The Greater Aneth Oil Field
The Greater Aneth Oil Field was discovered in 1956 and is the largest oil field in the Paradox Basin.
The Greater Aneth Oil Field was discovered in 1956 and is the largest oil field in the Paradox Basin and produces oil and small amounts of gas from carbonate reservoir rocks in an extensive stratigraphic trap from the Desert Creek zone of the Pennsylvanian (Carboniferous) Paradox Formation. To date the Greater Aneth Oil Field has produced over 448 million barrels of oil of the estimated 1.5 billion bbls of original oil in place ("OOIP") (Utah Division of Oil, Gas and Mining, 2017). The Greater Aneth Oil Field is comprised of three contiguous operating units: the Aneth Unit, the McElmo Unit and the Ratherford Unit. Collectively these three operating units are known as the Greater Aneth Oil Field.
The large amount of remaining oil in the Greater Aneth Oil Field and the demonstrated success of EOR by CO2 flooding to date gave Elk the confidence (technical and commercial) to take over operatorship and implement additional cost-effective production optimisation programmes. These optimisation programmes will create shareholder returns for many years into the future. The oil produced from the Aneth Field is exported via the Running Horse Oil Pipeline to Western Refining's Gallup, New Mexico refinery. The CO2 for the Aneth Field EOR programmes is supplied to the Greater Aneth Oil Field by Kinder Morgan under a long-term contract from the McElmo Dome CO2 Field located in south-western Colorado via a 28-mile 8-inch pipeline which is owned and operated by the Greater Aneth Joint Venture.
The Greater Aneth Field has a long history of continuous oil production since the late 1950's with 448 MMbbls cumulative production since to date and added ~59 MMbbls of 2P oil reserves and 6,500 bopd oil production effective 1 October 2017 net to Elk. Elk has the opportunity to double production within 3-5 years significantly funded by internal cash flow. The acquisition of the Aneth asset by Elk is at a significant discount to historical proven reserve and production values.
The Aneth acquisition has transformed Elk into a major CO2 EOR Producer and Operator, propelling Elk into one of the ASX's leading oil companies and operators by reserves, production and cash flow. The Elk team has increased its full-time employee numbers with the addition of the Greater Aneth Oil Field operating and management group.
During the third quarter FY2018, the Aneth asset saw operations run in excess of 95% efficiency with the corresponding year to date gross production running at approximately 300 BOEPD ahead of forecast for the Greater Aneth Oil Field. This quarter was also one in which, as the new Aneth operator, we worked hard in engaging and enhancing our relations with our key stakeholders - the Bureau of Land Management ("BLM"), the Navajo Nation Environmental Protection Agency ("NNEPA") and our joint venture partner, Navajo Nation Oil & Gas Company. Our proactive approach with these stakeholders was pivotal in the approval of a significant set of new field development activities. The BLM and NNEPA approved a series of field development projects and well repair and drilling solutions not previously implemented within BLM leases. These field development solutions were proven to significantly reduce well drilling and workover costs at the same time as improving overall well integrity and operability, thus reducing overall well capital and operating costs. These projects are targeting increased Aneth oil production to over 7,500 BOPD net to the Company over the next 15 months - a 30% increase.
The Company commenced these new field development activities at the start of June 2018 with the beginning of the well-deepening project in the McElmo Creek Unit of Aneth. The project involves the deepening of wells in the Desert Creek II zone in a central part of the McElmo Creek Unit ("MCU") where an historic waterflood programme in that zone was discontinued. Along with the deepening of the wells for production, additional wells that were originally drilled to the Desert Creek II zone will be recompleted, or in some cases side-tracked as injectors. The Desert Creek II zone lies only 45 metres (150 feet) below the producing Desert Creek I zone; deepening or reopening wells into this zone is a straightforward and positive economic process. The former operator had started a similar programme in the same area of MCU with great success. The overall programme involves the deepening of 28 production wells and the reopening of 15 water injection wells within the central part of MCU. By early July 2018, seven producer deepenings and the reopening of four water injection wells had been completed. Each well deepening was expected to take approximately seven days to complete, however we were able to undertake these activities in 3-4 days. this programme will continue through CY2018 and be completed by the third quarter CY2019. The net cost to the Company of each well operation averages approximately US$415,000 with a lease operating expense of US$1.41 per barrel. Each well deepening will have a payback of approximately 75 days. The total capital expenditure for the CY2018 programme is approximately US$4.6 million net to the Company.
The complete well deepening programme is expected to add 2.2 MMbbls of 1P PDP Reserves and peak additional production of approximately 1,000 BOPD net to the Company. The economics of the well deepening project are both highly attractive and accretive. At current oil prices the IRR on each well in the project is more than 100%. Following waterflood operations (secondary recovery), these deepened wells will be converted into CO2 EOR production (tertiary recovery) wells. The economics do not include the additional oil production these wells will recover when they are converted to CO2 flood production.
The Company's Stage 1 Aneth Development Programme is aimed at delivering a significant increase in the 1P Proved Developed Producing Reserves of the Aneth Field over a 24-month period from approximately 36.7 MMbbls (as of 30 June 2018) to over 53 MMbbls - an increase of nearly 45% - and is expected to increase production net to the Company by 2,000 BOPD to over 7,500 BOPD by late CY2019. The Company considers each of these projects as low risk Proved Developed Non-Producing or Proved Undeveloped. Implementation of these developments are expected to increase the net present value of the Aneth Oil Field by approximately US$120 million; increasing the total present value of the Greater Aneth Oil Field by US$180 million to over US$400 million based on a US$70 flat WTI oil price and after the impact of Aneth oil price hedging currently in place.