Challenger Energy Group expects to be awarded the AREA OFF-3 licence

Challenger Energy (LON:CEG), the Caribbean and Americas focused oil and gas company, with a range of oil production, development, appraisal, and exploration assets, has advised that it has bid for, and now anticipates being awarded, the AREA OFF-3 licence, offshore Uruguay.

HIGHLIGHTS

·    CEG has bid for and expects to be awarded the AREA OFF-3 licence, offshore Uruguay.

·    AREA OFF-3 is the sole remaining available block offshore Uruguay; all other offshore exploration licences are held by energy majors Shell and Apache and YPF, the Argentinian national oil company.

·    The AREA OFF-3 licence is 13,252 km2, and will increase CEG’s total Uruguay acreage holdings to ~28,000 km2, making CEG the second largest offshore acreage holder in Uruguay behind Shell.

·    AREA OFF-3 is located in relatively shallow water, with existing 2D and 3D seismic coverage. The block has a current estimated resource potential of up to ~500 million barrels of oil equivalent (“mmboe”) and up to ~9 trillion cubic feet gas (“TCF”), from multiple exploration plays.

·    CEG’s AREA OFF-3 bid consisted of an initial 4-year exploration period, with a work program limited to reprocessing and reinterpretation of 1,000 kms of 2D seismic data.

·    Award of the AREA OFF-3 licence to CEG will represent a successful expansion of the Company’s high quality, frontier play opportunity in Uruguay – a fast emerging global exploration “hotspot” – and is consistent with a strategy of targeting high impact Atlantic margin opportunities.

Eytan Uliel, Chief Executive Officer of Challenger Energy, said:

“We are delighted to advise that on 2 June 2023, ANCAP publicly announced the details of Challenger Energy’s offer for the AREA OFF-3 licence, which is the precursor step for the formal award of the licence to CEG, and which we understand should occur in the next 3-4 weeks.

AREA OFF-3 possesses identified prospects of material scale, and our immediate work focus will be a comprehensive technical reassessment of the block, applying modern 2D seismic re-imaging and our subsurface knowledge of the Uruguayan offshore margin, similar to the successful geotechnical de-risking approach we have applied on AREA OFF-1.

Strategically, the award of this licence will cement CEG’s position as a significant participant in Uruguay, a country that has fast become one of the world’s frontier exploration hotspots. At the same time, our bid for the AREA OFF-3 block demonstrated the same disciplined and opportunistic approach we have taken in the past: acting strategically and nimbly to secure large and promising acreage, yet with low-cost work obligations, discretionary expenditure phasing, and no new seismic acquisition or drilling commitments.

We are especially appreciative of the confidence shown in CEG by the Uruguayan regulatory authority, ANCAP. Over the next four years we intend to further grow that confidence by applying our basin expertise and fully evaluating the licence’s potential. We anticipate that we can create an opportunity of comparable value and industry interest to what we have thus far identified with AREA OFF-1, to the benefit of both Challenger and ANCAP.”

Overview

As part of the Open Uruguay Round, First Instance of 2023, CEG submitted a bid for the AREA OFF-3 block, offshore Uruguay. The Company is pleased to advise that on 2 June 2023, Administración Nacional de Combustibles Alcohol y Pórtland (“ANCAP”), the Uruguayan national regulatory agency, published on its website that CEG ‘s offer for AREA OFF-3 was received, outlined the terms of CEG’s offer, and noted that there are now no further available offshore blocks in Uruguay. No other offers for AREA OFF-3 are referenced in ANCAP’s communication.

Challenger Energy advised that this thus represents the precursor step to formal award of the block to CEG, with the process of finalising the award expected to take 3-4 weeks. Refer to https://exploracionyproduccion.ancap.com.uy/innovaportal/file/18158/1/2023-05-rua-first-instance-2023-v3.pdf

The award of AREA OFF-3 will expand the Company’s licence holding in Uruguay to two blocks, in the offshore Punta del Este and Pelotas sedimentary basins (AREA OFF-1 and AREA OFF-3), and will position the Company’s acreage on either side of Shell’s AREA OFF-2 block.

AREA OFF-3 has many operational and subsurface similarities to the AREA OFF-1 licence: comparable size acreage in similar water depths, both exhibit multiple, stratigraphic plays and complement each other with play diversity while demonstrating similar exploration upside.

The commercial terms and work program bid by CEG for the AREA OFF-3 licence are similar to those for the AREA OFF-1 licence, providing for an initial 4-year exploration period, during which CEG will be required to reprocess approximately 1,000 kilometres of legacy 2D seismic and undertake two new geotechnical studies. The Company expects that the cost of the work program in the initial 4-year exploration period will be approx. US$100,000 per annum.

Apart from the costs of completion of the minimum work program there are no annual licence fee payments, no seismic acquisition (2D or 3D) or drilling is required in the initial 4-year period, and extension into a second exploration period is at CEG’s discretion.

About AREA OFF-3

The AREA OFF-3 licence has a total area of 13,252 km2 and is situated in water depths from 20 to 1,000 meters, approximately 100 kilometres off the Uruguayan coast (refer to the map link in Appendix A). Mapped prospects of interest are in relatively modest water depths of ~250 metres.

There has been considerable prior seismic activity and interest on the AREA OFF-3 block, comprising ~4,000 kms of legacy 2D (various vintages) and ~7,000 kms legacy 3D (2012 proprietary acquisition by BP and leading seismic vendor PGS). The block was previously held by BP, but was relinquished in 2016. There are no prior wells on the block.

Two material-sized prospects have previously been identified and mapped on AREA OFF-3 (BP & ANCAP), as follows:

·    Amalia: resource estimate (EUR mmboe, gross): P10/50/90 (ANCAP) 2,189 / 980 / 392 – the Amalia prospect straddles the boundary with Shell’s AREA OFF-2, with an estimated 25% of the Amalia prospect contained within AREA OFF-3, and

·    Morpheus: resource Estimate (EUR TCF, gross): P10/50/90 (ANCAP) – 8.96 / 2.69 / 0.84 – the Morpheus prospect is entirely contained with AREA OFF-3.

During the initial 4-year exploration period, CEG’s technical focus will be on the re-evaluation of the existing 2D and 3D seismic data on the block, given the renewed interest in the types of plays present in Uruguay triggered by the recent conjugate margin discoveries offshore Southwest Africa. In particular, the data and enhanced technical understanding provided from recent activities in Namibia provides greater confidence that the regional petroleum system charging Venus and Graff (offshore Namibia) is likely to be present offshore Uruguay. As a result, traps that exhibit effective sealing mechanisms, and which may previously have been overlooked or not considered viable, are now potential exploration targets.

Moreover, AREA OFF-3 has the advantage of the majority of the block being covered by 3D (2012 vintage, proprietary acquisition by BP and PGS) that could be reassessed and subjected to the latest reprocessing technology – both in terms of reviewing existing known prospects / plays and identifying potential new prospects / plays. In addition, with the Amalia prospect straddling the border with AREA OFF-2, it potentially facilitates a joint exploration assessment with Shell (since May 2022 the AREA OFF-2 licence holder).

As noted by ANCAP, “with this new offer [to CEG], there are no more areas available under the Open Uruguay Round“. An updated map indicating the current and proposed licence position in Uruguay, as published by ANCAP on 2 June 2023, is included in Appendix A.

AREA OFF-3 Licence Terms

The following Table 1 presents a summary of the key AREA OFF-3 licence terms, as bid by CEG. As noted, these are similar to the terms applicable for AREA OFF-1, apart from the minimum work commitment obligation and associated cost for the 2D seismic reprocessing commitment: i.e., 1000 kms for AREA OFF-3 vs 2,000 kms for AREA OFF-1.

ItemLicence Provision Comment 
Operator:CEG  
Participating Interest:CEG 100%.ANCAP has the right to back-in for up to a 20% Participating Interest.ANCAP has the right to participate (up to 20%) in each commercial field that is developed. To exercise that right ANCAP must fund its relevant percentage share of costs (including back costs). No limitation on CEG being able to farm-down its working interest.  
Exploration Periods and Minimum Work Obligations (“MWO”):Three exploration phases, either:·    Option 1: 4+3+3 or·    Option 2: 4+2+3Both Option 1 and 2 have an initial 4-year exploration period. Minimum work obligation in this period is G&G studies and reprocessing of 1,000 kms of legacy 2D seismic. In Option 1 if the operator elects to move into the 2nd exploration period for 3 years, a single exploration well is required, but there is no relinquishment obligation. Option 2 allows for a shorter 2nd exploration period of 2 years with a 50% relinquishment obligation and a requirement to undertake technical work to an agreed level, but no drilling obligation.
Both Option 1 and Option 2 thereafter require drilling of two wells if the operator elects to move into the final 3-year exploration period, with a 30% relinquishment obligation.  
No drilling obligation in initial 4-year exploration period. CEG can elect, but is not required, to enter into Phase 2 or Phase 3 exploration period.
Minimum cost of MWO:None specified.CEG estimates the Minimum Work Obligation in Phase 1 will be approximately US$100,000 per annum.  
Contract Term: 30 years, with right to extend to 40 years.Development period can be declared at such time as operator wishes – thus allowing for development period of +25 years.  
Fiscal Terms:No royalties, signature bonus, or annual rentals. Licence regime is based on CEG as operator undertaking work and recovering costs based on a Cost Oil model, and thereafter a sharing of income between CEG and ANCAP based on a standard industry “R factor” model (a revenue/cost ratio model). CEG net profit is then taxed at normal Uruguay corporate income tax rate (25%). An attractive, internationally comparable fiscal regime in a stable, well-regulated environment.        
Other Costs:The licence mandates annual contributions to various education and social funds and initiatives, of approximately US$50,000 per annum. No annual licence fees.
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