Orcadian Energy (LSE:ORCA) — Investor Presentation

0:00 Good morning, and welcome to the ORCADIAN ENERGY PLC Investor Presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and can be submitted at any time by the Q and A tab situated on the right hand corner of your screen. Just simply type in your questions and press send. The company may not be in a position to answer every question received during the meeting itself. However, company will review all the questions submitted today and publish responses where it is appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Steven Brown, CEO. Good morning to you, sir. Good morning, and good morning to everyone who's taking the time to come and listen to us this morning. We really wanted to give you all a bit of an update on where ORCADIAN is after we announced our deal with SLB, formerly Schlumberger, that's how you'll remember them, on Tuesday this week. And the purpose of this presentation is just to give you a a flavor of what we've been doing in the past year and and

1:02 the progress we expect to make in in the coming coming months. So let me just move through the disclaimer, which I'm sure you've all read. And let me just start with the reason why you should invest in ORCADIAN. And, you know, it's actually really simple. We have a fantastic project in the pilot project. It's got a very substantial audited proven and probable reserve base, 79,000,000 barrels of two p reserves. And, you know, the important thing about having two p reserves is there is no exploration risk, and indeed, there is no appraisal risk with these barrels.

1:49 These are barrels that we have an economic development plan for, and they should be valued far more highly than prospects or contingent resource to us. Our project is really well advanced, and it's been shipped to deliver both on the NSTA, that's the North Sea Transition Authorities, net zero agenda, and and the government's energy security goals. The projects have a very, very large NPV, substantially substantially more than our current market cap. And there really are multiple paths forward to finance the project. I mean, in thinking about financing a project like this, you're always in an all of the above scenario.

2:38 So there'll be an element of debt. There'll be an element of equity. There'll be a farm in. There'll be deals with contractors and so on and so forth. So you'll be bringing together all sorts of strands to finance that project. And you can have confidence that the management team is absolutely focused on maximizing shareholder value because as you're, I'm sure, well aware, we have a very substantial stake in the company. We expect that when we strike a formal deal that it will result in a substantial rerating by the market, but predicting what the market does is always a tricky thing, so let me not make a prediction. But, really,

3:26 let me just move on to our team. We have a really good team. We've got Joe Darby as our chairman, Tim Feathers, another nonexec, and we have a lot of capability in that team and a lot of experience. And this here summarizes the the assets that we currently have. So we have four licenses in total. We have this license up here that we haven't talked about very much, P2516 with Parkmate as the operator. And but the core assets are actually down here in the Central North Sea. We have the P2244 license that has the pilot project in it, the exploration acreage surrounding it, and the discoveries of Elkhair Norbold to the south.

4:18 Once again, you know, the the value of these assets is is huge. It's $1,500,000,000 of value at $70.70 dollars a barrel. And the exploration upside is is pretty significant as well. But perhaps the main thing is that our project is on a pathway towards development. We've had a letter of no objection to our selective concept. We've got a draft FDP submitted to the NST in the middle of this year. We're dealing with the the feedback they've given us on that. We're looking at how we can improve and optimize the plan. And the NST has been working with us not not only on the the field development plan, but also with the with our licenses.

5:04 And this table here is one that we used in our IPO. It summarized all the licenses we have and the reserves and resources that we have on those licenses, but highlighted are all the changes since our IPO. So not long ago, we got a a year's extension to the second term of the p two two four four license, which is tremendous because it gives us more time to bring in partners and to get the project off off the ground. We also got a year's extension on phase a of the P232O license.

5:50 And we took the P2482 license into phase b of the initial term. And this is something we obviously pay a lot of attention to in the background, but it's the key key activity of oil companies is keeping your hands on your licenses. Just moving on now in case there's anyone who doesn't actually know the full story of Pilot. I'll I'll describe a little bit about Pilot and then move on to the work we've been doing this year. Pilot was discovered by a company called Petrofina back in 1989. The field's fully appraised. There's seven reservoir penetrations. There's modern three d seismic, some of which we licensed back on our IPO, and we we extended the license arrangements with TGS in a very interesting deal that we did earlier this year.

6:48 Five of those wells were cored. Two wells have been tested, and really, the most important test is this this horizontal well in the north of the field, which produced over 1,800 barrels a day. You know, previous operators have looked at this, and they approached it as a simple waterflood with multiple subsea wells. And they they always struggle to make that work because you need a lot of wells to produce these viscous oils efficiently and effectively and to achieve high recovery factors. And that tended to make the subsea schemes less economic. The real breakthrough for pilot came when Chevron published the results of the Captain Polymer Flood pilot scheme in 2018.

7:44 They'd actually performed the work back in 2013, but they kept it, confidential until 2018. And that really showed how a polymer flood would perform in a very close analog field and demonstrated how you implement a polymer flood offshore. And that was actually what unlocked pilot for us. And we we put together a concept based on that polymer flood in 2020, submitted it to the NSTA. It's, the more we've looked at it, the more confident we've gotten in, the more happy we are that the polymer flood is the right approach. And it's this technological breakthrough that's actually created the value for us on pilot.

8:35 Since since we got listed, we've actually acquired a new seismic survey. This was a survey that was really very recently reprocessed by TGS back in 2019, and it's allowed us to build a new geological and geophysical model of the field. I'm just including a few bits of the seismic because I actually find it incredibly impressive. This panel here on the bottom left hand side is a colored inversion display of the pilot reservoir running from the three well through the six well to the five well. So this is just along this axis here. There's the three well, five well the six well and the five well.

9:23 And you can see the

9:28 reservoir pinching out towards the three well. A good section of reservoir penetrated by the six well And all the way over in the, east of the field, you can see, the five well penetrating a very bright area there. And the reason it's so bright is because there's gas there. And in fact, you can see on the seismic the oil signal, which is the orange fading into the water signal, which is yellow. It's allows you know, this clarity on the seismic allows us to build a model that we have a lot of confidence in. And one of the things that's come out of this, and we we may mention this in a news release earlier, is that the developable area, oil and place, has increased by about 10%.

10:18 And we would expect that to feed into an uplift on reserves in due course. And we've been doing a lot of work on building reservoir models and geological descriptions of the field and potential a range of geological descriptions of the field so that we can build a range of production profiles and reserves. And I'll just show some a little bit of insight into the work we've been doing with TRAX, who are geological consultancy, to help us build realistic geostatic models of the reservoir. And what we've been looking at is, you know, how much heterogeneity can you actually sensibly put into this field?

11:07 You know, if you look at these logs, you if you look at these logs, people would just say, these are fantastic. These are absolutely brilliant reservoirs. It's very high net to gross. It's very high porosity. It's very high permeability. But if you look very closely, you can see some places where there's just a little bit more on the gamma ray and we can identify areas where there could potentially be barriers within the reservoir. And then we've looked at real world models. So this is Tavernas and on the right is the Anno in France. And these these give you analog depositional environments, and then you can build geostatistical models that match these. And in fact, we've built five different static reservoir models that cover a range of potential outcomes.

12:03 And we've used that to inform our development planning and to inform our estimates on recovery. One of the things that remains true no matter what the geological model looks like is that the pilot field development works best when you have closely spaced alternating production and injection horizontal wells. And that's analogous to what Chevron or or and Ithaca are doing on Captain. It's what polymer flood operators in Alberta, CNR on the on the the Pelican Lake field, Hill Corp in Alaska, on Millie Point, every operator does this. They have tight well spacings, long horizontal wells, alternating producers and injectors and that works tremendously well.

12:58 And one of the advantages of this is you don't have to have all these wells on stream at startup. You can start with just five wells. So you start with just three producers, two injectors because the wells come on at a high rate and it allows you to phase most of the drilling program to happen after first oil. You know, we've settled on having two drilling centers, two wellhead platforms, and 34 wells. And that's giving us when we look at the recovery factors we're getting from our reservoir modeling, it's actually been remarkable. When Spruill did the competent persons report, they had a range of recovery factors within the developable area that was 30% for a polymer flood in the downside case, 40% in the 2P case, and 55% in the upside case.

13:57 And we've done a ton of work modeling this, and we're actually coming up with exactly the same range within one or two percentage points as the outcome of our simulation work. And that convergence on those same recovery factors, one coming from a pure simulation approach, which is what we've been working on lately, and sprule with the analog approach because they're a reserve auditor, they look across multiple projects, and they they come to that range based on that experience. Coming to those same numbers gives us an awful lot of confidence that we've got a very good grip on on what the production performance from this field will be.

14:44 And we've been able to really upgrade the reservoir description and upgrade the reservoir modeling to FDP quality status.

14:54 This is just a little picture to show what one of those reservoir models looks like. This is it in three d. This is a plan view, and in the middle there is is actually on a on a expanded vertical axis. It's showing you slice through the reservoir. And this is done after three or four years of production, and you can see we're sweeping the oil out between the wells and sweeping, actually, very efficiently that that oil. This is what the overall development plan looks like. This is exactly as we submitted it in our concept select addendum, which we did just just around July 2021, is based on an FPSO where which has all the processing equipment on it. There are two wellhead platforms as we previously described, and all the wells will be drilled from a jackup.

16:00 We're planning to have a floating wind turbine with with the the project. We actually sent a letter of intent to one of the participants in support of that. And we're planning also to use the few gas field for gas. Because, obviously, if you're if you're relying on wind power, sometimes you need the gas, sometimes you don't. So you need some method of managing that gas supply, and we're planning to use the Fue Reservoir, which lies nearby as our gas management facility. So those things significantly reduce the emissions, and that's a really important point, which I'll come on to in a a little bit more. But, you know, when we look at this plan, we actually see some opportunities for optimization and simplification.

17:01 And that's one of the activities we're planning to do in the very near term is to see to what extent we can maybe phase the development a little bit more, reduce the upfront cost, and and simplify the development. You know, one one example of that is we have been planning to use low salinity water for the injection fluid. We're now thinking that, actually, we'll be better off setting the low salinity plant to one side because we can see the opportunity to recycle polymer from produced water. And by doing that, the economic benefit of installing the low salinity plant is much reduced.

17:54 So we think in terms of simplifying the project, that's a good step to make. And there are one or two other opportunities we have we have to do that that we're we're going to be looking at in the near term. But I said I'd talk about emissions, and, you know, this this is absolutely critical for us to secure the license to operate new developments in the North Sea. We we went back and looked at the development plan and looked at every opportunity to reduce reduce emissions. We have actually a very substantial benefit compared to doing a water flood by using polymer flood. So polymer flood typically halves emissions from a typical viscous oil. So typical viscous oil is 30 kilograms of c o two per barrel.

18:44 With the polymer flood, without any further optimization, we're less than half of that. But by using heat pumps and highly efficient reciprocating gas engines rather than simple cycle gas turbines, we can have emissions again, get down to just 5.9 kilograms of c o two per barrel. And including the floating wind turbine, gets it down to just 2.6 kilograms of c o two per barrel. And here's the thing, that's a tenth. I mean, think about it. Just a tenth of the UKCS North Sea average, which is in 2021, 25 kilograms of c o two per barrel. That's really remarkable.

19:29 And here's another way of looking at that. And I I find this an absolutely fascinating chart. It's actually pulled together by looking at data published by the North Sea Transition Authority. They're not just looking at the c o two. They're looking at the other gases as well for an overall emissions intensity, which is what we looked at too. And each of these blobs is one of the major fields that you know about in the UKCS, the major facilities. So, you know, you you can identify on here where 40 sits, where Brent sits, Lancaster sits, and where, say, Killeen fits. Actually, Killeen fits all the way over to the right.

20:18 It's the lower figure there, and it's got the lowest emissions per barrel for a field in the Central North Sea or Northern North Sea. You can get lower emissions from Southern North Sea fields, but for UKCS oil, liquids fields, such as Killeen, you can't get much lower than that. But every field that starts low is on a track to climb higher. And as fields age, they go along that curve and they work their way up that curve. If you design the facility from the outset to have low emissions, you can start low and stay low.

21:07 And that orange line that you can see there is actually where we expect pilot to be throughout the life of fields. So it starts very low and stays low throughout the entire life of the field. And this chart to me illustrates why we should have new oilfield developments on stream rather than relying on the older fields or worse still importing production from overseas. And we'll continue to make that case as publicly as possible. So let me move on to a couple of deals we've done that have really helped us move our assets forward very substantially.

21:53 We in June of this year, we struck a deal with TGS, which allowed us access to actually a very large volume of three d seismic data. This black outline on the map is is the the area that we got access to, and it included, you know, all of seismic over all of our licenses where TGS had data. And they're providing that data in return for a 1% royalty, which is a very good deal for us because it's deferring the cost of acquiring this data well into the future and but allowing us to get the benefit of that data now.

22:43 And TGS have been busy reprocessing all of the data on the right hand side of that chart, and that is working very well. We're expecting our partners on Cara CaraC to be going out to the market with a farm out on Kara in the New Year, and we're looking forward to seeing the results of that seismic reprocessing. And, you know, what we find ourselves is we actually have a great working relationship with TGS. TGS is absolutely geared to the success of pilot, and this participation is helping both of us really make the best of that data. We signed on Tuesday.

23:31 Well, we signed it on Monday, then we announced it on Tuesday, a memorandum of understanding with SLB. That's slumberger of old. And, you know, they're absolutely a leading well service company. They're they see themselves as a global technology company, and they're really excited about working on the pilot project. Go and read the quote from Rob Fox on the on on our press release. It's represents the enthusiasm we've seen from the whole Schlumberger team on this project. And they have some great technologies that can make a real difference to our project. And, you know, there's one there I've shown on the slide, and maybe it's kinda not obvious, but I'll explain it.

24:23 What the picture I've shown there is a conductor sharing wellhead. And what that allows you to do is to put two wells in one conductor, which is that's really neat. And that if we find that we can make that work for the pilot development, that could allow us to shrink the size of the wellhead platform. So rather than needing 20 slots to allow for, you know, seventeen, eighteen wells on a on a platform, we can get away with 10 slots. And if you can reduce the dimensions of the wellhead platform, you can reduce the cost of it. That's just one example of multiple avenues of project optimization that we intend to do with with SLB once we get started in the new year with them.

25:14 But it it it would be remiss of me to talk about our activities without talking about what's what's been going on with government and taxes and so on and so forth. And, you know, I have to say that the turmoil in government has has not been helpful to try and progress format discussions. There's been so much uncertainty about what's been going on, fiscally that that really has slowed things down. But I'm hopeful that we now have a settled fiscal system that's clear, and that actually really encourages investment in new projects.

26:06 So, you know, the government is absolutely committed to supporting new oil and gas investment. It's right there in the British energy security strategy. They've opened up the 30 round. There's almost 900 blocks. Actually, there's a they added a few extra in. So I put a thousand blocks up for grabs. And for all its and, you know, if I if I was receiving a 35% increase in my tax bill, I wouldn't be terribly happy about it. But for all its bills, the energy profits levy creates a very strong incentive for new investment in new oil and gas fields. And it can significantly reduce the cost for an EPL paying company.

26:59 So, you know, this illustrates the point. If you're a non tax payer, to spend a dollar of CapEx cost you a dollar of cash. If you're an EPL payer, it only costs you about 55¢ of cash because the rest is a reduction in your tax bill. And if you're paying CT, then that number goes down to just 25¢ on the dollar. So we're expecting that now that this is settled, that we'll get a lot more interest in the pilot project, and we're expecting to see a shift in activity in '23 as a result of that.

27:50 So, you know, this slide here really summarizes, what we're trying to achieve. We have a pretty clear development plan. You know, if you add all these bits up, it's roughly a billion dollars to get to first oil. There are there are real opportunities to optimize that and bring that number down, which we're gonna be pursuing in the very near term. And, you know, there are actually multiple sources of capital you can, you know, the you can do RBLs. You can issue bonds. You can raise some equity. Probably the most important one is bringing in a farming partner. There's ESG focused finance for the floating wind turbine, and you can get some level of contractor support, as well. So, you know, pilot will be financed by an all of the above strategy.

28:46 None of this happens overnight, but we're continuing to make progress, and we're expecting to deliver a result for all shareholders in 2023. So, you know, just in summary, what are we what are we trying to do with ORCADIAN? Well, we want to deliver a high return for investors, a high return for shareholders. And, really, the most important thing for us to do that is to get that pilot project off the ground. We're seeking farming partners. We're looking for investment from every possible angle. We're putting together a contractor alliance, you know, bringing SLB on board is a really important step there. We're engaging with potential financing partners, you know, bond people, RBL, banks, so on and so forth.

29:41 And pulling all that together will be the critical result for us. But, you know, don't forget what we said our strategy was. We said we would secure discovered resources at low cost and transform those resources into reserves and onto production. And we see that the thirty third round presents some opportunities there. We're hopeful we'll make some applications in the thirty third round and have some follow on opportunities as well. So I I apologize if my voice has been a bit shaky throughout this. I'm just recovering from a bite of some horrible bug. I don't know what it was.

30:30 But I'm absolutely open to take some questions now. Steven, Alan, thank you very much for your presentation. Ladies and gentlemen, please do continue submit your questions just using the Q and A tab, which is situated on the top right hand corner of your screen. I'd like to remind you that recording of this presentation along with a copy of the slides and the published Q and A can be accessed via investor dashboard. Steve and Alan, as you can see, received a number of questions throughout today's presentation. And if I could just ask you to read out those questions and give responses where it's appropriate to do so, I'll pick up from you both at the end. Right. Okay. Well, we've got we got a lot of questions here, so we'll just work our way through those.

31:18 Let let me start with this question that where I probably can't actually answer it terribly much. So I'm asked, can you say anything about the form out process? And the answer is I probably can't say very much about the form out process. These things, you know, they they move forward at their own pace, and it's it's difficult for us to be too transparent about what's happening on that. The next question is the windfall tax in The UK. Has this accelerated discussion with potential partners? What, if anything, would stop them from accelerating the development by joining in with you? I'd what I'd say, actually, is the turmoil has really slowed things down.

32:09 You know, when the when the tax was first introduced, the industry was a little shocked, I think, by what what actually happened. And it was taking quite some time to become accustomed to it. Then the trust government came in, and there was a hope that perhaps the windfall tax would go away because Liz Truss had suggested it might in one of her hustings meetings. But then everyone knows what happened to the trust government and then Jeremy Hunt increased the tax, but preserved the the alliances, which is helpful. Sadly, that that uncertainty slows things down.

32:59 And I'm hopeful that come the new year, people will say, right. We know where we stand. We understand that, you know, the energy crisis means that there has to be additional taxes, but the incentive structures are there. We're there's more certainty about the tax being around until '28, And we expect to see some renewed appetite for new developments. Next question is, good morning, Steve. Any observations on Ithaca's Captain Field Phase II polymer flood or is it too early yet to tell? I think the answer is it's too early yet to tell. I have been paying attention, obviously, to the Ithaca IPO documents because they talk about performance both on phase one polymer flood and phase two. But I think it is actually just too early to tell how how phase two polymer flood is going there.

34:05 The next one, I I congratulate the leadership of ORCADIAN on striking a deal with SLB. Thank you very much. When would you expect to move from a memorandum of understanding to a contract? Well, we expect to do actually two things. One is putting together a consulting work agreement so that we can get on with looking at those optimization opportunities. And then as a longer term piece of work, which is putting together the full project agreement for provision of all the services in the drilling of the wells. We kept those two things separate because that second agreement is actually quite a big complex agreement and will take some time to put together.

34:54 The consulting work agreement is a lot a lot simpler. So we'd expect to do the consulting work agreement in the next month or two and to have the project agreement ready for signature at at field development plan approval. So there's another question about why am I so positive about the new tax regime when others seem to be so negative. I suppose I'm not that I'm not that positive. You know, it's it's a no wind that blows nobody any good. And every cloud does have its silver lining. The the tax regime silver lining is actually the alliances that go with the energy profits levy. And it's it's excellent that those were preserved. You know, they it's so important that we have new developments in the North Sea.

35:50 We need to reduce the emissions associated with our own consumption, and the best way to do that is to have new developments in the North Sea. And we need that fiscal support to make it happen. So I think that's that's all the questions that have come in, unless there's any more that appear. If that's the lot, then I'd just like to say thank you for listening to me. And hope hopefully, 2023 brings the deal that we're all looking for. Steve and Alan, thank you very much for updating investors today. Could I please ask investors not to close the session as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations?

36:46 This will only take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of the management team of ORCADIAN ENERGY PLC, we'd like to thank you for attending today's presentation, and good afternoon to you.