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Lochard Energy Group announce operational update and offer by The Parkmead Group

Friday, June 7, 2013
  • The Field Development Plan ("FDP") was approved by the Department of Energy & Climate Change ("DECC") in September 2010.
  • On average, between 80% and 85% of production comes from two wells, P3 and P4.
  • A positive aspect of production until recently had been production of water at only trace levels (less than one per cent.) which is encouraging for indicating potential reserves recovery.

Further to the announcement on 23 May 2013 that the boards of Lochard and Parkmead had reached agreement on the terms of a recommended all-share offer by Parkmead for Lochard to be effected by means of a Court-sanctioned scheme of arrangement under Part 26 of the Companies Act 2006 (the "Scheme") (the "Offer Announcement") and the announcement by the Company on 31 May 2013 (the "31 May Announcement"), Lochard shareholders should be aware of the following information in relation to the Athena field and Lochard's exploration licences, and their significance to the Company.

Any decision in relation to the offer should be made solely on the basis of the information that will be set out in the circular to Lochard shareholders (the "Scheme Circular") containing the terms and conditions of the offer from Parkmead. It is expected that the Scheme Circular will be posted to Lochard shareholders and, for information purposes only, to Lochard share incentive scheme participants in mid-June 2013.

Athena

The Field Development Plan ("FDP") was approved by the Department of Energy & Climate Change ("DECC") in September 2010. Original recoverable mid case reserves were estimated at approximately 15 million barrels ("mmbbl") (gross), based on four production wells and one water injector, with upside potential of 31 mmbbl (gross) in total based on six production wells (i.e. if two additional production wells are drilled).

Sproule International Limited ("Sproule") undertook an independent reserves assessment for Lochard in 2012 and estimated original recoverable Proved Developed Producing reserves at 18 mmbbl (gross) and Proved plus Probable reserves at 26 mmbbl (gross). Approximately 3.6 mmbbl (gross) of oil has been produced as at 31 May 2013. It is the opinion of the Lochard Directors (the "Directors") that extra investment in wells would be required to achieve the reserves consistent with the Sproule Proved plus Probable estimate.

The field was developed with four production wells and one water injector with the expectation that the economic viability of adding two extra production wells could be assessed once reservoir performance from the first four wells was understood. The FDP projected initial production to be 22,000 barrels of oil per day ("bopd") (gross) from the four wells producing at the well design rates; these rates depended on the performance of Electrical Submersible Pumps ("ESPs"). The well completions incorporated two such ESPs in each well with the intention that together, they would provide uninterrupted well performance for approximately five years. ESPs are typically expected to last for a period of two to three years. As the field utilises a Floating Production Storage and Offloading ("FPSO") vessel, workovers to replace these ESPs would require the intervention of a drilling rig and the timing of any workover would therefore depend on rig availability.

The Athena field began producing around the end of May 2012 at an unexpectedly low level varying between 10,000 and 12,000 bopd (gross). Only two wells were producing at expected levels and one well had only one pump available. Despite that poor start, production had stabilised until recently at between 10,000 and 11,000 bopd (gross). Fears of early water breakthrough have been unfounded removing the probability of very low reserves recovery, but it is still too soon to predict production levels both in the short term and medium term (that is, over the next two years).

Like all oil and gas fields, the production from Athena will decline over time and, in their report to Lochard, Sproule have forecast a production decline rate of approximately 20% per annum from 2013 onwards under the Proved Developed Producing reserves case. Additionally, Sproule have forecast that it would not be economically viable to continue to produce from the Athena field at an estimated daily production rate between 3,500 and 4,000 bopd (gross). At this point, the costs of production would exceed the revenue generated and the field would therefore be decommissioned.

Workover activity and the drilling of additional wells could slow or reverse this projected decline, lead to increased recovery and extend the economic life of the field. However, there are no current plans or capital budgeted for workover or drilling of additional wells and the Directors believe that such a decision will not be taken until a longer production history at Athena has been established.

Current Athena production issues

As noted above, although initial production was below expectations, Athena has produced relatively consistently to date but there remain uncertainties, a number of which have been highlighted over the past month:

Wells

On average, between 80% and 85% of production comes from two wells, P3 and P4. Any loss of either of these wells would lead to a significant loss of revenue. The field co-venturers are making contingency arrangements to be able to replace ESPs in either of these two strongly producing wells in the event of any failure. The timing and cost implications of such an operation are unknown at present, but would be material to Lochard. The Directors do not believe that such expenditure is likely to occur in the near future but a cash reserve needs to be built up for Lochard to be able to meet its share of any contingent costs. In this respect, it is noted that well P4 has now been switched to its second ESP, after the failure of the first ESP which occurred earlier than expected. As noted above, ESPs are typically expected to last for a period of two to three years, although two of the ESPs used in the first phase of the Athena field have failed within the first year.

There are currently no plans to undertake recompletion work in the event that the two underperforming wells, P1 and P2, fail. Well P2 (which had been producing at approximately 600 bopd) has recently failed and requires additional spend on remedial works, although it is not expected to require recompletion. Lochard's share of funding the remedial works is currently estimated at approximately £200,000, which the Company expects to fund from its payment for recent oil sales due to be received in mid-June.

Neither the switch to the second ESP for well P4 nor the failure of well P2 are, individually, considered material in the normal course of business for Lochard. However, these events highlight the risks of being a single asset company should equipment fail. Current production from Athena, from the three producing wells, is approximately 9,300 - 9,600 bopd.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser. More

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