TAG Oil set out to establish a strong foundation (both operationally and financially) on its Taranaki shallow oil and gas opportunities, and with 31 successful wells in just a few years, we're pretty happy with how that's gone. But those of you who have been with us for awhile, know that we've also had an eye on prospects with even greater potential, such as the East Coast Basin's unconventional oil, and the Taranaki Basin's deep Eocene-level oil and gas.
In the current quarter, TAG successfully drilled, logged and cased its first deep Eocene well, Cardiff-3, which went to 4,863 meters depth, and intersected 45 meters (148 feet) of potential pay in the successful Kapuni Sands Formation. (We say "successful" because the Kapuni is a proven, strong producer elsewhere in the Taranaki, and its discovery by BP Shell Todd launched a new energy era for New Zealand a few decades ago.) And in the hopes of launching the next era in New Zealand energy, we're prepping to test Cardiff-3 in the near future.
Our shallow drilling program is still intrinsic to TAG's short and long-term success, but the goal with deep drilling is to capture reserves many times larger than what's possible with shallow Miocene drilling. An independent assessment by Sproule International Limited (effective 7/31/13) estimated the undiscovered resource potential on the Cardiff prospect on a P50 basis at 160 billion cubic feet gas and 5.59 million barrels of natural gas liquids.* Time will tell!
For past posts on the Cardiff deep gas well:
December 10, 2013, A quick update on Cardiff's deep gas / condensate well
November 15, 2013, Cardiff-3 Deep Gas Drilling: One zone at a time, so far so good...
October 25, 2013, 30-Days' Deep on Cardiff-3
September 19, 2013, Drilling Deep in the Taranaki Basin
** Footnote **
Sproule is a qualified reserves evaluator in accordance with NI 51-101 and the Canadian Oil and Gas Evaluations Handbook. Best Estimate is considered to be the best estimate of the in-place volumes that will actually be present. It is equally likely that the actual in-place volumes will be greater or less than the best estimate. If probabilistic methods are used, there should be at least a 50 percent probability (P50) that the in-place volumes will equal or exceed the best estimate.
Undiscovered Petroleum Initially-In-Place (equivalent to undiscovered resources) is that quantity of petroleum that is estimated, on a given date, to be contained in accumulations yet to be discovered. The recoverable portion of undiscovered petroleum initially in place is referred to as "prospective resources," the remainder as "unrecoverable."
Prospective resources are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from undiscovered accumulations by application of future development projects. Prospective resources have both an associated chance of discovery and a chance of development. There is no certainty that any portion of the resources will be discovered. If discovered, there is no certainty that it will be commercially viable to produce any portion of the resources.
Some combinations, like the ones in our title, are tried and true classics. While others need a little extra encouragement.
So TAG Oil and its Kaheru joint venture partners Beach Energy and New Zealand Oil and Gas are harnessing kids’ love of dinosaurs – and their unlimited imaginations – to bring science to life outside of the classroom.
We’re in the business of fossil hunting, and we think there’s a great story to tell right under the feet of New Zealand’s kids that will ignite their interest in geology and the sciences in general.
So the JV is sponsoring “What Lives Down Under,” to teach and engage online and in a traveling roadshow. It’s fun for us to get in touch with our inner kid once in awhile, too.
We've been not so patiently awaiting the results of the independently conducted Reservoir Characterization Study (RCS) on TAG Oil's East Coast Basin, unconventional Ngapaeruru-1 well, and it has finally arrived.
This RCS study provides the first true unconventional data set ever acquired in the East Coast Basin, and the quality of this state-of-the-art data set provides the first specialized interpretation necessary to unlock the major oil and gas potential of TAG's East Coast Basin unconventional play.
As our team had hoped, the study confirms that oil is being generated in the Whangai source rocks, as well as a number of critical positives showing the Whangai to be a viable unconventional oil target. Not that it's a surprise to us, but independent confirmation is always good. (This is a studio shot of our oil-rich Whangai shale, above.)
A few highlights include:
- Analysis places the Whangai source rocks in the oil/condensate window, correlating well with the 50-degree API oil seeps in the basin
- The hydrocarbon-filled porosity exceeds the minimum standard thresholds for unconventional reservoirs
- Permeabilities exceed standard unconventional reservoir thresholds
- The Whangai Formation has very low clay content, indicating fracture stimulation can be highly effective
In order to prove the viability of moveable hydrocarbons from within these source rocks and the economic viability of this unconventional play, TAG can now move on scheduling perforation and production testing of Ngapaeruru-1.
For more detailed information, see our recent Q3 press release. And stay tuned for what happens next!
Noted Canadian investment bank, M Partners, just released its Top Five Picks for 2014, and TAG Oil made the cut. The report highlights the up and comers on the firm’s investment radar for the year ahead, and each of the five companies profiled is expected "to lead their respective universe of coverage over the course of the year."
So, what do they like about TAG Oil?
They appreciate TAG's strategy of establishing its cash-flowing production base in Taranaki to fund the search for higher impact, deep gas plays with considerable upside potential.
And that the production income from our shallow, producing Taranaki fields has led to a solid balance sheet which also "de-risks" the enormous unconventional resource potential in TAG's East Coast Basin permits, plans for which are advancing in 2014.
They report that TAG shares currently trade at 2.2x EV/EBITDA (calendar 2014), which is a significant discount to its Southeast Asian/Australasian comps at 2.9x.
In their words, "Underlying our Buy rating is the attractive valuation and significant production growth trajectory, driven by the high-impact deep gas Taranaki program now underway and funded by the solid balance sheet and cash flow from its shallow Taranaki production base."
We couldn't have said it better ourselves.
The Cheal sites have been active these past few months, and we've finally gotten some photos in from the field. From Cheal A to G, we're making improvements, loading oil, and preparing to tie in more wells.
To start with the wider view before going micro with the shots below, here's one that shows TAG living harmoniously with its bovine neighbors.
A 400 bbl oil tank at the Cheal E site:
a second identical tank will be placed
beside it soon.
And over at the Cheal A site, oil tankers fill up with our product: a beautiful sight!
The five wells at the E-Site. The plant is permanently built, and two of the five wells are permanently tied in. Shows how low profile these sites are once we're producing.
Awaiting commission of the Thermal Combustion Chamber (hidden on the right), which will contain the flare at the E-Site.
Breaking it all down at the Cheal E Site.
A tidy G site with the G-1 well now underway.
A group protesting TAG Oil’s plans to explore for a potential new gas field near Mt. Taranaki recently distributed a leaflet with incorrect and misleading information that our team felt compelled to address. While we know that oil and gas exploration – and energy consumption in general – can be a very polarizing topic, we’re still disappointed that the protesters chose to inflame the conversation rather than to have an informed discussion.
The call to protest was made by Climate Justice Taranaki and Frack Free Kapiti and Beyond – which published a brochure, Don’t Frack With Our Mountain.
COO Drew Cadenhead said he was happy to speak with the protestors, but it was clear that they had no intention of engaging in a measured conversation. “We respect the right of people to protest, express their views and take an active part in the debate. However, we think any debate should be based on empirical science-based information. [This brochure] is a disservice to those that may rely on this information.”
While TAG doesn’t want to lend credence to inaccurate information, we do want to engage in a dialogue with concerned groups and the larger Taranaki community, in order to facilitate open communication and eliminate misinformation. Therefore, here is our rebuttal to some of the claims made in the leaflet about TAG’s plans to explore for gas in PEP 54873.
Claim one: Drilling will take place 220 metres off the park boundary.
Response: The drill site is in a farmer’s paddock within permit boundaries set by the New Zealand Government. A condition of the permit is that any drilling must stay inside the permit boundary: There will be no drilling into the National Park. The actual surface location is over 300m from the Park Boundary, the well will go almost straight down, nearly 5000m, and actually end up a little further from the Park Boundary at total depth than it is at the surface.
Claim two: TAG Oil has plans to develop a heavily industrialised worksite.
Response: “Heavily industrialised” is an exaggerated description of a site that, at its biggest, will be no bigger than any of the manufacturing and processing complexes in New Plymouth’s industrial park at Bell Block. The drilling pad is approximately 190m X 90m (1.7 hec) where we will drill one well to start with.
Claim three: Eight oil and gas wells will be drilled.
Response: Our consent allows us to drill up to eight wells, but only if the initial drilling and testing demonstrates the field might be commercially viable. If it is not commercially viable there will be no more drilling. We calculate our chance for success with this first well is about 30%.
Claim four: Heavy vehicle movements and noise will become the new norm.
Response: Heavy vehicles will operate sporadically only during the mobilization and de-mobilization of the drilling rig – approximately two weeks on either end. Other than that, large truck movements on the roads around the wellsite would be less than is presently the situation with milk tankers, etc. in Taranaki. Furthermore, speed of trucks on the road to the well site will be limited to 30 kph.
Claim five: Toxic chemicals will pollute groundwater beyond repair.
Response: This is a deliberately inflammatory statement that is not supported by any empirical scientific evidence. On the contrary, Taranaki Regional Council testing of water around all of TAG’s oil and gas sites last year found no trace of hydrocarbons in any water samples. Our consents for this site mainly deal with rainwater discharge from the site: No industrial liquids are discharged at the site, they are dealt with at an approved and consented facility.
Claim six: Contaminated waste will lay in pits, be pumped into deep injection wells or spread on land.
Response: Any rock cuttings or drilling fluid will only be disposed of in a manner approved in the conditions of our resource consent. Land farms are a proven safe and controlled way to use drilling mud and cuttings to rehabilitate marginal land. Some water may be pumped back into the well, and absolutely no contaminated water will lay in pits.
Claim seven: A large flare will burn from a pit; it will sound like jet engine overhead, light up the night sky and release dangerous pollutants into the clean mountain air.
Response: If TAG makes a discovery we’ll want to sell the gas, not flare it. While a minor amount of gas may be flared for a short time as a safety measure, it would be flared into an approved enclosed container, not into an open pit—TAG Oil doesn’t use flare pits any longer as one way of reducing noise and waste. In regard to discharge, natural gas is regarded as the cleanest burning of all fossil fuels.
Claim eight: TAG Oil hopes to make use of this site for the next 30 years.
Response: If we find no gas we’ll use the site for a couple of months to drill the first test well, then reclaim the site. If we are fortunate enough to make a discovery, then it may provide gas and jobs and revenue for the country for many years. The potential benefits for the region and the nation are significant. During that time TAG will continue to manage its holdings responsibly, safely, following all regulations, and openly. And after gas exploration and any production are finished the site will be restored to how it was.
Claim nine: Decisions were made behind closed doors and without the knowledge of the Mountain Iwi and the wider community.
Response: On the contrary, New Zealand Petroleum and Minerals (the Government regulator) consulted with iwi late in 2012 about this permit before it was awarded to TAG. TAG has made numerous attempts to discuss the permit with iwi and hapu and will continue to do so.
Claim 10: TAG Oil operates only in New Zealand and recently raised $25 million and employed two US fracking experts in its evaluation of a 2,720,358 acre prospecting area.
Response: TAG Oil is listed on the Toronto Stock Exchange and has its head office in Vancouver, and yes, all of its operations are in New Zealand. To date TAG has spent approximately $250 million in New Zealand and has not taken a cent out of the country. And indeed, the $25m recently raised from investors who consider TAG to be a well-run company with strong prospects in New Zealand, will also be spent in New Zealand.
TAG recently employed two unconventional oil experts—one whose expertise is in environmental management. Both are to work out of TAG’s new East Coast office on the Company’s East Coast permits. Fracking may be required to release some of the oil and gas known to lie below the ground on the East Coast, however, it is too soon to know whether it can or will be used there. Regardless of the technique, TAG Oil will continue to operate responsibly and conscientiously.
To wrap up our excitement on drilling our first deep gas well...
Drilling of Cardiff-3, targeting the high-impact Kapuni formation is nearing completion. As reported, the early signs are positive and we'll be likely carrying out a full testing program over the next few months. We didn't want you to think that no news was anything but good news, it's just that photos from the lab and office are a little less exciting than photos from the field.
The consent process for the Heatseeker well is now underway: By the end of this year we'll have drilled 13 production and exploratory wells, all adding to our future reserve potential and success.
Via press release on Friday (and here for those of you who missed it) TAG announced its intention to acquire up to 6,073,339 of its common shares for cancelation through the Toronto Stock Exchange, subject to TSX acceptance.
TAG's share buyback program is based on our belief that the market price of the Company's shares don't reflect their underlying value. Purchasing and cancelling shares will increase the proportionate interest of remaining shares, which is to the advantage of shareholders. To follow the progress please click here: http://canadianinsider.com/node/7?menu_tickersearch=tao
The common shares that may be repurchased over a twelve-month period represent approximately 10% of TAG's 60,733,391 outstanding common shares in the public float. There have been 867,000 common shares purchased and cancelled under a normal course issuer bid by TAG within the past 12 months at an average weighted purchase price of $3.83 per common share. Now back to drilling for oil and gas!
In early October we were delighted to sign a formal partnership agreement with Ngati Ruanui, whose traditional tribal lands extend from Hawera to Stratford, in the Taranaki. This was a high priority for TAG, and we worked diligently to get here, as it forms the foundation for a long, strong and mutually beneficial relationship for years to come.
The agreement is based on a number of critical guiding principles that recognize the aspirations of both TAG and Ngati Ruanui. As CEO Garth Johnson has said, “We
want many of the same things: to be economically successful but never to the detriment of high environmental standards.” One practical example is Ngati Ruanui’s environmental team having archaeological oversight and monitoring rights for any earthworks TAG carries out in the region.
Again, Garth Johnson: “This agreement is based on mutual trust, respect, and quality of life. To me, it means we have each others’ backs.”
Here’s an excerpt from TAG Oil’s Q2 conference call, conducted by Chief Executive Officer Garth Johnson and New Zealand Country Manager Randy Toone on November 14th. You can listen to the full podcast and see the Q2 financials here, or here's a highlight for those of you who don’t want to listen to the whole recording.
The transcript is from Thompson Reuters.
In which normally unflappable CEO Garth Johnson, allows himself to get a little bit excited…
“I don't believe that there is a peer company out there that could compare to TAG’s potential. We are creating value right now. We are fully funded to achieve our goals with over $70 million in the bank. We have no debt. We have strong cash flow from daily production. Cash flow is expected to keep growing over many years with the program we have under way. In early results we announced today at our Cheal-E site, the testing program continues to build our confidence.
Taking an optimistic view of what's in front of us at TAG is an exciting thing right now because we have a fully funded drilling program underway. With the resource potential being targeted, in the next 12 months, a 477 Bcf and 49 million barrels of oil and condensate on p50 basis. That includes prospects ranging from shallow Taranaki, deep Taranaki and shallow offshore Taranaki.
It's an amazing program for TAG. And added to that is the advancement of the East Coast unconventional play that has the potential to eclipse everything else combined if we prove it to be a commercial play. We have a lot of work to do in the East Coast but it's underway….
TAG’s always been a first-mover. We are confident we can continue to safely achieve our goals. And that will create significant value for our employees, our community, and of course our shareholders as we strive to unlock New Zealand's potential and become the number one oil and gas producer in New Zealand.
At the same time, we have a duty to all our stakeholders to consider all potential outcomes of our programs underway. We expect success and we have the people to make it happen. But what TAG offers now that other companies our size can't do is we could also mitigate downside risk. We can do so with our reliable and growing shallow oil reserves. We have reliable and growing cash flow and we have a low risk shallow prospect inventory that can allow drilling to continue in the Taranaki production fairway for the next five to 10 years, while also combining this lower risk drilling activity with numerous potentially game-changing wells being drilled when it's smart for us to do so.
This is what we've strived to achieve for TAG for many years, that's why we remained committed to New Zealand. And recently I have been speaking to many of our shareholders and a common opinion from those discussions became apparent. And that is that for an investor it doesn't get much better than owning TAG right now, with the fully funded, potentially game-changing opportunity to participate in major upside potential while also having downside risk being mitigated.”