VAALCO Energy, Inc. is a Houston based independent energy company principally engaged in the acquisition, exploration, development and production of crude oil. VAALCO places high emphasis on international opportunities and holds acreage in Gabon, Angola and Equatorial Guinea in West Africa. A total of 2,487,000 gross acres (902,000 net) are in EGY’s portfolio, with the majority (roughly 89%) located offshore.
VAALCO announced the completion of its Etame 8-H well located offshore Gabon in an update on December 10, 2014. The horizontal well was drilled to total measured depth of 10,485 feet, and encountered the Gamba sand at true vertical depth of 5,971 feet. The formation was described by the company as a “high quality reservoir” spanning 442 feet in length including an oil column of approximately 30 feet.
In a conference call on December 12, 2014, Steve Guidry, Chief Executive Officer of VAALCO, explained the well began producing hydrogen sulfide (H2S) halfway into the initial test. Therefore, the company decided to shut in the well and is currently determining its next course of action. “Neither the 4-H or 6-H are producing H2S, so you can imagine how surprised we were when it showed up,” said Guidry. “We thought it was confined to the Ebouri Field only, so we’ve been working with experts to better understand the source.”
Management said there are two possible explanations of the H2S presence, with the most logical explanation being the sulfide is moving down the fault plane to a point source. The other possibility is that the H2S is only at the location of the 8-H, which is less likely. Hydrogen sulfide is more common when seawater is injected into wells, but VAALCO says it has not used that method in any of its projects to date.
Source: EGY November 2014 Presentation
“We took samples from every well earlier this year and will hopefully put the puzzle pieces together,” said Guidry. Management said the company first came across H2S in North Ebouri field in 2012, after a well began producing in 2009. Two wells soured but one is still producing approximately 2.5 MBOEPD gross to this day.
EGY is designing a crude sweetening facility that will allow for the redevelopment of the Ebouri field and further development of sour Etame wells. Its current commissioning date is targeting mid-2017, but management is evaluating ways to expedite the process.
Operations Moving Forward
VAALCO has begun the development of the Etame 10-H well, located to the south of the 8-H. The 9-H well was designed as an infill for 8-H, and has been deferred until development of the latter continues. Three additional wells are included in near-term operations from its Southeast Etame/North Tchibala (SEENT) platform, targeting the Gamba and Dentale formations. The 10-H well is on a fault block and pressure system separate from the 8-H – traits that make management confident that its newest well will produce sweet crude.
Its crude sweetening facility is expected to cost $250 million and will contribute to further development of the Ebouri field, which EGY believes holds 10 MMBOE in place.
In the call, management said its contracted rig for its Angola operations is scheduled to arrive in late January 2015. The Kindele well, as mentioned by management in its Q3’14 call, is an offset well to a 20-year old discovery made by Conoco (ticker: COP) which yielded 1,100 BOEPD. Drilling time is expected to take 41 days with a net cost of $19 million to VAALCO. An April 2014 discovery by Cobalt International (ticker: CIE) in the nearby Kwanza pre-salt formation returned an initial production rate of approximately 6,500 BOEPD and is believed to hold 550 MMBO at its midpoint.
EGY has not hedged any of its production and has only $15 million in debt on its balance sheet, equating to just 5% of its current market capitalization.
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