Monday, July 11, 2011
Elixir Petroleum Ltd.
Elixir announced the conditional farm-out of an interest in Block 211/12b located in the Northern Sector of the UK North Sea.
Background
Elixir is currently 100% interest holder and operator of the Block 211/12b. Through the use of 3D seismic data analysis and Fluid Inclusion Stratigraphy studies, a significant Upper Jurassic aged oil prospect named Tiger has been identified in the Block.
The Tiger prospect is situated close to prolific fields including the BP operated, 900 million barrel Magnus Field, the Shell operated Penguin cluster, and the more recently developed Don West field. Each of these fields could provide existing local infrastructure for the export of hydrocarbons in the event of exploration success at Tiger.
The Tiger prospect is a direct analogue to the Magnus Field, which is located 5 kilometers to the West. All of the play components, being source, migration, trap, seal and reservoir have been demonstrated to work at Magnus. The most likely, unrisked recoverable resource for Tiger is estimated to be approximately 90 million barrels.
Farmout Terms
Elixir has executed a farmout agreement with a privately owned oil and gas explorer to acquire an 85% interest in the license and operatorship in consideration for carrying Elixir's 15% interest on a partially promoted basis through the drilling of a firm exploration well, and a contingent appraisal well.
The Exploration Carry also includes all costs associated with logging and flow testing, and should it be necessary, plugging and abandonment. The repayment of the non-promoted part of the Exploration Carry is recoverable by the Farminee from Elixir's share of oil production receipts from Tiger. The total cost of the firm and contingent wells and, in the event of a discovery, the expected testing program, is estimated to be approximately £30 million.
On completion of the farmout, the Farminee has also undertaken to pay to Elixir a substantial cash contribution towards back costs.
The Farminee is obliged to complete the drilling of the firm exploration well by no later than November 30, 2012. In the event this deadline is not achieved, Elixir will be entitled to the reassignment of the Farminee's interest in the licence and operatorship.
Optional Development Carry
Under the terms of the Farmout Agreement, Elixir has also been granted an option by the Farminee to be fully carried through the development phase of the project. If a commercially developable discovery is made, Elixir will be able to exercise the option to be
carried and will not be required to contribute towards the costs of the development of the field through to the commencement of production.
The cost to Elixir of exercising this option will involve the repayment of the costs carried, the reimbursement of the Farminee's financing costs and a premium calculated as a percentage of the carried costs. At Elixir's election, the Development Carry can either be repaid directly at the time of first oil, or can be recovered by the Farminee from Elixir's share of oil production receipts (in which instance an increased premium will be levied by the Farminee). The size of the development carry given a most likely development outcome would be in the order of £50 million.
Farminee and Conditions Precedent
The Farminee is a private company owned and run by a group of experienced oil and gas professionals and financiers who have previously owned and operated oil and gas assets. The Farminee is a new entrant to the UK North Sea, and therefore is required to obtain approval as a licensee and as an operator from the UK Secretary of State for Energy and Climate Change (DECC). The receipt of the approval of DECC to the assignment of the licence interest and the transfer of the operatorship to the Farminee are the only two conditions precedent to completion of the farmout.
An initial meeting between the Farminee and DECC has been held. The Farminee will be required to demonstrate to DECC technical and financial capability in order to secure DECC's approval. DECC guidelines indicate that the approval process is likely to take approximately three months to complete. Assuming DECC approvals are received, it is anticipated the Tiger exploration well will be spudded in the first half of 2012.
Comment
We are delighted to have secured a farmout of Tiger on compelling terms which will see Elixir carried on two wells, and in the event of a discovery, with the option of a full development carry through to first oil. This transaction will be the catalyst for near term drilling activity at Tiger, one of the largest as yet undrilled exploration targets in the UK North Sea, and provides Elixir with exposure to the possibility of a significant oil development project on a low risk, essentially fully carried basis.
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