AIM-listed IOG has reached the reservoir section with its Southwark East production well at its Southern North Sea Saturn Banks development. Once complete, its rig will then drill the Southwark West well, with both producers due to be completed by the fourth quarter.

Seabed instability caused IOG to halt Southwark operations in January, with work resuming in mid-April. The 6km, 24in extension section from the Saturn Banks Pipeline System to the Southwark platform has also been successfully installed.

Production from the first two Saturn Banks fields, Blythe and Elgood, increased from 30mn ft³/d (0.85mn m³/d) in early June up to 54mn ft³/d by the middle of the month due to partial alleviation of liquids constraints at the Bacton Perenco sub-terminal, where the gas comes ashore. Remaining restrictions to gas flow are expected to be “fully lifted” over the coming weeks.

Production has averaged 44mn ft³/d for June as a whole, with uptime at 84pc for Blythe and 94pc for Elgood, although IOG notes both have been at 100pc over the past week. Factoring in a May shutdown and other previous outages, uptime has been 45pc and 65pc for Blythe and Elgood respectively since first gas in mid-March.

54mn ft³/d – Saturn Banks production

Gross average production to date has been 32mn ft/³d. In addition, IOG sold a net 1,341t of condensate in April and May at an average price of $882/t.

Saturn Banks’ H2 gas production is projected to be in the 45-60mn ft³/d range. Average condensate production is projected to be 250-350bl/d over the same period as condensate rates “are expected to decline fairly quickly”.

These ranges make allowance for both 15 days of shutdowns to complete planned works— including a Bacton terminal shutdown—and unplanned outages. “We are pleased to see the company now in a position to give forward production guidance, which speaks of its confidence in forward rates," says Daniel Slater, oil and gas research director at brokerage Arden Partners. “Southwark should represent an important addition to company production later in 2022 and into 2023, particularly as the initial fields begin to decline.”

Total unit operating costs in 2022 are projected to be in a 10-15p/th (c.$8-12/bl oe) range. IOG's expected net capex for 2022 remains within a previously guided £70-85mn ($86-104mn).

Price volatility

Pricing of IOG's gas sales agreement with BP is directly linked to the UK NBP day-ahead price, which has been “exceptionally volatile” since first gas. The contract has traded in a 10-224p/th range in June alone

IOG's volume weighted average monthly realised gas prices so far have been 232p/th for March, 161p/th for April, 83p/th for May and 106p/th for June to date. It averages 135p/th in total since first gas.

The forward curve priced the winter 2022-33 contract at over 300p/th and summer 2023 at over 190p/th at the end of last week, “indicating an expectation of a very supply constrained market over the coming year”, says IOG. But the firm notes that these levels “fluctuate significantly and are not a forecast of future day-ahead prices”.

£70-85mn – IOG’s 2022 capex

In principle, the firm “remains inclined towards commodity hedging”. But it admits that, in the face of “exceptionally high volatility”, pricing and execution of typical hedge structures are “currently prohibitive”.

After Southwark, IOG's rig will drill the Goddard and Kelham North/Central appraisal wells. The former is intended to define the southeast extent of the main Goddard discovery and de-risk its two flank structures, “thereby helping to determine the optimal field development plan, including platform location and number of wells, to maximise investment returns”.

At a 45p/th price deck, the internal rate of return (IRR) from Goddard development is provisionally estimated to be 19-40pc, depending on whether the appraisal well proves up a larger structure. This rises to 50-80pc at a 75p/th price deck. The current forward curve average out to the end of 2027 is 158p/th.

Tieback opportunities

Subject to further drilling, there are also other potential tieback opportunities to a Goddard development.

The Kelham North/Central well is intended to prove up both accumulations as part of a potential three-field “southern hub” production cluster including the Abbeydale discovery in the same P2442 licence. If successfully appraised, “there would be potential to fast-track into production for a quick-payback high-return investment”, says IOG.

Based on pre-drill mid-case resource estimates, this is provisionally estimated at 33pc IRR at a 45p/th price deck, rising to 75pc IRR at a 75p/th price deck. There are also several other potential future additions to a southern hub within the licence, subject to further exploration and appraisal drilling.

Based on the current drilling schedule, the two appraisal wells are expected to be completed by Q1 2023.

IOG has submitted a concept select report to regulator the North Sea Transition Authority for its planned Nailsworth phase-two development, while an expression of interest for Feed work has also been issued. A concept select decision remains expected by the end of the second quarter, based on a tieback to the Southwark platform. FID is targeted by year-end 2022, with an aim of first gas in the second half of 2024.

“Southwark should represent an important addition to company production later in 2022” Slater, Arden

3D seismic reprocessing of the Panther-Grafton area in licence P2589 is expected to be completed by around the end of the third quarter. Evaluation of the newly reprocessed data will inform a new assessment of the area's potential, expected by year-end, seeking a similar uplift in resource potential as achieved with Kelham and Abbeydale in P2442. The Panther-Grafton area lies close to the Southwark, Elland and Nailsworth assets, creating potential development synergies, IOG says.

The firm also intends to be active in new licensing opportunities, including the UK’s 33rd offshore round planned for this year. Potentially synergistic nearby business development opportunities are also being evaluated in collaboration with IOG's joint venture partner, the Berkshire Hathaway-backed Calenergy Resources. “As the government encourages reinvestment in the North Sea to support energy security, we also have a clear view of value-adding new licence targets, alongside other business development opportunities under active evaluation,” says IOG CEO Andrew Hockey.