Zephyr Energy plc, the Rocky Mountain oil and gas company focused on responsible resource development and carbon-neutral operations , provides an update on its flagship project in the Paradox Basin, Utah, in the United States of America ("U.S.") (the "Paradox project" or the "project").
Since the successful completion of the State 16-2 "dual-use" stratigraphic test well (the "State 16-2 well") earlier this year, Zephyr has worked to analyse and interpret the extensive geological data obtained during the drilling programme - data from both the project's primary target, the Cane Creek reservoir (the "Cane Creek") and from multiple potential stacked reservoirs overlying the Cane Creek (the "overlying reservoirs").
In addition to the work carried out by the Company, Zephyr engaged the third-party consultant Premier Oilfield Group ("Premier") to assist the Company in determining the viability of additional methods for the development of the Paradox project. A U.S. Department of Energy-backed project team, led by the University of Utah's Energy & Geoscience Institute ("EGI"), also contributed data and analysis as part of their evaluation of the State 16-2 well data related to ongoing Paradox Basin research.
· Results from the recent evaluation work have reconfirmed Zephyr's view that the planned State 16-2LN-CC well is a suitable location from which to test the natural fracture play ("NFP") in the Cane Creek reservoir. Drilling operations are scheduled to commence in July.
· Results from reservoir, fracture stimulation and simulation modelling suggest that the Paradox project could also be developed by way of a hydraulically stimulated resource play ("HSRP") which provides an alternative to the NFP and which would potentially facilitate broader project development across more than one reservoir.
· Analysis of the twenty overlying reservoirs suggests that all reservoirs are likely to be hydrocarbon filled to some degree, based on the State 16-2 well sidewall core data and petrophysical analysis of several offset wells.
· Of the twenty overlying reservoirs, the Company has high-graded eight reservoirs which have adequate thickness for potential future development. If development of the eight high-graded reservoirs proves feasible as an HSRP, the Company estimates:
- The potential for up to 200 well locations across the eight overlying reservoirs; and
- A risked contingent resource potential, net to Zephyr, of up to an additional 125 million barrels of oil equivalent ("mmboe") on an estimated P50 Hydrocarbon Initially in Place ("HCIIP") of around 1 billion barrels of oil equivalent (" boe") on currently held acreage.
- This estimate of the HSRP potential is preliminary and highly dependent upon developing better understanding of each zone's reservoir pressure, fluid phase, geomechanical properties, permeability and a successful proof of concept hydraulic stimulation and production well. The contingent resources are classified as 'Development Unclarified' and are risked for Chance of Development.
- Additional data gathered during the planned drilling of State 16-2LN-CC well will be the first step in determining the viability and method of future asset development.
Colin Harrington, Chief Executive of Zephyr, said: "A huge amount of time and effort has been invested to complete this updated evaluation of our Paradox resource base, and I am encouraged that we may have a wider viable development alternative to the natural fracture play in the Cane Creek reservoir. I am both cautiously optimistic and excited about our initial findings for the overlying reservoirs and the potential for substantially increased resources on the Paradox project.
"The results suggest multiple viable scenarios for considerable upside - from the exploration potential of the overlying reservoirs to the hydraulic stimulation of targeted reservoirs, or from a combination of both.
"It's important to bear in mind that while the potential project upside is exciting, the Paradox Basin is an immature play with limited data when compared to offset Rocky Mountain basins, with the only notable production coming from the Cane Creek reservoir NFP and with only very limited prior testing of the HSRP. That said, the knowledge gained from the development of other basins has the potential to be leveraged and applied in the Paradox, and we are very grateful to Premier for sharing their deep experience and expertise in relation to hydraulic stimulation. Recent advances in the technology and understanding of modern completion techniques may also prove beneficial to future development efforts.
"Our next steps are to safely and responsibly drill the State 16-2LN-CC well to targeted depth, obtain further log and geologic data, and test the well should efforts to target production prove successful.
"Given the substantial potential increase in project scale, the Board will also explore the possibility of a multiple well programme in the near-term, as additional drilling could serve to better define and unlock the significant potential value of this asset.
"Above all, Zephyr's Board will always approach the potential Paradox development in a prudent and measured way and only deploy the Company's capital when it sees favourable risk/reward conditions.
"Our goal is to maximise the economic impact of a resource with minimal disruption to the environment, and we believe our Paradox acreage to be an excellent fit for this strategy. Much of our Paradox project acreage is located on an abandoned U.S. Air Force missile testing range - a brownfield site, near an interstate highway, with roads, infrastructure and pad sites already in existence. If the HSRP development route for development is selected, it could allow for a simpler surface footprint and more predictable well patterns including the grouping of multiple wells from a single pad, thereby maximising resource efficiency while minimising surface disruption. Beyond that, we are continuing to work with the Prax Group to mitigate one hundred per cent. of Zephyr's Scope 1 operational carbon footprint by the end of September this year.
"Our mission is to be responsible stewards of our investors' capital while also being responsible stewards of the environment, and I'm pleased to report that the Paradox project continues to fit that mission extremely well. We look forward to the next steps with much anticipation."
Since the successful completion of the State 16-2 well earlier this year, Zephyr worked to analyse and interpret the extensive geological data obtained during the drilling operation - data from both the project's primary target, the Cane Creek reservoir (the "Cane Creek") and from the overlying reservoirs.
The northern Paradox Basin is a relatively immature oil and gas basin with significantly less historical data than more established U.S. basins such as the Williston or Denver Julesberg ("DJ") basins in which Zephyr has evaluated numerous other projects. Zephyr's Paradox acreage position also has less historical data than the producing Cane Creek Field to the south.
It is therefore important to contextualise these initial positive conclusions being announced today against the level of data available. The positive results and findings need to be further corroborated and validated through additional drilling and data acquisition - particularly in relation to a potential HSRP development.
Based on the evaluation work undertaken to date, Zephyr is pleased to report its initial high-level assessment as follows:
· State 16-2LN-CC location analysis: Results to date reconfirm the Board's view that the planned State 16-2LN-CC well is a suitable location from which to test the Cane Creek through the targeting of the reservoir's existing natural fracture network, as identified on Zephyr's 3D seismic data. As previously announced, all permits related to the well have now been approved, the drilling contract has been executed, and Zephyr plans to commence the drilling of the well in July. The well is located on an existing pad with existing roads in an effort to minimise surface disruption.
· Additional development scenario: Newly-completed detailed reservoir, fracture and flow simulation models built by Premier suggest an alternative for wider potential development of Zephyr's Paradox asset base, should the currently envisaged natural fracture play prove limiting:
- Premier's work indicates that HSRP is a potential path to an alternative development of the project in the Cane Creek. This option would not rely upon the need for the development of naturally fractured reservoirs to deliver well productivity, which is currently a key risk to the project.
- It is important to note that the feasibility of any HSRP alternative is highly dependent upon the existence of a continuous hydrocarbon play across Zephyr's acreage at a given reservoir interval, as envisioned in the 2011 USGS resource assessment.* While a preponderance of evidence suggests this is likely, additional data must be gathered during the forthcoming State 16-2LN-CC drilling operations, and from subsequent drilled wells, to generate additional confirmation of this key point.
- Using data acquired to date, the Company estimates that the HSRP alternative could potentially be applied to up to 30 drilling locations in the Cane Creek reservoir. It estimates a range of net risked recoverable, contingent resources of up to 18mmboe from the Cane Creek reservoir (based on a 9% recovery rate). Given the HSRP alternative is in the early stages of appraisal, this initial resource estimate is preliminary and the play still requires, at a minimum, a successful proof of concept production well and further modelling work incorporating data from the upcoming State 16-2LN-CC well. As a result, the contingent resources are classified as 'Development Unclarified' and are risked for Chance of Development.
- Given the encouraging preliminary resource estimate, hydraulic stimulation also provides a potential secondary route to a successful well result on the State 16-2LN-CC. The Company is currently generating data acquisition and stimulation options for this well to be performed in the event the NFP proves to be less productive at this location.
· Overlying reservoir analysis: Initial analysis of twenty overlying reservoirs located above the Cane Creek reservoir has now been completed. This analysis suggests that all twenty observed reservoir zones are likely hydrocarbon filled to some extent, even at the off-structure location of the State 16-2 well. Initial findings by Zephyr have estimated the potential HCIIP of around 1 billion boe in place across the eight reservoirs that have adequate thickness to host development. These zones also have potential to deliver productive wells from the NFP and the HSRP.
- The overlying reservoirs have very limited analogue production in the basin from the NFP and no significant production from the HSRP. However, with the exception of the NFP in the C18/19 in the Cane Creek, there have been very limited attempts to test or develop these reservoirs in the past.
- The NFP in these reservoirs has potential across the Zephyr acreage, with Chance of Success risk estimate averaging 34% across the eight high-graded reservoirs, accounting for the unknown presence of the natural fracture network in these reservoirs.
- Should a contiguous hydrocarbon play exist allowing for development of the overlying reservoirs by way of HSRP, the Company estimates the potential for up to 200 well locations across the overlying reservoirs with a net risked contingent resource potential of up to an additional 125mmboe.
- Given this alternative is in the early stages of development, this preliminary resource estimate has been classed as Contingent Resources 'Development Unclarified' and are risked for Chance of Development. It will require further modelling and understanding of each reservoir's pressure, fluid phase, geomechanical properties, permeability and a successful proof of concept production well to mature the resource further.
· Next steps:
- Safely and responsibly complete the State 16-2LN-CC well, and test production if successful;
- Obtain additional geologic data during the drilling and potential testing of the State 16-2LN-CC well, in order to further inform our resource upside analysis;
- Commission an independent Competent Persons Report ('CPR") on the Paradox project; and,
- Utilise all learnings to plan for a multiple well development.
Updated Resource Estimation
NATURAL FRACTURE PLAY CASES
Base Case NFP - development of the Cane Creek reservoir only, utilising existing natural fracture networks
Background: The Cane Creek reservoir has developed over time as a natural fracture play, and Zephyr's previously released contingent resource estimates envisioned this type of development scenario. Although significant evaluation work was undertaken in recent months, the resource estimate for the Base Case Cane Creek NFP development is largely the same as previous estimates:
· The number of well locations remains unchanged.
· Type curves will remain unchanged and continue to be linked to the gas and oil ratios observed from the 2 mile offset, Federal 28-11 well production data.
· 12mmboe of estimated 2C net recoverable resources, as detailed by Gaffney Cline & Associates (GCA) in their 2018 Competent Persons Report.
· 2C resources with a net present value at a ten percent discount rate ("NPV-10") of $225 million using:
o $70 per barrel of oil ("/bo") flat oil price (minus a $7/bo differential); and
o $2.50 per million square cubic feet gas price (minus $1.75 differential)
Internal Zephyr Assessment: Upside case NFP - development of overlying reservoirs
Background: Overlying reservoirs C1, C2, C4, C7, C8, C9, C10/11 and C18/19 have been high-graded by Zephyr as potential exploration zones with an estimated P50 total of 1 billion boe HCIIP. In the central case of this NFP scenario, these resources could be targeted by an estimated 23 risked wells which are estimated to potentially deliver up to an additional 14 million BOE net risked recoverable prospective resources - representing an approximate 7% recovery factor from the gross in place resource. It should be noted that most of these overlying reservoirs, with the exception of the C18/19 reservoirs, have very limited analogue production and therefore have been risked within the following range:
· The C10/11 reservoir, which has no sidewall core fluid sample analysis, has been risked at a 27% Chance of Success
· The C18/19 reservoir, which is considered to be very similar in characteristics to the underlying Cane Creek reservoir (the C21 zone) and has offset production at the Cane Creek Field and significant shows in wells offset to Zephyr acreage, has been risked at a 67% Chance of Success
· Remaining reservoirs fall between these risk estimates (34% average)
· Net risked recoverable resources (overlying reservoirs only): up to 14mmboe (at a 7% recovery factor)
· Total net risked recoverable contingent resources (inclusive of Cane Creek) of up to up to 26mmboe
HYDRAULIC STIMULATION RESOURCE PLAY CASES
Internal Zephyr Assessment: HSRP Case #1 - hydraulic stimulation of the Cane Creek reservoir only
Background: In Q2 2021, Zephyr hired Premier to assess the Company's primary Cane Creek reservoir related to the potential for a HSRP development. This process modelled a modern stimulation and its impact on the Cane Creek reservoir, and concluded that if a continuous hydrocarbon play exists, there is good evidence that hydraulically stimulated wells have potential to deliver commercial well rates and volumes. This estimate is preliminary and highly dependent upon the continued observations of ubiquitous low water saturations, reservoir over-pressure and a yet to be proven, successful hydraulic stimulation operation.
This HSRP alternative delivers the following preliminary estimates:
· up to 30 well locations
· A range of risked net recoverable contingent resources of up to 18mmboe
Internal Zephyr Assessment: HSRP Case #2: hydraulic stimulation of the overlying reservoirs
Background: As mentioned above, the C1, C2, C4, C7, C8, C9, C10/11 and C18/19 overlying reservoirs have been high-graded by Zephyr as potential exploration zones with an estimated P50 total of 1 billion boe HCIIP in place across the ZPHR acreage. Scaling of Premier's models indicates an opportunity to target this in place resource via HSRP development. Should the conditions for the HSRP be proven to be favourable, it could result in the potential for up to 200 well locations across the shallow reservoirs with a net contingent resource potential of up to 125mmboe. This estimate is highly dependent upon developing a better understanding of each zone's reservoir pressure, fluid phase, geomechanical properties, permeability and a successful proof of concept production well. The assessment can be summarised as:
· up to 200 well locations
· Range of risked net recoverable contingent resources (overlying reservoirs only): up to 125mmboe
· Range of total risked net recoverable contingent resources for the HSRP: up to 143mmboe
Additional observations and identification of risks:
· The State 16-2 well has a good well tie to the existing 3D seismic data.
· Initial source rock analysis suggests that the State 16-2 well has organic rich source rock shales in many of the clastic layers, including the Cane Creek reservoir, as was confirmed in other wells by earlier studies.
· Initial source rock analysis also suggests that these shales are more likely to be more mature in both the Cane Creek zone and the overlying reservoirs, which could imply an increase in gas volumes while liquid volumes remain as forecasted. The production history from the Federal 28-11 well (in the Cane Creek reservoir and which lies within Zephyr's 3D seismic survey area), was used to guide previous Cane Creek production type curves and their gas and oil ratios. In the absence of detailed fluid analysis, these gas and oil ratios still remain the best estimate of fluid composition for the Zephyr acreage and remain valid for production forecasting and economic analysis. In the overlying reservoirs, the expected reservoir fluids have higher levels of uncertainty and range from a base case of liquid rich gas condensates to black oil fluids. A key objective of any well testing at the State 16-2LN-CC well will be to obtain high quality fluid samples for product valuation and production forecasting purposes.
· The matrix reservoir quality is better than expected and is high when compared to other continuous resource plays such as the DJ or the Williston.
· The overlying reservoirs are fine-grained, and contain high clay content and complex mineralogies, which can introduce uncertainty into the petrophysical analysis and estimation of porosity, water saturation and ultimately the overall Hydrocarbons Initially In Place estimation.
· Water saturation in the overlying reservoirs is comparable with log analysis and with core data from the Cane Creek Field, and log data from offset wells suggest that all overlying reservoirs are hydrocarbon filled to some extent, even in the off-structure location at the State 16-2 well.
· A preponderance of evidence suggests low water saturations across the Cane Creek reservoir as well. However, in the unlikely event that water saturation under Zephyr's leases is greater than in the Cane Creek field to the south, it would suggest a faulted, conventional reservoir rather than a continuous hydrocarbon plan across the Cane Creek reservoir. Should the scenario where higher water saturations exist in the Cane Creek, then the HSRP development option would not be feasible and the natural fracture play potential would also be reduced.
· The State 16-2LN CC drilling operation, which is expected to commence in July, will give more data on the Cane Creek reservoir. In addition, the Company will attempt to acquire pressure data from the most promising overlying reservoir targets. Once this data is secured, the Company will seek an updated CPR for its Paradox Basin assets in the second half of this year.
· A State 16-2LN-CC production test (of either the NFP and HSRP) will also help further develop the understanding of the asset, as well as provide additional data for the testing of the overlying reservoirs.
* Assessment of Undiscovered Oil and Gas Resources in the Paradox Basin Province, Utah, Colorado, New Mexico, and Arizona, 2011. Katherine J. Whidden