REG - IOG PLC - Corporate Update

IogAnnouncement

20/06/2022 07:00

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RNS Number : 4341P  IOG PLC  20 June 2022

20 June 2022

 

IOG plc

 

Corporate Update

 

IOG plc ("IOG", or "the Company"), (AIM: IOG.L), the Net Zero UK gas and
infrastructure operator focused on high return projects, provides an update on
current activities and operational guidance for the remainder of 2022.

 

Andrew Hockey, CEO of IOG, commented:

 

"I am pleased to say that Saturn Banks production continues to be restored as
planned, up to 54 mmscf/d gross currently from 30 mmscf/d at the start of
June. We are taking the necessary actions both to improve facilities uptime
and minimise restart times after any outages. Allowing for planned and
unplanned downtime, we expect to produce 45-60 mmscf/d gross on average over
2H22.

 

UK Day-ahead gas pricing remains extremely volatile, trading in a 10p to
224p/therm range this month. Our average realised price to date is 135p/therm
and forward prices for this winter are increasingly elevated, closing at over
300p/therm last Friday. We expect 2022 opex to be 10-15p/therm.

 

In parallel, the 24" extension of the Saturn Banks Pipeline System to
Southwark has been successfully laid, while drilling of the Southwark East
well is at an advanced stage. With Southwark expected onstream in Q4, we aim
to exit 2022 with a higher, more diversified production stream.

 

This is part of an exciting growth period ahead, with the Goddard and Kelham
appraisal wells following straight after Southwark, plus a Nailsworth final
investment decision and seismic re-evaluation results for the Panther/Grafton
area both targeted by year end.

 

As the government encourages reinvestment in the North Sea to support energy
security, we also have a clear view of value-adding new licence targets,
alongside other business development opportunities under active evaluation."

 

Saturn Banks Phase 1 Production

 

Further to the 1 June 2022 operational update, in which production was
confirmed to be restored to an initial gross 30 mmscf/d, temporary
modification of the second recycle compressor in the Bacton terminal
condensate stabilisation unit (CSU) was completed by its operator Perenco (UK)
Limited. In line with the announced plan, this has alleviated liquids
constraints and enabled production to be steadily increased, reaching 54
mmscf/d gross by 17 June.

 

In June to date, gross production has averaged 44 mmscf/d, with uptime at 84%
for Blythe and 94% for Elgood (100% for both over the past week). Factoring in
the May shutdown and other previous outages, uptime has been 45% and 65% for
Blythe and Elgood respectively since First Gas, giving gross average
production to date of 32 mmscf/d. In addition, IOG sold 1,341 tonnes of
condensate (its net share) in April and May at an average price of $882/tonne.

 

Forward Guidance

 

Significant progress has been made so far in June in improving liquids
management and onshore reliability at Bacton and the remaining restriction to
gas flow is expected to be fully lifted over the coming weeks. To underpin
uptime, work is underway to improve the Blythe platform's electrical stability
and reduce the risk of emergency shutdowns. The Company has also enhanced its
helicopter and vessel access to enable faster offshore restarts in the event
of any further unplanned outages. Permanent chemical injection modifications
are expected to reinstate full remote restart capabilities by early Q4.

 

The reservoir productivity observed to date at Blythe and Elgood is consistent
with the updated management estimated recoverable reserve range in the 2021
Annual Report released on 17 March 2022. These ranges are gross 1P/2P/3P
25.4/42.5/55.8 billion cubic feet (BCF) for Blythe and 9.6/14.1/18.3 BCF for
Elgood.

Based on reservoir analysis and ongoing facilities optimisation, gross average
2H22 Saturn Banks gas production is projected to be in the 45-60 mmscf/d
range. Average condensate production is projected to be 250-350 bbl/d over
2H22 as condensate rates are expected to decline fairly quickly. These ranges
make reasonable allowances for both planned (aggregate of 15 days to complete
the above works, including a Bacton terminal shutdown) and unplanned outages
over 2H22.

 

Total unit operating costs in 2022 are projected to be in the 10-15p/therm
range (c.$8-12/boe). Expected total capex net to IOG for 2022 remains within
the previously guided range of £70-85 million.

 

Gas Market

 

Pricing under IOG's gas sales agreement with BP Gas Marketing Limited is
directly linked to the UK NBP Day-ahead price. This has been exceptionally
volatile since First Gas in mid-March, with very strong LNG supply into the UK
market in conjunction with limited export and storage capacity, alongside
unexpected events such as the recent Freeport LNG outage and NordStream 1
capacity issues. The NBP Day-ahead price has traded in a 10-224p/therm range
this month. IOG's volume weighted average monthly realised gas prices so far
have been 232p/therm for March, 161p/therm for April, 83p/therm for May and
106p/therm for June to date (135p/therm combined since First Gas).

 

The UK NBP forward curve priced the Winter 2022 contract at over 300p/therm
and Summer 2023 over 190p/therm on 17 June, indicating an expectation of a
very supply constrained market over the coming year. These levels fluctuate
significantly and are not a forecast of future day-ahead prices. Whilst in
principle the Company remains inclined towards commodity hedging, with such
exceptionally high volatility, pricing and execution for typical structures
are currently prohibitive.

 

Southwark

 

Subsea and pipelay work has gone to plan in Q2, ensuring progress continues
towards Southwark First Gas in Q4. Notably, the 6km 24" extension section from
the Saturn Banks Pipeline System (SBPS) to the Southwark platform was
successfully installed by the Seven Borealis S-lay vessel. The Seven Kestrel
diving support vessel (DSV) has also installed the necessary mechanical
connectors at both ends of SBPS outer section - another important element of
the programme. The Kestrel is currently installing the spools to connect the
6km extension to the Southwark platform. The final closing spools will be
installed later in the hook-up and commissioning programme, which is currently
underway with risers being welded on the Southwark platform.

 

Drilling of the Southwark East production well has continued into the
reservoir section. The well has reached Total Depth at 14,330ft MD and the
production liner is being prepared to be run. The Noble Hans Deul rig will
then drill the Southwark West well (at which the top-hole section had already
been drilled earlier in the campaign). Both wells are due to be completed by
Q4.

 

Appraisal campaign

 

After Southwark, the Noble Hans Deul is contracted to drill both the Goddard
and Kelham North/Central appraisal wells in direct continuation at the same
attractive day-rate as the Phase 1 wells. Both the geophysical and
geotechnical site survey campaigns for the Goddard and Kelham wells are
complete, while planning and procurement for both wells is also well underway.

 

The Goddard appraisal well is intended to define the south-east extent of the
main Goddard discovery and de-risk its two flank structures, thereby helping
to determine the optimal field development plan, including platform location
and number of wells, to maximise investment returns. 3D seismic reprocessing
over the structure in 2020-21 has improved subsurface understanding and
enabled a choice of well location. At a 45p/therm price deck, the internal
rate of return (IRR) from final investment decision (FID) on a Goddard
development is provisionally estimated to be 19-40%, depending on whether the
appraisal well proves up a larger structure. This rises to 50-80% at a
75p/therm price deck. The current forward curve average out to the end of 2027
is 158p/therm. Subject to further drilling, there are also other potential
tie-back opportunities to a Goddard development.

 

The Kelham North/Central appraisal well is intended to prove up both
accumulations as part of a potential three-field "Southern Hub" gas production
cluster including the Abbeydale discovery on the same P2442 licence. Again, 3D
seismic reprocessing work has opened up extensive, previously unidentified
resource potential on this licence, which lies well within tie-back range of
the SBPS. If successfully appraised, there would be potential to fast-track
into production for a quick-payback high-return investment. Based on pre-drill
mid-case resource estimates, this is provisionally estimated at 33% IRR at a
45p/therm price deck, rising to 75% IRR at a 75p/therm price deck. There are
also several other potential future additions to such a Southern Hub on the
licence, subject to further exploration and appraisal drilling.

 

Based on the current drilling schedule, the two appraisal wells are expected
to be completed by Q1 2023.

 

Phase 2 and portfolio activities

 

Active regulatory engagement continues for the planned Nailsworth development,
with the concept select report submitted to the North Sea Transition
Authority. Meanwhile an expression of interest for Front-End Engineering and
Design (FEED) work has been issued. A concept select decision remains expected
by the end of Q2 based on a tie-back to the Southwark platform, with FID
targeted by year end 2022 leading to first gas in 2H24.

 

The 3D seismic reprocessing of the Panther-Grafton area (licence P2589) is
expected to be completed by around the end of Q3. This will be followed by an
evaluation of the newly reprocessed data to inform a new assessment of the
area's potential, expected by year end, seeking a similar uplift in resource
potential as with the P2442 (Kelham/Abbeydale) licence. The Panther-Grafton
area lies close to the Company's Southwark, Elland and Nailsworth assets,
creating potential development synergies.

 

IOG also intends to be active in new licensing opportunities, with the NSTA
recently confirming the 33(rd) Offshore Round for this year. The Company has
identified a clear set of value-adding priority targets that can contribute to
the UK energy resilience goals laid out in the British Energy Security
Strategy announced in April. Further potentially synergistic nearby business
development opportunities are also being actively evaluated in collaboration
with our joint venture partner CalEnergy Resources (UK) Limited.

 

This announcement contains inside information for the purposes of Article 7 of
the Market Abuse Regulation (EU) 596/2014 as it forms part of UK domestic law
by virtue of the European Union (Withdrawal) Act 2018 ("MAR"), and is
disclosed in accordance with the company's obligations under Article 17 of
MAR.

 

Enquiries:

 

 IOG plc                                            +44 (0) 20 7036 1400

 Andrew Hockey (CEO)

 Rupert Newall (CFO)

 James Chance (Head of Capital Markets & ESG)

 finnCap Ltd                                        +44 (0) 20 7220 0500

 Christopher Raggett / Simon Hicks

 Peel Hunt LLP                                      +44 (0) 20 7418 8900

 Richard Crichton / David McKeown

 Vigo Consulting                                    +44 (0) 20 7390 0230

 Patrick d'Ancona / Finlay Thomson / Oliver Clark

About IOG:

 

IOG is a Net Zero UK gas and infrastructure operator focused on high-return
projects. The Company's operations are currently concentrated around its
offshore and onshore Saturn Banks infrastructure in the UK Southern North Sea.
Phase 1 of its Saturn Banks Project, which started production in March 2022,
entails the commercialisation of the Blythe, Elgood and Southwark gas fields
through this infrastructure. Phase 2 of the Saturn Banks Project entails the
Nailsworth, Goddard and Elland gas discoveries, which are subject to future
investment decisions and expected to be commercialised through the same export
infrastructure. The Company also holds further licences with additional
resources including the Abbeydale, Panther and Grafton gas discoveries, the
Kelham North, Kelham Central, Thornbridge and Thornbridge Deep prospects, and
part of the Orrell gas discovery. Currently, all IOG's licences are held 50:50
with its joint venture partner CalEnergy Resources (UK) Limited and operated
by IOG. In addition, the Company continually evaluates further opportunities
for accretive portfolio additions to help generate additional shareholder
returns. Further details are available at www.iog.co.uk (http://www.iog.co.uk)
.

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