Well GY 676, the second well on Pad 5 has reached TD. Total oil net pay is 472 feet of which 250 feet were in the Goudron Sands and 222 feet, in the C-Sands.
Total production in Q2 averaged at 951 bopd, far lower than many expected, hence the short attack immediately upon the announcement. This was a far cry from the 1,550 bopd averaged in Q1. In the absence of any management news to address the decline, many decided that it was due to steep decline in pressure and that the wells were unprofitable in the long run. This is NOT TRUE.
LGO has always maintained that they would optimise the flow to preserve the longevity of the well, and therefore would always look at the most optimum output to maintain the integrity of the well. Therefore it is my believe that LGO wants the well to be free flowing for as long as it could do so, even if it means choking back the flow.
The other explanation is to preserve the oil in the ground rather than selling it at such a ridiculously low price.
This is just conjecture on my part but the truth is not far off as the 5,000 barrels sales tank will be in place towards September end and we will see if LGO would increase the output from the 8 wells drilled last year. If they remain the same, then likelihood is that the pressure within the well dissipates very fast and therefore affect the overall production. Then LGO may opt to have pumps on standby the pump from the wells.
Baring in mind that the 951 bopd does not include wells from Pad 4 & Pad 5. Well GY672 on pad 4 is producing at 240 bopd, so let's assume that all the 7 wells on Pad 4 & 5 will produce an average of 200 bopd. So that would give us an extra 1,400 bopd.
LGO has also confirmed that they have found a smaller rig to start drilling in the Goudron Sands later in the year. There are 15 wells remaining and likely all these 15 wells will target the Goudron Sands.
If we study the cost, the cost of drilling deep into the C-sands cost US$1.5 million last year. This year there is a savings of 30% - 40%, so let's assume the cost of drilling into the C-Sands is US$1 million per well. Now, compare that to the cost of drilling into the Goudron Sands which is estimated at between US$35,000 - US$40,000 per well.
If we study the decline rate, wells drilled targeting the C-Sands last year are averaging less than 100 bopd per well today. A well in the Goudron Sands will yield about 60 bopd with a pump. Isn't it more economical then to produce from the Goudron Sands? So it seems LGO is also aware of this, hence the start of a drilling campaign in the Goudron Sands later in the year.
Assuming 60 bopd per well for Goudron Sands, 15 wells will yield a production of 900 bopd.
Adding all the 30 wells,
Last year drilling ( 8 wells C-Sands) 951 bopd
This year drilling (7 wells C-Sands) 1,400 bopd
This year drilling (15 wells Goudron Sands) 900 bopd
Total 3,251 bopd going into 2016
So I would expect that future drilling of the next 30 wells (awaiting permit approval) will be a combination of 15 Goudron Sands wells and 15 C-Sands wells. The C-Sands wells are important because they will determine the how the waterflood programme will run. The waterflood programme will eradicate the issue of lack of pressure and will increase the production from the C-sands dramatically. However this will not happen until 3 years later. At this point it is worthwhile to note that a pilot project will start in 2016.
LGO also stated in the previous announcement that drilling in the Cedros will also commence in 2016.
So there are still a lot of positives surrounding LGO, but perhaps we need to scale back our expectation.
At current price of 1.59 pence, it is a BUY. But the 12 months target will now be scaled back from 10 pence to 6 - 7 pence at this current oil price.
My disclosure: I own shares of LGO.
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