Empyrean further builds Asian offshore portfolio with Duyung PSC entry

Oil and gas company Empyrean Energy has entered into a sale and purchase agreement to conditionally acquire up to a 20 percent shareholding in West Natuna Exploration (WNEL) from Conrad Petroleum.

Conrad Petroleum is the owner of WNEL, which holds a 100 percent participating interest in the Duyung Production Sharing Contract offshore Indonesia.

Following completion of the acquisition, Conrad Petroleum will retain an 80 percent shareholding in WNEL and will remain the operator of the Duyung PSC, Empyrean informed on Tuesday.

According to the company, the acquisition follows its recent investment in Block 29/11, located offshore China in the Pearl River Mouth Basin and is the next step in building an Asian offshore oil and gas portfolio of projects which boast mature targets and significant reserve potential. The Duyung PSC includes the Mako shallow gas discovery (Mako) which is estimated to contain 400 Bcf to 1.3 Tcf of gas in place.

In addition, the company said that the permit contains a number of other drilling opportunities in a prolific proven basin with nearby infrastructure to support any development and production. Three previous wells drilled at Mako in 1975, 1996 and 1999 intersected the gas zones but were not flow tested. Two of these wells were targeting deeper oil and the third well, targeting gas, encountered technical difficulties and so no flow test was completed.

LEAP Energy, the international subsurface consulting and technology delivery group, completed a Competent Persons Report on the Mako discovery in 2017, which attributed 2C and 3C Resources of 433 Bcf and 646 Bcf recoverable gas, respectively.

A new well on the Mako discovery, the Mako South-1 Well, is planned to spud in late 2Q / early 3Q 2017 targeting the Intra-Muda sands. The objective of the well is to flow test the gas sands and provide key data on the permeability and gas saturation properties of the reservoir.

Duyung PSC

The Duyung PSC is an offshore permit of over 1,100km2 in the West Natuna Basin, one of Asia’s most prolific proven basins, and is located in water-depths of 60-110 meters and close to existing pipeline infrastructure owned by the Indonesian Government.

High impact exploration leads and prospects have been identified within the Duyung PSC through analysis of existing 2D and 3D seismic data which was acquired in 2008 and 2009 respectively, indicating exploration upside potential of over 4 Tcf of gas and 120 mmbbl of oil (including Mako).

The permit also benefits from its proximity to key energy markets in Singapore, Malaysia and Indonesia (including both Batam Island and Sumatra), where there is a favorable domestic gas outlook. According to international oil and gas advisory firm RISC Advisory power generation is forecast to be the biggest source of gas demand and account for 35 percent of the 35,000 MW power acceleration program to be built in 2014-2019.

Financing

Under the terms of the sale and purchase agreement, Empyrean will pay Conrad Petroleum an initial cash consideration of $2 million immediately upon signing of a shareholders agreement that is required to be negotiated between the company and Conrad before completion and, conditional on completion, has agreed to pay a further $2 million on or before May 12, 2017.

The initial consideration will be paid from the company’s existing cash resources. In the event that Empyrean does not make payment of the further consideration then its interest in WNEL will remain at 10 percent.

The total costs of the Mako South-1 Well are estimated at $6.5 million. Following payment of the initial consideration and, if applicable, the further consideration, these amounts will be applied against the cost of the Mako South-1 well and any well costs exceeding these payments will be shared by the company and Conrad, proportionally to their shareholdings in WNEL. All future costs in respect of the Duyung PSC will be borne by Conrad Petroleum and Empyrean on the same basis.

For example, if Empyrean’s interest is 10 percent then it is expected that it will contribute $2 million as initial consideration plus $0.45 million as its share of additional costs for the Mako South-1 well, if total well costs reflect the estimate of $6.5 million. If Empyrean’s interest is 20 percent then it is expected that it will contribute $4 million as an initial consideration and further consideration plus $0.5 million as its share of additional costs for the Mako South-1 well, if total well costs reflect the estimate of $6.5 million.

Taking into account the company’s existing cash resources, the company said it has sufficient available cash resources to satisfy the further consideration. However, $3 million of existing cash has been earmarked for the proposed 3D seismic program on Block 29/11 in the Pearl River Mouth Basin, offshore China, which is scheduled to take place in 2Q 2017.

Accordingly, the company intends to raise up to a further £2.7 million through the launch of an open offer to all qualifying shareholders of the company pursuant to which such shareholders may subscribe for 1 new ordinary share in the company at a price of 3.5 pence each for every 4 ordinary shares held at the record date.

Empyrean CEO, Tom Kelly, said, “The Duyung PSC, with the high impact Mako shallow gas play to commence drilling in the near term, provides an exciting complement to our project in offshore China, Block 29/11. Existing sub-surface data has established that gas is present within the Mako reservoir, reducing typical geological risk considerably. We believe that the Mako South-1 well has highly compelling upside and is designed appropriately to address the uncertainty related to the flow potential of the Mako reservoir. We expect the results of this first well in Q3 2017, with drilling in Indonesia scheduled to take place at about the same time as we expect to be shooting 3D seismic in China.

“The acquisition reflects our recent focus on building an oil and gas company with a strong presence in Asia. Apart from Mako, the Duyung PSC has a host of significant leads and prospects already identified by both 2D and 3D seismic where Conrad has invested significant capital delineating these drilling opportunities. Together with our recent investment in Block 29/11, located in the Pearl River Mouth Basin offshore China, we believe that our newly established portfolio has the potential to provide us with significant production opportunities in the future.”