When we caught up with Otto Energy (ASX: OEL) at the start of 2015, the Australian oil and gas junior was starting a major drilling campaign in the Philippines and working on building an East African portfolio. But a lot can change in a year. Having successfully completed its drilling program in South East Asia, the company is in the process of leaving the region and entered into two major North American projects. These changes are testament to Otto Energy’s enduring ability to adapt to changing market conditions to reap the maximum rewards.
Asia and Africa
Otto Energy drilled the Hawkeye-1 exploration well offshore the Philippines, funded entirely by US$24.5 million committed by BHP Billiton when they withdrew in late 2013, between July and August 2015. It was a challenging, ultra-deep-water well and the company drilled it using a Maersk Venturer ultra-deepwater drillship, one of the most modern and advanced drill ships in the world.
Otto succeeded in delivering the well on schedule and under budget, at a total cost of just under $24 million. Unfortunately, the company’s best efforts weren’t enough to beat the odds, which estimated only a 27% chance of finding economic oil in the well from the start.
“Operationally, we achieved an outstanding performance with the Maersk Venturer drillship,” says Managing Director Matthew Allan.
“For a small company like Otto Energy to drill an ultra-deep-water well in nearly 1,800 metres of water, it was an outstanding achievement and the well intersected the gas cap at the prognosed level. However, below the gas cap, the reservoir was water wet. So we didn’t intersect any oil below the gas cap, which made the result sub-economic, and the well was plugged and abandoned as an uneconomic discovery. So from a results perspective it was disappointing, but we were very pleased with how the well was executed.”
On the back of these disappointing results, Otto Energy is now withdrawing from the Philippines and doesn’t expect to be making any more investment into the country. But there’s better news from its East African operations, namely its 50%-held Kilosa-Kilombero and Pangani Blocks in Tanzania. After completing a full analysis of the 2D seismic survey conducted over the blocks in 2014, Otto Energy is making plans with project operator Swala Oil and Gas (Tanzania) plc to drill the Kito target during the third quarter of 2016.
Tanzania remains an important asset for Otto Energy, but it’s fair to say that the company’s plans to expand throughout East Africa have been replaced by a new focus on North America. Matthew explains that this comes down to the lower oil price environment causing higher-quality assets to come onto the market.
“We can now afford to participate in a greater number of drilling opportunities in more mature areas” he remarks. “As a result, we’ve started moving away from frontier acreage, such as in East Africa, and into lower risk, more developed areas of the world.”
A perfect case in point is Otto Energy’s decision to buy into acreage on the Alaskan North Slope in August 2015. Through capital injections, the company acquired between 8% and 10.8% working interests in areas of the Alaskan North Slope exploration acreage held by private exploration company Great Bear Petroleum.
“The Alaskan North Slope is probably one of the most prolific producing areas in the world outside the Middle East – in the 1980s, it was producing more than 2 million barrels of crude oil per day, which was a large portion of global production at the time,” says Matthew.
“Production has steadily declined and now stands at around 500,000 barrels of oil per day, which is still a significant volume of production, but there’s been underinvestment in new exploration over the last 20 years. Great Bear’s acreage is immediately adjacent to giant discoveries made in the Prudhoe Bay and Kuparuk fields, so it presented a compelling opportunity to enter one of the most prolific producing areas and undertake low-risk activity looking to bring new production on-stream over the next couple of years.”
After US$13.5 million in two tranches to Great Bear in 2015, Otto Energy is free-carried on the cost of acquiring 1,170 square kilometres of 3D seismic data for the acreage in the first half of 2016. This will be analysed to identify drilling targets, and Otto will then contribute around $2.5 million per well towards drilling up to three wells later in the year.
Finally, in December 2015, Otto Energy secured a staged farm-in deal for interests in oil and gas assets onshore Louisiana and offshore the Gulf of Mexico owned and operated by Byron Energy. Matthew explains that this too is a historically productive region that has experienced underinvestment in recent years, and thus holds great potential.
“There’s been a significant decline in activity in the Gulf of Mexico over the last six years, but it doesn’t mean the prospectivity’s not there – it just means that people haven’t been exploring there because they’ve been focusing instead on shale projects in the onshore basins,” he says.
“We see that the area is highly prospective, it’s very close to high-capacity infrastructure, and Byron has built a good portfolio with a number of very interesting drilling opportunities.”
Drilling of the first offshore well will begin in the first quarter of 2016, and Otto will have the opportunity to participate in a further two wells during the course of the year. If the wells are successful, they could begin producing oil in 2017. It’s the final piece (for now) of Otto Energy’s strategically assembled portfolio, which will ensure a very active 18 months ahead.
“We’ve created a portfolio with a mix of low-risk, moderate return, through to high risk, very high return opportunities; and between drilling in Louisiana, offshore the Gulf of Mexico, and in Tanzania and Alaska, we can have a very active 2016,” says Matthew.
“The coming 18 months will see an unprecedented level of activity for us, all of which can be funded from existing cash reserves of circa US$34 million. In fact, I think we’ll be one of the most active junior companies around.
“We’re setting ourselves up for being able to return to production in 2017, when we expect oil prices to start to move into recovery phase.”