Zephyr Energy to acquire infrastructure and additional acreage in the Paradox Basin

Zephyr Energy plc (LON:ZPHR), the Rocky Mountain oil and gas company focused on responsible resource development from carbon-neutral operations, has announced that it has entered into a binding agreement to acquire a package of oil and gas assets located on and around the Company’s Paradox project, Utah, U.S.

Under the Agreement, Zephyr will acquire 21 miles of natural gas gathering lines, the Powerline Road gas processing plant (the “Plant”, which is not currently in operation), rights of way for additional gathering lines, active permits, five existing wellbores and additional acreage which is partly contiguous to the Company’s operated White Sands Unit (the “WSU”).

The consideration for the Acquisition is US$750,000 and will be satisfied by a payment from Zephyr’s existing cash resources and as the new owner, Zephyr will assume responsibility for all eventual decommissioning and plugging and abandonment (“P&A”) liabilities for the assets acquired (estimated to be approximately US$2.5 million in today’s terms).

Once the Acquisition is completed (which is expected by 7 October 2022), Zephyr will operate approximately 45,000 gross acres in the Paradox Basin, the majority in which the Company holds a 75% or greater working interest.

Overview

The Agreement enables the Company to acquire an asset package which will allow Zephyr to substantially reduce the capital required to build the necessary gas export infrastructure for its forecast gas production from the Paradox project. Given Zephyr’s potential significant gas resource, strong current pricing and increasing demand for U.S. domestic natural gas, the Board is delighted to have secured this opportunity ahead of commencing its further development of the Paradox project.

The assets being acquired under the Agreement include:

o  21 miles of six-inch gas gathering line, with an estimated replacement cost value of US$8.8 million, which will substantially reduce the capital and costs required to export the Company’s gas production from the WSU. The acquired gathering lines tie directly into the Plant. 

§ One of the acquired lines passes immediately alongside the site of the planned State 36-2 well (the first in a series of Paradox wells to be drilled in the upcoming drilling programme).

  • Additional rights of way for future pipelines are also included in the Agreement. 

o  The Plant, while not currently in operation, is well suited for brownfield redevelopment and contains useable pre-existing infrastructure and related permits. This Plant is ideally located at the head of a 16-inch gas export pipeline recently purchased by Dominion Energy (“Dominion”), and can also act as a supply base for other WSU operations. The Plant has an estimated replacement cost value of US$1.8 million.

o  1,160 acres which comprises the final leasehold acreage parcel under Zephyr’s existing 3D seismic, giving Zephyr a complete and contiguous 20,000 acres in the WSU with 3D coverage.  Zephyr estimates that this portion of acquired acreage will contribute:

  • 2 gross drilling locations with 2C contingent resources from the Cane Creek reservoir of 1.25 million barrels of oil equivalent with a net present value at a ten per cent. discount rate (“NPV-10”) of approximately US$17 million.

o  4,320 additional acres, in locations near to the WSU, which are not covered by Zephyr’s pre-existing 3D seismic data but with resource upside potential in a success case.

o  Five existing vertical wells, four of which were planned for P&A by the existing owner, all which are expected to have re-use potential under Zephyr’s ownership:

  • The Federal 28-11 well, currently shut in, has near-term workover potential and is expected to have an initial estimated proved developed not producing (“PDNP”) reserve value of US$0.4 million once the well’s gas export is online.
  • Two wells with notable prior observations of hydrocarbons which may have additional work over or sidetrack potential.
  • Remaining wellbores which have re-use potential as future salt water disposal and water supply wells, which could substantially reduce future operating and completion costs (subject to State approval).

o  A full well database from the Operator.

The consideration for the Acquisition is US$750,000 which will be satisfied by a payment from Zephyr’s existing cash resources. As the new asset owner, Zephyr will assume responsibility for all eventual decommissioning and P&A liabilities for the assets acquired (estimated to be approximately US$2.5 million in today’s terms).  The Acquisition is expected to complete by 7 October 2022.

Upcoming Investor Presentation

In light of today’s Acquisition and the recent Paradox project acreage acquisition announced on 25 August 2022, and prior to the commencement of its upcoming Paradox drilling programme, the Company intends to present detailed development plans and schedules for the Paradox project at an investor webinar, the date of which will be announced within the next two weeks.

Colin Harrington, Zephyr Energy’s Chief Executive, said:  “We’ve often compared our Paradox project development to a jigsaw puzzle with a number of requisite pieces to be assembled prior to the commencement of commercial production – and today’s announcement is another substantial piece now in place.  By acquiring this package of surface infrastructure, we are moving rapidly from a programme of value delineation to a tangible development programme which is expected to facilitate cashflows from the project in a more rapid timeframe. 

“Beyond the additional resources being acquired, today’s Acquisition provides us with several critical benefits.  Firstly, it allows us to greatly reduce the capital needed to build out the gas infrastructure required to sell produced gas volumes into the market.  Secondly, it completes the acquisition of all key acreage covered by the WSU 3D.  Thirdly, it provides an additional well pad already tied to the pipeline, which in combination with the New Acreage will simplify future development drilling.  Similarly, the gas plant, while currently not in use, has excellent potential for reintroduction to service and can potentially act as a WSU supply base.

“The acquired wellbores provide us with multiple re-use options over the short to medium term.  Along with the wells comes a proprietary well database from the Cane Creek and overlying reservoirs (including wells with notable hydrocarbon shows and prior production).  Wellbores that do not become work over candidates have potential as water supply and/or salt water disposal wells, which can substantially reduce our future operating and completion costs as the development progresses.

“I would like to take this opportunity to thank our counterparty in this transaction, as I believe we have jointly created a win-win situation for both parties through the Agreement.  We are now able to accelerate our Paradox project development without incurring significant upfront cash costs, and we plan to be proactive managers of the acquired assets in order to best bring them back into service.  Our aim, as responsible stewards of capital and of the environment around us, is to minimise surface and environmental disruption to the greatest extent possible, and making best use of the existing brownfield infrastructure across our leaseholding is a key way to achieve this objective. 

“Following the significant recent additions to both our land and infrastructure positions, we plan, in the coming month, to give Shareholders a comprehensive update on our forthcoming drilling.  It’s an exciting time for the Company, filled with short-term operational activity and long-term strategic potential.”

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