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Horse Hill Kimmeridge might live up to the hype but commercially viable Portland is an important breakthrough

Last updated: 18:00 20 Oct 2018 AEDT, First published: 02:06 20 Oct 2018 AEDT

oil and gas operations
Testing continues at Horse Hill

The more blue-sky minded followers of the Horse Hill oil project have likely looked past the significant piece of good news relating to the Portland oil reservoir this week.

It is a conventional, and essentially traditional, style oil discovery. It is not as sexy as the deeper, and potentially larger, but, still somewhat un-proven Kimmeridge zones at Horse Hill.

Already, having just used the word ‘un-proven’ in the first few sentences, the bristling of Horse Hill’s passionate investor following is palpable.

That some folks in the ‘investment community’ have chosen to spend their October hanging out in Surrey fields counting passing oil tankers and watching hot air exit a distant flare stack, tells you everything you need to know about how enthusiastic some investors are about this project.

The Kimmeridge is exciting but still early stage

Presently, the second phase of production-testing in the Kimmeridge is evidently enjoying success - with reported rates exceeding those in prior testing two years ago - but, these remain short-term tests.

It is, essentially, a brand new play. Longer-term data is not available and stock market sticklers don’t quite know enough to properly value such a discovery.

Important questions about the Kimmeridge are (naturally) still un-answered as the project transitions from exploration into a field development and production scenario.

We know the well can flow in strong volumes today. But, what will the decline rate be?

What will the production profile look like a year after start-up, and, what about a year after that?

How high will peak production reach and for how long?

Will all of the project’s most productive days be soaked up in the capital recovery phase?

And, by the time all the project costs are covered and cash flows are for the benefit of shareholders, how profitable will the asset be then?

Scepticism and speculation

Forget, for a second, the environmentalist viewpoint (which, whatever its size, has been visible and vocal in its opposition). Since the very early days of the project, the numbers of Horse Hill sceptics and the numbers of Horse Hill evangelists have been quite evenly matched.

Speculators latched on quickly and were happy to punt on Horse Hill’s potential – and, to varying degrees, accepted the somewhat extrapolative nature of some very large estimates of what the project could one day represent.

Naysayers have quite frequently and consistently said nay.

Nonetheless, whether you’re a sceptic or not, the actual results from the well have for the most part lived up to a lot of the initial hype and sales pitch.

It may be looking good, but, the fact still remains though that only time and more work will truly tell for the Kimmeridge.

Portland is tangible and present

There’s a strong case to be made, for all the reasons above, that as it presently stands the Portland is the most significant part of the Horse Hill project.

As pointed out by analyst Barney Gray, in a Proactive Investors interview this week, the Portland is a very much known entity onshore UK.

Those appraising the asset, presently, will be able to make confident assumptions about what a production operation will look like.

For that reason, Thursday’s declaration that Horse Hill’s Portland reservoir is now deemed commercially viable was an important breakthrough.

The declaration follows on from the successful extended test of the conventional Portland reservoir, which exceeded expectations with a calculated vertical well production rate of 362 barrels of oil per day (bopd).

The company now envisages a further field development, including the proposed horizontal Horse Hill 2 well which will have a targeted production rate of 720 to 1,080 bopd from the Portland.

Consultant Xodus has modelled the Portland’s production profile and claims that up to 45% of the Portland reservoir’s oil-in-place could be recovered if certain pressure support measures are put in place.

A development of the Portland would comprise up to three production wells and two pressure support wells.

Planning and environmental consents are already in place for the drilling of HH-2.

Portland provides a handy starting point

Significantly, a Portland production operation would effectively allow the deeper Kimmeridge to be opened up as – from a risk point of view, at least – an added extra.

The Kimmeridge’s evident potential means it could quickly come to overshadow the conventional Portland operation.

Nonetheless, Portland is very much in hand whilst at least some of the Kimmeridge remains in the proverbial bush.

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