There are strong technical and commercial reasons for Drilling first VS 3D.
The question is simply: Is the cost and time delay for acquiring 3D before drilling justified?
Regarding the 'farmout', if it was to a well funded major I would agree. Farming out to a company smaller than MMR, run by an ex-director, whom still have to raise the money is not a major achievement.
For the reasons below, it seems clear that the likely strong share price on drilling, and the good possibility of drilling success without 3D far out weights the time delay, cost and likely unsatisfactory result from 3D first.
3D can provide additional information to reduce the drilling risk, but it is not always useful. And even if the 3D data is amazing, there will still be significant risk and a well will still have to be drilled to find the answers for sure.
For example, Woodside acquired extensive 3D coverage over parts of the North West Shelf and this did not result in large exploration successes. Some of the technical problems they experienced are also expected in PEP 11. (http://www.searchanddiscovery.com/documents/longley/) Note also that several dry holes were drilled before Woodside had commercial success.
There seems to be a perception that 3D will give answers. It will not. It will only give indicators. Only drilling will give answers.
The strategy of 3D first significantly dilutes the company’s interest in its main asset, and I believe will lead to a continued stagnation of the share price for at least 3 years and probably longer.
The conclusion to drill first is supported by these facts.
Both the Berge and Marlin reports above recommended Baleen as a priority drill target
The independent ‘Marlin’ report recommended Baleen to be drilled next and without the need for 3D
The 2D Survey just completed was specifically designed to enable drilling at the Baleen target.
There is plenty of indication of source rock, with onshore data and seeps, so 3D is not necessary to determine source.
The structure is large, and easily mapped on 2D data. 3D would likely provide clarification and detail, but 3D is not necessary to determine that there IS a structure. This is confirmed by the company’s current active farmout brochure (http://envoi.co.uk/projects/active-projects/australasia/australia/)
This brochure states that there is “clear evidence of very large 2D defined closures being associated with active hydrocarbon system seepage”and there are “multiple large prospects coincident with seismic anomalies including AVOs, gas chimneys, reverse polarity events and flat spots across the acreage. The active hydrocarbon system offshore is supported by satellite seepage and thermogenic gas bubbling from the seabed. Large pock marks evident on the sea floor is also further evidence of gas migration which correlates strongly to the sub-surface structures mapped in PEP11.”
If good quality 3D is acquired, it has the possibility that it can reduce the drilling risk however the quality of the seismic is likely to be poor:-
Independent Australian Government Geological research has confirmed the seismic data quality in this area (PEP11) “suffers from poor penetration and low signal to noise ratios, caused by hard, shallow and irregular water bottom, presence of volcanics and structural complexity” (Ref: Offshore Sydney Basin: Petroleum Prospectivity Bulletin). It is therefore unlikely that the quality of the data will be good enough to reduce the seal and reservoir risk significantly.
Research from experts from Shell and Chevron and others confirm that 3D surveys are not always valid for “problematic areas such as beneath hard seafloors ...and complex geology" This is the situation in PEP 11.
This comment from the farmout brochure is very important
“The original location, targeting the deeper Permo-Triassic play prospects, was only abandoned after the site survey required prior to drilling, failed to confirm seabed stability and mitigate the risks posed by shallow gas for use of the rig contracted.”
IT MEANS THAT THE WELL DRILLED IN 2010 WAS NOT THE BEST TARGET. THE WELL THAT WAS DRILLED AND FAILED WAS A SECONDARY TARGET.
COMMERCIAL REASONS
The actual PEP 11 work program as approved by NOPTA and announced by the company requires that a well is drilled by 2019 and THEN 3D seismic. The company will have to request a change of work program. (ASX MMR: 02/10/2015)
I believe that there will be at least a 3 year delay before drilling if 3D is acquired first. It is likely to be closer to 5 years.
The East Coast gas demand is currently desperate, and a number of large very expensive solutions are being contemplated. If the NSW gas market becomes "satisfied" by supply from others, PEP 11 may become unnecessary and may never be drilled.
Demand for gas is high, rig rates are low, there has never been a better time than now to drill and test the proper target in this permit.
Note: In the farmout brochure 3D seismic costs are $5M, the RL Energy farmin is for $4M, cost estimates from the company have been for up to $8M (ASX MMR 24/11/2017). The company is giving up considerable equity in the project, and will still likely have to fund a large portion of the seismic.
IN SUMMARY.
MMR should drill its primary target now while the energy demand is high, and rig rates are low. Drilling the Main Target now is likely to cause a major increase in the share price.
A 3D first strategy will dilute the equity in the company’s main project to 11.75% before a well is even drilled, and is likely to keep the share price down for years. Advent is likely to have to pay for part of the seismic cost. And the best case is that the drilling risk is reduced, and a well will still have to be drilled, to see if there is commercial gas.
I do not see how the company can possibly justify the risk, cost, dilution and especially the delay for what is likely to have only a small benefit.
Timing is everything and for reasons previous posted, I believe there will never be a better time to drill PEP 11.
MMR Price at posting:
1.9¢ Sentiment: Buy Disclosure: Held
(20min delay)