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    N African Gas Pays Off for SDX: CFO (Update)


Results from drilling in Morocco and Egypt are adding to the independent's end-user strategy.

by: William Powell

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N African Gas Pays Off for SDX: CFO (Update)

(Adds operational update June 23)

UK-listed minnow SDX is reaping the rewards of its broadly secure upstream gas businesses as production and sales are rising in Morocco and getting off the ground in Egypt, CFO Nick Box told NGW.

The first quarter of this year was SDX’s first full quarter of production from the dry gas and condensate South Disouq field in the Nile Delta, which has been on stream since November. The four producing wells have been running at 54-55mn ft³ equivalent, a tenth better than guidance; and the company has pushed the maintenance programme back at the central processing facility, as it is also outperforming. Further, the customer for that gas, the state company Egas, has been paying in full, despite the crisis. SDX and its predecessors have been in Egypt since about 2009.

In Egypt it is the bigger partner in a 55-45 joint venture with another independent company IPR, which opted not to fund its share of the latest well, SD-12X, the second well in a two-well campaign that was undertaken during Q1 2020. As it happened, its first well, SD-6X, testing multiple targets, was a duster; but the second, which targeted a single play, was a success, finding an estimated 24bn ft³ at a cost of $3.7mn. Given the distance from the nearest tie in point, 8bn ft³ was the threshold for a commercial development, he said.

This will be enough to produce at least 50mn ft³/d for five years at plateau production. “We will then be in harvest mode there,” he said. The company has also de-risked several follow-on prospects close by, which he describes as lookalikes to SD-12X. 

Under the ‘sole risk operations’ clause in the JV contract with IPR, a partner that does not elect to fund may only re-enter the project by paying its proportion of the costs and then three times that on top, as an incentive to get in at the start.

So if IPR decides to enter the SD-12X, it will have to pay about $6.7mn, Box said, and at the time of the interview it was still debating internally whether to go ahead, he said, suggesting that it would be no problem for SDX to carry all the risk itself. SDX will convert its SD-12X discovery into a 25-year development lease, producing gas for delivery to the central processing facility, joining the South Disouq and the Ibn Yunus 25-year leases.

Morocco: Covid limits sales

In Morocco, there have been some setbacks in the wake of the Covid-19 virus. But gas prices are high and the company is free to negotiate prices with  no competitors except other fuels. “The alternative is bottled gas, or liquid petroleum gas and in most price environments that is more expensive than our natural gas,” he said. There is no oil indexation in SDX’s supply contracts; the unit price goes down as the volume goes up, he said, and the buyer also has take-or-pay obligations. SDX publishes the average realised price in its quarterly results: “There are no secrets to what we do in Morocco,” he said.

While three of its eight industrial customers are taking less than before Covid-19 restrictions were put in place, the others are in priority sectors so about half the demand was switched off in March; the rest are allowed to continue taking gas. They include a dairy products company; French automotive maker Peugeot; and a Chinese alloy wheel maker. “We are not reliant on any one sector,” he said. “We have a diverse enough portfolio.” But some of the demand will fluctuate as the manufacturers build up and then run down inventory for export. He said that Peugeot had been ramping up its shifts with the aim of getting back to 24 hour operations.

At the start of May, the three customers that were required to close down in March began to re-start operations,  with those customers back at about 40% demand as of May 18, but that was shortly before the Eid holiday when demand usually dips. SDX hopes that by September, all customers will be at full capacity once more. 

Upstream success is adding to its reserves in both markets and SDX believed it was about to add more with one well in Morocco “a potentially exciting play-opener” – until the lockdown in Morocco sent the testing crew home. Its recent 10-well Morocco campaign has seen seven wells drilled near the company-owned 8-inch pipeline to its customers, which runs 60 km to the industrial city of Kenitra on the Atlantic coast.

Of those, five were successful and have provided useful reserve additions, and two were too small to justify development. There is no gas storage on site in the event of any disruption to flows but the company has spare linepipe on site and could carry out any repairs if needed quickly. It also patrols the line.

The wells were targeting small deposits of biogenic gas around the pipeline route, based on “high quality seismic data making it easy to see gas accumulations” to support its contracted gas sales, he said: stable supplies seem to be the focus, rather than a surge in output. “We have been following a drill-and-supply model.” The gas is pure enough to go straight into the pipeline without treatment: no sulphur or CO2 and only a small amount of water.

Larger deposits of thermogenic gas however are also believed present: it had just drilled a well, LMS-2 in a reservoir that it explored in 2018, and the company believes has a 31% probability of holding gas, but the lockdown came before the well could be tested and so it is completed securely and activity suspended. But the testing crew can be mobilised again at short notice. “There is the potential for it to be exciting,” he said.

Morocco’s gas market is growing in the Atlantic Free Zone, which is a significant development: the government offers tax advantages to companies setting up business there and has had success attracting multinationals which could see gas demand rise further.

LMS-2 could de-risk over 10bn ft³: SDX

Subject to successful testing, SDX said in an operational update June 24 that LMS-2 could contain about 1.5bn ft³ and has the potential to de-risk a further 6bn ft³ in separate compartments within the same feature. A further 3.4bn ft³ of close by prospective resources will be de-risked if LMS-2 tests successfully, increasing the overall prospective resource potential to 10.9bn ft³.

The company reiterated also that it expected to extend its gross 50mn ft³/day plateau production at the Sobhi field in Egypt by 18-24 months to 2023 and, with some follow on drilling success, this could be extended further into 2026. Sobhi has also helped it identify about 100bn ft³ of follow on, de-risked, incremental prospectivity in the South Disouq concession.