US oil exploration: Brian McDonnell of US Oil and Gas talks to Stockopedia

In the coming months, Brian McDonnell is planning to drill an oil well in the heart of the Nevada desert that he thinks could be company-making for his business, PLUS Markets listed US Oil and Gas plc (PLUS: USOP). For three years McDonnell, his management team and a small army of scientists have been scrutinising a 21 sq km licence area in the searing heat of Hot Creek Valley – a drive of around 200 miles north-east of San Francisco, close to the California-Nevada border. After securing the licence by acquiring the assets of Major Oil International LLC in 2009 they have since carried out a series of advanced surveys and are now closing in on a drilling campaign.

McDonnell’s greatest inspiration for pursuing the project is the fact that Hot Creek Valley sits just 20 miles from the prolific Railroad Valley and lies in the oil rich region of central Nevada and western Utah known as the Sevier Thrust. The land also shares the same geological features as the 1bn barrel Covenant oil field in western Utah. US Oil is not alone as a London listed oil group targeting onshore US, with others including Nighthawk Energy Plc (LON:HAWK) , Caza Oil & Gas (LON:CAZA) , Aminex (LON:AEX) , Empyrean Energy (LON:EME) , San Leon Energy (LON:SLE) and Nostra Terra Oil Gas Co Plc (LON:NTOG) . Ahead of plans to begin drilling in first quarter of 2011, Brian McDonnell spoke to Stockopedia about the detailed analysis that has been carried out in Hot Creek Valley and his longer term expectations for the project.

Brian, US Oil and Gas came to PLUS in January this year. What have you been working on since then?

The first thing is that we have achieved everything that we set out to achieve. The share price is up by well over 80% and it’s holding very solid and the response to the company and the programme has been extraordinary. Two weeks ago we reported to the market that we had integrated a fantastic set of data and we’re now moving forwards very, very fast.

I think the important thing is that every milestone that we set out we’ve achieved – and in less time than even I had planned. Everything we said we were going to do we have done and the data set is now in and it’s 100% perfect. Earlier this year we carried out a gravity magnetic survey of the area and a passive seismic survey. The passive seismic survey produced an excellent set of data and told us we had an enormous anomaly of oil. Now the reading on the passive seismic was 0.96 out of 1, which is a direct hydrocarbon indicator. To put that in context, if we had had a reading of 0.6 or 0.7 and it was the Middle East that would point us to a very, very large oil field. We have a reading of 0.96 out of 1, or 96% out of 100, which is an extraordinary reading and you just can’t get any higher. The scientists produced that figure with a margin of error plus or minus 0.04%, which means it could never have been higher than 0.96.

So we had the gravity, we had the magnetic and we had the passive seismic. We then went on to confirm the geochemical results. Firstly, for that particular area, we got the reading from the passive seismic result of 0.96 and it showed up three anomalies – A,B and C – and what they said is that we were looking at a direct analogue of Railroad Valley. We are looking at what would be described as a high angle classical normal structural trap. So the geochemical data came in and it showed up the anomaly in exactly the same place that we had the high reading for the passive seismic and it was exactly the same place where the gravity magnetic people said ‘you’re going to find an anomaly’.

Until recently, all I was able to say was that there was a high correlation. What we did was to integrate the data with the structural geology and geodynamics and they confirmed that there was a 100% correlation between the data sets and that was the basis of our recent market updates. Now what we can do is rework the earlier 2D and 3D seismic data to see whether we can get any structural information out of it and that is what we’re doing at the moment. In the meantime we’ve staked the land and completed the public process with the Bureau of Land Management for a well drilling campaign and now it is just a run through with the administration in order to confirm the Application for the Permit to Drill. We have filed a staking plan with the US federal authorities in Nevada in preparation for the drilling of our first target.

We are anticipating that we will be actually drilling, as promised, by the latest, in the first quarter of next year. So we’re actually on target to drill within the next three to five months and that’s a very, very quick agenda, normally a company would be, at this point, two years hence without any exaggeration.

Have you sounded out the market on rig availability?

That’s exactly what I’m doing at the moment, I’m finalising the quotations with drilling companies. What has actually happening is on land in Texas the drill rig availability is starting to fill out a little bit but their drilling competences and capabilities are completely different from what we want. We have checked rig availability and we’re quite comfortable at the moment. It will fill out quite quickly if there’s an upturn, but I’m getting the clear indication that that movement hasn’t happened in the United States yet so I’m not worried about that.

How straightforward has it been to deal with the relevant US authorities on this project?

They have been extraordinary. Firstly they have been involved in all aspects of the project. We walked the land with the Federal authorities in August and there were no issues. We are on public land so there are no private ownerships rights problems, there is no national forestry service problem, there are no access roads problems, there are no private land problems, because we’re in the middle of the desert. The key issue on the project now is to continue to finish analysing the data in order to confirm the engineering aspects of the well we’re going to drill, that’s really what we’re working on at the moment.

Is this going to be a complicated well?

No. Any seasoned drilling company would tell you that this is quite a straightforward process, it’s on land and there is nothing complex. The words that have been used each time is that this is quite straightforward. We have got easy access to the site, we’re less than one and half miles away from hard serviced roadways, gravel roads. This area of Nevada, California, Utah, Colorado is a prolific well drilling region with literally dozens of companies that I’m going to be able to access.

Has there been any exploration activity in the surrounding areas during the year?

Actually, one of the geologists that we’re bringing onboard on our team is finishing a drilling project in Railroad Valley, so in actual fact what I can say is that large companies, like Shell (NYSE: RDSA) and Texaco have been very, very active in Nevada. That activity is essentially within the Sevier Thrust and has been triggered by this massive 1bn barrel find by Wolverine Gas & Oil Corp in the Covenant Field. They now know that they can move forward but we still have the edge on them in terms of the technology, there’s no question about it, the technology has been the key for us.

You have employed a vast array of technology to firm up you assessments of the land,. Why has that been important to you?

Yes, and we’re actually going to add another layer of technology to it. So I’m really, really happy that we’ve identified the oil in the ground, we’ve confirmed the anomaly is true and actually we use cutting edge geochemical techniques also. Some of the stories that were given back to me as to how others have picked well drilling locations in Utah and Nevada would scare you. That is not the approach we’re using, we’re literally focusing in on an XY co-ordinate on very, very specific information. Ours is a precision process and I think it is very, very important to realise that.

How do you see your forthcoming drilling programme taking shape?

Well, in one area around the very high DHI reading of 0.96, we’ve actually got three separate chemically confirmed anomalies of oil and they’re within 100m of each other. Now that’s the way the Nevada geology works, the geology works that if you drill and you move 150m away you will actually find that you’re into a completely different geological structure being fed by the Chainman shale below. With three anomalies alone that would be a three well drilling campaign. Out of three sections we have got one target in section 2, which is the north well drilling target and another in section 3, which is our second well drilling target.

We’ve already come up with the secondary and the third well drilling target in the north and that would be perfectly anomalous to what happened in Railroad Valley where you have in an area I think as small as about 40 sq miles about 22 well targets that are actually producing oil. That’s classically what could happen here, what you could actually find is that you could be drilling into structural traps that are each independently being fed from the Chainman shale below and that’s what we’re looking at.

What we’ve got is a reading of 0.96 and all of the land around it, approximately 200 acres to 400 acres, is saturated with oil. At the point that we’ve picked, we can actually have success and a well that flows with oil for a long period of time because the nature of the geology here is that that would will be continuously replenished by the Chainman shale beneath it – that’s where the analogue to Railroad Valley comes. The geologists have said that the structural geology is an analogue of Railroad Valley and that’s very, very encouraging. So, we’re de-risking the project on the basis that we’ve got a lot of the profile of Railroad Valley, which is only 20 miles away. Everything that we’re looking at could lead to a successful well drilling campaign.

Thank you for talking to Stockopedia.