Chinese offshore drilling company COSL is set to sign an integrated drilling contract with Empyrean Energy to drill the Jade exploration well on Block 29/11, offshore China. The drilling is expected to start in December, Empyrean said Thursday.
Empyrean said COSL had confirmed drilling rig availability, and all technical, commercial, and contractual terms have been agreed. The well will, per Empyrean, target "a world-class conventional oil target." It did not say which rig would be used for the project.
According to the oil company which operates the block with a 100% stake, COSL proposal includes a significantly reduced drilling cost estimate of $12.3 million, compared to the previous estimate of $18.5 milion. The contract includes a success-based testing cost estimate of $7.4 million.
Providing details on the cost reduction, Empyrean said: "[Empyrean] had previously been quoted US$18.5 million to drill the Jade well with testing of any oil column to be in addition to this amount. Following the well engineering and design work completed with AGR, the Company has been working diligently with COSL towards securing a rig and finalizing costs for the well.
"To this end, the parties have reached an agreement on a substantially reduced turnkey quote for the drilling of the Jade Prospect of US$12.3 million on a dry hole basis, an approximate 34% saving on the initial quote. On a success basis, testing of any oil column has been quoted at US$7.4 million."
In the event of a commercial discovery, China National Offshore Oil Company ("CNOOC"), may assume a 51% participating interest in the development and production phase.
Block 29/11 is, covering 1806 square kilometers, is situated in the prolific Pearl River Mouth Basin, offshore China, approximately 200km southeast of Hong Kong
Procedural conditions remaining. Funding required
A condition of the drilling contract award is that Empyrean and COSL have agreed that there will be no further exceptions, qualifications or deviations to the technical, commercial, and contractual terms and conditions ahead of signing the IDC [Integrated Drilling Contract].
"The Drilling Program and Geological Program are the only remaining items to be incorporated into the IDC and are procedural in nature. CNOOC approval was sought and provided ahead of the award of the IDC and all parties are aligned in the targeted timing to drill the Jade Prospect in mid to late December," Empyrean added.
As for the funding, Empyrean said in July it had raised gross proceeds of £5.02 million (US$6.92 million) through an equity placing and that the net proceeds would be used to secure a suitable drilling rig and order long lead items, as well as for the general working capital requirements.
For the drilling of the Jade prospect, Empyrean will require further funding, which it expects to secure via a joint venture, exercise of warrants, or from an equity raising.
According to Empyrean, Gaffney Cline & Associates ("GCA") assigned a Geological Chance of Success ("GCoS") of 32% for the Jade prospect.
Following the GCA, Empyrean carried out further studies which have led the company to estimate the GCoS to 41%.
"The Jade Prospect has a GCA audited mean in place potential of 225 MMbbl and a P10 in place upside of 395 MMbbl. Four recent nearby discoveries by CNOOC immediately to the West of the Jade Prospect are filled to their P10 potential or better. All four CNOOC discoveries have gas clouds showing in the overburden on seismic" Empyrean said.
The Jade Prospect is the first of the three identified prospects within Block 29/11, which also contains the Topaz and Pearl prospects. The combined audited mean in place potential of all three prospects is 884 MMbbl and a P10 in place upside of 1,588 MMbbl.
Empyrean said that any oil discovered is expected to be light oil in the 38-41 API range, similar to nearby discoveries.
Empyrean CEO, Tom Kelly, said."This award of contract to COSL at approximately 34% below our previously anticipated drilling cost estimate is a massive leap forward for Empyrean and the reduced drilling cost is effectively better than a 34% JV style deal as there is zero dilution to Empyrean.
"The countdown to the drilling of the Jade prospect has begun. Locking in rig availability, finalizing costs and setting a target spud date were all essential to securing the remaining funds required to drill the Jade Prospect whether that be by JV, warrant exercise, or equity raise.
"The thorough work Empyrean has completed in conjunction with AGR resulting in the negotiation and award of contract is a credit to our technical director Gaz Bisht and the team at COSL. All other drilling preparation activities, including finalizing the site survey, ordering long-lead items and securing the necessary drill permits, are progressing well. We also thank CNOOC for their continued support and cooperation throughout this process."