Why drill Antelope-7?

[bdahl385]

I now think A7 will happen.  But there will be more than A7 from that pad.  No matter what the logs say after reaching TD, there will still be more to be learned.  If they are too far west and cross over the fault and hit a dry hole , they will do a sidetrack A7-ST1 and move back to the east maybe 1000m or so and see if they get back on the good side of the fault.   If they hit excellent reservoir then the bounding fault will lie further to the west, so here comes A7-ST1 drilling off to the west to try and extend the field even further or find the fault.

Of course they could also sidetrack north and south if that is of more interest after the primary well is drilled.  I have seen this type of angular sidetracking on offshore wells. It wouldn't surprise me to see this on A7 since it will be the last well before FEED and plant design optimization.  They will want as much data as possible on this well.

[Putncalls]

Doesn't MH get to make the drill or no drill decision on A7? That's taking on about as much responsibility as tossing the coin.

[Stavros]

MH really has little say in this. As Operator and the MUCH more experienced in this industry Total has the heavy hand. The overall inexperience of MH is one reason (IMO) he has a need for this size of BOD. Of the 3 CEOs on the medals stand, he takes the bronze. But PM would fare no better. It's what happens when a very small exploration company happens upon a huge discovery. This same inexperience led to the sense of security about having $400 million that he thought would last forever.

What you basically said is that IF IOC AND OSH MERGED, it would be suicide for the Company to install Dr. Michael Hession as the CEO.

I don't think anyone on this Board would disagree.

[Indoreservoir]

They will not be using material balance (pressures as Pet described above) for the reserves cerrtification. Am sure Pet knows this - seems he was showing the possible ranges of in-place on the basis of material balance calculations.

They will use mapping from seismic and well results (logs for porosity, saturations, and fluid contacts), a geostatistical program such as Petrel which ties the two and distributes reservoir properties and does the volumetrics, and combine that with a reservoir/outflow simulator which models reservoir/aquifer and wells/facilities backpressures to model abandonment pressure.

They will likely do the resoures in at least two ways - geostatistically by Petrel or equivalent linked to some type of reservoir/surface facility simulator as mentioned above (the probabilistic approach), and possibly hand mapping of the structure/net pay to develop deterministic results using calculated/estimated recovery factors.

Material balance or p/z plots have far too much uncertainty at this stage, as Pet pointed out: what is the pressure difference due to the production, what is the formation compressibility, is the aquifer providing pressure support, etc?  Material balance could provide a negative indicator - compartmentalization or small reserve - if the pressures did not return to their initial pressure.  Apparently that has not happened, which is GOOD.  Usually material balance methods start being believed after10% or so of reserves are produced and there is a measurable pressure decrease.

Seems to me the question is what have they learned to date? TOT certainly are doing the work mentioned above internally and have a view of reserves/in-place volumes, probably a very good view to boot.

So, why would TOT want to drill an Ant - 7?  Not sure, but speculating:

1. they want to delay the cert payment by, say, 90-120 days? Not likely unless they are conserving cash until 2017, which is a possibility (my company is).  And maybe they like squeezing IOC to make them drop their asking price for a few % more?

2. so they could pay IOC more (or less) on certification?

a. I don't think they'd want to pay more.

b. Would they want to pay less? Of course.  I don't know if there is a mechanism in the SPA for TOT to recover an overpayment on certification, but if not forget recovering those funds.

So if no IOC repayment on a reduced recert size, TOT would definitely want to ensure they were not overpaying and they would draw the fault as close to the current wells as possible.

If that interpretation was wrong, IOC could recover those funds on the recert.

3. right-sizing the LNG plant? doubtful, as most plants in the region are running 3.4-3.8 mtpa/train.  Would they want a 5 mtpa/train, or larger - not sure why build big and costly in a soft LNG market

4. they do not think they have enough (7 Ts)  for a 6.8 or 7.6 mtpa (2 train) plant and need to verify resources  Thats a scary thought!  But I don't think its correct - can't believe GLJ would be that wrong with the new well data.

5. Want to eliminate arguments about the reservoir size with IOC and banks for LNG lending?  Knowing where the fault is and the reservoir quality over there will help answer a lot of questions

6. Other?

Assuming that the SPA specifies on a reduced recertification size, IOC must repay Total, I'd go for 1 and 5 as the reasons TOT may want to drill. Reduce uncertainty.  Unfortunately, 4 may also be an option - prove up more gas.

Any thoughts/comments welcomed.  Really thinking out loud and probably missed some (many) things.

[jft310]

Right sizing the LNG plant must be a viable concern. Was stated by Hession as a reason . Using independent data from Wood Mac presented several places the LNG market is not supposed to be soft when the plant opens . Today doesn't matter , Some projects will not get built , some older projects will run out of gas to produce . Demand for LNG is supposed to grow 4 percent per year . Clean fuel etc.The reason to build now is lower costs because of weak demand today ,

[Palm]

MH really has little say in this. As Operator and the MUCH more experienced in this industry Total has the heavy hand. The overall inexperience of MH is one reason (IMO) he has a need for this size of BOD. Of the 3 CEOs on the medals stand, he takes the bronze. But PM would fare no better. It's what happens when a very small exploration company happens upon a huge discovery. This same inexperience led to the sense of security about having $400 million that he thought would last forever.

What you basically said is that IF IOC AND OSH MERGED, it would be suicide for the Company to install Dr. Michael Hession as the CEO.

I don't think anyone on this Board would disagree.

Don't know if that's basically what I said, but it wasn't the point I was making.  Phil had to go and it would be more suicidal for him and his crew to gain Board seats.  PM's much-bigger-than-MH's-ego caused him to show his hand with the Board nominees he's proposed.  Some of his proposals are valid, but his move for Board seats is greatly flawed.

MH was likely one of the few who were interested in replacing PM back when PM's Board made the decision to replace him.  IOC was a quickly sinking ship and needed drastic changes.  MH likely was not as experienced as we'd like, but the ship was righted.  He received an outstanding pay package (yes now too lucrative), but his legals did a great job taking advantage of the situation.  Now we are where we are and things aren't perfect.  What happens from here is what's most crucial and we'll see how good this team is.  Hopefully they've learned that cash is ALWAYS king and not to be squandered.

What would have been certain suicide was to retain PM in the CEO role.

[admin]

Have to agree with that, Palm.

[sageo]

MH really has little say in this. As Operator and the MUCH more experienced in this industry Total has the heavy hand. The overall inexperience of MH is one reason (IMO) he has a need for this size of BOD. Of the 3 CEOs on the medals stand, he takes the bronze. But PM would fare no better. It's what happens when a very small exploration company happens upon a huge discovery. This same inexperience led to the sense of security about having $400 million that he thought would last forever.

   Palm - Many thanks for your post.  I hope you don't mind that I am printing it and then framing it to put on my wall for all my "young-uns" to see (and remember) . Your last sentence was very revealing about one of (several) of MH's flaws.  [ Maybe he just doesn't realize that borrowed dollars have to be paid back,or that the "borrowing well" can eventually run dry.]  After all the criticism, I still beleive PM has his "good points",but perhaps you are right that he would fare no better.  Thanks again for all your help to our board.

[Tusker]

Why might they drill Antelope-7?

IOC has stated that the recent long term flow test failed to see any indication of the western fault. In the recent presentation http://tinyurl.com/j6fu99b on page 6 they show a graph of the pressure build up after the long term flow test. You may note that they conveniently failed to mention the shut-in reservoir pressure prior to the flow test. That is the pressure we would need to make the calculation for gas in place as UBS did last August for the first test.

We have talked about the accuracy of these gauges before but comparing the pressure from both tests is interesting. Remember the lower the pressure drop for a given volume of gas the higher the gas-in-place number will be. I believe the gauges were set at the same depth for both of the two flow tests. Here is a comparison of the numbers reported for both tests:

Test No. 1 Antelope-5 Orig. Res. Pressure 3536.185 psi Pressure after a 5 day build-up was 3536.124 This gives a pressure difference of ).061 psi Apparently they did not know the pressure was still building after the 5 day shut-in period. This gives a gas-in-place number of  10.9 TCF. Which I find disappointing since this is a gas-in-place number and not a recoverable gas number.

Now the interesting part.

Test No. 2 Antelope-5 Orig. Res. Pressure Not reported. (why not?) Reservoir pressure at the beginning of the pressure build-up period after the end of the flow test 3536.38 psi. Note this is slightly higher than any of the pressures reported on Test No.1. As I have said before I do not think these gauges are “perfectly” accurate so let’s just concentrate on the pressure change. After being shut-in the pressure built from 3536.38 psi to 3536.42 psi over a period of 27.5 days for a pressure build-up of 0.04 psi and the pressure was still building. IOC said they think it is because the gas from the lower quality rock is still flowing into the higher porosity rock (the super highway to the well bore) Looking back at the pressure build-up on page 6 of the presentation http://tinyurl.com/j6fu99b , in the first 5 days (120 hours) (the period the well was shut-in on the first test) the pressure built up about 0.01 psi and the next 22.5 days the pressure built another 0.03 psi and was still building. Now the question: can we assume that if the gauges had remained in the well on test No. 1 for another 22.5 days would the pressure have built another 0.03 psi? If so the pressure drop from the original reservoir pressure would have been (0.06 -0.03) or 0.03 psi, half the previously reported pressure drop. Using the same UBS/IOC calculation as before would give us a gas-in-place number of 21.45 TCF. Do I believe this? No, I just show this to emphasize the fact that using numbers this small can be very misleading. So the JV partners may be looking at these numbers and saying “she is a giant” but we don’t believe the numbers and don’t know how big the giant is, so we will have to drill Antelope-7 to get a better idea of the size, at least to the west.

Now let’s look at page 7 of the presentation http://tinyurl.com/j6fu99b to see where they want to drill the well. The eastern most fault is the old interpretation and the western most fault is the new interpretation. So they are going to drill the well between the two faults (as shown). Of course you know there is only one fault, we just don’t know where it is. Drilling the well at this location will definitely prove if the old interpretation is correct. If the old interpretation is correct the well will be a dry hole. If we find the top of the pay as predicted by the map we will have proven that the fault is further to the west. If the well cuts through the fault they should be able to estimate how much further to the west the fault would be at the top of the pay zone which is what they show on the map.

Their map shows the well should find a rock type of “reef slope” which I take to mean that they do not expect to find any high porosity limestone or dolomite. I will  be so bold as to say if they find the top of the pay zone as mapped they will also find some high porosity limestone and /or dolomite. This is simply based on the fact that we have drilled six wells and they all had dolomite. So that is what they will be looking for, top of reservoir, rock type and location of the western fault.

Pet - Appreciate your great thinking as always. I don't quite understand their thought processes on where to drill A 7 and run the risk of a dry hole. As I ponder the map on page 7 a bit more,why not drill the well approximately 5,000 ft west of A 5 or approximately 7,000 ft west of A 3 ?  True,if they drill a dry hole,they will know how much further west our reservoir does NOT go , but several more million dollars are gone without more dolo $$ mite found. True,where I am thinking about one of two locations may still not give us the complete picture, I beleive we would cut the fault and know more than we now know. ( ...and also have another good chunk of highly porous dolomtic rock).

I will quantify my post by saying that due to excessive arthritis pain,I started on my "adult beverages" a little early today, so if my thinking is cloudy,please cut me a "little slack" .  Thanks (hic-up) !

Sageo- Your proposed locations 5,000 feet (1.5 k) west of Antelope-5 and 7,000 feet (2.1 km) west of Antelope-3 look good to me. They would be a safer bet to avoid a dry hole but might not give us as much information as the location they are building if the fault is truly west of that location as shown on the map. The location they will be drilling would seem to indicate that all three of the JV partners agree that the western fault is west of the location. Maybe that should give us a warm fuzz feeling.

Regarding the timing of the drilling David Kirk had this to say at the conference call:

"The Operator needs to close out a few outstanding queries around well design and cost, before being in a position to submit a formal proposal to the Venture. We expect the Operator to clarify those issues in the next few weeks, leading to a decision this quarter."

It was recently pointed out to me by one of our esteemed members that the producing wells will need to be big bore wells so that they can accomodate 7 " production tubing. Maybe Total has decided to start drilling big bore wells so that they can be used for high rate producers. If so they will need to develop a new casing program and get all of the larger size tubulars for the well. I believe the rig we have will be able to handle everything but they may need to obtain some additional equipment for handling the larger pipe. Anyway ordering the new size casing and pipe handling equipment could delay the spud date if that is what they are doing. Morgan Stanley estimated IOC's cost at $35 million which seems higher than usual at $90 - $100 million gross cost. They probably got the number from IOC so this may also indicate they are planning a more expensive well than we have drilled in the past.

In search of warm and fuzzy.  How informative of IOC to tell us how far west of Ant 5 the earth works for Ant 7 are located.

[sageo]

Tusker - And a jolly good day to you ! [...on warm and fuzzy ] , my best  guess at this time (  Pet would be more accurate,I'm sure) would be approximately 2 miles west of Ant 5. Let's see (soon)  what it does turn out to be . Best to you & yours.