What should our focus be? We are told that Shaikan is huge, equivalent to the distance between Heathrow and City Airport.

Author Dalesmann Date posted Wednesday 14:08 Subject What should our focus be? We are told that Shaikan is huge, equivalent to the distance between Heathrow and City Airport. Into this huge anticline we have only drilled 8 wells, which in term of the vast area covered by Shaikan is a very small number on which to assess reserves. A reserve engineer will err on the side of caution. He will calculate the volumes in a small radius around each drilled well and effectively say that within that small radius he can be certain of x million barrels which he assigns the tag P1 (Proven) he will then assign a further figure as P2 (Proven + Probably) and finally a P3 figures (Proven+ probable + possible) The area that is covered by these figures, will be small and so in this first CPR I expect a low number to be assigned to 2P Reserves. That figure is only the beginning, the starting point and that figure will rise over time. Just for emphasis I’ll say it again, this is not a final number. As further development drilling takes place in the spaces between existing wells, this uncertainty due to extreme distances will be resolved. These gaps in understanding will be filled and the 2P figure will rise over time. Determining what lies outside a small circle described around a well bore is a tricky business for the reserve engineer and his reputation will be on the line - hence I expect a conservative report. If connectivity can be proved to his satisfaction between wells then the reserve figure will also rise and this may well be the case for some of the wells at Shaikan, particularly those clustered around PF1. Without this additional insight the reserve engineer has no way of assessing if the intervals between wells are tight or the fracture system is continuous over a large area. He needs to know the properties of the fracture system, its ability to channel oil to the well bore and he needs to assess the possibility of compartmentalization in various far flung areas of the field. (I'm thinking of the Shaikan 6 area) The ultimate 2P figure will undoubtedly rise with time and with production, more insights will be available to the reserve engineer. The depletion rates will become available and these too can be fed into the equation. As an aside John G has said that the depletion rates at SH1 have been minimal – good news. Add into this mix the application of enhanced recovery methods and the 2P reserves WILL rise. Shell raised a 0.3% RF to 30% in tight fractured carbonates in Oman using steam injection. In conclusion to this section of my post I'm not at all worried about a lowish reserve figure as it is just the starting point. The figure is needed for listing. This figure also allows a considerable amount of reserve based lending to be available to the company. As well as reserves a CPR will also allocate contingent/ prospective resources. Reserves, Contingent and Prospective resources all require a recovery factor to be applied and this will be the first time that a definitive RF will have been produced. Both CR and PR will have a value, which can be also be applied to GKP. The reserve figure will in addition allows a considerable amount of reserve based lending to be available to the company should it be needed. Indeed the current talk about these first reserve figures is actually a distraction. We are at the beginning of the race towards the prize. The reserve figures will be considerably greater in the future and will increase as many more wells are sunk. Look at the figures for DNO. Their reserve figures have been dramatically elevated over time as development wells were drilled. As DNO has moved to drilling horizontal wells, DNO have also been increasing production. It is this increase in production that should be the focus for GKP PI’s, not reserves. In addition (IMHO), we have not yet been given the final OIP numbers for Shaikan. Nothing has ever been quantified for the cretaceous and additional areas to the NW I believe have still not been included in the final figures. 21 billion OIP is IMO a distinct possibility and any such addition will lift the final valuation. A major will have its own valuation and IMHO it will be applying figures for forward production and what it believes it can elevate that production over the length of the contract (which I think it would re negotiate) including the application of ERM. I therefore don’t see a low ball CPR as a problem. What we SHOULD be focusing on is the RISING production figs. 20,000 to 40,000 to 100,000 and on to 250,000 bopd +. In all this talk about reserves these figures are conveniently being lost and yet it is the production figures that should be the prime focus for investors. The reserve figures are only part of the mechanism for listing to be achieve. Concentrate on the rising production and you then get a truer valuation of the company, and a greater understanding of the potential that GKP offers to its shareholders. Kind regards Dalesmann