How Much Oil Will HZN Produce from Beibu Gulf and Maari/Maania?

How Much Oil Will HZN Produce from Beibu Gulf and Maari/Maania?

The minimum should be the 2P Reserves from 2021 Annual Report.

	From Annual 2021	2P	2C	Total
1	New Zealand	3.2	4.9	7.1
2	China	3.4	1.3	4.7
3	Total from 2021 Annual	6.8	6.2	11.8
4	Include Likely Upside	As detailed below	> 2.2	> 14.0+
5	Include Unlikely Upside	Maania Moki	> 6.0	> 20.0

The 2P (and 2C) would likely be slightly higher because marginal prospects and workovers at sub-$50 oil would have become “low hanging fruit” at $80 oil. Perhaps not 100% certain, but are very low risk.

In addition, if high oil prices persist, the “economic life” of our New Zealand assets could be significantly extended.

There are other opportunities in New Zealand and China, that will very likely see the final recovered oil exceeding 14mmbo as long as oil prices don’t tank (as they have in the past).

Maari/Maania, New Zealand.

Maari is being acquired by Jadestone Energy (JSE).

The acquisition presentation from 01/11/2019 Presentation

Jadestone Investor Briefing 25/2/2020 Webcast here

Discussion of Maari subsurface runs from approximately 70 mins to 80min

Maari is discussed elsewhere in the presentation.

These presentations give me great confidence that New Zealand 2C will be produced, with further upside from currently producing reservoirs

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There is significant potential upside at the undeveloped Maania-Moki reservoir. HZN’s Net Resources would be in the order of 6 mmbo.

Whilst JSE states that a lot more work is required at Maania-Moki, it has a very low probability of being developed, but there is a slim chance.

Beibu Gulf, China

I suspect that as a consequence of the Government Edict to maximise production to ensure “energy security”, CNOOC has increased the pace of development (and production).

There are wells planned for the producing areas (6-12 and 12-8-W). I believe that the higher oil price has transformed many low risk projects from marginal/sub-economic to “no brainers”.

The new project, 12-8-E Phase 1 only contributes 600,000 bbls to the Annual Report 2P number (this would likely have been in a $40 to $45 oil environment).

In this game, the outcome can be better or worse than anticipated.

On the balance of probabilities, I believe that Phase 1 is very likely to recover significantly more than 600,000 bbls, because

• CNOOC and HZN have consistently under-promised and over-delivered. I get the impression that under-delivery can have negative career implications in China.

• CNOOC’s estimate of recovery factor, and production rate is (much?) higher than HZN’s publicly stated estimate.

• CNOOC has analogous fields, and are therefore, likely to be closer to actual performance.

There are 5 wells into the viscous Jiaowei reservoir, where early water coning is the danger.

There are 2 exploration wells into the deeper more productive Weihzou reservoir (A7 Weizhou is an exploration well with a modest target – and will be converted to a 12-8E project water disposal well if unsuccessful; the WZ12-8SE well is a nearfield exploration well, which can be immediately brought onto production, if successful)

What About 12-8-E Phase 2 and 3?

HZN has stated that it depends on how Phase 1 performs, and that they need to see 12 months of production to gauge success or failure.

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The 12-8E Jiaowei reservoir has in excess of 90 mmbo of oil-in-place.

Phase 1 targets a small area of this reservoir (see AGM presentation slide).

Whilst the P1 target area may have been selected because it is the best defined, Phase 2 and 3 (if they proceed) would simply target new areas of the Jiaowei reservoir targeting similar reserves to Phase 1.

In broad terms there are several outcomes.

	Outcome vs Plan	Comment	Phase2/3
1	Significantly below Plan	Small loss, break even or modest return on capital	No
2	Below Plan	If higher oil prices persist, a lower recovery rate would still be economic.	Yes
3	Plan	Smiles all round	Yes
4	Above Plan	Very, very big smiles all round	Yes

It is clear that HZN’s estimate is based on a very low recovery factor for the very large 12-8-E Jiaowei reservoir resource. I suspect sub-5%.

It is possible that we could recover an additional 2 to 3 mmbo from the 12-8-East area versus current 2P+2C.