Mongolia-focused oil explorer Petro Matad delighted its growing fan base with a bullish operations update in March. The firm, run by Australian veteran Doug McGay, announced a meaty upgrade to its own reserve estimates after re-working the data on its core exploration prospect, Block XX, in the far east of the country. Petro Matad shares hit an all-time high on the back of the news, but with the next 12-18 months set to be an exceptionally active time for the company, the hope is that in-fill testing, additional seismic work and more drilling on the huge acreage within its Mongolian licenses will identify a major new oil producing area.
Mongolia itself is in an “embryonic” stage according to the company, both in its economic development and also in exploiting its own natural resources. That includes its largely untapped oil fields. At present, it imports all of its oil requirements and is keen to substitute home produced for imported. As a result, it has established a reasonably benign regime for oil companies to explore. Politically also, it is stable.
Even so, interest has been patchy compared with the frenetic activity offshore Brazil, Africa and the Gulf of Mexico. Indeed, Petro Matad can claim the title of the only internationally-listed firm operating in the country, with the exception of a subsidiary of Ivanhoe Energy (TSE:IE), which operates one PSC.
Its principal asset is the 100 percent owned production sharing contract for 14,250 sq-km Block XX. It also has two other Blocks, IV and V, located in central Mongolia and which jointly cover 71,040 sq km. In Block XIX, next door to Block XX, Chinese-owned PetroChina has drilled extensively and is inching forward towards meaningful commercial production, but infrastructure still remains primitive with any oil produced shipped out by road.
Petro Matad still has some way to go to reach even that stage. So far, it has drilled only three complete wells on Block XX, on the prospect it now calls Davsan Tolgoi (or DT), and any meaningful production remains a way off, though it is a testament to the potential that even with the limited drilling so far the current market value is nearly £370 million (USD 600 million).
A fourth well on Davsan Tolgoi was suspended three–quarters of the way down just before the end of 2010 as the Mongolian winter really kicked in. Temperatures can dip below minus 20 degrees centigrade and Petro Matad took the decision to avoid reaching a critical stage of drilling just as temperatures plunged to potentially dangerous levels.
Using a reassessment of the information from the wells drilled last year, Petro Matad raised its forecast of the amount of recoverable oil in Block XX by nearly 200 percent. It also increased its targets for possible additional discoveries to 18 prospects and three leads.
According to the March statement, the data led to a much greater understanding of the target area’s geological characteristics, while, as a huge bonus, it also made a potentially significant new discovery.
As a result, DT is now estimated to contain total unrisked recoverable resources of 293 million barrels, with a risked recoverable resource of 225 million barrels. In terms of unrisked recoverable resource, it represented an “approximate tripling of what was previously postulated for at Davsan Tolgoi,” the statement said.
The new discovery provided most of the upgrade in reserves and will also form the basis of the 2011 drilling program, chief executive Doug McGay added. "The discovery and definition of the new UvganGol paleovalley prospects are very exciting and add a new dimension to resource definition in this region,” he said. Total oil-in-place estimates for this eastern corner of Block XX now stand at 1.87 billion barrels, a figure that includes the recent drilling plus estimates for an adjoining area of 228 sq km immediately to the east.
Financially, Petro Matad is also solid enough. It raised USD54 million last year through a placing. That has given it cash enough for the immediate plans. How quickly it burns through it depends on how quickly the drilling program and other in-fill work accelerates. In addition to appraisal work, there is also a possible fifth well on DT while an initial seismic survey is planned for Blocks 1V and V with possible drilling here later in the year if those results throw up some interesting results.
To fund all that may mean Petro Matad has to come back to shareholders again for more money, but a major plus is that institutional support so far has been very solid. All of its major shareholders took shares in last year’s placing including Mongolian oil products importer Petrovis, which has a 20 percent stake, and also the European Bank for Reconstruction and Development (EBRD), which owns 17.3 percent.
The key in the next few months will be the appraisal test results for the flow rate and quality of oil at Davsan Tolgoi, which should follow once drilling resumes at DT-4, which is expected to occur fairly quickly now that the weather has improved, and further testing is carried out on the three previous wells.
Source: Proactive Investors
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