"The Best Place to Find Oil....

[Kaliboo]

A few reflections and a little celebration from a an old oil and gas well engineer still working full time but who was off today and watched the market ALL day long; something I never do.

If you recall the Q3 conference call, Dr. Hession talked about drilling wells very soon BETWEEN E/A and Triceratops (as well as other exploratory and appraisal wells), and how that relates to the historical chances of finding more hydrocarbons. Indeed there is an old saying in the industry that has proven itself countless times over: "The best place to find oil, is in an oil field."

I've personally witnessed if from my vantage point in a super major, especially when we've sold old "depleted fields" to an independent. Amazingly the independent finds a lot of reserves all around the main depleted reservoirs that the super major missed. It happens over and over again. But sometimes the super major simply drills blindly in a different direction from all the other wells or maybe deeper below the existing producing reservoirs, below where seismic cannot "see" and they discover huge volumes which can extend the life of a field by decades.

Similarly, onshore independents kept working on the technology to unlock the gas (and now oil) from onshore shales. Super majors knew it was there from their own drilling but were impatient on working how to unlock it and moved on to other "more attractive plays." The independents persisted and came up with the working technology forumula to unlock tight gas accumulations in shales that previously were uneconomic.

In PNG super majors punched some holes in the past but weren't able to dream up geological models that worked. These are simply the theories and guesses based on their geological training of how various mechanisms in nature may have interacted to create hydrocarbon accumulations in different places on earth. So they gave up when they didn't find large accumulations to meet their minimum volume requirements.

Their models did not succeed. But IOC have come up with their own geologic model and interpretation of how the sediments were laid down and charged, and have with at least two discoveries so far, determined THEIR MODEL WORKS. The structure and traps are there, reservoir quality rock is there, the source rock is there, and the structure is charged full of gas. So now they are expanding their exploration and appraisal plans to replicate the prior steps OVER AND OVER AGAIN using their model; but this time MUCH FASTER!!! thanks to Dr. Hession's more CORRECT VISION on how to accelerate value for the company.

They are drilling fairly shallow for the easy stuff into seismic amplitudes that look most promising. (Maybe there are deeper accumulations to be explored later in what will be by then, IOC's producing gas fields. That's typically how it unfolds down the road.) Delineation of the size of these discovered big boxes of hydrocarbons and their connectivity and water contacts, will determine how many wells will be needed to drain this stuff and what the probable recoverable volumes are.

They are drilling straight holes so far. They will/should be making technical assessments as to what type of wells to drill for the development wells. E.g., a long slant hole or even a horizontal well would likely require a different rig with more capability, but might deliver wells with twice the productivity OR HIGHER and require FEWER wells to develop the volumes at a lower cost. So drilling similar untested structures CLOSE BY AND BETWEEN the existing discoveries is the "finding oil in an oilfield" practice.

There is a very high probability of finding MORE HYDROCARBONS than drilling e.g., many miles away. Given that there are multiple similar structures to drill, one starts to get giddy wondering what the resource estimates and proved developed reserves will be by Dec 31, 2014 and beyond. Undoubtedly a sizeable amount of resources will no longer be classed as "resources" but will be on it's way to appearing on the balance sheet as PROVED DEVELOPED RESERVES, wherein the book value of IOC currently between 15-16 $/share will start to take large incremental jumps as each entry is revised.

Once the numbers are "officially on the books", analysts and speculators (especially those shorts fond of harping earlier this year over and over again by saying, "IOC has NO RESERVES." will have to up their valuation and their projections for the valuation. As we know "the first deal" will unlock this door. The door or dam holding down the valuation is leaking steadily since the Nov 12 CC but will burst wide open (in my humble opinion) to make this week look like bargain pricing.

Drilling is no sure thing, but we have confidence in the IOC geological model and so do several super majors. Since the day he arrived, Dr. Hession is doing exactly what I'd be doing: Get the first deal done BUT drill as quickly as you can the rest of the prospects, and they will come to buy it. The faster you drill it, the faster you can make discoveries, the faster you can prove up volumes, the faster you can derisk the volumes, the more attention you will get from super majors, the faster the supermajors can formulate an offer, and the faster you can sell it.

Bigger volumes mean bigger opportunities and economies of scale for super majors, which means more LNG trains and greater profit margins, and thus the ability to bid A MUCH HIGHER PRICE. I still don't think the market gets it yet. Just give em time. As I said previously, while we have to have a deal for the first quantity of gas to break through that barrier, DRILLING IS THE REAL VALUE MULTIPLIER. Yes you need partners to build the delivery system, but that is not a question of IF, it's only a question of how big and the agreed price.

Mr. Mulacek was the right leader for the right time, which was leading the company to arrive at the right geologic model and finding these great opportunities. But he was mistaken on the path to create the most value the fastest. He had dreams of a being fully integrated oil company and building LNG plants which led him astray. We now have the right leader for the future which is to rack up the HC resource volumes as high and as quick as he can. Onward CHARGE!!!!!!!DRILL BABY DRILL!!!!

[Palm]

Very timely Kilaboo. That's one of the latest rumors; they are looking for some oil with this drilling campaign. Hmmmm

[Palm]

A couple of comments/points Kaliboo. First of all, great post; very enlightening from another industry source.
1. Ant 2 was a well drilled horizontally with great success. It was the first well drilled directionally like this in PNG per IOC. Their currency rig #2 was used for this.
2. Dave Holland is considered THE expert as far as knowing the geology of PNG. We are very lucky to have him aboard.
3. What you say about Phil is absolutely correct. He was the pioneer needed to take the risk and go where others had been before. It was time however to bring in a guy like Hession. Would it have been better to make the change sooner? No doubt, but Phil was the founder of the company and deserved a chance. But as you say, Hession is the guy to see this through. As perfect a person as we have in Dave Holland, Hession is the one we need at the helm. And Collin V is a great CFO. With the other people Hession has brought in I don't think we could be in a better position right now.
3. There has always been the strong sense that oil is there in IOC's acreage. When they find it....
4. Berkshire's purchase of Exxon stock is very interesting.

Thanks again for the great post. Have a great weekend all!

[admin]

["3. There has always been the strong sense that oil is there in IOC's acreage. When they find it...."]

Highly likely:
- Per CISRO report 2004
- Per multiple oil shows in Ant1&2 and Bwata1
- Even according to Bertoni. Remember him, the Brazilian geologist hired by the shorts?

The point is finding it in rock that is good enough for it to flow.

[Kaliboo]

Very timely Kilaboo. That's one of the latest rumors; they are looking for some oil with this drilling campaign. Hmmmm

Finding oil would be nice and deliver revenue faster than building LNG plants, but I get concerned as to what undesirable consequences will occur with the people. Oil pipelines are more easily tapped by theives. I've seen headlines and pictures of the Nigerians thieves stealing oil. The economic losses reportedly are extremely bad for some companies such that they've shut in some pipelines. I can't imagine anyone trying that on a gas pipeline. Sabotage - potentially yes, but stealing the gas - ain't gonna happen.

[Kaliboo]

A couple of comments/points Kaliboo. First of all, great post; very enlightening from another industry source. 1. Ant 2 was a well drilled horizontally with great success. It was the first well drilled directionally like this in PNG per IOC. Their currency rig #2 was used for this. 2. Dave Holland is considered THE expert as far as knowing the geology of PNG. We are very lucky to have him aboard. 3. What you say about Phil is absolutely correct. He was the pioneer needed to take the risk and go where others had been before. It was time however to bring in a guy like Hession. Would it have been better to make the change sooner? No doubt, but Phil was the founder of the company and deserved a chance. But as you say, Hession is the guy to see this through. As perfect a person as we have in Dave Holland, Hession is the one we need at the helm. And Collin V is a great CFO. With the other people Hession has brought in I don't think we could be in a better position right now. 3. There has always been the strong sense that oil is there in IOC's acreage. When they find it.... 4. Berkshire's purchase of Exxon stock is very interesting. Thanks again for the great post. Have a great weekend all!

Much thanks for the update on the HZ well.  Good that they have that already trialed doing this there and now have it in the proven toolbox.  That's more risk removed from the development cost estimates.  Yes, I was wondering the same about Buffet's move.  I think that is just another good sign, but this time you and I beat Warren to it.  You have a great weekend now.  I'm headed to eat some Mexican food and a drink very large margarita.

[Palm]

We have at least 2 things in common; IOC and a love of tequila.

Have a great weekend.