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OIL COLUMN – Hurricane investors blown over by Lancaster success

Published: 02:30 28 Jun 2014 EDT

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Hurricane Energy (LON:HUR) shares soared after well test results confirmed the 200mln barrel Lancaster oil discovery is commercially viable.

At 9,800 barrels per day oil flow rates achieved by the newly drilled horizontal well were far better than expected, and crucially it exceeded the commerciality threshold estimated at 4,000 barrels per day.

For the discovery itself the result is an emphatic success, though at the same time it has greater significance because it effectively opens up a new ‘play’ type for the UK and the North Sea.

Lancaster, located in the West of Shetland area, is what is known as a fracture basement discovery.

The geological ‘play’ is increasingly common in other parts of the world - notably in Vietnam, Libya and Yemen - but, has yet to be properly assessed in the North Sea and the UK.

The Lancaster discovery could just be the “tip of the iceberg” for the UK’s newest oil play, according to chief executive Robert Trice, who believes basement reservoirs could in time prove strategically important sources of oil.

What is no longer in any doubt is that the Lancaster discovery is strategically significant for Hurricane.

“It is an extremely positive outcome,” Trice said in an interview with Proactive Investors. 

“We had an excellent flow rate. And the key piece of information is that rate was constrained by the surface equipment, which means the reservoir has more to deliver,” 

It is the type of result that makes the North Sea’s big operators sit up and take notice, according to Trice, who says “it is a key result, one that would be attractive to anybody working in the UK sector”.

Hurricane owns 100% of Lancaster and it has a stated aim of bringing in a partner into the project’s development phase. 

Trice says the flow rates achieved in this well test “would certainly be a catalyst to achieving that aim.”

In the Lancaster well test, Hurricane used an electrical submersible pump to achieve the production figure. Without it the maximum sustainable flow rate was a highly respectable 5,300 barrels.

Lancaster field boasts estimated contingent resources of 207mln barrels of oil equivalent.

Trice believes the latest result represents an important step towards de-risking the group’s wider oil resource base.

It is a fillip in the sense it shows a sceptical oil establishment that the fractured basement theory works just as well in the waters around Britain as does Vietnam of Libya.

These fractured structures occur when volcanic activity or some other tectonic force pushes the basement rock (often granite) through into the higher lying hydrocarbon bearing layer, forcing the basement up by as much as 1.5 kilometres.

This then results in the oil-bearing layer being lower than the basement high produced.

The granite is hard but the faults and millions of fractures created in the rock then become host to significant oil accumulations, sealed in by layers of muds and shales.

Broker Cenkos Securities said today’s result was “very positive news” for the field and significantly de-risks the basement play across the company’s acreage and “marks a significant step forward towards commercial development.”

Cenkos added that the well significantly exceeded the 4,000bopd (barrels of oil per day) rate necessary to demonstrate commercial flow rates.

The broker added that Hurricane trading at a price of US$0.69 per barrel, compared to UK peers such as Faroe (US$5.45) and Cairn (US$5.89).

“This also fails to reflect the scale of Hurricane’s resource base, which is materially larger than any other independent E&P companies in the UK.”

Cenkos has raised its target price to 103p, from 81p, with a ‘buy’ recommendation.

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