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Elk Petroleum Limited (ASX: ELK) is focused on enhanced oil recovery projects in the Rocky Mountains of the U.S.

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Elk Petroleum starts water injection at Grieve oil field

Wednesday, May 15, 2013 by Bevis Yeo

Elk Petroleum starts water injection at Grieve oil field

Elk Petroleum (ASX: ELK) and operator Denbury Resources (NYSE: DNR) have reached a milestone at their Grieve Enhanced Oil Recovery Project in Wyoming with the start of water injection to accelerate re-pressurising of the Grieve Muddy oil reservoir.

Water is being sourced from the recently completed Grieve-62 well that was drilled to the deeper Madison formation and pumped into two Grieve wells at an initial total rate of about 7,000 barrels per day.

The pump currently in Grieve-62 is a temporary testing arrangement with a rented generator and will be replaced by a permanent larger capacity pump and permanent power supply next month.

Water injection is supplementing the carbon dioxide, which continues to be injected into four Grieve wells at a total rate of about 40 million standard cubic feet per day.

The injection of water is designed to accelerate re- pressurising of the reservoir to achieve minimum miscible pressure and hence expedite the onset of first oil from the Grieve EOR project.

Denbury has commenced work planning for the installation of the facilities required to separate and process first oil as well as compress and recycle produced CO2.

These facilities are expected to be in place to receive first oil in mid to late 2014.

The Grieve project is fully funded and is expected to produce up to 1,000 barrels of oil per day net within three years, and possibly up to 5,000 barrels of oil per day by five years.

It has estimated proved and probable reserves of 18.6 million barrels of oil in the target Muddy reservoir.

Elk has a 35% interest in Grieve.

Ash Creek

At Elk’s wholly-owned Ash Creek EOR project, the company will install the brine-making tank and its controls as part of the first phase of the chemical flood operation there.

This involves the pre-flush of the pilot study area of the reservoir with a 4% brine solution to ensure the injected surfactant and polymer achieve the most effective sweep and hence, maximum level of oil recovery.

The injection of brine will commence into three injection wells after the facility has been commissioned and the first salt has been delivered to the site.

Brine injection is expected to start before the end of May and continue for approximately 3-4 months before surfactant and polymer injection commence.

Grieve Crude Export Pipeline

Elk is also proceeding with monetisation of the oil export pipeline from the Grieve field.

This includes the:

-    Execution of the purchase and sale agreement;
-    Execution of one or more transportation agreements;
-    Issue of a private placement memorandum;
-    Offering Unocal Pipeline Company the opportunity to exercise a prevailing right of first refusal to re-purchase all or part of the pipeline it sold to Elk in 2011; and
-    Receipt of funding commitments.

Elk expects the sale process to start this week with execution of a purchase and sale agreement between Elk’s Grieve Pipeline LLC and a newly created entity, Natrona Pipeline LLC.

The rest of transaction process should then proceed over May and June.

Elk intends to retain a 35% interest in the pipeline to match its 35% entitlement to crude oil from the Grieve EOR project.

Analysis

The start of water injection continues Elk’s progress towards achieving first oil from the Grieve EOR project.

Along with the injection of 40MMscfd of CO2, up from the original planned 30MMscfd, this could pave the way for earlier than expected production.

Achieving earlier oil production will increase the projects value to Elk with Ryder Scott previously estimating that its base case NPV could increase to US$103.3 million if first oil occurs six months earlier than expected in mid-late 2014.

Elk had $2.25 million in cash as of 31 March 2013 but is fully funded to first oil for the Grieve EOR Project.

We believe the recent drawback in Elk’s shares to A$0.185, mirroring the dip in ASX energy stocks, presents a buying opportunity into a near-term oil producer.

 

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