oil barrel 14 sep

14.09.2007
Investors Hope For Some Sweet News As Empyrean Energy Prepares To Test Sugarloaf And Looks For A Sugarkane Look-Alike On The Surrounding Acreage
The onshore US is proving a useful playground for oil juniors chasing near-term development and production to bolster their balance sheets, among them Nighthawk Energy and Meridian Petroleum. Low cost, low risk drilling and high gas prices can make for a convincing business case, particularly when new imaging and completion technologies enable today’s companies to access previously overlooked or difficult-to-access reserves. There are many projects out there looking for financial backing but not all are worthy of the investment: the secret is finding the right project at the right price.

Empyrean Energy is among those increasingly seeking its fortune in these mature but resource-rich lands, and its initial efforts appear to justify its investment choices to date. The AIM company, which also has onshore interests in Germany, has just concluded one drilling campaign in Texas, the successful Project Margarita shallow drilling programme which yielded three commercial gas finds and is already generating cash flows. It is now in the midst of another, this time testing the potential of the Sugarloaf prospect and surrounding acreage in Texas. And the fourth quarter will see the start of a higher risk drilling programme as the company chases deep gas reserves.

For now the focus is on Sugarloaf. This prospect covers 80 sq km in the prolific Gulf Coast Basin of Texas and lies just 6.6 km east of the producing Sugarkane gas-condensate field. Empyrean has a 6 per cent working interest in the Texas Crude Energy-operated project, which was first drilled in 2006 when Sugarloaf-1 found tight reservoir sands in the primary Cretaceous-aged Hosston Formation.

This was disappointing but there was compensation, with at least 92 ft of potential gas pay in a shallower secondary target, the Cretaceous-age carbonates. There are three distinct zones in these carbonates and it is these zones that are now being tested, with the deepest zone being tested first. Of most interest, however, will be the uppermost zone, which correlates with the apparently extensive Sugarkane reservoirs.

Encouraged by what it has seen here, Empyrean has acquired additional interests in this area, having farmed into a 16 well programme over Sugarloaf Block A and Block B. Empyrean will earn a 7.5 per cent working interest in Block A by paying 12.5 per cent of the pre-production costs. The first well here, a horizontal appraisal of a gas filled reservoir already proven to exist at Sugarkane, is still drilling ahead having encountered encouraging gas shows to date. Investors will be impatient for news on this well, which has been drilling since May and could, if it yields a Sugarkane look-alike, prove to be a very attractive project and justify the additional investment.

Empyrean also has an 18 per cent working interest in Block B, where the first well to drill will be Kennedy-1H some 5.5 miles to the east of the Sugarkane field. This will spud in the coming days and will be a vertical well drilled to a depth of 12,000 feet, at which point the well will drill a 5,000 feet horizontal section into the upper zone of the Cretaceous-aged carbonate reservoir. This should take 45 days, followed by fraccing and testing operations.

This drilling work follows the completion of a six-well shallow drilling programme at Project Margarita in South Texas. This resulted in three commercial gas discoveries, which should generate 2.3 million cubic feet of gross gas production per day when all are onstream. Empyrean has a meaty 44 per cent interest in the project, which commercial director Tom Kelly said has produced a “terrific result” for the company.

The fourth quarter will see drilling on three deep, high impact gas prospects. The first proposed prospect is a potential gas accumulation of between 15 and 48 billion cubic feet. This is a different scale of resource from the shallow prospects targeted to date but carries a higher risk profile. Investors like to see this mix of bread-and-butter shallow drilling (particularly when it yields the kind of strike rate seen at Project Margarita) with “jam tomorrow” high impact wildcatting, particularly when oil juniors can point to some early production to act as a financial buffer against a run of dry holes. To date, Empyrean has done a pretty good job of delivering its US strategy.