Despite difficult market conditions, Elixir made progress in the December 2008 quarter in various aspects of its portfolio.
We were pleased to have been awarded interests in Blocks 211/27d and 211/12b in the UK Continental Shelf 25th Seaward Licensing Round, which further consolidated the Company's position in the northern sector of the UK North Sea. Block 211/27d contains the mapped southern extension of the Mulle field and Block 211/12b contains the Tiger Prospect, which is believed to hold 90 million barrels of oil ("MMBbls") on a most likely in-place resource basis. The Tiger Prospect is located 5 kilometres to the east of the large Magnus field, which has been in production for some years and is operated by BP.
It was also pleasing to be granted in the December quarter a four month extension to the licence term on Block 211/18b which contains the Leopard prospect. The recent upper Jurassic discovery in the Cladhan well has further reinforced the potential of the Leopard prospect, which is one of the largest remaining undrilled exploration targets in the UK North Sea. Despite a difficult market for farmouts, we are hopeful of completing the farmout of Leopard in the next few months and will then move to drill the Leopard exploration well before year end.
In terms of our production assets, the High Island field was shut-in during the December quarter pending the repair of third party operated export pipelines. This was an unfortunate and frustrating consequence of the passage of Hurricane Ike in mid-September 2008. We were pleased however that by early January 2009 the two High Island wells were brought back into production at rates equivalent to those being achieved prior to the shut-in. We are also looking forward to undertaking a remedial well intervention on Well #1 at Pompano in the coming quarter which, if successful, should increase gas production rates from that well.
Commodity prices continued their decline in the quarter, with oil falling a further 60% in value over the quarter to approximately US$40 per barrel, whilst gas prices declined 35% to approximately US$5.50 per thousand standard cubic feet ("Mscf"). Natural gas, which comprises the majority of Elixir's production, is currently achieving a well head price of approximately US$4.60 per Mscf, which is below the 10 year average price.
The impact of the shut-in at High Island, intermittent production from Well #1 at Pompano and the decline in natural gas prices in the US reduced cash flow for the December quarter, with total receipts from production of A$1.9 million being achieved. However, Elixir remains well funded with cash currently on hand of A$9.0 million. This figure is net of the repayment in late January 2009 of A$3 million of convertible loan notes. The repayment of the notes means that the Elixir Group is now debt free. Elixir's current cash on hand equates to a cash backing per share of over £0.02.
We continue to examine asset and corporate opportunities which have the potential to be value accretive to the Company, although a measured approach is being adopted in light of the volatile market conditions and the prospect of better assets at more attractive values coming available in the next few months.
An update on the Group's operations follows.
Elixir is an internationally focused upstream oil and gas company with a diversified portfolio of offshore petroleum interests across the exploration, appraisal, development and production lifecycle.
Elixir's business strategy is to acquire interests in exploration licences with high impact potential, to work up prospects internally and to farm these out to industry to drill, typically on a full carry basis. Complementing this exploration strategy is the addition of lower risk oil and gas development projects with appraisal upside located in the shallow waters of the Gulf of Mexico. These projects typically demonstrate a short cycle time to production and provide cashflow for the Elixir Group.
The Board of Elixir considers it important to remain flexible in the pursuit of new business opportunities which are judged to be complementary to its existing business activities and able to deliver superior growth in shareholder value.
DEVELOPMENT AND PRODUCTION
Gulf of Mexico
Project Name: High Island Project (Block 268A)
The High Island field is located 65 kilometres southeast of Houston, Texas and was first brought into production in mid-September 2007. Wells A-1 and A-2 at High Island discovered gas and condensate pay in two separate accumulations, with each well currently only producing from the lower of the two reservoir zones.
As previously reported, the field was shut-in during the passage of Hurricane Ike in mid-September 2008. The High Island facilities suffered only superficial damage as a result of the hurricane, but the High Island Offshore System ("HIOS"), a regional pipeline system into which production from High Island is ultimately transported to shore, was damaged preventing production from being re-instated at High Island. Consequently, in the three month period to 31 December 2008 no production was recovered from the High Island field.
Repairs to the HIOS were completed in late December 2008 and the pipeline was re-commissioned and in operation in early January 2009. Wells A-1 and A-2 at High Island were brought back into production from 5 January 2009, and stabilised flow rates have now been achieved. Well A-1 is currently producing approximately 0.3 million standard cubic feet of gas per day ("MMscf/d") and 160 barrels of condensate per day ("bocd") and Well A-2 is producing approximately 3.7 MMscf/d and 10 bocd.
It is expected that the prolonged shut-in of the wells will be useful in providing the operator with a further source of data to assist with ongoing reservoir management.
In the normal course, a lag of two months is experienced from the month of production to receipt of sales proceeds. Accordingly, receipts for production achieved during January 2009 are expected to be received in the month of March 2009.
Project Name: Pompano Gas Project (Block 446-L SE/4)
The Pompano gas field lies in the Gulf of Mexico approximately 150 kilometres southwest of Houston, Texas. Well #1 at Pompano was directionally drilled from a new caisson installed adjacent to the field's existing "B" satellite platform and was placed on production in March 2008. Well #2 at Pompano was drilled from a caisson adjacent to the existing main processing facility, the "A" platform and was placed on production in May 2008. Well #3 at Pompano encountered potentially commercial sands in one horizon, with the deeper sand targets being wet. Well #3 has been temporarily suspended pending a detailed review of data before a decision is made as to whether to complete the well over the 6700 ft Sands or to use the well bore as a sidetrack candidate in the future.
Production from Well #1 was restricted in the quarter due to sand forming bridges in the short production string which produces from the 6700 ft Sand. Water and sand production is also affecting gas rates in the long production string which produces from the B Sand. The water is believed to be originating from the deeper B2 Sand and is channelling up to the B Sand through a leak path in the annulus cement. It is expected that a well intervention operation will be conducted in the coming quarter which will seek to remedy these issues with a view to increasing production from Well #1.
Well #2 achieved an average flow rate in the quarter of approximately 6 MMscf/d and produced 37 bocd, with the majority of the production being delivered from the deeper E Sand. The well continues to produce in accordance with expectations.
In the normal course, a lag of two months is experienced from the month of production to receipt of sales proceeds. Accordingly, receipts in the quarter were for production in the months of August 2008 to October 2008 inclusive. Sales receipts for these months totalled US$1.5 million. The average price realised for the sale of gas produced in these months was US$8.11/Mcf, and for oil was US$94.63/Bbl.
UK North Sea
Project Name: Mulle Prospect (Block 211/22b and 211/27d)
The Mulle accumulation lies in Block 211/22b on the south-western extension of the Osprey ridge and is adjacent to the proposed Causeway oil field development. Elixir's wholly-owned UK subsidiary, Elixir Petroleum (Europe) Limited ("E(EU)") holds a 40% working interest in the Block.
The operator of Block 211/22b, DNO (UK) Limited, published in late May 2008 a most likely contingent resource estimate for Mulle of 18 million barrels of oil. This equates to a most likely net contingent recoverable oil resource to E(EU) of almost 7 million barrels. During the December quarter, Block 211/27d was awarded to the Mulle joint venture. The Block contains a mapped southern extension to the Mulle field and it is likely that this will result in a modest increase to the resource estimate for the field.
The joint venture has developed an appraisal and testing programme for the Mulle accumulation and is seeking a further partner, or partners, to enter the Block to assist with the funding of the programme. To that end, an online data room in respect of the Mulle accumulation was open during the December quarter and attracted an encouraging level of interest from industry participants. The data room is now closed and the joint venture partners are in discussions with several parties concerning the project.
UK North Sea
Project Name: Tiger Prospect (Block 211/12b)
E(EU) was successful in being awarded during the quarter Block 211/12b under the UKCS 25th Seaward Licensing Round. The Block is located in the northern UK North Sea, approximately 140 kilometres north east of the Shetland Islands, in a water depth of approximately 125 metres. Block 211/12b contains a newly mapped prospect named Tiger. The Block lies 5 kilometres to the east of the Magnus Field which was brought into production in 1983 with an in-place volume of approximately 1.5 billion barrels of oil.
The target reservoir in the Tiger prospect is the Magnus Sandstone Member, over 500 feet of which was encountered in Well 211/12b-15, which was drilled down dip of the Tiger Prospect in 1992. The equivalent sands in the nearby Magnus Field have excellent porosity and permeability characteristics. Evidence from the 211/12b-15 well also indicates the presence of a nearby hydrocarbon column. Reservoir presence and hydrocarbon charge for the Tiger prospect are considered to be low risk.
Elixir is in the process of finalising the forward work programme for 2009 for the Block. The Block has been awarded for a licence term of 4 years with a drill or drop decision required at the end of year 3.
Project Name: Leopard Prospect (Block 211/18b)
Block 211/18b (Licence P1381) is a traditional licence awarded in the 23rd UKCS Seaward Licensing Round in December 2005.
As announced in December 2008, a four month extension to the original licence term of the Block has been obtained from the UK regulator. Efforts to secure another farminee in order to largely cover E(UK)'s cost exposure in the proposed Leopard well are ongoing with several companies currently assessing the opportunity.
Project Name: Red Fish Prospect (Block 479-L N/2 and NE/4)
During the quarter, the Red Fish lease was awarded to the Pompano joint venture participants. Work continues to evaluate the opportunities within the block and Elixir is currently considering participation in two further extensions of the Red Fish area.
West Africa -- Sierra Leone
Project Name: Block SL-4
An interest in Block SL-4 was assigned to E(UK) in February 2008. At that time, E(UK) was also approved as operator of the licence. Block SL-4 comprises an area of 4,429 km2 lying in water depths from 100m to over 3,500m offshore Sierra Leone, West Africa. The acquisition of a 1,222 km2 3D seismic survey over the Block was completed in early June 2008 with processing of the dataset completed in November 2008.
As previously announced, E(UK) received in mid-December a statutory demand for payment in the amount of approximately US$2.6 million from the seismic contractor who has undertaken the 3D acquisition over Block SL-4. E(UK) has addressed this issue with the seismic contractor's solicitors and has reached agreement that recovery proceedings be suspended against the company for the time being and that 21 days written notice would be provided to E(UK) if the recovery proceedings were to be recommenced by the seismic contractor. It remains the view of the E(UK) directors that E(UK)'s joint venture partner in Block SL-4, Prontinal Limited, remains responsible for payment of the outstanding amount owed to the seismic contractor in respect of the 3D acquisition and processing.
As a result of Prontinal's failure to remedy its default in payment for the seismic acquisition and certain other outstanding joint venture expenses, E(UK) notified Prontinal in early December of the forfeiture of its interest in Block SL-4 to E(UK). Prontinal has indicated they will be contesting the demand, default and forfeiture notices. E(UK) has formed the view that any challenge to the default and forfeiture process by Prontinal will be without merit. E(UK) has subsequently commenced legal proceedings in the British Virgin Islands seeking recovery of the outstanding amounts. A hearing date in relation to this matter has been set for early March 2009.
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