c02, is it a problem?

Hi All,

First thing; don’t sweat the small stuff. Focus on the fundamentals (re: Kris energy release).

As has been discussed a number of times, the Song Hong-Yinggehai basin (in which Block 105 and the Dongfang gas fields lie) is characterised by high concentrations of C02. However the characterisation is incorrectly applied i.e the basin and surrounding areas are ‘contaminated’. This is not true however. For evidence of this, you need look no further than Dongfang, where the field, 1-1, is polluted with it (ranges between 1%-90%). However, less than 10Kms away field 13-2 contains less that ~10% by volume.

I’m going to focus on the C02 risk and nothing else.

Throughout 2012, CNOOC drilled a lot of wells. The exact location of these has been near impossible to figure out. Sometime (most likely around March/April) in 2012, they found Dongfang 13-2 with the drilling of DF 13-2-1. At the time, based on IHS data NEN mapped the location of this well/field – approx. 25-30kms away from Cua Lo in Block 105 as indicated in the following from the 2013 June quarterly:

Figure 1

Around July-August 2012, CNOOC did an appraisal well by drilling 13-2-2 striking a very large field comparable to Cua lo-1. The production results showed good flow and large reservoir. Note that Cua lo has the potential to dwarf DF 13-2-2 as our best case is 3Tcf and high case 14 Tcf vs 13-2-2 at 1.7Tcf. This was reported by NEN via the GOC presentation in Sept 2013 showing the field location and commercials outlined in blue (also take note of the black outlines which denote DF 1-1):

Figure 2

You will note that the outer extent of the fields between Cua lo and DF 13-2-2 are ~10-15kms away. Very close from a geological perspective. CNOOC followed up with two more appraisal wells (DF 13-2-3, DF 13-2-4) completing them in the 2012 Sept quarter. This was reported in CNOOCs Q3 report:

Figure 3

Since the completion of the Dongfang appraisal wells, CNOOC has been very tight-lipped on the metrics around them. This is because they are the most successful wells drilled in the Song Hong-Yinggehai basin to date. It is very important you understand the location of these wells in relation to Cua Lo. Take note. Its obvious that Cua lo is an extension of the DF 13-2 field towards the west, and is therefore very likely to replicate those results i.e low C02

Now the next obvious question; If DF 1-1 is characterised by high concentrations of C02 and is roughly the same distance from DF 13-2, why does DF 13-2 exhibit low concentrations of C02 at less than 10%? The answer is quite simple and can be extrapolated via geological analysis. Firstly we need to see how Cua Lo presents itself against DF 1-1:

Figure 4

From the picture above you can see DF 1-1 on the far right-hand side. The payzones are contained in the late Pliocene/Pleistocene rocks. These geological layers occurred later in time and are more modern (crude explanation). Please take note of this as its importance will become obvious. Cua lo however sees its payzones in the late Pliocene, down to its primary targets in the lower/upper Pliocene and Miocene layers. i.e deeper.

In a joint research paper between CNOOC and the China University of Geosciences, a conclusion was drawn from DF 1-1 within the basin context (abstract):

Figure 5

The important points are underlined. It’s a statement; reservoirs in the late formative years (eg: Pliocene/Pleistocene) are more likely to exhibit high concentrations of C02. Reservoirs in the early (eg: Pliocene and Miocene) formative years are more likely to exhibit low concentrations of C02. When you view this information in relation to figure 4, it marries nicely. However what is more important is that the DF 13-2 field (as in figure 2) targeted the same depth ~3100 and rock-age as Cua lo. By all accounts we will encounter the same geological phenomena. It’s the SAME target formation!!!

Also a general comment on other items that have been raised:

1. Natural gas, by industry standards, is only economically viable when concentrations are 10-15% of total gas volumes. Anything higher and you need to think about beneficiation techniques/technology or producing other products. Alternatively the operating costs may be so cheap to make higher concentrations feasible or end-prices higher to make separation feasible at the wellhead.

2. Industry standard for gas in ground is to use USD $0.50mcf.