Elk Petroleum's (ASX: ELK) Grieve Enhanced Oil Recovery Project in Wyoming has been valued at US$95 million (A$92.6 million), confirming the robustness of the project's economics and supporting its focus on similar EOR opportunities.
Ryder Scott, which had been commissioned by the company to provide a valuation, had assigned the project with the net present value discounted at 10% on the base case recovery of 5.46 million net barrels of oil from Elk's 35% working interest in the project.
"Ryder Scott's valuation provides a credible perspective to the market of the value of Elk's share of the Grieve project; Elk's Board considers the valuation fit for this purpose," Elk managing director Bob Cook said.
"The sensitivities to ultimate EOR recoveries and time to first oil confirm the robustness of the project and the valuation supports Elk's drive to seek other similar enhanced oil recovery opportunities."
The valuation is unrisked before income tax and financing and the valuation is based on a constant crude price of US$86.40 per barrel.
Ryder Scott estimated the project would yield revenue of US$420 million net to Elk after the deduction of production taxes and net income before federal taxes and administrative overheads of $234 million.
It also does not include any adjustment for outstanding loans that may exist nor does it include any adjustment for cash on hand or undistributed income.
Liquid hydrocarbon reserves account for 100% of total future gross revenue from the probable reserves.
Notably for Elk, the NPV for Grieve could increase to $141.2 million should the project achieve oil recoveries of 24.6 million barrels of oil while the start up of production 6 months earlier than the current estimate of mid to late 2014 would increase the base case NPV to US$103.3 million.
Ryder Scott has in October 2012 reclassified their earlier classification of gross reserve recovery of 18.6 million barrels for a carbon dioxide flood of the Grieve field to the higher certainty Proved and Probable (2P) category from the earlier Proved, Probable and Possible (3P) category.
Grieve EOR project
Work on the project by operator Denbury Resources (NYSE:DNR) has progressed well and CO2 injection is expected to begin this month at about 40 million cubic feet per day (MMcfd) from the previous 30MMcfd.
This is expected to accelerate the time to produce first oil.
Denbury will acquire 3D seismic over the field in mid-2013 to assist in optimising the future development and reservoir management of the EOR project.
It may also use 4D seismic (repeat 3D surveys over time) to track the accumulation and movement of CO2 as it makes contact with the oil in the target Muddy reservoir.
Results from the new Grieve 62 and Grieve 59 wells will also be used to finalise plans for the distribution of CO2 and water into the reservoir to achieve the earliest oil response from the re-pressuring of the reservoir to a pressure above the minimum miscible pressure (NYSE:MMP), at which point the CO2 interacts with and mobilises the oil remaining in the reservoir.
Denbury expects this to occur in the second half of next year. If hydrocarbons are not encountered, the Madison wells are expected to be the source of water injected into the Muddy formation to expedite the re-pressuring to MMP.
The Grieve Oil Field was discovered in 1954 by Forest Oil and has produced 30.2 million barrels of oil with the peak rate of 12,000 barrels of oil per day achieved in 1960.
Elk has a 35% working interest in the Grieve EOR project while Denbury holds the remaining 65%.
The valuation of Elk's share of Grieve at US$95 million compared to the company's market capitalisation of A$45.11 million is a clear sign that investors are still not quite clued in to the potential of EOR plays.
EOR offers the potential to deliver as much production as primary and secondary oil recovery, presenting the opportunity to return previously producing fields to commercial output.
Notably, investors should company's other EOR project, Ash Creek, which while is much smaller than Grieve, is nonetheless expected to start pilot production earlier.
The company is also carrying out negotiations on two prospects that may be finalised in the current quarter.
Elk's share price range of between A$0.28 and A$0.31 continues to support Proactive Investors' forecast back on 5 September 2012 that the company offered significant upside potential when its shares were priced at A$0.18 ($26 million market cap).
We continue to be bullish on prospects of further share price increases beyond $0.30.
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