Melbana Energy Limited (MAY.AX) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to today's webinar. My name is Alex Paull from investor Stream, and I'll be your host today. Presenting for you is Melbana Energy, Executive Chairman, Andrew Purcell, who will be providing an update on the company's ongoing drilling program for its Block 9 contract area in onshore Cuba. Andrew will give a brief overview on this progress, and we'll be on hand to address any questions following the presentation. You can download a copy of the company's most recent announcement by navigating to the handouts pane in the control panel. A copy of the webinar will also be available on Melbana's website and social media platforms later today. But for now, I'd like to throw it over to Andrew to kick things off for us. Andrew, the floor is yours.

Okay. Thanks, Alex. Much appreciated, and thank you, everyone, for joining. I thought this might be a useful forum given it was precipitated by the fact that we're having a physical AGM next week, and I've had a number of requests from people who are unable to attend the AGM for an update and an ability to ask questions. So this is Part A, I think, of 2-part forum, what here we'll give an update as to what the forward plan is in Cuba. And there's a number of questions that have been sent through that I will go through. And then we can finish off with answering any other questions that may come up in the course of the meeting. So what I've prepared today is one of the slides from next week's presentation for the AGM. And it's a cartoon of the subsurface from our first well at Alameda-1 that we completed earlier this year. The keen observers of the company's fortunes in Cuba will recall that the Alameda-1 well intercepted 3 independent reservoirs. What we have now characterized in these cartoons as an upper Amistad reservoir comprised of different sections, but all the one reservoir, and that is reservoir A. We then drilled forward, and this is the solid line, if you can see it on this diagram. The solid line is the original Alameda-1 well. It then went through into another reservoir, sealed and independent of the first reservoir, which we call Alameda. And then we had a third reservoir, this deepest one in Marti. So what we've been doing whilst we have been completing the drilling of Zapato, the second well of our 2-well exploration program is designing an appraisal program that allows us to test each of these 3 reservoirs. What happened the first time around, although we were greatly encouraged by the amount and pressure of oil that came at us in each of these reservoirs. The exploration well that we designed was unable to be repurposed to take samples, some polluted by the mud systems, and due to reservoir performance testing and extended flow testing. We've taken all that information on board, and we've come up with a forward program that we think is best done in the following way. We're going to do initial appraisal well -- or both wells are going to be back off the same pad at Alameda. But our first well is going to be into that upper Amistad section only. That was some 1,800 meters and we drilled that very quickly in the original pad. We started to encounter oil in this Amistad formation almost immediately after setting the surface casing of 455 meters, I think it was. And then we had 1,300 meters thereafter a gross interval with good oil flows in various sections. So we're going to get back in and punch down that upper section well, drilled very quickly, we suspect and get some appraisal going on that well in the New Year as our first appraisal well. After that, we're going to let that inform us as to how things are performing and if that is performing encouragingly as we hope it will, then we're set up to do extended flow testing and appraisal of these upper sections because there is a very interesting potential to step out on these upper formations. And if it works well here it at the Alameda pad, in parallel, we're also permitting up some additional pad sites stepped out, a few hundred meters in some cases, from the Alameda pad to test other interesting points on these sort of -- on what we think is the same formation around this central area to Amistad to give us a good crack at some early production. And with this well alone, it is flowing well and we'll leave it on extended flow test, then we're geared up to let it keep going and to start storing and trucking the oil to a nearby factory. So the transition from appraisal to production could be very quick for this well. The balancing act. However, if that's good, we let it go. But then we have a second well that we've designed to go back and test the 2 deeper sections. Now Alameda and Marti. All 3 of these reservoirs exhibited high pressure in places and strong flows of movable hydrocarbons. Alameda and Marti and Marti in particular, were very high and precious. And so having the 2 wells means we could design them differently. And the second well, it's designed is to go back down into those deeper, higher pressure sections. And Alameda now with what we know, we're very confident we can manage all of this. The wells have been designed accordingly. The rigs are going being adapted accordingly. And we know we're probably where to stop equally importantly, especially in that Marti well, where we're very excited by the strength of flow down there, but we got close to a faulted zone probably that made it very difficult to do anything else other than controlling the well. So these 2 wells together, our immediate forward appraisal program for Cuba. We just released the rig a week or so ago from the Zapato well sites. We are doing some much needed maintenance on it. Look, our contractors are doing much needed maintenance on it. I mean that rig had been drilling almost continuously since September of last year. And it's good enough, easily good enough, to drill this section again. We did it once before. It just showed what it's capable of doing and the very high drilling we encountered at Zapato. And for all the issues that occurred in Alameda and Zapato, the capacity of the rig was not the driving factor for the issues that we faced. And also to do with geologies and chemistry to floors and inventory not performing correctly downhole. The actual top drive, the rig and its capabilities perfectly adequate for what we want to do, and we blooded each other, and we have a good working relationship now with our contractors after having been in Cuba for over a year together drilling those 2 wells. So I'm very excited and very confident about this appraisal program coming up as are our partners Sonangol and Cuban regulators. And the sooner we can get into it, the better. But we have just released the rig and with the maintenance to do, it's going to be in the new year before we start and how far into the new year just depends on this maintenance program, but we're gearing up to get going in January. I think maybe it's going to be optimistic to think we could start operating that quickly. It's probably going to be towards the end of February. But from there, it's a straight program to get this all out of the ground and into production and then get it reserved and stop at last the transition from what was a very exciting well result in Alameda to becoming an oil producer in Cuba at a time when it's going to be a very exciting to be. So given global energy Alameda comprises. So I think that's a very brief introduction as to where we've been and what we're about to do. I think there's a number of questions that might flush out, people's questions on this call who want to know more detail about certain elements. I'll now hand back to you, Alex, at the moment to go through those questions and see if that takes us in a direction that people want to hear.

Absolutely, Andrew. So the first question, you referenced the forward program just before. Can you just expand on what the prescribed work program for Block 9 is? Is Melbana ahead or behind? And has Melbana's work program for 2023 being approved?

We're well ahead of our work program in Block 9. We have completed everything we had to do for Block 9 until -- it's this time next year, November '23 is when the next period of the exploration subperiod commences. So what we're doing now for next year in addition to what we have to do, but appraisal is the point of being here. And the final subperiod, which starts in November of next year, the well commitments in that 2-year period, which are the drilling of 2 wells, if we elect to go into that final sub period. But the wells we're planning to drill here will satisfy that commitment in that follow-up period. So we're well ahead of things, the approvals for the 2023 appraisal program, which was the second limb of your question, have been read between the partners, Sonangol, and ourselves. We have -- I'm going to flying to Cuba Tuesday, over the next week. And we are going to have our end-of-year technical and financial and operational meetings for the 2023 year with the regulators. But we've been discussing with this all along. Their approval is required. I expect it to be a formality. And they're just as keen as we are to see these appraisals and to get some well flowing out of these holes.

So is there a schedule that can be shared indicating the activities and milestones before Alameda is in production? And when will we start to see the appraisal wells at Alameda -- sorry, when will we start the appraisal wells at Alameda? And how long do you anticipate that will take?

Well, I think we've probably got that answered already. We're looking to start it as soon as possible in the new year, the appraisal program. What happens thereafter depends on what we count. So we are geared up for a 2-well appraisal program. We've got 3 reservoirs. There's 6 billion barrels of oil in place according to our independent reserve service provider. And resources certify. So how much of that 6 billion can we recover, over what time frame? That's the point of the appraisal. So the better the results in the very first section, the longer we're going to stay there and get to know that and to produce oil from it, so we can define step out production wells. And then we get the competing challenge of wanting to get to that deeper to reservoir as soon as possible to test them. We want to know it all as fast as possible. And the challenge was, well, we've got a pad ready, the pad on the use for these first discoveries that we made. We want to go back to that pad, but then -- let say, at this time, none going to build a new pad, on that pad, we can put 1 rig at once in 1 place, we couldn't get 2 rigs at once doing these things at the same time. So it's a trade-off. And this is the fastest way for us to get to the point what everybody wants to see is what is the performance of these 3 reservoirs like.

Can you just clarify something for me, Andrew. I understand work on Block 9 does not commence in November 2023, but it's more likely to be January or February for the first appraisal well. Can you just confirm that for me?

Yes. No, work has commenced now. I mean we're already doing work, civil works, preparatory works, et cetera. But the actual spinning of the drill bit into this appraisal well is going to not occur until late February. Next year is my best guess at the moment.

So does Melbana expect to remain the operator of the forward drilling program on Block 9?

Yes.

And so what input does Sonangol have into the design and drilling of each well or the work program in general?

Look, we're the operator. We put up the plans and then they review them with this. We had a number of delegation from Sonangol, in Melbourne in August. I think it was for a week going through the budgets, the technical plans, the lessons learned from the last well and well designed, for the upcoming appraisal program, they're a great help in studying what we proposed, for taking it, challenging it and optimizing it as a result of that process.

So how far along is the planning for a new pipeline to transport oil to the receiving facility?

We've not done much work on that yet. That's going to -- we get oil flowing. We're prepared and have planned or moving oil by truck to the nearest oil battery, which is about 50 kilometers away. That's typically how it's done around us and the other producing fields. Once we got a sense of flow and reservoir performance, and probably all of this, but maybe even a couple of the offset wells that we want to drill after, we know the results of these wells that's then going to tell us what is likely under our feet, what rate is it coming at is, how quickly we want to produce it before then thinking about pipelines, but you need all that data first before you can start to scope it, scale the diameter of the pipeline. Where you're going to run it? We have 2 options. We can run it north to the oil terminal and battery. We can run it south to the refinery at Santiago, depending on its knowledge quality. So we need more information. But the trucking is the first option, and that gets us going straight away.

Okay. So how will it be funded then?

Well, tracking is just an OpEx. It's just an operational cost of the production. And so where we typically in Cuba see cost of production, Gulf of Mexico, typically $10 a barrel. And that's been the experience of Sherritt, who have been producing here for decades, and it's consistent with, as I said, of Gulf of Mexico produces in Venezuela. So it's just another element of that cost of production. If the question is, what about pipeline, how would that be funded? Well, we've got many -- excuse me, after a lot of experience building infrastructure is for gas and oil fields. And there's many ways to skin that cat. And if it's big enough an often and offer the state is encouraged to build the infrastructure because they're the ones that benefit greatly from that increased and reliable flow to market or for their own use. But there's other ways to do it, too. You can obviously once you've got production and once you've got that in place, you can get debt, you can -- people who want to buy the offtake will prepay for the right to take it and that can be used to part fund or part fund the infrastructure. There's many ways to do it without tapping Melbana shareholders.

So moving on to drilling. The drilling operations at Alameda and Zapato, were both characterized by very low rates of penetration, many trips and sidetracks and inability to get to TD in Alameda, will a rig of adequate power be brought into Cuba for the appraisal drilling at Alameda?

So there's a couple of bits of that -- of those questions that I'd have to clarify. I mean we didn't -- we got to TD in both wells. In Zapato, the TD, we always said would be 3,150, we got 3,152, probably what the person writing the questions asking, does it took a long time. And in Zapato, it certainly did take a long time. And that very thick and hard if you like, volcanics that we were drilling through, we always knew that was going to be hard. It was much thicker than our analysis suggested it would be. We didn't at TD get through those volcanics to the carbonates that lie underneath that could be oil-bearing. We're pretty confident they are, there that they are oil bearing, but we spent enough time and we couldn't keep going because the competing pressure was always to get back to Alameda, but we know we found a lot of oil. And the drilling at Alameda, you've got the TD as well, it had its complications as well. But for pressure reasons, for other operational reasons, materials wasn't the rig -- the rig wasn't the limiting factor. And so we've learned a lot. They were exploration wells, and we've learned a lot, and we've found a lot of oil. And now we can come back knowing what we're going to encounter with well adapted designs to cater for the environment we know we're in. And the team and contractors have been together through all of this, who are now already very experienced, but now very experienced in Cuba in these conditions and who are all very keen to see the final successful result after months of hard work.

So was the drilling operation a lump sum? And what was the additional cost for the delay, 158 days against 55 days planned at Zapato?

No, it wasn't a lump sum drilling contract. And so these were cost overruns. But as a result of these extended drilling times relative to budget, I think the final washup is about just over 50%, more than 50% compared to the initial budget, it is what it's cost to drill these first 2 wells.

So is there any recourse on the drilling contractors for the 200% schedule overrun?

No. No. Downhole risk is with the operator. That's the game we're often in exploration.

And so has the new drilling contract have been identified? And could you just talk us through the track record of running successful operations?

Well, we have identified some new drilling contractors, but our preference is -- certainly our tension is to use the same drilling contractor for these wells next year. We're still formalizing the contracts because they contemplated the 2 wells. We're now refreshing them and updating them to the going-forward program. But they want to do it. We want them to do it. And that is the best option for us, as I say, given the experience and they are familiarity with the teams and the equipment.

Is the availability of diesel an issue in Cuba? And could that have the potential to impact your drilling operations?

Yes, it is an issue from time-to-time for the general population. It hasn't been an issue for us. I'm pleased to report we're a partner with the national oil company, Cuba National Oil Company is very supportive of this program, and they are very keen to get to the outcome of what we might have found here. Cuba produces 50,000, 40,000, 45,000 barrels a day. It needs twice that. And if they can secure that from its own domestic resources, this is what the world is wanting to do now in this challenged energy environment. So they prioritized our fuel request all the way through the drilling program. So we've not had an issue and I suspect that will continue going forward for the reasons I've just given.

So just going back to field development for a second, Andrew. Can you just discuss the time frames for converting a drilling or appraisal program on Block 9 to production if the latter is economically viable?

Well, good appraisal equals production if you're putting it on extended flow test particularly. And so we have planned for this, and we have got infrastructure ready in terms of tanks on side, logistics solutions with tanker trucks, battery farm allocation for the oil up the road. So we're thinking ahead that this is going to be production. And if it is, then it continues directly from appraisal, there's no pause at all oil starts going into tanks.

And so can you just talk us through the decision process in calling total depth at Zapato? Was any flow observed? Or is this a dry hole?

It's neither. The answer is no and neither. I guess. It's -- we got the total depth, was in the volcanics. We didn't get through the volcanics. The old bearing formations were below the volcanics and we suspended it. We haven't walked away. It's not a dry hole that we haven't got to the target formation yet. So we haven't definitively figure out what's going on there. We booked ourselves the option to go after more study and after thinking about what we encountered after we generating oil from Alameda and we've got other options and other rigs and maybe some seismic, new seismic in the years ahead. We'll keep it in the backlog.

And so on to Alameda, have long lead items such as casing, tubing, wellheads, et cetera, have been procured for Alameda?

So the 2 wells, the 2 appraisal wells we're calling Alameda-2 for the shallow 1 and Alameda-3 for the 2 deep ones. For Alameda-2, we have almost everything we need for those wells in country, in our inventory, but 1 or 2 things still to come. But no, nothing there that's particularly difficult Alameda-3, we've got more stuff to bring in to that, but we've got more time to do so as well. So we're going through that whole planning and ordering and costing process at the moment to re-costing process.

So how confident are you that you've got the right technical people on board to be successful at Alameda?

There's no better combination of contractors and operating team in the world in this [ phlebology ], in this jurisdiction. This is the best possible combination of experience and skills we could have on the ground that we have in Cuba.

And so is there plan to re-enter Alameda-1?

No. No, we don't want to do that. We're going to have 2 new wells.

And so has there's -- has a solution being engineered to allow further work and flow testing of the Alameda or Marti sections? And if so, when?

I think I've answered that. The second well, appraisal well, Alameda 3 will do the Alameda and Marti reservoirs immediately after we do the first appraisal well in the shallower and [indiscernible] reservoirs.

So have discussions commenced with CUPET and others on offtakes oil from Alameda to their refineries?

We have had -- well, we've had to do all the planning, as I've said, to have the ability to store and transport the oil to their oil metrics from this appraisal program in principal conversations about -- it stored and get used or get refined their details at this stage until we know the quality of the oil and what its value is, and they were with us every step of the way in terms of waiting for the results like us, and let's just get the oil into tax and then we start thinking about all those next order considerations. So have you made any contact with the Cuban hydrocarbon regulator on either pipeline export or trucking the oil to local refineries? Yes, the latter, the trucking as we discussed on the pipeline, there's more information still required before we can determine the engineering requirements for that.

Just back on Alameda-1 -- or Alameda, are you allowed to -- are you able to give us a bit more detail on the testing plans at Alameda-3?

Not yet. I mean, testing plans are not any different for us before -- than they offer any appraisal. Well, you want to, a, know the quality of the oil. You want to understand its flow rates. You want to see how the reservoir performs over time as you flow it and then shut it in again, but the pressure rebuild, and lower again and what are those production curves look like and may allow you to infer something about the volume based on the -- of oil based on the structure size. And that's an appraisal process that's common to all discoveries of conventional reservoirs.

So what are the key issues to determining if the 6.5 billion barrels of OIP in discrete reservoirs will be suitable for economic production? And can you just talk through what the appraisal processes are involving?

I'll answer that question again only because it's probably important to people. To determine the appraisal characteristics as to whether it can be commercial. With reference to the 6.5 billion barrels oil in place question, 6.5 billion barrels in place has been estimated by our independent resources required to be about -- been under fall of 380 million barrels of prospective resource. So the way they've gone from 6.5 billion to 388 million barrels as they said, okay, we think you're going to recover 5% of the oil that's it. Now that 5% number is what is typical in Cuba because they produce from shallower depths. Those shallower depths of heavy oil, that's been typical for Cuba, the heavy oil. And although it's free flowing, that heavier all in Cuba, typically, you get 5% of it at ground and what's there. What we're hoping is because we're deeper, we have a, lighter crude and the deeper it is, the hotter it is, and the [indiscernible] light end of the hydrocarbon chains can't survive there and to lighter crude. And that's been 1 of our theories as to why we've done what we've done in Alameda. And we had tantalizing glimpses of that in the oil over the shape as well we're drilling in Alameda, but couldn't get a sample, if we those mix with the Marti. But if it's lighter then it's likely recovery rates will be greater than 5%. So tick one, better than 388 million barrels of prospective resource. And then the second thing is the pressure of the reservoirs. You don't need the more pressure you have to be injecting pressures into the world to encourage flows, and it just wants to come at you. We saw plenty of pressure in Alameda. So that's an encouraging second tick for the performance of the reservoir, but we have to test it. And then third and finally is it's over time, as said before. It is a flash in the pad and it is a good steady producer over a longer runway, a latter being typical, the bigger human discoveries. But they are the 3 key things we want to know in order to determine really what the economic prize is here at Alameda.

So just going back to the drilling of the Marti well, if I can, Andrew, how will you approach the drilling differently to last time when pressure caused a problem that it did?

Different flow of the well, different orientation of the well to avoid some of the areas we know that we did find challenging with the previous design. The balance with the fact that we like, the pressure in those. So going back in with a new design with better safety protections at surface, better orientation and better familiarity with what lies ahead, standard casing sizes to reduce the complexity of the well given the first time we didn't know what we were going to encounter. We built a lot of contingencies in to be able to adapt to what we found. And if we hadn't built all those contingencies and we never order got, down to rigs, the TD and Alameda found what we found. But now that you know what's there, you go and fit for the environment that you encountered, and it's just a matter of engineering for it.

Just on the -- I guess, can you just talk us through the relationship that Melbana have with the Cuban government? In what way has the Cuban government shown support for the endeavor? And you mentioned that, obviously, you've got a number of key stakeholders that you're in close contact with over in Cuba. Can you just talk us through that relationship specifically?

Well, it's been a long working relationship now, but it's at the business end. And over the years, I think there was a question someone asked about work programs earlier. That's defined at the beginning of a PSC as to what you have to do by what periods. And as we were getting data initially and as we were analyzing the data, I think, for the first time in the way that we analyzed and we talked the quants a lot about their own geology. We have to do side tracks, so work programs allow us to do things more differently before we could drill and they've said and they've listened to our reasons and they're very accommodating and being flexible with the terms of the PSC. And then we get through to introducing a partner, and they had to be qualified to operate in Cuba and they had to be accepted by the regulators, obviously, on sale through that process, but the human regulators made that process very simple. But perhaps the best answer to your question is in their flexibility is operationally, they provide us their engineering oversight of their of their own engineers that drill hundreds of wells in Cuba and have lots of ideas and experiences that when we meet with them regularly, they critique and comment and advise. And then we have the fuel situation that Paul talked about before is what fuel delivery issues are in Cuba. They prioritize this and they're ready to step up and track our oil in the minute we start producing it and we work together into that [indiscernible]. So it's a very good working relationship, and I find it a jurisdiction -- a regulatory jurisdiction that's a shared light to work in after the complications we have had and are having in many developed countries.

Just a couple of core type questions to finish, Andrew, if I can. Will Melbana sell Cuba operations, noting takeover provisions changing at the AGM?

The takeover provisions resolution for the AGM has nothing to do with anything. It's happening corporately or we think might happen -- well, nothing might happen corporately. It's a protection for shareholders that many directors of public companies choose to put in because it's a rather time gap in how people can launch takeover bids where it does allow them to do it more cheaply and without delivering full value to shareholders. The Corporations Act allows you to close the window on that arbitrage, but it has to be refreshed every 3 years. So we've been putting up this resolution to shareholders every 3 years. And as are many other companies, and it's purely there for that purpose that if someone were to make a takeover offer in the future, they have to pay that if the payable for shareholders demand for their shares for all.

Is the company likely to explore another capital raise anytime soon? And how are you how are you positioned financially for next year's appraisal program?

No capital raise needed. We've got plenty of cash in the [ tin ], and we're fully funded for this appraisal program. And that's not going to require any more cash until we see oil flowing out of the ground. And then at that stage, hopefully, we're funded there on if this all works as well as we hope.

And just finally, Andrew, does the company intend to consolidate its share capital?

Yes, we looked at that, and we don't believe that's a good idea. No, we won't be doing it.

Fantastic. Well, look, Andrew, that's all the time we have today. Thank you all for joining me, and I'd also like to thank Andrew for presenting and taking the time to answer some questions. Thank you all for the high-level of questions. We're not dialing the questions today and over the course of the past week. So apologies if we didn't manage to get to your question, but it shows the high level of engagement among Melbana Energy shareholders, particularly ahead of the AGM. Now as I mentioned before, recording the webinar will be on Melbana's website and social media platforms later today. Andrew, before I let you go, do you have any final comments to leave with us today?

No, I just would like to emphasize that we are pushing hard to get this appraisal program started as soon as possible. Given the logistical issues still ahead and moving people and doing rig maintenance and recertifications. The estimates that we present here today as to when things will happen in the new year is giving us some room to be correct in the event of unforeseen circumstances. So we'll always be conservative that you can rest assure that we're all as keen as all of the shareholders to get this happening as soon as possible.

Fantastic. That wraps it up for us here. Thank you, everyone. Have a great day.

Thank you all.