London Video with Transcript, page-2

Questioner: Going back to the previous-
Dave Wall: I don't know if that's on. Is it going through there? It is okay.
Questioner: It is on.
Dave Wall: That's better.
Questioner: The picture before.
Dave Wall: Which one?
Questioner: No. Keep going. That one. There you go.
Dave Wall: I'm sensing this is a Paul question.
Questioner: Southwest. Migration from north to southwest which goes straight from middle down southwest.
Paul Basinski: This is a continuation of last year's question. We must have done a very poor job answering.
Questioner: So far. How much is that going to increase by the 3.6 million barrels?
Paul Basinski: I want to get the first part of your question right about going from-
Questioner: North to southwest.
Paul Basinski: Yeah. If we can flip that around, we're starting to get in the ballpark of what we're doing here.
Questioner: Southwest to north?
Paul Basinski: Yeah. Oil is lighter than water and it goes upslope. I know last year, it was a problem, right?
Questioner: Yeah, but then that means all the oil is going to be up in Great Bear territory, not down where we are.
Paul Basinski: Now, that's a different question. Here's the thing. The calculations have been done on how much oil has been generated by this rock. Approximately 2% left the rock. That means most of the oil is still there down in the kitchen. The key for these plays is that, if you have what people consider to be the ideal source rock for a conventional play, that's usually a pretty lousy shale play, because it means it's leaky. Now, our shale, the HRZ, where we are isn't leaky, but then why is all of the HRZ oil up north and why are all the people finding HRZ oil if it didn't leak from where we're at?
This is the real question. The way it leaks is that we're near a thrust belt. What happens is this dives underneath the thrust belt. When it does, rocks get all busted up and they don't have a seal anymore. All the oil went up this way, updip, meaning from low to high. It went up structure. When it got under the Barrow Arch, it just charged the whole thing. That's the reason why we have a reservoir, a play that's got a great seal because where we do, it does but it just gets 1000-foot thick when it gets into the thrust belt. That's the part that sourced everything, but where we are never got there. We still have 98% of the oil. Where we are, the oil, basically almost none of it ever left. It's still mostly there.
Questioner: Really, what you're saying is-
Paul Basinski: It went updip.
Questioner: No, it still goes north. Where it should be, going back to Steve now, is 1.4 conventional down there. There could be hell a lot more. That could be more conventional than unconventional.
Paul Basinski: On the north slope, everything that's got a seal is filled to spill. The question is, do you have seals? The best way to make a big field on the conventional is called Prudhoe Bay, is to have a stratigraphic trap. If you're going to have a stratigraphic trap, it will be as full as the trap is, as far as the trap can trap. That's what we're working on with the seismic, to see the size of these. How much oil is in? There'll still be a lot more oil in the shale because most of it never left.
Questioner: Thank you, Paul.
Paul Basinski: You bet.
Questioner: Good afternoon. Probably more a question for Dave. You've mentioned that we are fully funded for Icewine-2. We've got plenty of money in the bank. What consideration on funding are there - you've said we can go to banks? What are the options available after in terms of [inaudible - dilution, industry banks], whatever?
Dave Wall: This is something we've touched on before in the last meeting. Like I've said, slightly glibly back then and the same applies here, is that we just do whatever is the most accretive option that we can do. Certain things you cannot do depending on the circumstances which might be the best thing ever, but if you can't do it, then they're not so good, right? The vanilla-type things that we know we could do if we have success is we can come to the market and raise money, or we can go into a deal with the industry.
When you think about that, it's like, "Okay." Say the market can't go to half a billion pounds or something like that on the success of Icewine-2, but someone in the industry thinks the project is worth a billion pounds based on that point in time. Would you take money from the market at half a billion pounds or would you deal with the guy that says it's worth a billion? It's pretty simple answer, right? I don't know what that answer would be in the future because I don't have a crystal ball. I don't know what the oil price is going to be. I don't know what the flow rate is going to be. I don't know what the share price is going to be.
There's too many moving parts for us to be able to make meaningful predictions on what we're actually going to do. We know that there will be multiple pads available to us. I guess you guys just have to trust us to try to do the right thing because we're shareholders, too, and we want to make money like you guys do.
Questioner: You said the options are open and it's a question of finding the best options at the time.
Dave Wall: 100% correct. Yeah.
Questioner: Thank you very much.
Dave Wall: I guess just in terms of there's an unspoken question in there is like, "What happens if we had success operationally?" We did touch up on this. Really, the plan would be to try to accelerate the appraisal of the project as quickly as we could. We had started permitting additional wells in this project which could be drilled as soon as the first quarter or second quarter of next year. That would likely be another follow-up well to Icewine-2 as a horizontal well from the pad to show that here's a vertical well that flowed at 150 barrels. Here's a horizontal well that flowed at two-and-a-half thousand barrels. Therefore, theory proven and we've shown that that relationship is real. Even though empirical evidence shows it works in other plays, it doesn't mean it's going to work for us, but we can prove that, so we'd aim to do that.
Then, we look to drill out to the east and the west, or east and west, and hopefully tag a couple of these conventional prospects on the way down. Then, we look to build out something on the road which will have more wells that would show that you can get significant production out of this as a test case for developing a starter kit unconventional shale play on the north slope. At that point in time, which is two-and-a-half to three years away, our estimate, you would have a delineated resource across the entire acreage position. You would have proven flow rates from four or five horizontal wells. That point in time, the project is eminently saleable. We can retain our leverage to the project without diluting too much until then, that is the best way for us all to make the most money. Like I said, it depends on what options are available to us at that time.
Questioner: One question. Why is it taking so long for someone to come along here and start drilling there?
Dave Wall: What do you mean? I don't know understand the question.
Questioner: Historically, we know a lot of other fields are there, but why wasn't this done five, 10 years ago?
Dave Wall: I'm going to leave that one for Paul.
Paul Basinski: Thanks a lot for that, Dave.
Dave Wall: Paul loves these questions.
Paul Basinski: Is that right, Dave? A big part of it was something outside of my field which was the above ground situation. While the shale gale was going in Lower 48, Alaska put a very punitive tax structure in place. What happened was the only people that remained up there were the majors. What drove the shale gale and the revolution in Lower 48 were the independents. Because of the fiscal regime, it didn't make any sense at all because of the takes that the state was putting on at that time. Probably as much as anything else, that's the story.
Then, what happened was the price got really low. It was at that point, and then the state put enhancements in the fiscal regime in order to encourage exploration and the outcome of that on the conventional side has been pretty profound because Armstrong has gotten a billion barrels. ConocoPhillips has just got the Greater Mooses Tooth. Caelus has announced a couple billion barrels in Smith Bay. All this has happened in a very short period of time.
On the unconventional side of the story, the issue was that people were thinking about this play with a conventional oil model. They probably were making the right decision because if this is just conventional oil and not volatile oil, it probably wouldn't be successful. The volatile oil model is a relatively new model that we developed during the Eagle Ford and it wasn't until around 2011 and '12 when it actually got out. By that time, the state was starting to pivot to this tax regime and then we had the low oil price. In a nutshell, I think that's 20,000-foot overview.
Dave Wall: I thought Paul was going to give us some more profound rhetoric about the formation of ideas and how flugelbinders were invented and things like that.
Paul Basinski: God, I wanted to.
Dave Wall: There's one up in the back there if we can ... All right, here.
Questioner: Just building on Mickey's questions a little bit. First of all, you mentioned in your initial talk that you acquired additional acreage based on what you believe is the extent of the shale play. Can you give us some idea? You mentioned thicker zones, so higher net pay. You must have an idea on what you think is recoverable or potentially what is in place.
Paul Basinski: Right now, we're sticking with the guidance of DeGolyer and MacNaughton.
Dave Wall: I think what we're saying is that, at this juncture, there's a big number on the table already. We need to prove that first. Then, we can think about the next step.
Questioner: Are you intending to acquire more seismic information?
Dave Wall: At some point in time, but it's all a question of when the right time is. For example, if the HRZ play works, then we would immediately potentially buy the 3D seismic that exists around the well pad there which was shot using the dynamite. That's there to be bought. It doesn't have to be acquired. If it doesn't work, then do we need more seismic for us to have the confidence to go and drill one of these prospects? Really, that becomes partly a strategic decision but also a commercial decision.
For example, seismic acquisition on the slope is quite expensive because it can only be done in winter. That also makes it quite time-consuming. Could we instead go and drill Bravo and Charlie? That might be a $10 million post-hole as we call it in the industry, which would be relatively inexpensive compared to the cost of a 3D shoot. If our major risk here is seal and reservoir quality because we're deeper in the section than these other discoveries to the north, the seismic can't answer those questions for us. The seismic can answer other questions like if we did find decent reservoir quality with a decent seal, how big is it.
We know that if we're going to find something here, the definition that we can see on the 2D means that these things are big, but they still have quite a high risk associated with them. 3D could potentially, we might say the chance of success on drilling one of these, just one of the conventional not the stacked leads, is maybe in the order of 10%, 15%. With 3D, we could probably improve that to maybe 35% or 40% where we are. Do we spend two years acquiring seismic and then planning for that well, or do we just go and take a little bit more risk for lower costs? We don't know the answer to that yet. It does depend on some of the ongoing work that Steve alluded to in terms of maturing these prospects.
Questioner: Thanks, Dave. I have one final question for you then. Last year, when you presented in September, you've mentioned the 50% success. You've changed the well design. You're obviously looking to get a good flow result. Is there any further upgrade on your expectation?
Dave Wall: No. I know that people want us to say yes but, really, the 50% is based on our calculation of risk and also our estimation of uncertainty which is not actually very hard to estimate. Changing the design doesn't actually change any of that. What it does is increases the potential to maximize the flow rate, but it doesn't tell us whether it is going to flow and whether the fracture is going to remain open and how the rock is going to behave and all those things that we will never understand until we actually drill the well.
Until we get new information, we can't change our assessment of the risk or uncertainty. 50-50 on a few billion barrels, so pretty good in my book. Obviously, if it doesn't come in, we'll still be villains even though we do try to highlight the risk to everyone and make sure people understand. That's one of the reasons why we're to here, to say that if you flip a coin, and this is not a coin flip because this isn't a chance because there's a lot of work that has gone into this. When it boils down to it, it might not work. There's a 50% chance that it's going to be a lot of value destruction here.
Don't worry, the next answer will be more optimistic.
Paul Basinski: It sounded like a morgue. It didn't sound like much quiet.
Dave Wall: I could hear the crickets chirping. Yup?
Questioner: Firstly, thank you for coming over again. Fantastic. Two questions. Sorry. My name is Martin, private investor. First question, if we are looking to raise more money, obviously, it'd help if our share price was higher. Is there any thought about doing some sort of PR campaign to let people know the news we have? To me, it's nearly all positive. Yes, there's risk, but it is positive news. The first question, for a relatively small amount of money, you could do a very positive PR campaign on 88's behalf. Second question, your pay package has gone up, which I think is well-justified. Are you looking to spend any of that on buying shares because that would be good PR?
Dave Wall: It's funny when you talk about PR and also directors investing in companies. It doesn't always send the best signal. One of the things that it tells you is that if I'm buying stock, it means that everything that I know is in the market and everything is complete and fully formed. That's very rarely the case. For example, when this story where things are constantly changing and evolving, it's very rare for me to have the opportunity to invest and buy shares. That's part one. Then, in terms of PR, we do probably more PR than any other oil and gas company in our peer group. I think it's been pretty effective today. For us to be able to have all of you guys on the register, it just doesn't happen by accident. That is something that we do put a lot of time and thought into, and that is something that we'll continue to do in the future.
Questioner: Thank you.
Questioner: Hi, guys. My question is somewhat similar to the previous questions. Insomuch that the intent to grow the shareholder's wealth and indeed the wealth of the company and its capitalization, the shares itself, the price is stagnant. What do you see in your way as trying to move that share price forward? Is it your intention to remain in the ASX and AIM markets, or do you intend to go into further markets?
Dave Wall: The question of moving on to another exchange is one that is really right time and right place. At the moment in time, it's not right. Once we have success, God willing, we do have success in our next well, then we'll start to push that agenda forward. We've already made a forays into the US with the capital raising that we did towards the end of last year. We have some relationships there that are improving and evolving, but we need success before we'd really consider seriously moving on to another exchange because it's quite a lot overhead and effort to do that.
Say we did it now, then the share price shoots up, and then it's not successful, then we've basically created unsustainable situation for the company moving forward. We have to think about oil situations, short-term, median term, and long-term. The timing is just not right for that right now. Definitely, it's something that we are looking at and that is continuing to move forward albeit in the background and contingent upon success.
Questioner: Could I just ask one other question? That is in relation to the ability to be able to draw down reserves from the Bank of America. Is it your intention to draw any more down on this, and for what purpose would you use it?
Dave Wall: The Bank of America approves those drawdowns on a project-by-project basis. The situation in Alaska, and this is something that we should talk about a little bit actually, is that we borrowed money from the bank, $17.7 million. Today, it's been drawn down. The state owes us about $18.5 million and that will obviously increase when we file our credits for the calendar '16 year for money that we didn't secure lending from the bank. We've got a big buffer in between what is owed to us and what we owe to the bank.
However, the side of Alaska has payed out much less in terms of percentage of the credits over the last couple of years as there had been running budget deficits due to the oil price being so low and then being so dependent on oil revenues, which means that the bank has basically said, "Look, until something changes and we get some of that money back, we don't really want to lend you guys or anyone else any money for that matter." We're quite happy with that situation because we ... If you're managing you're balance sheet prudently, you're taking on only so much even though you've got a receivable that outweighs it, we're probably in that zone where I think we feel pretty comfortable about where that's at.
Taking on more money at this stage when we've got an uncertain outcome in our future, probably not appropriate. We've got the money in the bank to fund the well. Why take on that debt risk when you don't really need to? The short answer is no, we're not looking to borrow any money from them at this stage. I know that if we had success, they would be quite interested in having our business but more on a reserves borrowing basis, which would be sometime in the future.
Questioner: Thank you for your honesty and open opinion on that question. Thank you.
Dave Wall: No worries.
Questioner: Hi.
Dave Wall: Sorry. There's a guy in the middle here who's ... There's a lot of microphone over there. I'll get to you next.
Questioner: Thanks. Private shareholder. I'm relatively new to the company. Can you just explain the black dots on this chart. Are they existing wells?
Dave Wall: Correct.
Questioner: Two of them seem to be in an area on your conventional prospective portfolio in the western play Fairway.
Dave Wall: That's right.
Questioner: I presume you've got the data from those wells. When you describe these prospective plays as, I forgot the word you used, but not even prospective yet.
Dave Wall: Not prospects. A prospect is basically something that is matured to the point that you believe you have confidence that you would just go and drill it tomorrow if you could. A lead is something that you think is more risky and less defined. It is a good question. The answer to this is, there's several aspects to it. One of which is that Prudhoe Bay was discovered in the '60s. People went searching for oil all over Alaska and had found quite a few big discoveries, but they'd left a lot behind, right?
Part of the reason why a lot has been left behind is because the drilling, or more the logging technology at the time was good, but it's much better today. Also, our understanding of the reservoir composition and what impact that has on the logs, and this a big part of our story, actually, all this volcanic material that's mixed in with a lot of the sediment in Alaska, it does play havoc with the logs and gives you some counterintuitive ratings. When you look at something like Tam, if you look at the logs on Tam, it doesn't look like an oil discovery.
Questioner: Looks wet.
Dave Wall: It looks wet. That's because the volcanics changed the log response. On a lot of the logs that we see, and if you look at what Great Bear has done with the pipeline state's well which is the black dot just above the peak of the bow, they're saying that that's a discovery because they've gone back and done some forensic analysis on the logs and calculated the impact that these other materials in the reservoir have on the logs and say, "Look, we can now see based on what these other discoveries that have been made that this looks the same and therefore, simplistically, this has oil in it." Whereas before, people would have thought it was wet.
We've started doing similar work, and Steve alluded to that. We need to do more of that work. One of the challenges is that some of the log quality is quite poor in some of these wells. They've had what's called wellbore washout where the shape of the hole expands and gets quite rugose. When that happens here, your logs become ratty and not very reliable. Reconstructing them sometimes is just not possible. When we go back and look at Malbec and Smilodon that Steve talked about, in the interval where we see this reservoir, hopefully it's a reservoir coming through those wells, we can't see a lot on the logs. When you look at the mud log, they've got oil shows throughout the ascensions.
Unfortunately, and this is a funny way to say it, there's a lot of oil shows on the slope. That's obviously a good thing. However, it doesn't make it differential for us to say that is definitely something. We know the oil is there. You can't tell from the logs whether there's actually bypassed prior reservoir there. I assume that we currently know it, but we're going to do more work to try to improve upon that. If we can, that's the maturation that could lead us to say, "Bang, we're going to go and drill Bravo and Charlie."
Questioner: I have one more question. You described volatile oil as the liquids that come with gas. Is that correct?
Paul Basinski: It's the volatilized oil fraction in the gas.
Questioner: One thing you haven't mentioned is the gas. What are you going to do with the gas?
Dave Wall: That's a very good question as well. There's quite a lot of gas on the slope. One other thing is that they have been pushing for in the government there is to try to get some of that gas to market through an LNG project. That's had various levels of momentum over the years. That have waxed and waned, but it's still a big focus for them but it's still a long way away. Until then, the gas would need to be re-injected or sequestered on a large-scale basis. They do currently inject a very significant portion of gas into Prudhoe Bay. They have a couple of other fields that they could bring into development if they had more gas to inject into them.
They're not going to produce gas in order to develop those fields, but if someone was already producing gas, like co-produced gas, because we have liquids which makes the project economic, then it would make sense to pipe their gas out of these projects and inject them into that. That's more of a medium term thing. They would have the infrastructure associated with doing all of that. In the first instance, that pad that we talked about during those first four horizontal wells, one of the wells that we drill on, that would be a gas injection well.
Questioner: Thank you.
Dave Wall: Ready to go.
Paul Basinski: It's awful quiet in here. I guess that's why.
Dave Wall: Thank God.
Questioner: This is a question for Paul. Basically, you've both bought a lot more land and you've thought it's still 50-50. In my mind, I keep thinking why. Why have they bought all that extra land if it's just 50-50, or is it just my ignorance? In other words, people just gamble that way with that sort of money. To me, it's extraordinarily mad. Is that the way that it works? You just take a huge gamble in our terms, but maybe for a big institution, your friends in America, it's not a lot. Why? There's a dichotomy here which I can't get my head around. We all want to believe Paul's optimism and your caution. Somewhere in between, actually we're hoping it's all going to go towards Paul's optimism.
Paul Basinski: You haven’t seen a fraction and my optimism.
Questioner: No.
Paul Basinski: Effectively, what we're talking about here is risk expected monetary value. We do these Bayesian analysis that we did at Conoco, we did elsewhere. Effectively, when you're dealing with a two-to-one on an investment or a three-to-one on the outcome, then the question is different about what the probability is. When you have the potential uplift of a reward which is in the multiples that we're talking about, and then you look at what the value left on the table at $35 or $40 an acre, and the expected monetary value, the project basically only has to have about a half of 1% probability in order for it to be screamingly commercial because of the risk expected monetary value.
Dave Wall: The simple way of saying that is because the upside is so big.
Questioner: I was trying to get it. I thought it was just me.
Dave Wall: It's basically like-
Paul Basinski: I told you. I was trying to be good.
Dave Wall: If you got 1% of 10 billion, that's a big number. If that's your risk and that's your reward, that's still a big number. If you got 1% of 10 or 100, it's a small number and you wouldn't bother chasing it. If we can increase an upside and we've got a 50% chance of achieving it, that's a no-brainer for us. Would you rather have 50% of a small number or a big number?
Questioner: No. I'm quite happy with that.
Dave Wall: That's it, simplistically.
Paul Basinski: The denominator is a wonderful thing.
Dave Wall: Just behind you, there's a gentleman.
Questioner: Thank you.
Questioner: Hi. A private investor as well. You've mentioned that there is a two-and-a-half year further away point of which if everything works out well, it's where things could get very interesting. I guess I'm cautious as well and I'm quite interested in how say after the summer, after July or August, when there's more data and more results, if those results prove to be average, how does that two-and-a-half year-
Dave Wall: It pushes it out.
Questioner: It pushes it out?
Dave Wall: It certainly does.
Questioner: At what point does one decide it was below average and not good enough? Then, with the immediate 6 to 12 months, after that, what sort of things would you be looking at doing?
Dave Wall: Let's go through a couple of scenarios which I think will help clarify how that will play out if it does get to that. Say we got 75 barrels a day which is okay, not great. If we could understand that the reason why we got 75 barrels a day is because 60% of the stimulated interval had just not worked because there'd been a blockage or something had gone wrong, then, we go, "Okay. Well, if we could frack 100%, then that 75 barrels in that context looks pretty good." The market would be going, "Hmm, I don't know. You guys, we don't trust you so much anymore because you didn't execute properly." That's why things sometimes go wrong.
We would have to drill another well to prove to the market and execute the job again effectively. We probably wouldn't have the information that we needed to drill a horizontal because 60% of the fracture didn't work with stimulation. That would push the timeframe out. We had permanent sites that we can drill additional wells from the pad, so we could fast track that. Obviously, there'd be some dilution associated with that, and possibly at lower prices depending on the market's reaction. That's one scenario.
It's really about understanding why it didn't work. If we effectively fractured 100% of it and it still flowed at 75, that would probably be the end of that for the time being because you probably need much higher oil prices to justify spending more money on something that we think has questionable economic value given what we know about the above ground cost, structures, and everything else on the slope.
Questioner: Plenty of appetite to get on with it in less than ideal figures going forward into-
Dave Wall: We quickly focus in more on the conventional and try and prove out something on that front.
Questioner: Great. Thanks very much.