More drilling disappointment on AIM, this time from Range Resources and Red Emperor

Another disappointing well result this week after the Chariot Oil and Gas bombshell, this time from Somalia’s somewhat aptly named Puntland region!

Operator of the Shabeel well, Horn Petroleum Corp listed on the Canadian TSX, provided an update yesterday. The prospect is jointly owned by Red Emperor (20%) and Range Resources  (20%) as well as Horn (60%).

The Puntland exploration blocks cover a region nearing 36,000km2 and are a potential replica of the 5-10 billion barrel basin in nearby Yemen.

In July 2006, AIM listed Range Resources reached an agreement to acquire the remaining 49.9% interest in the rights to the exploration and development of Puntland’s natural resources. In October 2006 Range signed a Memorandum of Understanding with Africa Oil in relation to a US$50m 80% farm-in in the Nogal Basin and Darin Basin Blocks. This resulted in a Joint Venture project being formalised between Range and Africa Oil which saw the formal signing of the Product Sharing Agreement between Range, Africa Oil and the Puntland Government take place on 17 January 2007.

In mid 2010 ASX/AIM listed company, Red Emperor Resources farmed into a 20% share of Africa Oil’s 80%. Subsequently Africa Oil spun out its interests in Puntland into TSX listed Horn Petroleum as a fully focused Puntland vehicle which raised $41 million in August 2011.

$70 million has been spent by Range Resources and Horn (Africa Oil) since acquisition in 2006 on 2D seismic data and drilling preparations.

Somalia is in North East Africa and has been identified as a country with the requirements for abundant oil and gas – hydrocarbons in the Jurassic, Cretaceous and Tertiary rocks, plus good quality sandstone and carbonate reservoirs. Also the sandstones and carbonates are above organic rich shales and marls which may be a source for the hydrocarbon system. There are a number of areas in Puntland where oil is seeping to the surface.

During 1989 and 1990 Conoco drilled the Nogal and Kalis-1 wells in the Nogal basin and revealed significant evidence of oil shows which lead to an estimate of 500m barrels of recoverable reserves. Amoco, Shell and others also drilled in Puntland during the 1980’s and early 1990’s but this was stopped by the start of the civil war in 1991. There is a possibility that the Nogal and Darin basins are extensions of the petroleum producing Marib Shawba and Sayun-Masila basins in the Gulf of Aden, Yemen.

In October 2005 Range acquired a 50% interest in the rights for mineral (now relinquished) and hydrocarbon exploration in Puntland and later increased this to 100% in July 2006. In October 2006, the company signed a Memorandum of Understanding (MOU) with Africa Oil for a 80% farm in in the Nogal and Darin basin blocks.

In 2009, Gaffney Cline & Associates estimated that the un-risked oil in place (OIP) could be upto 12.4 billion barrels in the Nugaal block and 5.8 billion barrels in the Dhahoor block. 

The first target, Shabeel, with estimated resources of 900million barrels in place, was spudded in January 2012.

Horn was down over 40%, Range Resources dropped 16.5 per cent to 7.3p and Red Emperor Resources was down 41.5 per cent to 18p after the companies said drilling had been suspended. Red Emperor had recently been trading just shy of 50p in March on the initial encouraging reports. It is now valued at £46 million. Range Resource is now valued at £140 million (over 2 billion shares in issue).

Initial findings from well operator Horn Petroleum had identified “up to 3 metres of potential hydrocarbon pay in several thin sand units between 3246 and 3430 metres. The results “are not considered to warrant testing at this time but do further confirm the existence of a working petroleum system”.

Horn had previously said it hit between 12 metres and 20 metres of significant hydrocarbons pay in the Upper Cretaceous Jesomma Formation at the well.

 Lessons for the small investor:

1. Wild cat wells are intrinsically risky, the chance of success being usually in the region of 25%
2. Frontier regions like Somalia are even more risky because of lack of infrastructure (transportation of oil and gas from any find), security risks and difficulty in hiring suitable personnel
3. Be wary of bulletin board rumours predicting gushers!
4. Take profits on the positive rumours

What next for Puntland? The rig will now move to the Shabeel North location that is 3.5km north of the
current location with spudding scheduled for the first week of June 2012. Many questions remain about the Shabeel well. Whether the company are holding information back for security reasons or the results really do disguise a non commercial find is something which investors will be keen to find out once and for all. Range and Red Emperor are not for the faint hearted that’s for sure. 

Contrarian Investor UK