Junior oil companies are experiencing tough times at the moment. The worldwide oil price crash is forcing innovation and efficiency measures across the board. Low costs and the ability to commercialise existing resources are key to a junior’s success in the current environment and Australian energy company ADX Energy (ASX:ADX) are looking to manoeuvre in the current market by developing the previously abandoned Nilde field in the Sicily Channel.
ADX, which holds four oil and gas permits in North Africa and Europe, is progressing through a transformational year in 2016. The company is overseeing the recognition and progression towards development of remaining oil from the Nilde discoveries in Italian waters, the redefinition of the Dougga discovery offshore Tunisia for future appraisal, the ratification of an extension on its onshore Romanian acreage and the implementation of some structural and financial organisational efficiency measures.
ADX in its current form started in around 2008. Prior to that it existed as a gold and base metals company and when executive chairman Ian Tchacos joined in 2010 he felt it was inappropriate to have a company in both oil and hard rock mining. The company demerged its mining assets into Riedel Resources where it still holds a 11.5% interest and the Company’s name was changed from Audax to ADX to represent its new focus on energy.
Tchacos joined ADX in 2010 having developed Nexus Energy from a AUS$2 million market capitalisation in 2003 to around $1.2 billion in the following six to seven years during his tenure as managing director.
The skills he fine-tuned at Nexus provide him with an excellent platform to perform similar progress with ADX. Tchacos’ 25-year experience in offshore oil and gas development projects make him ‘ideally suited to the company’s next phase of growth’.
“One of the things I liked about ADX is that I saw Dougga as a fairly analogous value add project to what we had [at Nexus], which is a large gas field with high condensate yields. Unfortunately, the Arab spring has delayed our ambitions but we still see massive potential at Dougga under the right fiscal and economic conditions” he said.
Nilde Area oil project
ADX’s current focus lies with the Nilde field and the surrounding discoveries and commercialising the project, something Tchacos has extensive experience in.
In February 2016 ADX announced an independently assessed 2C (most likely) contingent resource for the Nilde Area offshore Italy of 34 million barrels by Senergy (GB) Limited, an independent consulting company and a member of the Lloyd’s Register Group of companies.
The Nilde Area consists of the Nilde field and three nearby discoveries which were found in the 1970s. A single well in the Nilde field produced at a flat rate of around 10 thousand barrels a day for around five years. The previous operator, Agip, abandoned the Nilde field following the 1989 oil price crash to US$13 per barrel after having drilled another well to increase productivity, Tchacos believes the drilling of the second well in close proximity to the existing well prematurely induced water production which could not be produced or processed by the facilities available at the time.
“We think the field was prematurely shut down mainly because of poor reservoir management and an inability to produce oil and water from the wells or process the water in the primitive by today’s standards offshore production and storage facility. The induced water production could have easily been produced and processed with current production well installations and modern production facilities which are common place in today’s oil developments.”
What makes Nilde so attractive for an offshore project according to Tchacos is that it is located at a relatively shallow drill depth in about 90m of water, the reservoirs are highly productive which has been proven by historical production, meaning fewer wells resulting in low capital expenditure and there are excellent fiscal terms. Tchacos believes that with a capital cost per barrel of less than $8 per barrel a redevelopment project at Nilde would work well even at an oil price of between $30-40 per barrel.
The past Nilde production wells have proved to be extremely productive and Tchacos is hoping to capitalise on that to commercialise a potentially very economic project by achieving high flow rates from relatively few wells, thereby keeping capital costs low.
For the initial development ADX intends to redevelop the main Nilde field and an extension of the original field that has not been produced. The 2C contingent resource is 28 million barrels. ADX will effectively only be spending on the drilling and completion of two wells and subsea facilities. The floating production storage and offloading system (FPSO) is likely to be leased from a third party FPSO contractor.
“The beauty for us as a small company is that by leasing an FPSO a large proportion of the projects facilities can be secured via a lease and rather than as a capital investment. This makes Nilde very attractive for a company with limited capital resources at this point in time.”
A very important aspect of the Nilde area project is the large amount of data that is available to assess its reserves potential. The Nilde field has a number of appraisal wells as well as historical production data. All three of the other discoveries in the Nilde area have already been flow tested and an extensive seismic data set exists. This data provides ADX with an excellent understanding of the productivity of the reservoirs, the quality of the high API oil and the likely oil volumes remaining to be produced.
The availability of seismic, drilling, test and production data means that ADX can confidently undertake reserves assessments, development feasibility studies and make development applications without the need for further appraisal operations. ADX expects that ongoing desk top studies will enable the finalisation of a development plan and the declaration of reserves by the end of 2016.
“Our independently assessed best estimate contingent resources (2C) for the initial development of Nilde is approximately 28 million barrels. It is 2C classification at the moment we haven’t proven its commerciality. Once we have a development plan supported by a appropriate feasibility studies and development costs we expect to be able convert these resources to reserves which will in turn increase confidence in the value and viability of the project.”
Tchacos is positioning the company to take advantage of what it has at Nilde by progressing the development in a low cost environment and to potentially benefit from a higher oil price in the future.
“We are extremely well placed [at Nilde], what we need to do is to define the project so that we can take advantage of relatively low development costs, low drilling costs and the availability of competitively priced leased FPSO facilities.
“What’s good about Nilde is that our current development plan only involves two development wells, the oil is a high quality, high API crude that is simple to process, the field is located in a relatively shallow water depth in a relatively benign sea state environment so most generic floating production storage offloading systems (FPSOs) would be able to handle it. This gives us potential access to a number of potential facilities that could be deployed to develop Nilde”.
In addition to the already discovered resources in the Nilde Area a number exploration opportunities exist in the area which provide the potential to extend the life and value of any Nilde development. ADX intends to acquire 3D seismic over the existing discoveries as well as nearby exploration prospects. 3D seismic will assist in the optimal placement of development wells as well as mature near field drilling targets currently identified on 2D seismic.
ADX also holds another important asset offshore in the Sicily channel, the Dougga discovery offshore Tunisia which was independently assessed to hold a large gas and condensate resource. The Dougga gas condensate field was drilled and tested by Shell in the 1980s producing gas, LPG and condensate. It holds around 600 billion cubic feet (Bcf) of gas and almost 120 million barrels of liquids (LPG and Condensate). Dougga is in 328m of water but is only 40km from the Tunisian shore which makes it attractive for accessing domestic gas markets and export via the Trans-med pipeline which connects Tunisia to Europe.
Dougga is a substantial and valuable resource however there are some challenges given the water depth, the drill depth of approximately 2600m and the presence of CO2.
“While Dougga could deliver significant value for Tunisia and ADX it is a capital intensive project. We believe the project could provide acceptable investor returns if we can find a more innovative fit for purpose development solution to bring capital costs down and get some help from the Tunisian authorities to secure a more equitable revenue split between the government and the contractor at a time when many projects are struggling to achieve commerciality.”
“Our longer term vision for Tunisia is to create a gas hub around Dougga and then look at bringing in other gas discoveries which are yet to be commercialised. There’s a big prize offshore Tunisia but we need the right fiscal conditions to be able to take advantage of that.”
In terms of the work that has been completed at Nilde to date and taking the project forward Tchacos recognises the excellent work that has been done on the supply chain side through some excellent consultant and contractor relationships.
“Senergy have been really helpful for us in terms of independently defining the resources available at Nilde. We’ve also had great support and assistance from an FPSO advisory group called Crondall Energy who has helped assess the availability, suitability and likely cost of FPSO vessels in the current market. We thank our advisors for their excellent early support and hope we can reward them with involvement in an important new development.”
Looking forward to the rest of this year, Tchacos hopes to make significant progress on Nilde in the next six months. The wheels are in motion to finalise feasibility studies and the sub-surface development plan for the field. This will be based on a geological model incorporating all the available data that will in turn be the input to a reservoir simulation model. The reservoir simulation model will be used to replicate the previous production on the field and, predict how it will produce in the future.
“We hope to develop a high degree of confidence in future production from Nilde and couple that with development studies to determine an optimal production, storage and offloading option for the field. Bringing these studies together will enable us to gain a high degree of confidence in relation field revenues and costs to enable the declaration of commerciality as well as the declaration of reserves.
“The important thing for us is to put a bow around the project in terms of definition, that includes reserves, development wells and production facilities, so that investors and third parties can easily understand what Nilde means in costs and revenues. We think we can achieve that in a six-month period.”
From there it will be a case of securing funding for Nilde and Tchacos think there will be a range of options for this relatively quick, simple and low cost project. ADX are considering either funding it via a farm out, a partial sale, companies who will drill for equity and oil trading companies who could gain access to a share of field production in exchange for funding.
In the longer term Tchacos’ vision for ADX is to see significant production at Nilde, a potential development at Dougga and building on its position in Romania, where he believes there is plenty of development and field rejuvenation potential.
“I’d certainly believe we have assets that can enable us to become a significant mid-capitalisation, production and development company,” he concluded.