Malcolm ShawBy: Malcolm Shaw
(Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. I am long POE.V)
In the oil exploration game, it's other never as simple as you might want it to be. Pan Orient Energy (last at C$1.81) released a drilling update on the much anticipated AYU-1X well and it would appear that the 'anticipation' is going to last a little longer as results were encouraging, but don't appear to be a clear-cut success. Preliminary analysis suggests that the well found "5.5 metres of high porosity net oil pay at the top of good quality reservoir in the Batu Raja limestone", which was the primary target interval in the well. That interpretation is supported by wireline logs, pressure data, and oil samples, so that's about as much confirmation as you're ever going to get without a flow test. Pan Orient went on to say that, "significant indications of hydrocarbons in the form of oil shows and high gas readings in well-developed sands of Gumai age were also found". That might mean that Pan Orient is close to something of interest in the secondary Gumai-age target interval, or it might mean that oil has simply swept through the structure at that level.
The well reached a total depth at 1,140 metres in granitic basement an August 21st, which was about 400 meters shy of the projected total depth as indicated on the drill curve in the company's corporate presentation. To me, that suggests that the structural interpretation was off by a fair bit, as the well was TD'd before the projected top of the Batu Raja (which was pre-drill estimated to be at 1,200m depth). It's unclear what implications that may have for the greater structural complex.
Based on the results of the AYU-1X well, the partners have elected to drill a sidetrack (ELOK-1X) to a subsurface location about 700 metres south where they aim to evaluate a possible thick wedge of Lower Talang Akar sandstones that are on-lapping the AYU-1X high and thus could be oil charged. The well is expected to take 30 days to drill.
So what does it all mean? For one, the presence of oil in highly porous Batu Raja limestone is a very good thing. It means that the development of reservoir in the Batu Raja interval has been proven and that oil has migrated into it. However, 5.5 metres of porous limestone may or may not cut it in the jungles of Indonesia. I ran some quick math on 5.5 metres of oil pay assuming 25% porosity, 75% oil saturation, and 30% recovery and I can end up in the ballpark of 3-5 mmbbls recoverable per square mile. That may or may not work, depending on a number of factors, including development costs and the prevalence of porous Batu Raja limestone in the area. It also remains to be seen where thicker Batu Raja oil pay might be found, if anywhere, in the greater structural complex. In a nutshell, I would say that more information is needed via updated mapping and/or additional drilling.
However, if the Lower Talang Akar sands are found to be both thick and oil-charged in the ELOK-1X sidetrack, the odds of commercial success are likely going to look a lot better. Just 30 more days of waiting... here's hoping they find a nice thick section of oil-charged Lower Talang Akar sands.
In the meantime, investors are left on edge again, waiting for more data. I have sold some of my stock this morning (for a small gain relative to my most recent purchase price of $1.60) in order to reduce my risk as the hopes of a thick Batu Raja oil hit on the first well is off the table, but I'm definitely keeping one foot in the door should the ELOK-1X sidetrack come up with the goods. In light of the oil pay encountered in the Batu Raja limestone, I would imagine that the partners will also be trying to find thicker Batu Raja reservoir in a structurally favourable position... surely that will be one of the topics at the upcoming partner meeting.
Stay tuned.