write up from ED -...

write up from ED - http://www.proactiveinvestors.co.uk/...s/art.php?EME5

A very active year for Empyrean has seen them establish modest production from shallow discovery wells at the Margarita Project in Texas, and in the last few days, confirm commercial gas flows at the Sugarloaf Project in Texas which is shaping up as a major discovery.

Tom Kelly, Chief Executive Officer of Empyrean Energy, has a straightforward game plan. Since listing in 2005, the concept of Empyrean was to invest in more advanced, technically sound projects that had drilling on the immediate horizon. Tom didn’t want to be chasing grass roots or frontier exploration projects that required years of investment and time before a drill-ready target was defined. Since listing, Empyrean has stuck to this model and is now reaping the rewards.

Empyrean listed on AIM in mid 2005 with the high risk/high reward Glantal Gas Project, in Germany and has since balanced their portfolio by earning into projects that offered the potential for near term production. Of course, oil and gas exploration and development is never an easy game, and all kinds of things can go wrong, even after a commercial discovery has been made. However, to date, Empyrean has had an impressive technical track record: every well the company has participated in has returned oil or gas shows. Completion problems at the Eagle Oil Pool, where oil shows were recorded, overshadowed the company, plus there were non-commercial gas flows from the first exploration well at Glantal. However, commercial discoveries from 3 out of 6 wells drilled at Margarita, in Texas, and recent news that two wells on the Sugarloaf Project have flowed commercial rates of gas, have rejuvenated shareholders’ optimism and sent the shares soaring.

Texas Crude Energy Inc (TCEI) first identified the Sugarloaf Project whilst examining seismic for shallower play types. The size of the structure made it one of the biggest untested structures onshore USA. The big appeal of the prospect was the potential for multiple pay zones at different depths. Empyrean started out with a 6% working interest in Block B, a 22,000 acre landholding operated by TCEI.

The first well drilled, Sugarloaf-1, identified multiple gas shows both in the Hosston sands and the secondary targets of the Austin chalks and Edwards formation. These carbonate plays are proven in discoveries all around the Sugarloaf license, with several significant oil and gas fields - discovered in the 1950s and 1960s - containing a cumulative 5TCF of gas and 100MMbbls of oil. Carbonates can provide excellent reservoirs for commercial accumulations due to natural cracks and fissures opening up permeability. In most cases, carbonates need to be fractured to open up the reservoir and allow natural cracks and fissures to connect and channel gas and/or liquids to the wellbore. Fracture stimulation of the Hosston Formation recovered only minor gas at a rate too small to measure, so a decision was made to plug off the Hosston and to test the shallower plays.

Before these shallower zones were tested, TCEI and partners increased their leased areas around the Sugarloaf discovery. Empyrean also announced a new deal with TCEI giving them an increased interest in wells drilled on Block B and also giving them an interest in wells drilled on the adjacent Block A where they previously had none. The new deal is for the next 16 wells drilled, after the Sugarloaf-1 well, on either Block A or B, where they earn 7.5% of Block A wells drilled as part of the 16 well deal and an additional 12% of Block B wells drilled as part of the 16 well deal. Assuming there will be 8 wells drilled on each block as part of the program - the deal gives them 7.5% of the Block A wells and a total of 18% working interest in 8 wells on Block B. Beyond the 16 well deal, Empyrean retain their 6% working interest in Block B.

Subsequently, the A-1 well - the first of the sixteen wells to be drilled - has returned spectacular results. The well was earmarked for fracture stimulation but flowed commercial quantities of gas during preparations. This is big news for Empyrean, as it implies that subsequent wells on the field may not require fraccing if natural cracks can be targeted; something that can be identified on 3-D seismic. Not having to fracc reduces the cost and complexity of the well completions. On testing, A-1 has already recorded flow rates exceeding 2mmcfepd (million cubic feet gas equivalent per day). This flow rate could increase substantially with fraccing.

Equally good results emanated from the A-3 well too, where a horizontal well stopped short of its proposed target after encountering strong gas flows and high pressure. Testing to date has recorded flow rates exceeding 7.8mmcfepd - this time from an open hole test, again with no fracture stimulation.

All of this recent good newsflow has sent shares in Empyrean soaring, with the prospect of the company having an interest in, potentially, one of the largest U.S. gas field discoveries for many years. Results to date are excellent, and the potential to drill horizontal wells and increase gas flow by multiples is very enticing. In many ways, Empyrean Energy’s business model has been completely vindicated by the success at Sugarloaf, and enticingly, there are plenty more wells to drill. Results from the Kennedy 1 Well are pending.

The past twelve months have been particularly active for Empyrean Energy with a largely successful campaign of shallow wells in Texas bringing the company its first cash flow. Viewing the volatility and range of the share price over the same period, it is clear that it has not all been plain sailing. Nonetheless, there is no doubt that Empyrean now has significant potential in the Sugarloaf carbonate reservoirs. The option for Empyrean to participate in the 16 well deal at Sugarloaf to appraise (and develop) the Austin chalk reserves, will be one of the driving forces behind the share price for the rest of 2008 and 2009. The production thus far has come from the uppermost zone of three potentially productive zones. The two deeper zones are likely to be tested shortly, and have the potential to double or even triple the recoverable reserves of the Sugarloaf Project discovery. Empyrean suddenly finds itself in a very enviable position. It still has £1.4 million in the bank, with cash flow from Margarita and several commercial discoveries at Sugarloaf. Glantal and Eagle Oil Pool still sit in the portfolio, but at last investors can look past those projects and focus on the rapidly evolving portfolio in Texas which looks set to keep investors on their toes for many months to come.