EnCore announced its interim results for the six months ended December 31, 2010.
Chief Executive's Review
The six months to December 31, 2010 and the subsequent period to date have been dominated by our two key assets; Catcher and Cladhan. During the six months under review, we drilled three side-track appraisal wells (one at Catcher SW and two on the Cladhan discovery), and commenced one exploration well which resulted in an oil discovery post period end at Varadero. Activity since the period end includes one completed appraisal well at Catcher North, the spud of an exploration well at Burgman and the spud of an appraisal well at Cladhan.
UKCS Block 28/9 - Catcher / Varadero / Burgman; EnCore equity: 15 percent., Operator
The financial period began with a successful side-track appraisal to the South West of Catcher (Well 28/9-1Y) which was described in our 2010 Annual Report.
In late September 2010, a contract was signed for the Transocean Galaxy II heavy duty jack-up rig to return to the Catcher area to drill up to four exploration and appraisal wells. After an extended period of waiting on weather in Dundee harbour, drilling commenced in mid-December 2010 with the spud of the Varadero exploration well. The Varadero well 28/9-2 was drilled to a total depth of 5,205 feet Measured Depth (M.D.), discovering a calculated net pay of 106 feet of 26 degree API oil over a gross hydrocarbon bearing interval of 400 feet. Well logs indicated average porosity of approximately 33 percent. This result at Varadero further confirmed our view of the existence of high quality, injectite reservoirs within the Tay Formation which could be directly mapped from the seismic data and which, to date, have been hydrocarbon bearing.
Since the period end, the Catcher North appraisal well 28/9-3 has been completed. The main objective of the well was to appraise the Tay and Cromarty reservoirs and improve our understanding of the area to the north of Catcher. The well discovered 34 feet of net hydrocarbon pay with average porosities of 31 percent.; 14 feet of 29.8 degree API oil within the Cromarty interval and 20 feet of gas within the Tay section. The results extended the gross hydrocarbon column for the Catcher area to 410 feet, comprising a gas column of 75 feet and an oil column of 335 feet. The Gas Oil Contact (GOC) was a little deeper than anticipated and unfortunately, the sands were less well developed than were predicted. However, the data from Catcher North added further information to confirm our previously held view that Catcher, Catcher East and Catcher North are a single accumulation.
The Burgman exploration well, located in Block 28/9 was spudded on 1 March 2011. The main objective of the well is to establish if hydrocarbons are present in the Tay and Cromarty sands. The well will also drill a deeper, high risk, Jurassic aged Fulmar sand target below the main Burgman prospect. If Burgman encounters well developed reservoirs at either or both the Tay and Cromarty levels, with good quality hydrocarbons, we anticipate electing to drill an additional well to test the Carnaby prospect due west of Burgman.
At the conclusion of this drilling campaign the group will integrate all the information from these and the previous wells with a newly reprocessed 3D seismic data set. This work will give us a better understanding of the likely areal distribution, quantities and qualities of oil and gas in place, together with associated recoverable reserves potential together with greater clarity on the potential volumes for the undrilled prospects in the area. We will then be in a position to proceed with the design of a suitable development program for the area.
UKCS Blocks 210/29a & 210/30a - Cladhan; EnCore equity: 16.6 percent.
August 2010 saw a successful side-track appraisal of the 2008 Cladhan oil discovery in UKCS Block 210/29a. Well 210/29a-4Z targeted the southerly extension up dip of the original Cladhan discovery and discovered a gross hydrocarbon column of 159 feet with 102 feet of net hydrocarbon pay. Tests confirmed that the discovery was light oil with an API of approximately 34 degrees and a Gas Oil Ratio of 245 scf/bbl. Reservoir porosity was 21 percent. and average oil saturation was 86 percent. The well tested with a restricted flow rate of 5,900 bopd for over 13 hours through a 28/64 inch choke with a final wellhead pressure of 1,874 psi. This was followed by a second Cladhan side-track (210/29a-4Y) with the results announced in early October 2010. This side-track targeted a down dip location to the south east of the original Cladhan discovery and discovered a 258 feet gross hydrocarbon bearing reservoir interval (169 feet vertical thickness) with 108 feet net pay (71 feet vertical thickness). The three wells drilled on Cladhan to date have discovered oil down to 9,650 feet, a total oil column of over 425 feet and no Oil Water Contact has yet been established.
A Competent Person's Report commissioned by Sterling Resources, the Operator of Cladhan, gave a range of oil in place estimates, but it is our opinion that although it is currently very likely a commercial accumulation, until further appraisal drilling is done, an Oil Water Contact is established, and connectivity to other areas of the broader Cladhan structure is confirmed, the potential size of the overall Cladhan discovery remains uncertain. Since the period end, Sterling Resources signed a rig contract which will see one appraisal well and up to two side-tracks be drilled by the Transocean Prospect semi-submersible rig, the first of which commenced drilling last week.
Other Portfolio Activity
In October 2010, we were provisionally awarded two licenses in the UKCS 26th Seaward Licensing Round containing six Blocks or part-Blocks and were formally awarded the licenses in January 2011. The licenses comprise traditional licenses for UKCS Central North Sea Blocks 14/29e, 20/4c (part) and 20/5f (part) together with 28/5, 28/10a and 29/1d (split).
Blocks 14/29e, 20/4c (part) and 20/5f (part) lie to the south west of the Tudor Rose heavy oil discovery in EnCore's existing Block 14/30a. These Blocks contain the 1998 Hoylake discovery. EnCore is Operator with a 50 percent. equity and has agreed to reprocess existing 3D seismic data with a drill or drop option on these Blocks. Blocks 28/5, 28/10a and 29/1d (split) lie east and north east of the Catcher oil discovery in EnCore's existing Blocks 28/9 and 28/10c; EnCore is Operator with 100 percent. equity and there is a drill or drop option on these Blocks. Further reprocessing of the seismic and information from the results at Catcher are being incorporated into our ongoing evaluation of these Blocks.
A number of 26th Round applications remain outstanding pending further environmental assessment by the Department of Energy and Climate Change (DECC). It is expected that the results of these applications will not be known before the summer of 2011.
Since the period end, DECC has granted an extension to license P.1463 which contains the Tudor Rose and Buffalo discoveries on Block 14/30a (EnCore equity: 40 percent., Operator). We intend to drill a well on this license within the extension period in order to establish the gravity and viscosity of the oil in place at Tudor Rose. A site survey was shot over the prospect during the period and we are currently investigating rig availability.
An extension to license P.1475 containing the Merrow prospect in Blocks 113/29c & 113/30 (EnCore equity: 50 percent.) has also been granted. An onshore drilling site has been secured, planning permission has been submitted and a well is being planned for later this year.
Additionally, License P.1655, Block 15/21g (split), (EnCore equity: 40 percent., Operator), containing part of the Spaniards prospect, has been granted an extension by DECC. This extension has been granted with a view to an early conclusion of ongoing discussions with the holders of the neighboring license, and committing to drill a shared well to test the Spaniards prospect which spans the two licenses, at a mutually agreed time and location.
Under the license terms agreed with DECC on award, our interests in license P.1689 which contains Blocks 14/30c (split) and 14/29d (split), and license P.1674 which contains Block 48/1d (split) have now lapsed and the Blocks have been relinquished. Additionally, we have elected to relinquish license P.1687 containing Block 9/27c.
Little work was carried out during the period on our Irish licenses (PEL 4/05 and PEL 5/05) as we await a decision regarding the lease undertakings application by the Operator, San Leon Energy from the Petroleum Affairs Division (PAD) in Ireland.
Our interest in Egdon Resources has performed well over the period with the divestment of our onshore assets and interest in the Ceres field completing in July 2010. Since completion, Egdon has announced: the sale of Egdon Resources (New Ventures) which is a French subsidiary targeting unconventional hydrocarbons; an oil discovery at Markwells Wood-1; and the acquisition of a number of additional onshore licenses.
Finally, the marketing process for our Esmond offshore gas storage project in UKCS Block 43/13a is still ongoing. There have been no formal offers received to date.
We remain debt free (30 June 2010: debt free) and ended the period with a cash balance of £31.0 million (30 June 2010: £41.9 million), the majority of which is held in GBP sterling. We made a loss for the period of £3.8 million (31 December 2009: profit of £17.4 million and 30 June 2010: profit of £11.4 million). We remain fully funded for the remainder of the current Catcher exploration and appraisal drilling campaign and for the forthcoming Cladhan appraisal drilling campaign.
The Board has given significant consideration to how we can move our broader asset base forward while at the same time continuing to build on the significant value created to date for shareholders at Catcher and Cladhan. While the ongoing appraisal plans for the Catcher Block and Cladhan are sufficiently funded, it has become increasingly clear to the Board that we need to consider how best to fund our ongoing and expanding exploration portfolio.
In order to maximize the potential value of our exploration portfolio and to avoid undue further dilution of shareholders' interests by raising additional funds for an extended exploration program with the associated risks, the Board is currently examining the option of floating a newly formed company containing our exploration assets on AIM, with EnCore retaining a significant shareholding. The new company would raise the necessary capital to progress a high impact exploration drilling program. It would be expected that exploration of these assets would be at higher working equity levels than EnCore would have retained, and it is expected that this would also allow the retention of operatorship control which would likely have been lost via individual farm-outs. EnCore would remain exposed to any success through our significant shareholding in the new company.
EnCore's assets would then comprise:
"I believe that this would re-position EnCore primarily as an asset development company with significant exposure to exploration upside, but with the ability to commit all of our current capital towards the development assets," said CEO Alan Booth. "EnCore would then be well placed to focus on moving our key assets, the Catcher and Cladhan projects, through to Field Development Plan (FDP) stage and possibly beyond, ensuring that our capital is directed towards that goal."
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