An initial technical review of the geological, geophysical and recent production data has now been concluded. It is clear from the performance of the producing wells that deliverability from the reservoir is much poorer than had been predicted. This lower deliverability has led to the previously reported issue of water build up in some of the wells, which has acted to further restrict deliverability.
The results of the 2001 appraisal well and five earlier exploration wells led to a conclusion that a common gas water contact existed across the field. However, the field's performance since production commenced and subsequent technical work suggest that this key conclusion, upon which the reservoir model used for planning the development and for reserves estimates was based, is erroneous. It is now believed that a series of different gas water contacts exist across the field, a phenomenon known as "stacked pay".
The existence of multiple gas water contacts suggests the reservoir is more compartmentalized and each of the five producing wells is connected to a smaller volume of gas bearing rock than had previously been thought. If this proves to be the case, it is likely that further wells will be required to enable maximum reserves recovery. It is also likely that a different well design will be required for optimal gas recovery.
Work to develop a revised reservoir model has already commenced. This will take several months to complete and will be an important tool for reassessing the field's recoverable reserves and designing a future work program.
Data acquisition is paramount in determining the field's future deliverability and recoverable reserves. In order to enhance data acquisition, the Seven Heads partners elected to restrict the field's production. With effect from the start of April, daily production from the field has been set and maintained at 25 mmscf/d. This has allowed a sequence of single wells to be shut in for periodic acquisition of reservoir performance information without requiring a full field shut in. This production rate management decision has also enabled the removal of any water that has built up in the weaker wells when the wells are returned to production after being shut in.
The daily production rate of the field is affected both by the pressure at which the onshore pipeline system is being operated and by the production and capacity re-profiling activities of Marathon's Kinsale facility. The decision to produce the field at below its maximum capability has enabled the Seven Heads partners to manage the field in a more efficient manner by reducing the exposure to fluctuations from outside sources. This both facilitates the cost effective management of gas transportation capacity requirements and ensures that revenue per mmscf/d is maximized.
Ramco's 86.5% share of production at the 25 mmscf/d level is generating sufficient revenue to fully cover operating costs, loan interest and the cost of the back up transportation needed to ensure that its full nomination under the Gas Sales Agreement (GSA) is delivered to RWE. Following discussions to clarify the application of transportation system rules it has become clear that the previous estimates of the cost of this facility were overstated. It is now estimated that the total cost to Ramco for the capacity required to support field production at the current level of 25 mmscf/d is £4m. Over the first three months of the year Ramco has recorded a small profit on its substitute gas transactions. As confirmed in previous announcements, gas sales nominations under the GSA can be reset from October 1, 2004.
The lower than anticipated production from the field, coupled with the unforeseen costs of the technical studies and the back up transportation system mean that RSHL is generating much less cash from the field than had been expected. Discussions have commenced with our bankers over the possible rescheduling of the £56.6m non-recourse project loans and the £12m loan secured over Ramco's oil services business. To the extent that the final technical review recommends further work, such as the acquisition of 3D seismic, the reworking of existing wells, the drilling of new wells or the provision of compression, it is likely that significant additional funds will be required. RSHL has commenced preliminary discussions with its bankers and a number of third parties as to how this additional investment might be structured.
As indicated earlier it will take several months more to complete the technical work required to support a revised reserves report on the field. As a result the Directors believe that the right course of action is to base an impairment review of the carrying value of the Group's interest in the Seven Heads Gas Field on the proved reserves that can be directly attributed to the five producing wells. This prudent approach gives rise to an impairment provision of £93m. In addition a provision for tax of £23m, in respect of a held-over gain, is now no longer expected to crystallize and has been released. The impairment adjustment together with the release of tax will reduce the net assets of the Group by £70m and will be reflected in the 2003 results which are now expected to be announced in the first half of June 2004.
The Seven Heads partners are RSHL (Operator) 82.5%, Northern Exploration Limited (a wholly owned subsidiary of Ramco) 4%, Lundin Ireland Limited 12.5% and Sunningdale Oils (Ireland) Limited 1.0%.
Most Popular Articles