Under pressure Kea Petroleum seeks new funds to drill Shannon-1

By Amy McLellan
Two months on from the launch of a strategic review and Kea Petroleum has yet to find a buyer. The AIM micro-cap, which is focused on New Zealand, has now released more details of its recently identified Shannon prospect, which lies beneath its shut-in Puka oilfield. This is a drill-ready prospect with existing production infrastructure on the surface and the company is keen to highlight these attractions as it seeks potential buyers or other investors.

Over the past five years the company has spent more than £22 million on the PEP51153 licence area, which includes Puka and Shannon. This includes 2D and 3D seismic studies, drilling the Douglas well down to the Tikorangi limestone, drilling three wells at Puka and the Wingrove-2 well to the Mount Messenger reservoir, as well as extensive the reprocessing and re-mapping of data to build an increasingly sophisticated understanding of the permit area.

This work has highlighted the potential of Shannon, a Tikorangi Limestone formation, some 1,000 metres below the Puka Mount Messenger sand reservoir. It’s a formation that is known to be productive in the area: the operator of an adjacent licence pumped 24 million barrels from this reservoir in the Waihapa oilfield.
Kea reckons that a well on the Shannon prospect would be high impact, with a gross unrisked mean prospective resource of 9.62 million barrels.

These fractured limestone reservoirs often have very high initial flow rates: production wells at Waihapa, for example, yielded IP rates of between 1,000 bpd to 10,000 bpd. It is keen to drill this as early as Q3 – pending funding. Kea has a 70 per cent interest in the permit, with joint venture partner MEO New Zealand holding 30 per cent.

The company has long battled funding shortfalls – and this has only been exacerbated by the slump in the oil price and the subsequent shut-in of Puka. Cash-strapped Kea admits its future is “precarious” but it isn’t giving up on Shannon and is investigating the possibility of raising funds to test the prospect.

The well could also intersect another Mount Messenger sand, which, if it found oil, could increase volumes so that it makes economic sense to resume production from Puka-1 and Puka-2. Maybe.

Given this is onshore drilling, and drilling costs have retreated in line with the oil price, there is a real possibility that this is a commercially viable project even at current prices. A discovery of 9.62 million barrels of recoverable oil at an average oil price of US$70 per barrel over 15 years would translate into US$673 million of gross income, with production netting around US$40 per barrel. Again, maybe.

All of this needs to be tested by the drillbit. To get this drilled, Kea reckons it would need to raise £3 million, to cover the well and to meet operational and corporate overheads through to the end of drilling. MEO has indicated that it may be prepared to contribute toward drilling the prospect and Kea is seeking other potential farm-in partners. But it is also looking to raise funds to get Shannon-1 drilled independently: a general meeting is planned for May 8 to seek authority to issue shares to be in position to raise equity funds should it agree terms with investors.

If the company cannot raise new funds, then it faces insolvency. Shares in the AIM-quoted company slipped almost 15 per cent in morning trading to 0.72 pence per share. The coming months will be key.