The mainstream press and the bulletin boards are all of a tizz about a massive discovery of oil at Horse Hill in Sussex. The numbers are quite gargantuan. The BBC reports there could be 100 billion bbls of oil in place. Here is what was said by one company's CEO "Based on what we've found here, we're looking at between 50 and 100 billion barrels of oil in place in the ground. We believe we can recover between 5% and 15% of the oil in the ground." Let's just do some sums, the middle of his guess for oil in place is 75 billion bbls, the middle of his guess for recovery factor is 10%. Multiply those two together and that makes 7.5 billion bbls of recoverable oil, or three quarters of the entire US tight oil reserves of 10 billion bbls recorded at the end of 2013 by the EIA (See table 2 here).
How does that compare with what is left in the North Sea, well DECC kindly publish an annual estimate of the remaining reserves in producing fields, and identified discoveries that companies plan to develop, the mid case reserve estimate for that is 5.6 billion bbls (I prefer the table that is in oilfield units).
Just focussing in on the Horse Hill block itself, the oil in place is estimated at 8.7 billion barrels, so if we take the man at his word that might be 870 million barrels recoverable within the Horse Hill block, that would make Horse Hill the biggest field in the UK ranked by remaining reserves, i.e. right at the top of this list on the right, and just off the scale for good measure.
Now I would like all that to be true, the UK oil industry really does need a boost of that magnitude, but I am an engineer and a pretty sceptical and conservative engineer at that. So let's parse the press release with a petroleum engineer's hard hat on before we get too carried away.
The first thing you have to do when looking at an unconventional resource play like the Kimmeridge is to find an analogue with a good production history, make some comparisons on a zone by zone basis and from that you might get a feel for how much oil you can hope to extract. Fortunately the press release does that for us, apparently we should be looking at the Wolf Camp (Permian) and the Bakken shale plays in the USA and a Russian play without much production history, which might be the best thing since sliced bread but as it doesn't have a likely range of recovery factor it is of no use to me. However the Permian and the Bakken do have a lot of production history. They, alongside the Eagleford, are the reason why US onshore oil production has gone through the roof.
Of course US oil production went through the roof with about 1,700 rigs drilling simultaneously. We know that won't happen in leafy Sussex, but let's not worry about that for now.
Now I don't have a lot of experience of these unconventional plays but I have come across a man who does and if you are thinking of investing in any of the Horse Hill players you could do worse than listen to this lecture (video here, slides here) from Neil McMahon of Kimmeridge Energy. Now Neil is a great believer in the potential of the Kimmeridge as an unconventional play, it has been a fantastic source rock for the UKCS and there are certainly good examples of productive zones within the Kimmeridge which have been ignored because they weren't well understood when they were encountered.
For those of you who skipped the homework, at about 24 minutes and 30 seconds into the video Neil tells us what Kimmeridge Energy looks for in the shale plays that it invests in:
- Firstly, you need a high total organic carbon content (TOC%), "the higher the better", it seems like the Kimmeridge at Horse Hill has a TOC% ranging from 2% to 9.4%, according to Table 3 of the press release, but when I look at Table 2 in the press release and read off the average TOC% for each of the zones within the Kimmeridge that looks more like 1% to 4% to me. Not quite as good as the Bakken (8-12%) nor the Wolf Camp (4-8%);
- Secondly, you need some porosity, and the Kimmeridge at Horse Hill seems like it meets the criteria;
- Thirdly, you need reservoir energy to drive the oil out of the rock, the reservoir energy is proportional to depth, and the deeper you go the better the chance that your reservoir is over-pressured, which further boosts reservoir energy. It is no surprise that the Woodford and Bakken are deep reservoirs at between 7,000' and 11,000'. Sadly at Horse Hill the Kimmeridge is only at 2,300' to 4,400'.
- But then Neil warns us that we shouldn't be touching mineralogies with greater than 40% clay content, "at least not today". You see with porosities this low the permeability of the rock is going to be really low and the only way you will get decent flow rates is if there are fractures along the well; either natural, or created by pumping sand and water into the well. Anything with a clay content of 40% or higher is just not brittle enough to fracture easily. You have to go back to Table 2 in the press release to get the clay content. It is really only the three limestone zones that have a low enough clay content to try to produce.
This play is all about the Kimmeridge, the press release doesn't say too much about the zones outside the Kimmeridge, but if they were good I am sure we would have heard more, and of them all it is only the Lower Lias that might have a bit of promise. Nevertheless, in the Kimmeridge using a 40% clay cutoff, it seems that the only oil that is in rock which can be drained is in the limestones. The trouble is that among the limestones there is one nice thick zone, with about 60 feet of net pay and two thinner zones which might not even be worth drilling into. In any event, for sure you will start by producing the Lower Limestone 2 first. All that means is that there is only about 13 mmbbls of oil in place per square mile which looks producible to me. The rest is all too thin or too clayey.
The companies involved are playing down the need to hydraulically fracture the wells. The limestone here might just produce without fraccing if there are enough natural fractures in the system, but for sure you will get better production rates with hydraulically fractured horizontal wells. The whole shale oil miracle depends on producing oil from hydraulically fractured horizontal wells, conventional wells just don't get much oil out of rocks like these.
And more importantly, it is only by fraccing the wells in the Wolf Camp and the Barnett that the operators there get the recovery factor up to the 3% to 15% range seen in the two analogous US plays. If we are to use the recovery factors from the analogous plays we have to assume the same production technology.
Anyway, I have now discarded everything apart from the Lower Limestone 2 in the Middle Kimmeridge sequence. And now I might surprise you because having narrowed it down to the sequence that I think is producible, I am not going to use the lowest possible recovery factor. Getting a 10% or 15% recovery factor would probably be too optimistic, remember there is much less reservoir energy in the Kimmeridge at Horse Hill than in either the Bakken or the Wolfcamp, but I think maybe 7% or 8% recovery factor could be possible. That means about 1 mmbbls recoverable per square mile.
If we then make the assumption that the resource extends across the whole Horse Hill block, that means the Horse Hill recoverable reserve could be, when it is appraised, around about 55 mmbbls. But it will take at least four or five more wells before we know that and a good few production tests to confirm that the limestone will produce. I think it will, but it will take fractured wells to get decent rates and as I have said, I have my doubts that there will be any meaningful contribution from the mudstones, no matter how hard they frac those zones.
So is UKOG a buy or a sell or a "wait-and-see", well it depends, just now, with the oil price on the floor, and with so much appraisal needed that the companies still have to pay for, I would be hard pressed to say this was worth much more than $1/bbl, or maybe $2/bbl, right now. Once it is well appraised and the productivity of the Lower Limestone 2 is proven, and the decline curve for production wells is understood, that is when it might be worth $10/bbl, but not before. UKOG has about a 20% interest in the acreage so, my estimate is they might ultimately be able to prove they have about 11 mmbbls of reserves.
As the Americans say, do the math.