oex on oilbarrel

January 19, 2009

Investors Await News Of Next Steps In Oman After Oilex Completes Four Well Programme On Its Promising Onshore Block 56

Despite a precipitous slide in its share price over the course of the last year, Aussie oil junior Oilex has started 2009 with some promising drillbit-led news that in other times would surely put some momentum behind the stock. The AIM-quoted firm, which at the end of last year initiated production from its Cambay brownfield development in India, has announced the results from its Block 56 drilling programme in Oman, where the company was looking to confirm that the oilfields in the Eastern Flank Salt Basin extended into its acreage.
That now seems certain, with three of the four wells drilled over the second half of last year, the second phase of drilling on the block, delivering solid results for the firm, which is also listed on the ASX. All the wells – one appraisal well and three exploration wells - encountered hydrocarbons and one, the Umq-1 wildcat, pointed to the prospectivity in a previously undrilled area.

The first well was an appraisal of the previous Sarha discovery, made in early 2008 as part of a three-well programme. Sarha-2, drilled some 600 metres to the north west of the discovery well, confirmed the presence of oil in the Al Khlata reservoir, with the horizontal section encountering 200 metres of productive net pay and producing between 150 and 200 barrels of oil per day. Less positive, however, was the oil gravity, which was heavier than that encountered at Sarha-1. The company is now trying to understand why there is this difference in oil quality between two such close wells, both of which have been suspended as potential future producers.

The second well, Lathab-1, encountered oil shows through the Al Khlata, Haima and Huqf Formation reservoir intervals but the thin oil pay – around two metres - meant the well didn’t warrant testing. The third well, Al Jumd-1, however, delivered a more promising result, with 27 metres of net pay found in the Al Khlata with no oil-water contact identified. The structure is reckoned to be similar to Sarha and the well has been suspended for future testing.

The final well, Umq-1, found oil shows and high gas readings in the Huqf primary objective over a gross interval of over 500 metres but the well fell short of the deeper sandstones predicted beneath the Huqf carbonate due to operational difficulties. Even so, this was a good result for the company, confirming the presence of oil and gas in a previously untested central portion of Block 56, the Central Terrace area, which the company has been keen to explore.

The wells were no gushers – but then they were never going to be in this part of Oman where heavyish crudes and complex geology are the norm – but they do prove the existence of oil in Block 56 with the Sarha structure still a candidate for near-term development, the Lathab production test pending and the Umq well opening up the potential of the Central Terrace. What’s more, the wells provide invaluable data to help the company understand the subsurface rocks in an area where seismic interpretation is difficult. The wells will now be tied into the seismic database to help with that interpretation effort, a process that should be completed by the end of February. This will then help determine a forward work programme for 2009.

All of this, of course, costs money. The company recently raised A$10 million to help with its investment needs and is trimming back its overheads in a bid to reduce cash burn. However, the lower oil price environment doesn’t help the project economics and the global credit crunch means the corporate focus needs to be on lifting production to bolster cash flows and that means pumping money into the development of its Cambay oil complex in India: the company has set a target of producing 2,000 bpd by the end of 2009, which should make it cash flow positive. This is a laudable business model given the current economic and financial outlook but its implications for further appraisal, testing and development work in Oman remains to be seen. Oilex has a 25 per cent operator interest in Block 56.