Analyst Comment

10th Feb '10 by Cuthbert C

23 comments 8197 reads

Thread created to provide a home for analyst comment and related discussion

Arbuthnot note is here

Unlock with Email

Unlock with Google

Already have an account?
Login here

About the Author

Cuthbert C

Premium Member

23 comments

Jimarilo

10th Feb '10

Hi fb,

The company realise from a KBC report that the life cycle of the Bentley development could be at least 15-20 years beyond the start of first oil (said to be mid 2011) Also the drilling of horizontal wells makes a huge impact to production and further so if they introduce steam flooding

The volumes in place and the possible rate of return over a 15-20 year cycle certainly rests my nerves or is that the whisky chasers ? ;-)

"The company achieved test production of 150 b/d with the help of an electric submersible pump from an appraisal well drilled in 2007-08. Both the specific gravity – around 13ºAPI - and the viscosity of the oil were
found to be within acceptable limits, and assessment by Schlumberger indicated that well
productivity of 4,400b/d could be achieved from a 3,000-metre horizontal section."

http://www.dw-1.com/files/files/400-April_09_update.pdf

Cheers

flyinghorse

12th Feb '10

I reply to posts 3 &4 and I dont think I have seen a Bressay FDP or ES? Chevron sold it along with Mariner to Statoil. Statoil have the know how, and potential access to a heavy oil upgrader however I suspect the Mariner Maureen will be developed first. The rest (heimdal) is almost alternate resource for later and Bentley falls into this category.
I also think Steve Kew (excite) wrote an Spe paper on calcium Napthenates and sodium soaps on the original Bentley wells being the testing issues originally.If so this will pose big process problems.
1 in 4 of Chevrons bbls globaly are heavy and they walked away.

I meant the hype from XEL not analysts-they just dont understand Heavy oil.

I also think that the likes of XEL and Nautical will need to produce their Heavy oil assets before anyone else bigger takes them on, and theres little competition for Statoil.

Its been a while since I read the CPR for Bentley but I recalll a collosal amount of capex being required(from where?)for development. I would want a proper horizontal well test before investing , and certainly would not invest on the back of Schlumbergers extrapolations!

As for the horizontals, thats blindingly obvious, but 4000bbls/day will soon cut to water(water is les viscous than the oil) so again many wells required. 90% water cut is only 400bbls oil/day.
Steam currently is a no go offshore, its requires close well spacing to work and lots of energy to generate.

I guess what I was trying to say is this is a stock to ride on the way up and get out just before they come back wanting more cash for the next phase.
Regards
FH

Cuthbert C

12th Feb '10

"...this is a stock to ride on the way up..."

Hope so......

;~)))

Proselenes

13th Feb '10

One must not ignore the recent UK government incentives to North Sea Heavy Oil fields, and the fact that more are said to be "on the way".

A new round of further incentives will certainly make the task easier for Xcite and others.

Comments on the last set of incentives are here :

http://www.deloitte.com/view/en_GB/uk/press-release/0b78a2ffce812210VgnVCM100000ba42f00aRCRD.htm

http://www.epmag.com/Magazine/2009/8/item42848.php

.

MrT

13th Feb '10

In reply to Proselenes (post #7)

That WoodMac/E&P Mag article is very interesting, cheers for posting it. What's the basis for the comment that more incentives are "on the way", though? How imminent is that? What happens if (as seems almost certain) there's a change of government shortly?

flyinghorse

13th Feb '10

The incentives are on any profit made. You have to make a profit first.
Not really help from the government, just we tax you less if its heavy oil.(ie surcharge)

Note, Nautical were one of the government/treasury consultee's on heavy oil.

Cuthbert C

15th Feb '10

...The incentives are on any profit made. You have to make a profit first.
Not really help from the government, just we tax you less if its heavy oil.(ie surcharge)...

Don't understand what you mean by the above.

I tend to think the best approach is the one in Norway which provides cash incentives for exploration - if you spend money drilling an exploration well in Norwegian waters, the govt refunds 85% of whatever you spend, and sends the cheque within 12 months. So there is a significant subsidy incentive to encourage exploration. Of course if you find anything and bring it into production, then the Norwegian Govt then imposes higher rates of tax than say the UK. So you are encouraged/enabled to do a lot of drilling but the govt eventually gets its money back if/when you succeed. Bottom line is that the refunds increase the NPV of all projects compared to what they would be without the refunds. That IS an incentive to explore. I like this approach a lot.

It's different in the UK. Our govt does not offer similar cash incentives up front. What they have done though is offer a significant tax incentive for those who develop small discoveries and/or heavy oil discoveries. Both classes of discovery cost more to develop and generate lower returns than larger fileds full of lighter oil. So previously there was a commercial disincentive to develop them. Or at least they would always be at the bottom of a priorised to-do list. The additional tax allowances make it more advantageous than previously to go ahead with small/heavy projects. They make a substantial difference to the economics and the relative merits of the affected projects. Bottom line is that the refunds increase the NPV of the affected projects compared to what they would be without the refunds. That IS an incentive. It is of course an incentive to produce rather than explore, but that's hair splitting in my view.

If it is not help from the government, then what is it? It lowers the threshold at which the project economics will be attractive, it makes it easier to obtain finance and easier to attract partners and it increases the after tax profits that will ensue. If that's not help, what is it?

Proselenes

15th Feb '10

In reply to MrT (post #8)

It is rumored the UK government are very keen (as in its more revenues for them) for the heavy oil fields to be developed. It was said recently that Darling was looking at further incentives, however whichever government is in power they all need for North Sea oil revenues so the incentives should keep coming.

Also, page 3, some coverage for Xcite

http://www.bridgehall.co.uk/images/Bridging%20the%20Gap%20Tips%20for%202010.pdf

flyinghorse

15th Feb '10

In reply to post 9.
Appologies for not being clear.

I dont believe that these heavy oii projects will make the money being projected, as they are based on costs that are very immature-likley +- 40% , so the incentive will not apply, and the deeper they get into full project engineering the more costs will spiral.

The incentives only work if you have a NPV +ve project. And yes they will help ,if you make profit.
When the reality of a heavy oil development dawns,quality well cost's are in and the reality of well production is seen that the NPV will be negative, and the incentive offered by government irrelevant.
The best current incentive is the lower rig rates at present.

FWIW, and being pessimistic, Bentley low case needs approximately $1.881 billion capex, $1.394 billion opex($3.275 total) , to extract 72mmbbls from 38 sidetracks(9 injectors) for a NPV10 of $181mm.

Its not clear if this NPV10 number includes the field allowance.(stated at $100mm in the Arbutnot appendix)
Whatever -spending $3.275 billion to get $181mm return, some of the NPV possibly being "incentives"

I may be missunderstanding the incentive but I thought the mechanics were to allow avoidance of the suplementary 20% tax by a yearly offset.

Dont get me wrong, I would love to see N Sea heavy oil developed,but I think sustained long term oil price >$110,management of the supply chain and access to upgrading will be the catylst, not a government incentive.
Regards,
FH

Jimarilo

15th Feb '10

An interesting interview with Statoilhydro UK's Heige Hatlestad on Bressay/Mariner

http://www.energy.focusreports.net/zh/Interview/124/HatlestadHelge

Statoil certainly have heavy oil experience and the will to extract it, but would they have the will to take out XEL if the next horizontal well is good or at least take a slice of XEL's 100% interest ?

http://en.wikipedia.org/wiki/Peregrino

http://www.energy-pedia.com/article.aspx?articleid=137490

Cuthbert C

16th Feb '10

In reply to flyinghorse (post #12)

Dear FH

you are quoting the numbers for the most pessimistic scenario in the CPR (the case where reserves come in at the low end of estimates)

And of course the CPR was done before the latest round of 3D seismic

That latest seismic already justifies an increase in reserve estimates but that increase has not been put through yet because a further increase is expected when the next drilling results come in and XEL plans to do both increases in one go

The original CPR was published in September 2007 and was updated in February 2009. XEL has since reprocessed the 3D seismic data which has upgraded the resource base, but the CPR has not yet been updated. Instead, this will be done post drilling in 2010.

If we look at the CPR base case, where the numbers come in as expected (but still before subsequent 3D )we get a much better outcome than the case you describe - NPV = $780 million and IRR = 23.6%

However, that is still based on resource/reserve estimates pre-latest 3D seismic. These numbers will be upgraded before investment decisions are made - the work done already indicates an upgrade is appropriate but XEL is waiting for the next chunk of data so it can do a single upgrade taking into account all of the latest data rather than doing it in little bits.

When all of this is factored in the economics will be even better than in the base case.

Which I expect to be enough to get the project moving forward.

Which is why I've invested.

That's how a market works after all......

flyinghorse

16th Feb '10

In reply to 13.
I did caveat that I was pesimistic, and have my reasons for that. I believe that this project will be very phased and incremental. Even the low case of 36 wells is ambitious.
I think that you will find very little difference between the base case reserves and low case reserves on a per well basis. ( recovery/well). This appears to be a scaling up of opex and capex for more wells between the 2 cases,(approx 2mmbbls/well in each case)likely based on the seismic you mention. The low case has 36 mother bores and the base case 56, in other words a phased development(Captain was done in 3 phases -a/b/c). The high case is 3mbbls/wells-dont know why but may represent EOR/IOR or better recovery factor.

This is a mining exercise, and I would expect in reality, recovery by well to vary with geology,oil viscosity variation and well completion issues and voidage strategy.
The risk's in each case are still the same to the overall project, they will be spending at a phenomenal rate. (Low case continuous drilling for 3 years at 1 month per well) I hope the abandonment of the wells is factored in as there are a lot of them.
Any start to this project will be liikey phased starting below low case anyway.
I suspect the higher NPV in the base come's from having paid of the capex for the fixed infrastucture,possible well synergies in defying Sw10's law(possible in a batch drilling scenario) etc

It would be interesting to see time to payback-a key investment marker in my opinion.

I also know from Captain that the wells will need worked over (pumps fail,sand screens rupture,scaling needs dealt with)-is this factored in, or once water cut/sand prone will they be left for dead?

Untill the well test, the completion of engineering FEED, full understanding of opex and tying costs down to + - 5% and submission of the FDP and ES, raisng of capital,I suggest that they can make the numbers look very compelling-we will wait and see and we both have different opinions.

My view comes from having worked on developing the stuff in the North Sea so I am very pessimistic and wont take the CPR numbers at face value.

I dont plan to say more on this but suggest if any investor is heavily invested here ask the company the right questions,as heavy oil cannot be treated like normal developments.

Regards,
FH

muckshifter

16th Feb '10

Great post flyinghorse!
That sort of first hand knowledge, used to inform us readers, is precisely what makes a good bulletin board worthwhile.
Regards.

Cuthbert C

16th Feb '10

Hi FH

You are not just being pessimistic, you are systematically excluding some positive material factors for which there is hard evidence whilst talking up negative factors which are based purely on your personal misgivings. The result is, in my opinion, that you are misrepresenting the situation.

Refer to the Resources Assessment Report done by independent consultants in Feb 2009 - ref www.xcite-energy.com/docs/CPR09_release.pdf

First thing that stands out to me is that the economic analysis in that report took account of the oil accumulation that had been discovered already but excluded the additional potential of prospect A and lead B. A was given a COS of 72% and a P50 size of 30 mmbls - which is non-trivial - A and B were left out of the economics to keep them conservative.

Second thing that stands out is that the consultants concluded that as things stood a year ago the chance of Bentley proving to be commercially viable was 70% (and that excluded prospect A and lead B)

Third thing, the OPEX of $2.1 billion covered the whole life of field - 15 years. Your earlier comments implied that this was a component of the up-front investment - it isn't - it is a cost which will be met from a portion of annual revenue only if the project succeeds. So the economics as stated in the report were talking about up-front capex of $2.5 billion to produce gains with an NPV of $780 million.

Fourth thing, the capex included a contingency element of 33% of drilling costs - a very conservative approach.

Fifth, OPEX estimates include standards levels of contingency - as is prudent

Sixth, the plan being considered is the installation of an early production system (EPS) which will be used to try out the intended operational approach and allow it to be proven beyond doubt before full scale development is approved. This will allow assumptions and forecasts to be proved or disproved and/or adjusted as necessary. This is a sensible and prudent approach to risk management. if your pessimism proves justified then the EPS will demonstrate that you were right and the project will either be modified or abandoned.

Bur what won;t happen is that all of the development budget gets spent and only then do the problems get identified. That's not going to happen.

If you read the 39 pge report available at the link above, you can see that the issues you are raising are not things that XEL and its consultants have failed to consider. Indeed you will find a very full and detailed analysis.

IMHO the idea of an EPS combined with the reserve upside and economic contingencies provides more than enough reassurance about the concerns you have expressed.

Cuthbert C

16th Feb '10

Further to my comment in post #17

the economics set out in the CPR report were done before the government introduced the tax incentive for heavy oil field development last year

So the additional $100 million added to NPV by the tax changes must be additional to the $780 million figure

So we come to an NPV of about $880 million

factor in the additional resources/reserves that XEL expect to declare in due course, and we must be close to an NPV = $1 billion

Cuthbert C

16th Feb '10

Hi Again FH

Further to discussion of the project economics I'd refer you to the interview with XEL management last week which is available at www.stockhouse.com

David Pescod: Now you’ve already had five wells done
into this field, what kind of resource numbers do you feel
comfortable with now?

Richard Smith: In terms of oil in the ground and recovery,
we have the competent person review that was prepared
at the beginning of 2009 which gave a range of recoverable
reserves from approximately 80 to 90 million barrels
in the downside case, all the way through to about 170
million on the upside case and most likely of 122 million
barrels of recoverable reserves. So I think we’ve done a
bit of work since that time. From a managements perspective,
we now think the most likely recovery from the
field is going to be in the order of 170 million barrels with
an upside potential of over 220. That’s using conventional
technology, no enhanced oil recovery techniques, cold
flow that horizontal wells and down hole pumps.
And if you look at some of the well tried and proven, enhanced
oil recovery techniques, we are seeing the possibility
of substantially increasing the recoverability and
those will be some of the techniques that we will look at
once we get into the full field development. But we are
basing the development and the financing of the development
on the very conventional drilling and well completion
approach. The volumes within the ground are within
the range of 500 to 700 million barrels of oil in the ground
and we are therefore, planning on a relatively conservative
percentage recovery with substantial upside potential....

JPGH

16th Feb '10

Excellent posts today guys....FH makes some really excellent technical points regarding the potential pitfalls of Bentley offshore heavy oil project (due to the state of immaturity of the engineerng "flesh on the bones" so far)and RG also makes similarlily good points regarding what might appear to be a case of FH calling a half full glass almost empty.
I have some onshore heavy oil facilities engineering experience (not subsurface unfortunately) and have a good working knowledge of Bressay Mariner economics (I have a few NPE so developed a model very similar to the Schlumberger model that did the rounds in 2002/2003). I will now revisit this as I havn't looked at it for a while. I do recall though that the economics were not all that bad but then the risk of early water cutting of wells was not addressed in the production profile (and hence more less-productive wells to add some the CAPEX which would have a negative impact on Project NPV10 value). Once up to speed I will try add some input to the debate where possible with a Bressay/Mariner slant.

My only observation on FH's earlier post on costs estimates...... is that you will not get a costs close to +/- 5% accuracy from a FEED study, much more detail (and project manhour spend) than that produced (and expended) in a FEED STUDY would need to be added to the project to reach an estimate of that accuracy.

JPGH

JPGH

13th Mar '10

I spoke for a long while to Charles Lucas Clements after lunch at Oilbarrel on thursday last. Being a fellow Chemical Engineer the conversation was in the the main a technical one focusing on topics such as why Bentley's bulk viscosity is not as high as it should be, given its low API, well deliverability, choice of pump (Progressive Cavity Pump (PCP) vs Electro submersible pump (ESP), various development options, why Bentley has no wax (biodegradation of low molecular linear alkanes (C2 to C11 fractions means low paraffin content, high Naphthene content), refinability of Bentley crude (its basically equivalent to the VGO cut from a oil refinery's atmospheric distillation column) ...etc.
He also explained in detail how the Alliance members contributed to the Bentley story and how they will get rewarded.

Anyway I left with the firm belief than Xcite know precisely what they are doing with Bentley.

Charles L-C was also a very pleasant approachable person.

I will be adding Xcite to 2010's ISA when I get funds ready in early April.

JPGH

Cuthbert C

5th Apr '10

New broker's note out from Arbuthnot

see www.xcite-energy.com/docs/XciteEnergy190310.pdf

I wrote a post last night with a summary and analysis of the main points but it got lost on the wires and I don't have time to reconstruct it right now.

Just read the note.

Cuthbert C

6th Apr '10

Worth adding that the nature of the "Bentley Alliance" is explained in the new note

Unlock the metrics for all these stocks and more...

Take a free trial

Facebook Twitter Youtube Instagram RSS

This site cannot substitute for professional investment advice or independent factual verification. To use it, you must accept our Terms of Use, Privacy and Disclaimer policies.

Unlock the metrics for all these stocks and more...

Take a free trial

Analyst Comment

Unlock the rest of this article with a 14 day trial

About the Author

Cuthbert C

23 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...