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empyrean energy: your questions answered

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    Empyrean Energy: your questions answered
    ONLINE Q&A: Empyrean Energy director Tom Kelly answers IC readers' questions on prospects, funding, drilling programmes and more
    18 June 2008

    18 June 2008
    Written by:
    Jonathan Eley
    Empyrean Energy is on a roll. Shares in the Aim-quoted oil and gas exploration company have almost tripled over the past month, following a gas and condensate discovery in Texas, and the company has just raised £4.5m via a placing. Here, executive director Tom Kelly answers questions submitted by Investors Chronicle readers, ahead of the company's annual meeting in London next week.

    Grateful for any information on forward planning for Eagle and Glantal - including broad timescales, please?
    At Eagle, the operator VicPet (an Australian quoted company) has made it known they wish to sell their US assets. They had in any case been seeking a farmout of their interest in Eagle. Empyrean has 38.5% and is keen to maintain this interest and drill a fresh well to test the zones that logged oil pay in the Eagle North-1 well. As the leases come up for renewal over the coming months, VicPet (or their successor if their US assets are sold) and our other partners will need to decide whether they wish to continue with the project or not. This should clear the way for fresh activity at the project. Some of the major leases come up prior to the end of the year - so the question of operatorship and working interests should be resolved over this period.
    At Glantal, a seismic program has been proposed over the Lautertal Prospect on the Eastern side of the massive Pfalzer Anticline. There is still some final planning and approvals required before this work can commence. It will be at least late in Q4 2008 or Q1 2009 before this work is able to be started. Following the seismic and analysis, drill locations can be selected for a test of the Lautertal Prospect, which is a multi TCF gas target.
    Any information on plans for fund-raising to complete drilling at Sugarloaf/Sugarkane?
    Empyrean has just completed a placement to UK and European institutions and other investors, raising £4.48 million before expenses [this was completed between submission of questions and receipt of answers - Ed] This raising will hold Empyrean in a strong position as we continue to appraise and develop the exciting Sugarloaf Project within the Sugarkane Field Gas/Condensate discovery area.
    I've read that flow rates decline very quickly in these onshore wells. How representative are these test numbers of what we're going to see if Sugarloaf gets to production?
    We need more test data before we are able to provide longer term representative numbers for the flow rates. The initial flow rates are often greater than the longer term stabilised rates. We will also get a variation in flow rates from well to well, depending on the natural fracture swarms that the horizontal wells are able to intercept. Where the wells intercept multiple swarms, we are likely to see spectacular initial flow rates with good permeability that may not require fracture stimulation. Where we do not intercept these fracture swarms, we have proven with the TCEI JV Block A-1 well that successful fracture stimulation can achieve great results. The results to date indicate good pressures and long reservoir production life.
    What's the outlook for US gas prices? Are they directly linked to the soaring oil price?
    Although it is not our job to predict energy prices, the current oil and gas price regime in the US is obviously strong. The important thing to note with Empyrean is that at both our production assets (Margarita and Sugarloaf) we have production from both gas and oil. Especially at Sugarloaf where the condensate fetches a price directly linked to the oil price - and we have a terrific condensate to gas ratio that provides a greater value from the condensate than the gas production. To conclude, we have direct exposure to the soaring oil price through oil production at one of the Margarita wells and condensate production which makes up the bulk of the Sugarloaf production in terms of value.
    Given the success in the US, are you going to put the German project on the back burner for now?
    No, we will continue to work on all of our projects until we achieve a definitive outcome.
    The share price has been very volatile, and despite the recent gains, it's still well off previous highs. How confident are you that we are ending 'famine' and entering 'feast'?
    Empyrean is now part of a major discovery in onshore USA and the early results from this project should give everyone confidence. This is the second project that Empyrean has brought into production in just under three years since floating on Aim. Some projects take more than 10 years from conception before a first well is drilled. Empyrean has a tight committed team dedicated to continuing the momentum that exploration success brings. At Sugarloaf Block B alone there is the possibility of at least another 34 wells to be drilled to develop the acreage. If these wells are brought successfully into production with anything like the initial flow rates from the first Block A-1 and A-3 wells then it will likely be a worthy "feast". If we have additional exploration success from our other projects then it has the possibility of being described more as a "smorgasbord". Empyrean is in the strongest position it has ever been in during its short history.
    With your plans to develop more oil/gas wells on the Sugarloaf complex in Texas USA, can you explain how you intend to finance this development programme and highlight in what time frame you intend to start and finish this?
    The recent fundraising puts Empyrean in a strong position as we continue to appraise and develop the exciting Sugarloaf Project within the Sugarkane Field Gas/Condensate discovery area. In terms of development timeframes, we would expect that there will be a number of wells drilled on both Block A and B before the end of this calendar year. I would say a minimum of two wells and a maximum of six wells likely before year's end. As development wells are brought into production successfully it is natural for the development schedule to speed up. These are our best estimates right now and we will obviously notify the market as the operators confirm the development schedule and the timing of wells.
    Is it intended to test Zone 2 at SL/SK in parallel namely Kennedy at Block B & Kunde #2 at Block A. If so, has the testing started at Kunde 2 yet ?
    Blocks A and B each have different operators. The TCEI JV Block A-2 well is likely to test the "middle" pay zone but has not commenced testing yet as it is being used to monitor the fracture stimulation of the TCEI JV Block A-1 well. Kennedy testing has commenced.
    When you expect to be able to issue estimated production numbers and reserves etc for the Sugarkne condensate fields?
    There is already an estimate of recoverable production to Empyrean based on our net acreage position in Block B and the additional wells in Block A. That estimate is 32.5 billion cubic feet of gas equivalent, and relates to the uppermost pay zone only - i.e. the zone that the TCEI JV Block A-1 and A-3 wells are producing from. If we get good flow rates from a second or third zone, then that estimate will be revised.
    When do you plan to name the major partner in Block A with TCEI ?
    We are not able to comment on the identity of the block A operator at the present time due to confidentiality agreements
    Do you plan to continue at Eagle North & if so has the new operator been chosen yet. What is EME?s likely revised working interest in this project?
    Empyrean plans to continue at Eagle and we currently have a 38.5% working interest. We would look at increasing that interest if and when the opportunity arises. A new operator has not been chosen yet.
    Is it possible to raise a loan or debt finance for the SK project remaining wells?
    We decided that the placing we've just completed was the most appropriate source of funding at this time, predominantly due to timing issues and also a desire to increase institutional support for Empyrean - something that should benefit all shareholders in the longer term.
    Is Empyrean likely to participate in fiurther new projects in addition to Margarita deeps?
    Yes, Empyrean has proven that it can successfully identify, negotiate and bring into production exciting projects. We remain ambitious and we're always on the look out for projects that we feel can add shareholder value.
    What is the likely date for the new drill at Lautertal in view of Galaxy's financial problems. Would Empyrean consider a 100% interest?
    Right now, Empyrean is funding 100% of expenditure at the Glantal Gas Project - so Galaxy's financial situation does not impact negatively on the project. Drill locations for Lautertal will be selected following completion of the seismic program over Lautertal. EME would consider increasing its interest in the project should the opportunity arise.

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