Falkland Oil and Gas shares crash on Scotia Well failure. Is this the final nail in the coffin for Falkland oilies?

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South Falklands basin oil and gas explorer, Falkland Oil and Gas today announced the long awaited results of the Scotia well drill. With a big spike in the share price last week, moving from 55p to 70p intraday, expectations were raised on the bulletin boards (common theme here?!) for an oil bonanza. Sadly, it was not to be as the Falkland oilies continue down the road of failed dreams for their investors in what is looking like a re-run of the last adventure, previously by the oil majors, in these remote South Atlantic Islands. It looks like the Argentine’s may have the last laugh at British investors expense…

The Scotia well always had a low chance of success (COS) because of the lack of 3D seismic data to confirm the viability of the well. Unfortunately, although hydrocarbon bearing sands were encountered on the drill, the reservoir quality was poor with low permeability meaning no hydrocarbon flow.

The well marks the end of the 2012 South Falkland basin drilling programme for Borders and Southern and Falkland Oil and Gas. Borders Darwin East well had a gas condensate discovery and FOGL’s Loligo well encountered gas. But this Scotia result accompanies Borders disappointment at Stebbing where technical problems meant the well could not be completed.

The good news is that hydrocarbons have been found in the acreage to the south of the Falklands, but Rockhopper and Desire Petroleum in the North Falkland basin remain alone in discovering oil (in the case of Rockhopper – 356 million barrels 2C).

Lots of patience required now, with FOGL due to conduct 3D seismics next year and Borders and Southern, for now, lacking funding. Further drilling is unlikely before 2014 and will probably accompany further exploration by Rockhopper around the same time frame.

Expectations remain that Argos Resources will prove succesful and which has acreage to the East of Rockhopper’s and that a farm out will be announced at some point early in 2013.

A disappointing day for holders of shares in the Falklands with FOGL now down almost 50%. Wild cat drilling is not for the faint hearted!

Contrarian investor UK

FOGL 10 Day chart

The main part of today’s RNS is as follows:

FOGL, the oil and gas exploration company focused on its extensive licence areas to the South and East of the Falkland Islands, announces the results of the Scotia exploration well.

FOGL is the operator of the well, holding a 40% interest, whilst Noble Energy Inc. holds a 35% interest and Edison International Spa, holds the remaining 25% interest. Under the terms of the farm-out agreements, FOGL is paying 15% of the costs of this well.

Well 31/12-01 was drilled to a depth of 5,555m. The well penetrated the mid Cretaceous aged reservoir objective on prognosis. The Scotia objective had been identified on the basis of its seismic amplitude response. Strong gas shows (C1 to C51)were encountered whilst drilling the target section. Interpretation of wireline log data indicates that the target interval 4719m to 4769m comprises 50m of hydrocarbon bearing fine grained sandstones and claystones. The wireline logs indicate that, at this location within Scotia, the sandstones form fairly poor quality reservoir, although some zones have up to 20% porosity. Other thin hydrocarbon bearing sandstones were encountered beneath the main target in the interval 4900m to 5164m. Subsequent evaluation of the main interval using a wireline formation testing tool did not flow hydrocarbons, indicating that the reservoir has low permeability.

The well was deepened below the main target in order to penetrate and sample Cretaceous aged source rocks. Rock cuttings and sidewall core samples have been obtained from several potential source rock intervals and these will be sent to the laboratory for detailed analysis. The results should provide vital information on the quality and maturity of these source rocks and also provide a better understanding of the distribution of oil and gas within this part of the South and East Falklands basin. A further announcement on the results of this work will be made in the first quarter of 2013.

The Scotia well has proven a working hydrocarbon system in the mid Cretaceous Fan play and has also demonstrated that Scotia is a viable stratigraphic trap. Whilst reservoir quality at this particular location was poor, it should be recognised that the seismic amplitude anomaly that defines Scotia covers an area of approximately 350 square kilometres. As such, further technical work is required to assess just how representative this result is, and whether or not better quality reservoir may exist elsewhere within Scotia.

The well data will be invaluable for calibrating the forthcoming 3D seismic programme. The 3D seismic will be used to map sand fairways in the play and, when combined with detailed analysis from the Scotia well, should allow identification of better quality reservoir and differentiation between oil and gas prospects.

FOGL now intends to plug and abandon the well and this is expected to take approximately 10 days. On the basis that the well is completed within this timeframe, it is estimated that the Company’s cash balance post the 2012 drilling campaign will be approximately US$220 million.

The PGS M/V Ramform Sterling is expected to arrive in the Falklands and commence 3D seismic acquisition imminently. A further update on this work will be provided in due course.

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