Zephyr Energy acquisition of additional acreage in the Paradox Basin

Zephyr Energy

Zephyr Energy plc (LON:ZPHR), the Rocky Mountain oil and gas company focused on responsible resource development from carbon-neutral operations, has announced an increase in its operated land position through the acquisition of an additional 1,920 acres in the Paradox Basin, Utah, U.S., and to provide an update on its State 16-2LN-CC operations and upcoming Paradox drilling programme.

Acquisition of prime Paradox Basin acreage

Zephyr has increased its land position adjacent to its operated White Sands Unit (the “WSU”) through the targeted acquisition of 1,920 leased acres deemed by the Company to have immediate development potential. 

Acquisition highlights:

·    Optimal Location. The new acreage is directly contiguous to the Zephyr-operated WSU, with the potential to be added to the Unit acreage subject to approval from the U.S. Bureau of Land Management (the “BLM”).

o  The acquired acreage is largely covered by Zephyr’s existing 3D seismic, and directly borders the Zephyr lease on which the planned State 36-2 LNW-CC and 36-3 LN-C9 well pad is located.

o  The new acreage is close to pre-existing surface infrastructure in the form of a six-inch gas pipeline which traverses the leasehold.

·    Immediate drilling benefits.  By adding the new acreage, the lateral for the proposed State 36-2 LNW-CC can be fully completed across a 10,000-foot lateral length, subject to final regulatory approval. This is expected to further enhance the well’s forecast economics and estimated ultimate recovery. 

o  In conjunction with the acquisition, Zephyr recently amended its BLM application for a permit to drill (an “APD”) for the State 36-2 LNW-CC well to reflect the enhanced completion design.  BLM approval is expected shortly.

·    Increased overall resources and drilling locations. Based on modelling results of the recently drilled State 16-2LN-CC well, modelling for the upcoming State 36-2 LNW-CC well, and production data from the nearby vertical Federal 28-11 well, Zephyr’s technical team estimates that the acquisition adds over 4 million barrels of oil equivalent of additional 2C net Contingent Resources to Zephyr’s Paradox Basin position with the following additional benefits:

o  The acquisition substantively increases the Company’s Working Interest in an estimated 4 Cane Creek reservoir well locations, adding an estimated 2.4 net wells assuming 2-mile lateral well lengths.

o  It adds unrisked net present value at a ten per cent. discount rate (“NPV-10)”, net to Zephyr, of approximately US$40 million from the Cane Creek reservoir, based on estimated economics for 2-mile laterals. This estimate assumes success case outcomes from State 16-2 LN-CC flow testing and State 36-2 LNW-CC drilling and testing.

o  It delivers access to acreage that may host liquid yields similar to that observed at the nearby vertical Federal 28-11 well and higher than those at the recently tested State 16-2 LNW-CC well.

o  It provides additional potential in the overlying shallow clastic zones.

The acquisition is part of the Company’s ongoing portfolio management of its Paradox Basin position.  This active land management strategy has resulted in a defensible and growing portfolio of development opportunities which Zephyr’s Board believes is increasingly difficult to replicate in today’s regulatory and political environment.  

The consideration for the new acreage has been satisfied by a payment from Zephyr’s existing cash resources. In addition, the seller will be entitled to receive royalty payments which are only payable in the event of drilling success.  The Company has also agreed to use reasonable commercial efforts to drill at least one well across the new acreage prior to December 2023, a requirement which the Board believes will be satisfied by the upcoming drilling of the State 36-2 LNW-CC well.

Inclusive of the new acreage, the Company will operate a total of 39,473 gross acres in the Paradox Basin, the majority in which the Company holds a 75% working interest.

State 16-2LN-CC and Paradox drilling programme update

The Company continues to prepare for extended production testing of its successfully drilled and completed State 16-2 LN-CC well.  All relevant applications have been filed and orders for long lead time items have been made in anticipation of recommencement of production operations this autumn, subject to final permit approval.  The production test is designed to further investigate the flow potential of the State 16-2 LN-CC well, to add production data for use in surface infrastructure development decisions, and to test and develop flow assurance processes for the well.

In conjunction with the production test, and as announced on 7 June 2022, Zephyr planned to sell a small portion of gas produced from the State 16-2 LN-CC to a crypto-mining facility to be co-located on the well pad.  Due to continued volatility in the crypto-currency markets, Zephyr’s Board has elected to further monitor pricing of crypto-mining equipment and facilities prior to proceeding with a co-located facility and prior to committing to any related investment.  To date, no Zephyr funds have been expended on crypto-mining equipment or facilities.  In parallel, Zephyr continues to focus on commercial efforts regarding the acceleration of gas sales into nearby existing gas infrastructure.

The Company also continues with extensive preparatory work related to its upcoming high impact drilling programme.  The State 36-2 LNW-CC well, with a 10,000-foot lateral well targeting the Cane Creek reservoir, has been designated as the first of the three wells planned to be drilled.  As previously noted, the Company updated its APD with the BLM to reflect the extended lateral.  Zephyr will proceed with drilling operations upon receiving Federal approval and securing a rig contract.  All state level approvals related to the State 36-2 LNW-CC well have now been received.

Colin Harrington, Zephyr Energy’s Chief Executive, said: “Our team has been working flat out to deliver substantive value from our Paradox project during a globally challenging period of supply chain conditions.  We’ve often compared this type of development process to a jigsaw puzzle, and another important piece has been connected through the acquisition of the new acreage.  This prime acreage, already located under Zephyr’s 3D seismic, adds valuable locations and resources, and just as importantly, it secures an immediate win by providing the opportunity to drill and complete a longer and more effective delineation/development well.  We expect a corresponding beneficial impact on the well’s production potential and its estimated ultimate recovery.

“With the new acreage secured, we plan to spud the State 36-2 LNW-CC as soon as final permits are received and a rig contract is secured.  We will be providing a full update on the proposed drilling programme once the final permits have been issued.

“In the meantime, we are focused on recommencing production testing at the State 16-2 LN-CC, for which operational preparations are largely complete and long lead time items are in process.  The test will allow for the sale of liquid volumes and, most critically, allow for data generation which will help as we evaluate the most effective options for infrastructure development.

“Overall, I am thrilled to bolster the scale of our Paradox project at this point in time.  Our team is developing a unique understanding and data set across the Paradox Basin – and we’re excited about this timely opportunity to further expand our operated asset base. Furthermore, we are always mindful of our core mission to be responsible stewards of the environment in which we operate, and we have taken great care to acquire acreage which we believe can be developed with a maximum of potential and a minimum of surface and environmental disruption.

“It’s an exciting time for the Company, filled with short-term operational activity and long-term strategic potential.  Today’s news is strong progress on both fronts, all in the pursuit of delivering significant value creation from the Paradox project for many years to come.”

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