Market: AIM Gerry Orbell is experiencing the extreme ends of oil and gas exploration. As non-executive Chairman of Antrim Energy (AIM: AEY), he is on the board of one of the better performing AIM oil and gas exploration companies of the past few years: Antrim's gas licences in Argentina have had a high success rate, and at the same time, they have enjoyed success in the otherwise difficult and expensive North Sea.
At the other end of the spectrum is Sound Oil - where Gerry is Chief Executive Officer - which for the last 18 months has been busy evaluating and drilling Indonesian gas prospects ? in Kalimantan (Indonesian Borneo) and the island of Java. Sound Oil hasn't been fundamentally unsuccessful in Indonesia; it is more that it has suffered from delays and complications with its drill targets.
Sound Oil came to Indonesia through the reverse takeover of Mitra Energia, an Indonesian oil and gas company with two key interests: a 34% working interest in the Bangkanai Block, onshore in Central Kalimantan; a 20% working interest in the Citarum Block, onshore central in Java, not far from Jakarta. Post acquisition, the company started trading at 7.5 pence per share, and had in excess of £20 million in the kitty with which to fund its exploration plans for the next few years.
Fast forward 18 months, from the reverse takeover of Mitra, and shares in Sound Oil are hovering at around 3.6 pence, and the cash pile has reduced, by seismic and drilling, to around £15 million. This cash balance still covers the company's exploration commitments to the end of 2008, which is fast approaching. So good news flow in the short term is, no doubt, a much-desired outcome.
Sound Oil's most advanced project is still its 34% interest in the Kerendan development, within the Bangkanai Production Sharing Contract, here there is a recoverable reserve of 238 billion cubic feet (bcf) of gas. 133 bcf of this gas is due to be sold to a combined cycle gas fired power plant that is to be built nearby. This should generate an estimated US$2 million net, per month, to Sound Oil in revenues. However, original plans to commission this power plant in 2009 have been delayed by a year, primarily because it requires approval to sell the electricity into the grid before it gets the green light for development. This appears to be easier said than done, and to date, no agreement has been reached between the grid and power plant; until this happens, no power plant will be built, leaving Sound Oil and its partners stuck between a rock and hard place. This doesn't kill the development of the field, but development would be a lot quicker and cheaper if there was an off take agreement in place for a large portion of the proposed gas delivery.
The only other option open to the partners is to sell the gas for export, but it appears unlikely that the current reserves would stand up to development scrutiny for that purpose as this would involve building over 200 kilometres of pipeline. Sound Oil has decided to focus instead on a recently identified deeper target at Kerendan, aptly named 'Kerendan Deep', which is prospective with a P10 of 540 billion cubic feet of gas - and P50 for 220 billion cubic feet of gas. (That's a 'small chance of a helluva lot of gas or a bigger chance of a lot of gas' - in oil industry speak.)
Sound now intends to adapt one of five planned Kerendan development wells to investigate 'Kerendan Deep'. The US$16 million Sungai Lahei-1 development well will be extended to test the Kerendan Deep' target at 14,000 feet. We will have to wait longer for results from the Sungai-Lahei-1 well, which has slipped behind on the drilling schedule - as it will now take 90 days to complete the additional 5000 feet of drilling.
Sound Oil has published estimates of what they believe they need to find to make an economic case at Kerendan to export gas, and the absolute minimum is 250bcf, but this is highly sensitive to variations in the gas price, and observers hint that a figure of at least 400 bcf would be a more realistic target to make the cut. Capital Expenditure to develop a target of this size, and build a pipeline 210 kilometres east to a LNG plant in Bontang, are in the region US$300 million ? this is a high risk, high impact project.
Comparatively speaking, Sound Oil's 20% interest in the Citarum PSC west of Jakarta looks like a walk in the park. After all, it's on the southern fringes of the North West Java Basin - a southeast-northwest trend of commercial oil and gas discoveries - but even here things have not turned out to be easy! As I write, Sound Oil has released an operational update on the Pasundan-1 well, which was drilled to a total depth of 10412 feet. The well was severely delayed after hitting an underground cavern that caused the well to lose approximately 100,000 barrels of fluid. Eventually, it took nothing less than rocks, wicker baskets and even a tree trunk shoved down the hole, to create a solid foundation on which to make a cement a plug above the cavern, so that the well could be re-pressurised and drilled on to target depth. The good news is that despite the poor conditions in the well below the cavern, and contamination by lost fluids, the well did highlight good porosity in the Baturaja Limestones and the presence of gas and oil. The question now is how much gas and oil? It is hoped that drill stem testing will be able, at least, to indicate the possibility of commercial quantities in the coming weeks. A second well was also planned for Citarum earlier this year, but as of yet, has not happened. Delays and complications at Pasundan-1 may well force the companies involved to sit down and take stock of progress to date, before deciding on the next course of action.
This leaves Sound Oil a little short of where it would like to be. Drilling on both projects has been delayed, and the first well that the company has participated in since acquiring Mitra 18 months ago hit complications, which delayed completion and also reduced the amount of data that can be retrieved. No investor likes to hear the word 'delay' under any circumstance, but Indonesia is a challenging place in which to operate on the best of days, so complications, though unfortunate, are not surprising. The upside is that Sound Oil's prospective targets haven't gone away, and more drilling will occur in 2008, which still offers the possibility of a high impact result. Sound Oil is still funded for another 18 months, so there is still breathing space. This is no stock for widows or orphans, but investors who like to pick up potential recovery stories may find Sound Oil a suitable addition to their portfolio.
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