Desire Petroleum announced its Interim Results for the six months ended June 30, 2010.
Commenting on the results, Stephen Phipps, Chairman of Desire, said, "This drilling campaign in the North Falkland Basin (NFB) has started very positively. Our first well Liz discovered gas in two zones and on the Sea Lion prospect drilled by Rockhopper Exploration, a potentially significant oil field has been discovered. The confirmation of oil in the NFB has clearly significantly de-risked the rest of the drilling campaign. With the Ocean Guardian rig due to return to Desire within the month, we now enter an exciting period of drilling activity which may see us drilling up to four wells back to back."
The current North Falkland Basin (NFB) drilling campaign has started very positively. Gas has been discovered by Desire in two zones in the Liz well and a potentially significant oil field has been discovered by Rockhopper Exploration on the Sea Lion Prospect. The third well drilled to date, the Ernest well by Rockhopper, was plugged and abandoned as a dry hole. Currently the Ocean Guardian drilling rig is with Rockhopper for the flow test on the Sea Lion discovery and following this the rig will revert to Desire to drill our Rachel prospect. This is likely to be in late September or early October.
With the Sea Lion oil discovery and the Liz gas discovery the NFB has entered a new phase of exploration. However exploration is still in its infancy and a great deal has still to be learned about this area. The Sea Lion discovery is particularly significant as this has demonstrated that oil has been trapped in potentially significant quantities in a good quality reservoir. The oil at Sea Lion is trapped in a fan sandstone and we believe that this is one of a number of such fan sandstones on the eastern flank of the NFB. Oil fields rarely occur singly and we would expect a number of further oil discoveries in this play type on the east flank fan play fairway. We believe that over 50% of this play type is on Desire acreage.
Accordingly, since the Sea Lion discovery, Desire's geoscience effort has concentrated on identifying similar prospects for early drilling. In addition to the already recognized Rachel, Anna and Ninky prospects an exciting new prospect named Elaine has been identified.
As noted above the next prospect to be drilled by Desire will be Rachel. In the Competent Persons Report (CPR) prepared by Senergy (GB) Ltd and published by Desire late last year, using a reservoir thickness range of 30 to 85 meters, Senergy (GB) Ltd calculated a gross unrisked mean recoverable potential of 318 million barrels of oil. As a result of further work Desire now believe that the sand thickness in Rachel may exceed this range in a series of stacked sands, with a consequent increase in the recoverable potential. In addition the Rachel prospect has been significantly de-risked as a result of the Sea Lion discovery.
Geoscience work is ongoing to evaluate which of the other prospects in this play type on the eastern flank are best for drilling in the current campaign. Unfortunately, the full nature of these fan plays can only be identified on 3D data and currently Desire has 3D seismic coverage over only half the relevant acreage. Therefore, Desire intends to investigate the possibility of acquiring further 3D seismic, possibly in conjunction with other NFB operators to mitigate the costs.
As previously indicated, the Sea Lion oil discovery in the east of the NFB has meant that further evaluation of the Liz gas discovery has been given a lower priority. The Liz dry gas discovery and the gas condensate discovery are in reservoirs of uncertain lithology and quality and studies are continuing to get a better understanding of what we are dealing with. In addition, the trapping mechanism for both discoveries is uncertain, both are stratigraphic traps, and much work is required to identify these traps and associated volumes. As a result Desire believes that further appraisal of the area is unlikely until a later stage in the development of the NFB.
From the outset Desire has designed its drilling campaign with flexibility in mind. Hence our ability to move Rachel and other eastern flank prospects to the head of our drilling plans post the Sea Lion discovery. However, beginning with the Rachel well Desire is likely to drill up to four wells for our own account back to back. The number of wells to be drilled could be changed should Desire decide to sidetrack or test one or more of the wells. In addition a further two wells may be drilled by our partner, Arcadia Petroleum Ltd, when their plans for this drilling program have been finalized. In order to give ourselves time to evaluate the results of the Rachel well we are most likely to drill the Dawn/Jacinta prospect following the Rachel well. Despite the disappointing Ernest well result the Dawn/Jacinta prospect continues to excite us and we believe that there may be significant hydrocarbons in the southern licenses. Dawn is a possible Jurassic horst block structure which Senergy (GB) Ltd in the CPR calculate has a net unrisked mean recoverable potential of 124 million barrels. Jacinta is an Aptian stratigraphic prospect overlying the Dawn target which Senergy (GB) Ltd assess to have a net unrisked mean recoverable potential of 797 million barrels. These prospects may have been sourced from the main basin to the north which would not have been possible for Ernest which instead relied on a local source.
The loss for the six months ended June 30, 2010 was $6,398,000, of which exchange losses were $5,954,000, compared with a loss for the corresponding period of $265,000. Administrative expenses of $525,000 were lower than the previous half-year, largely due to increased recharges to joint venture licenses resulting from drilling activity. The non-cash charge for share-based payment at $29,000 continues to decline as the economic cost of share-based compensation plans is largely expensed. The exchange loss for the period of $5,954,000 arises primarily on Sterling cash balances held to meet exploration costs, and follows a weakening of the pound against the dollar between the previous year-end and the date of this report. These sterling balances are a combination of those held directly by Desire and those in escrow accounts.
Investment revenues of $110,000 are higher than the corresponding period, with the benefit of increased cash balances offset by interest rates remaining at historically low levels.
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