the delays seen on Stebbing are to be expected.

Although Howard would not take questions about the status of Stebbing he did confirm the content of an OGJ article from 2009 which suggested there is a chain of five anticlines with gas hydrates located above the crests sounded correct. In other words there is a lot of upside should Stebbing be a discovery.

5. Forward Program
BOR are planning on running a new 3D survey in the FI summer at the end of the year. This should firm up Covington and provide other exploration targets. My sense is that a rig can be contracted on the basis of the results from reprocessing of the existing 3D survey provided there is sufficient encouragement from the Darwin liquids yield and Stebbing.

BOR were indicating that a firm program of five wells is one possibility and IMO the area covered by the existing 3D should support this length of program. The new survey might enable any optional slots to be filled if the results are available in time.

CONCLUSIONS AND OTHER OBSERVATIONS
• BOR has just scratched the surface in terms of revealing the potential of this acreage. There is a healthy prospect portfolio that should expand when the 3D has been reprocessed and additional 3D is run and interpreted.

• The Stebbing results will have a bearing on the importance placed on the Darwin liquids yield. If Stebbing were to find oil then the focus would be on Stebbing and less so on Darwin. If Stebbing were to find a gas condensate then the focus will be on sample results from both wells.

• The key to the share price will be demonstrating it can find enough liquids to underpin a commercial project. RKH was able to prove commerciality over the course of several wells in one drilling campaign which helped underpin the share price. BOR has only two wells in which to achieve the comfort of commerciality to underpin the share price. That is asking a lot. Should BOR not achieve that then sp performance will be influenced by how the longer term potential of the acreage is viewed versus a sub commercial discovery or one that can only be commercialised in the longer term.

• It was evident from Harry Dobson’s comments that this has been an extremely stressful campaign as a result of the rig problems. It was good to hear him pay tribute to the efforts of the team who have overcome the problems and delivered a discovery despite all the issues.



Finished at last!

Regards and GLA including the BOR management team,

Gramacho

PS: Apologies if I had to cut short one or two conversations at the AGM in order to get some time with the BOR folk in the post presentation conversations. Since BOR don’t do the PI presentation circuit we only get this opportunity once a year!........