UKOG - A Case of Fact and Fiction
UK Oil & Gas Plc – LON:UKOG
Broadford Bridge Operational Updates Analysis
Most active AIM investors will have encountered UKOG recently. Simpvestor has not yet issued a report on UK Oil and Gas Plc but we have been following developments at Broadford Bridge closely. A share price that was as low as 0.8p in May 2017 is sat at close to 8p less than three months later with the potential for even more (or less) in the near future. Kind of hard to miss with almost daily updates, Shakespearean twists and Bulletin Boards buzzing with rumours. UKOG investors will be forgiven for being a bit exhausted by the incessant news flow.
With so much conjecture around such a hot topic, we could not resist the challenge of separating fact from fiction. No doubt some will disagree, but please do try to keep an open mind to the end.
Quick Intro to UKOG Plc
UKOG Plc cliff notes:
- UKOG owns a stake in several Petroleum Exploration and Development Licences (PEDLs) in the UK, including 48% in Horse Hill
- Horse Hill was dubbed the “Gatwick Gusher” because flow tests showed it could produce at a surprisingly high 1300 bopd
- UKOG owns 100% interest in Broadford Bridge license
- UKOG conducted a placing in May 2017 to fund exploration work at Broadford Bridge site
- Work at Broadford Bridge began in June
- By early July, drilling showed mobile oil
- Coring and electric logging was conducted at the end of July
- French firm SCDM Energy increased its stake in UKOG to 5.03%
- News on flow test commencement is imminent
Fracking vs Conventional
Anti-fracking campaigners have targeted UKOG as they believe the company will use fracking technology to release oil in place (OIP). In very basic terms, fracking entails creating fractures in the surrounding geology of an oil well. UKOG however, state they do not need to frack at Broadford Bridge, maintaining that the geology is naturally fractured and a viable amount of oil can be recovered using conventional (non-fracking) methods.
Campaigners are concerned that fracking permission may be granted at some point in the future. While not the case for all, most of the anti-fracking campaigners could also be classed as “anti oil” or “anti carbon fuel” protesters. Some have attended the Broadford Bridge site on a daily basis to disrupt the works with police officers on hand to defuse any trouble. They have also been active in disseminating misinformation, whether door-to-door near Broadford Bridge, through online publications or social media.
A Professor?
David Smythe is a former geology professor at the University of Glasgow, having retired in 1998 he now resides in the south of France. Mr Smythe is also a former oil consultant. He is now an active anti-fracking campaigner, wielding his academic accomplishments against the oil industry he once worked in. In 2014 he had his university email revoked and was reprimanded by the University of Glasgow for wrongfully portraying his ideas as endorsed by the university geology faculty and fraudulently using credentials. There are two sides to every story and having raised £14,121 from 362 individuals through crowd funding in August 2016, Mr Smythe intended to take his former employers to court. His aim: to prove there had been a coordinated campaign by the geology faculty, energy companies and national newspapers to defame him. Since then Mr Smythe has invested considerable time and energy in the online trolling of the faculty, targeting Professor Paul Younger in particular. What he has not managed to do is progress any further than a strongly worded letter issued to the University through his pro-bono solicitor in October 2016. If you’re wondering what happened to the £14,121, you’re not the only one.
Why is Mr Smythe important? Because he has submitted an objection to a UKOG planning application, issuing a thesis length report (complete with University of Glasgow affiliation) in the process. This report seems to have caused a fair amount of anxiety to investors as anti-fracking campaigners and those with UKOG short-positions use it to support claims UKOG are breaching regulations.
Broadford Bridge Planning Application
Broadford Bridge already has planning permission – UKOG would not be operating there if it did not. The question in front of the planning committee is very specific: to extend the current work by 12 months or not.
It is important to make this point again: the committee will not be making a decision on whether UKOG can drill at Broadford Bridge because the company already has that permission. The committee will only decide on whether UKOG can continue the same work in the same regulatory framework for another 12 months.
In addition to Mr Smythe, the planning committee will also hear from other interested parties, both for and against the application – we stopped counting at 100 representations. Almost any private individual can make representations to such an application. And of course the committee must consult with other responsible authorities. Below are two representations made by responsible authorities involved in the application, both dated 26th July 2017.
Natural England stated “No Comment”, adding:
Should the proposal be amended in a way which significantly affects its impact on the natural environment then, in accordance with Section 4 of the Natural Environment and Rural Communities Act 2006, Natural England should be consulted again. Before sending us any further consultations regarding this development, please assess whether the changes proposed will materially affect any of the advice we have previously offered. If they are unlikely to do so, please do not re-consult us.
Environment Agency issued “No Objection”, adding:
The applicant has the necessary Environmental Permits and technical procedures and measures in place to prevent pollution to the environment. The Environment Agency is in constant contact with the applicant and their consultants and have undertaken a number of site visits as part of the permit compliance procedures. The time extension does not change any of the requirements within the permits as the technical procedures and pollution control measures are sufficient.
Other authorities have issued similar "No Objection/Comment" statements including Highways Authority, Southern Water, Environmental Health and Sussex Police. Two parish councils do make submissions to improve traffic flow and safety but without objection to the application.
Regardless of credentials, all representations will be viewed through the narrow scope of whether there is any reason current work should not continue for a further 12 months. A decision is expected by early September.
Sidetrack Well
Documents relating to Waste Management were released last week which showed the BB1 well at Broadford Bridge had been abandoned and instead the Kimmeridge reservoir would be accessed through a sidetrack – designated BB1z. In an RNS released on 10th August, UKOG’s Executive Chairman Stephen Sanderson stated:
Although BB-1 drilling and coring results were highly successful, proving our geological concept, it became clear that the duration and difficulty of coring such highly-fractured rocks in an inclined hole put the borehole in a less than optimal condition, ultimately jeopardising Kimmeridge flow-test performance. Consequently, using the drilling knowledge gained from BB-1, we have delivered BB1z, consisting of a fresh, undamaged, 1,480 ft thick, intensely fractured Kimmeridge oil-bearing reservoir in optimal condition for flow testing.
It is entirely possible this information would not have been made public had selected pages from a document related to Waste Management not been circulated. However, it is also true that a provision for the sidetrack was part of the original OGA permission for instances such as this.
The change from BB1 to BB1z has not halted operations at Broadford Bridge and flow testing works seems to be continuing as normal.
The Simpvestor View on UKOG
There is certainly a lot of noise surrounding UKOG. Whether it is anti-fracking campaigners objecting or the notorious “shorts” on keyboards, there is definitely no shortage of information and misinformation to sift through on UKOG. The Board not offering up details of the switch to BB1z does not help their credibility. But it is also understandable, as using the sidetrack does not seem to have materially impacted progress of flow testing at Broadford Bridge.
Ultimately oil exploration is a bit of a gamble. An explorer will focus on a prospect based on a variety of information collected from different sources. But a prospect’s potential, or lack thereof, cannot be determined until it has been drilled and tested.
Accept for a moment our overly simplistic view that oil exploration success is a coin toss (50/50), then add in the following “weights” in relation to Broadford Bridge:
- It is part of the UK Weald Basin, where new technologies have uncovered oil reserves previous explorations in the 1980s have not
- proximate to Horse Hill well – aka “Gatwick Gusher”
- Angus Energy Plc are currently awaiting OGA approval for nearby Brockham well
- Europa Oil Plc are looking to start work at nearby Holmwood site in the coming months
- Observations from early drilling found traces of mobile oil
- Logging suggests a significant continuous oil deposit under the Broadford Bridge license and a significant portion of the Weald Basin (this could have huge implications for other Weald players including Angus Energy and Europa Oil)
- French giant SCDM Energy increased its stake in UKOG right after recent coring and logging had been conducted
With the above weights in mind, our opinion is Broadford Bridge looks to have better than coin toss chance of delivering positive flow test results. How much better than a coin toss is subjective to individual opinions – certainly one reason for the plethora of posts on Bulletin Boards recently.
The impact on the share price will be determined by a) whether production from Broadford Bridge is commercially viable and b) if viable, how flow rate levels will drive price movement. Given that UKOG is highly volatile and currently regarded as speculative, it is reasonable to expect that whatever the share price direction, it will have significant momentum.
The Simpvestor View: If you’re already in UKOG, then you got into it for a reason and have a strategy. Don’t let the noise cloud your judgement. If you’re not in UKOG, then only get in if you have a strong stomach because the ride will be bumpy and quite possibly not as short as many hope.
Further Reading
For more information on the Weald Basin, Simpvestor has previously published a detailed report on UKOG's former Horse Hill partner, Angus Energy Plc. The report on ANGS can be found here:
https://www.simpvestor.com/plcprofiles/2017/2/28/angus-energy
