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This report is based on information available to the public. Information presented, while obtained from sources we believe to be reliable, is not guaranteed either as to accuracy or completeness. Estimates and projections contained herein are Yorkton's own or obtained from our consultants. This report is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned herein. This research material is approved by Yorkton Securities Inc., which is regulated by SFA for the conduct of investment business in the U.K. Approval is only to the extent defined in Section 57 of the Financial Services Act 1986. The investments or investment services, which are the subject of this research material, are not available for private customers as defined by the SFA. Yorkton Capital Inc. accepts responsibility for the contents of this report and U.S. persons receiving this report and wishing to effect a transaction in any security described herein should do so with Yorkton Capital Inc. Yorkton Securities Inc., Yorkton Capital Inc. and their respective officers and directors has, or may have, a position or holding in, or may effect transactions in the investments concerned, or related investments, and is providing, or has provided within the last three years, significant advice or investment services in relation to the investments concerned or related investments. Yorkton Securities Inc. has or may perform financial advisory, investment banking, or other services for the companies mentioned herein. Copyright Yorkton Securities Inc. under the Berne Convention. All rights reserved. No part of the publication may be reproduced without the written permission of the publishers. Printed in Canada
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THE WAKE UP CALL
Natural Resources April 30, 1999
EXPLORATION PLAYS IN THE NEWS: EAST LOST HILLS UPDATE
Nick Rontogiannis (403) 260-6408; nrontogiannis@yorkton.com
With this inaugural issue, Yorkton's oils and gas research team is introducing a new research product called "Exploration Plays in the News". In these write-ups, we will feature current plays that have significant exploration upside potential for the companies that are involved in them. The availability of interesting stories will dictate the frequency of these reports, but we anticipate publishing them on a fortnightly basis. Our first research piece features the East Lost Hills play in the San Joaquin Basin in California, which we have been following now for quite some time. Future write-ups may include stories like the NWT play (or Berkley and Purcell Energy Ltd. (PEL, TSE)), or the Deep Webamun play in the Musreu area (which Chevron has had considerable success chasing).
East Lost Hills Drilling Update: It is now four months and counting since the original Bellevue #1 well (drilled by Berkley and its partners in California) hit high pressure natural gas and blew out. The relief well, being drilled to intercept and extinguish Bellevue #1, is currently within 7 to 8 feet of its point of contact with the original hole. The relief well will now be plugged back with cement, and then drilled out to intercept Bellevue #1. If all goes well, the original well will be put out within two weeks. After this, another 6 to 8 weeks will be required to finish drilling the replacement well, taking us into the middle of July. Although not much information is available to the public on the pressures and production rates being recorded at Bellevue #1, we believe that it is still producing high volumes of natural gas and water at high pressures.
There exist a number of theories as to the source of the salt water being produced, which at this time are impossible to validate. Included at the end of this note is a reprint of some of the technical information we used to "guesstimate" a value of the
potential reserves associated with this play that we first published in late December 1998, when the Bellevue #1 well first blew out. Based on our assumptions, we continue to believe that the East Lost Hills structure contains over 1 tcf of reserves
on a risked basis, and as such, this discovery, if or when validated, has the potential to substantially impact the stock price of any of the major working interest participants in this play, which we have detailed in Exhibit 1. The continuous
production of salt water and gas from the blow out well merely reiterates the fact that the discovery, although potentially large, contains possible reserves only that will require the drilling of another well before being validated.
Exhibit 1. East Lost Hills Participants
Ticker, Approximate
Company Exchange Interest
Berkley BKP, TSE 46%
Paramount POU, TSE 25%
Westminster WML, TSE 9%
Richland RLP, TSE
Elk Point ELK, TSE 5%
Three More Swings at a Home Run: Following the validation of reservoir trap, seal, and source assumptions made by the blow out well, the explorer's associated with this play have wisely decided to diversify. Pursuant to a joint venture agreement with Armstrong Resources PLC, Berkley and its partners in the East Lost Hills play have committed to drilling three more deep exploration wells in the San Joaquin Basin joint venture area. The three exploration wells will be drilled in sequence, using the same rig. All three will be targeting separate temblor sand structures, at depths ranging from 15,000 to 18,000 feet. Average costs for each of these wells will be in the vicinity of US$8 million, which will be paid for according to the following interests:
Exhibit 2.
Ticker, Greater San Joaquin JV
Company Exchange Capital Interests
Berkley BKP, TSE 46%
Paramount POU, TSE 25%
The first well, scheduled to be spud sometime in mid to late June, will be drilling the "Cal Canal" prospect, directly south of the East Lost Hills prospect, which has 850 to 1,000 feet of potential closure. The table below outlines the unrisked upside potential of each of these three shots:
Exhibit 3.
Unrisked Upside Potential
Cal Canal 150 to 300 million boe
Lucky Dog 0.5 to 1.1 billion boe
Pyramid 0.7 to 1.2 billion boe
Conclusions: We believe that there is a good chance that the partners of the Greater San Joaquin Joint Venture will eventually have a sizable hydrocarbon find on their hands. Whether this find is East Lost Hills or one of the other plays in the Greater San Joaquin basin is still unknown. Although it may be both a costly and timely venture before this is confirmed, the upside associated with such a discovery should, in our opinion, outweigh the short-term negative impact associated with the blow out.
We continue to believe that the safest way to participate in the upside of the East Lost Hills Play is through the purchase of shares of TSE senior producers such as Berkley, Paramount, or juniors backstopped by some solid asset value such as Elk
Point.
Additional Information Reserve Estimation; While the East Lost Hills blow out well points to a potentially large discovery, to arrive at an estimation of reserve size at this point in time remains a theoretical exercise, given that there are still many
unknowns, such as total net pay thickness and areal extent of the discovery. Regardless, we have taken our "best shot" at estimating the size of the pool, and then applied risks based on our confidence. Thus, assuming that the prospect is gas in nature, initial sales gas and condensate reserves were estimated based on the following assumptions:
Exhibit 4. Possible Reserve Estimate
East Lost Hills Prospect San Joaquin Basin
Formation Temblor
Area 15,000 acres
Average Net Pay 400 feet
Porosity 12%
Water Saturation 30%
Reservoir Pressure 8,170 psia
Reservoir Temperature 382 O F
Formation Depth 19,000 feet
Gas Gravity 0.74
Z 1.28
IGIP (Raw) 5.9 TCF
Recovery 80%
Shrinkage 12%
Initial Sales Gas Reserves 4.2 TCF
Initial Condensate Reserves 109 MMbbl
The recent blowout of the discovery well is believed to have validated the above reservoir trap, seal, and source assumptions. The greatest unknown at this point is still the total thickness and areal extent of the reservoir. As a result, significant risks
still exist to warrant the classification of the above reserve estimate as nothing more than "possible reserves" (versus proven or probable). This typically implies that a prospect has a range of chance factors of success ("COS") from 10% to 25%. At
this time, based on the quality of information we have, we believe that there is a 20% COS that the above table is reflecting that true value of the play. Further drilling, both at this and off-setting locations, as well as production testing will be required in order to increase confidence in this prospect to assign proven and/or probable reserve estimates.
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