High-lights from this Post: De-watering of Grieve could be...

High-lights from this Post:

• De-watering of Grieve could be increased to 20,000 BWPD
• After 5 years, Elk’ shareholders are owed a realistic EOR forecast
• Possible estimates of first EOR oil
• Where is all the CO2 going in Grieve?
• What did Denbury do with Grieve’s CO2?
• Other Elk assets

De-watering
Disposal of 4,000 BWPD into the Cloverly means that after 5 months of cycling produced water, Denbury is finally removing some of it from the Muddy reservoir. Why doesn’t Denbury inject larger volumes of produced water into Grieve #62? It produced water at rates in excess of 16,000 BWPD from the Madison formation so its not unreasonable to think the Madison could take water at close to those rates and/or Denbury could re-perf #62 in the Cloverly. It appears to be a perfectly good new high rate well and flowline that have completed their initial role of water supply. Injecting 20,000 BWPD of produced water certainly would expedite the de-watering and could match the daily volume of CO2 that Denbury is injecting and expedite first EOR oil. A shareholder’s question for the AGM.

First EOR Oil from Grieve?
It is obvious that this side of the AGM, that Elk’s directors have decided its shareholders are not to be given any idea when first EOR oil is to occur and in what quantities. That is after shareholders have waited patiently through 5 years of EOR preparation and after copious quantities of CO2 and water have been injected into Grieve. To achieve what outcome and when? Shareholder’s question for the AGM.

We are told that Elk management has engaged VSP Petroleum Consultants (and presumably paid them) to conclude “that the 2P Reserves net to Elk were unchanged and that the field would achieve its expected peak gross production rate of approximately 3,400 barrels of oil per day once the CO2 injected in the field and currently compressed in the field’s natural gas cap into the residual oi bearing portion of the Grieve reservoir” and Denbury’s simulation work allows them to advise Elk “that the dewatering phase is a short-term operational issue”. With those assurances and presumably its own in-house estimates, Elk management “remains confident that with significant dewatering occurring in the primary residual bearing oil reservoir significant oil production will begin to ramp up going forward over the coming months” but “is unable to provide precise guidance on the timing of this oil production ramp-up and the timing of achieving the peak production rate”.

If Elk shareholders can handle advice that Grieve production can be expected to achieve approximately 3,400 BOPD at some time, surely they can handle advice when that is expected to happen and also when that first barrel of that incremental EOR oil can be expected to flow.

Possible First EOR Oil Forecast
Without the aid of a reservoir model or the skill to run it, but using the Grieve map from last week’s ASX release and publicly available data, the following is a best guess of when first EOR oil might be expected from a CO2 gravity stable flood of Grieve.

First EOR oil from a text book gravity stable flood of Grieve should be seen first at Grieve #7, the highest oil producing well and it will occur after the original gas cap has been filled with CO2 and after CO2 has also mixed with the residual oil between the original gas-oil contact and the top perforations of Grieve #7 (see Elk’s map).

Time to first EOR oil will be the time it takes to inject the volume of CO2 to fill the original gas cap and to then mix with all the residual oil above Grieve #7. So it is a matter of calculating the volume of the original gas cap and the volume of the original oil zone that needs to be filled with CO2 between the gas-oil contact and the upper perfs of Grieve #7.

WOGCC has the total gas produced from Grieve as 109.13 billion cubic feet (BCF). This has come from the original gas cap and from the solution gas from the original oil in place (OOIP) in the reservoir.

The Wyoming Geological Association had original reservoir pressure of 2,950 psi and a temperature of 135 degF and the oil had a gas oil ratio (GOR) of 861 SCF (standard cubic feet) per barrel of oil.

Working out the volume of solution gas from the OOIP in the 109.13 BCF of produced gas becomes an issue (without the benefit of Denbury’s or Elk’s history matched models) since the OOIP volume of Grieve has always been an issue, even for Forest Oil Corporation who developed Grieve. A 1970 paper by Forest (when cumulative oil production was about 27.5 MMbbls and all the produced gas was being recycled to maintain reservoir pressure) had estimates ranging from 54 MMbbls to 103 MMbbls with the average of five estimates being 87 MMbbls. The same paper also had an estimate for the volume of the original gas cap as 21.182 BCF. The paper was published before the gas cap was blown down and before the gas recovery volume was established but if Forest’s gas cap volume is correct, it produces yet another possible OOIP number of 116 MMbbls based on the actual produced gas volume of 109.13 BCF.

Applying a GOR of 861 SCF/bbl for the produced crude and say 725 SCF/bbl for gas released from the residual oil in the reservoir (there is still pressure in a 1600’ fluid column), the possible gas cap volumes are as follows in terms of billions cubic feet (BCF) at standard (atmospheric) conditions and in terms of millions barrels at reservoir conditions.

	Column 1	Column 2	Column 3	Column 4	Column 5
0	OOIP​	Recovery Factor​	Solution Gas​	Gas Cap​	Gas Cap​
1	MMbbls​	%​	BCF​	BCF​	MMbbls​
2	54​	56%​	43​	66​	63​
3	87​	35%​	66​	43​	41​
4	103​	29%​	78​	31​	30​
5	116​	26%​	88​	21​	20​

​

To the original gas cap volume needs to be added the volume of CO2 to effectively replace the volume of oil that was produced from the oil zone between the gas-oil contact and the top perfs of Grieve #7. This is the volume of oil produced from the field (approximately 3.5 MMbbls) before Grieve #7 was first shut-in in 1958 because the gas cap had expanded (through pressure decline and crude removal) to its perforations. Therefore, depending on which is Grieve’s correct OOIP, the total volume of CO2 that needs to be added before first EOR oil is seen at Grieve #7 could be any of those shown in the following table. By subtracting the 38 BCF of CO2 that has already been injected into the gas cap, the table also shows the additional volume that still needs to be added to achieve first EOR oil produced from gravity stable technology. The time to first EOR oil is calculated by dividing that additional volume by whatever rate Denbury/Elk decides to inject CO2 into the gas cap. The following table has assumed the current rate 35 MMSCFD of CO2.

	Column 1	Column 2	Column 3	Column 4
0	OOIP​	Total CO2​	Additional CO2​	Time to 1st EOR Oil​
1	MMbbls​	BCF​	BCF​	Months​
2	54​	134​	96​	90​
3	87​	90​	52​	48​
4	103​	68​	30​	28​
5	116​	47​	9​	9​

The above is a very simplistic assessment and ignores variations in porosity and permeability and faulting, etc., across the field. Denbury, Elk and VSP Petroleum Consultants do have the ability to provide more reliable forecasts. How do they compare with the above assessment? Another shareholder question for the AGM.
Where is all the CO2 going in Grieve?
As of July, Denbury has split the volume of injected CO2 between the gas cap and a number of down dip wells so the gravity stable sweep will be slower than shown in the table. The reason for the change in direction in terms of where Denbury is injecting CO2 in Grieve is a mystery. It may be based on their modelling suggesting that a pattern flood will produce a quicker response but injecting 4,000 to 5,000 bbls of CO2 in Grieve #6 and #41 and producing 400 bbls of water from Grieve #39A is unlikely to achieve EOR oil any quicker and its justification is difficult to follow: once again, where is the other 3,600 to 4,600 bbls (injected CO2 minus produced water) of CO2 going? The Muddy reservoir pressure must now be considerably higher than its supporting aquifer which means flow is towards the aquifer? Another shareholder question for the AGM.
Denbury/Elk should be able to explain to shareholders where 38 BCF is in the original gas cap but may have difficulty placing the whereabouts of the 8 BCF that was injected in 2013 in Grieve #18, #32 and #43 and now, also in Grieve #6 and #41.
Any EOR text book will have miscible CO2 as the best EOR technology and gravity stable flooding as the most efficient sweep technique. Pattern floods rely on flow paths between injection wells and producing wells and as such cannot assure the same sweep efficiency as a gravity stable flood. This is a case of “old bull versus new bull” approach to oil recovery outcomes. It looks like Denbury’s young bull is back in control of Grieve. If the old bull is re-instated, gravity stable flooding should exceed Denbury’s general claim of 17% of OOIP for miscible CO2-EOR of oil fields.
What did Denbury do with Grieve’s CO2?
On the matter of Denbury and Grieve, it is interesting that Grieve does not get a mention in Denbury’s website listing of its current tertiary activities in the Rockies:
Bell Creek Field. We acquired our interest in Bell Creek Field in southeast Montana as part of the Encore merger in 2010. The oil-producing reservoir in Bell Creek Field is a sandstone reservoir with characteristics similar to those we have successfully flooded with CO₂ in the Gulf Coast region. During 2013, we began first CO₂ injections into Bell Creek Field, recorded our first tertiary oil production, and booked initial proved tertiary reserves.
Salt Creek Field. We acquired our non-operated working interest in Salt Creek Field in Wyoming for approximately $72 million in June 2017.
Maybe Grieve needs to get EOR oil into barrels before it rates a mention by Denbury as a current Rocky Mountain tertiary activity for them.

Denbury does appear to be able to pick winners and Grieve will be one of them. Its acquisition of Bell Creek which was about the same time as its farm-in to Grieve, has more than quadrupled in production rate by CO2-EOR and is still on an upward trend . The Montana Board of Oil and Gas Conservation’s (MBOGC) data base is not as spreadsheet friendly as WOGCC's but the selected Bell Creek production figures for each August since Denbury acquired it in 2010 shown in the following plot and table provides some comfort for Grieve’s EOR future and to Elk shareholders.

It is worth noting the drop in water cut from 97.8% in August 2010 to a low of 87.2% in August 2017 that has accompanied the production increase.

	Column 1	Column 2	Column 3	Column 4	Column 5	Column 6	Column 7	Column 8
0	Owner​	August​	BOPD​	Cum. Purchased CO2 (BCF)​	Purchased CO2 MMSCFD​	Prod Gas/ Recycled CO2 MMSCFD​	BWPD​	Water Cut​
1	Encore​	2010​	1,116​	​	​	0​	51,200​	97.9%​
2	Denbury​	2011​	1,061​	​	​	0​	41,750​	97.5%​
3	Denbury​	2012​	947​	​	​	0​	42,315​	97.8%​
4	Denbury​	2013​	782​	0.0​	0.0​	0​	47,481​	98.4%​
5	Denbury​	2014​	2,484​	27.1​	86.1​	26,846​	53,255​	95.5%​
6	Denbury​	2015​	2,939​	59.2​	51.0​	66,573​	48,438​	94.3%​
7	Denbury​	2016​	3,336​	74.7​	25.0​	70,031​	35,011​	91.3%​
8	Denbury​	2017​	4,186​	92.4​	66.0​	105,141​	28,503​	87.2%​
9	Denbury​	2018*​	4,710​	123.0​	69.1​	124,660​	41,594​	89.8%​

* July 2018

Injection of CO2 at Bell Creek commenced later in 2013 than Grieve. The total volume of purchased CO2 injected at Bell Creek to July 2018 is in the order of 123 BCF with rates at times as high as 128 MMSCFD early this year, possibly when Denbury was waiting for their production start up of Grieve.

Denbury’s allocation of purchased CO2 (sourced from Shute Creek and Lost Cabin) between Grieve and Bell Creek since 2013 is shown in the following plot:

The average CO2 purchase for Grieve to date and over the 5 years is 22.8 MMSCFD while that for Bell Creek is 68.5 MMSCFD. What had Elk contracted in its take or pay contract with ExxonMobil (Shute Creek) and if it was significantly more than 22.8 MMSCFD, what happened to the difference? Was it used by Denbury in its 100% owned Bell Creek field? Could Bell Creek owe Grieve CO2? Did Elk relinquish CO2 for Grieve in the re-negotiated JV agreement with Denbury? Several shareholder’s questions for the AGM.

From the above plot, the preferential CO2 supply to Bell Creek by Denbury in 2014 appears to have delayed first EOR oil at Grieve by at least 1 year and the average supply rate of 22.8 MMSCFD together with Grieve project management by Denbury has possibly added another year to first EOR oil at Grieve. Is it time for Elk to raise the issue of Denbury’s conflicted operational interest in the Rockies and resolve any past CO2 supply issues? Does Elk have rights to its share of Lost Cabin CO2 or is it all contracted to Denbury? Several shareholder’s questions for the AGM.

Grieve will be a successful EOR project particularly if it is developed as a miscible gravity stable flood. It was unfortunate that the timing of its implementation happened to coincide with a dramatic fall in the price of crude. That appears to be behind us and so Elk needs to do everything possible to expedite first EOR oil. That could be achieved by injecting CO2 at higher rates (possibly with CO2 that Denbury may have preferably allocated to Bell Creek) and increase the production and disposal of reservoir water. Elk certainly needs to STOP the injection of CO2 in down dip wells if oil recovery from Grieve is to be optimized.

Elk’s Other Assets
Denbury’s handling of Grieve aside, IMHO, the assets that Brad has managed to add to Elk’s port folio has transformed Elk from a developing oil company into an established producing company with well founded EOR operating experience. Elk is now well placed to pursue the many other EOR opportunities in the USA and elsewhere in the world and like Denbury, recognizes that it is not necessary to risk exploration dollars to discover new reserves.