Upstream Projects for the Global Transition

A Mongolian opportunity with local markets, appraisal/development and exploration upside, and generating fewer emissions than coal.
This article appeared in Vol. 18, No. 6 - 2022


NE Mongolia (Tamtsag Basin) Block XX Exploitation Licence

Since 2018, Petro Matad’s new management team has switched the company’s focus from exploration to lower risk appraisal/development. This includes the immediate extension of the proven-producing play area and extension of the proven fields into Block XX, which led to the 3D seismic defined Heron-1 and Gazelle-1 discovery wells in 2019. Interpretation of the 2D seismic data to the south now suggests the Heron closure extends into a much larger undrilled hanging wall trap. This lies immediately downdip of oil recovered on test from one of Petro Matad’s older wells (DT-4), now interpreted to have been drilled on a fault terrace where wells defined high quality shows, but appraisal drilling proved limited reservoir development.

The Heron closure alone has estimated resources of between 160 and 200 MMbbls STOIIP if its south-westerly extension (Siaga prospect) is confirmed by the planned appraisal work.

Petro Matad was granted an Exploitation Licence (EL) in June 2021 over the northern part of Block XX over an area of 218 km2 covering all the Heron and Gazelle discoveries and importantly all identified upside closures within the Toson Uul Sub-basin. The initial plan is to drill several production wells within the vicinity of the Heron-1 discovery and existing 3D footprint, complete Heron-1 as a production well and acquire a new 3D seismic survey across the rest of the EL. Revenues from the initial development phase will fund further production wells in the following years across the then fully 3D seismically defined Heron structure to access the total resource potential of 32 MMbbls (P50) within the Heron closure. Full field development includes a water injection well programme and construction of a central processing facility that will export crude directly to the Mongol refinery via a planned pipeline, both of which are scheduled for completion by 2024. The resources quoted above have been independently assessed by Leap Energy in a Competent Person’s Report (CPR) completed in February 2020.

First oil is possible in 2022 if current plans can be progressed, with the oil being exported via truck on the existing road that runs through Block XX. This is already used to export the production from PetroChina’s Block XIX to a pipeline terminal in the Aershan Oilfield in the Erlian Basin across the border to the south in China and sold at market prices under a contract with China National United Oil Corporation.

With the new 3D seismic survey across the entire EL, Petro Matad will, in parallel with development activities, develop well locations for the defined near-field appraisal and exploration prospects with a view to drilling these within the next few years to establish the total resource potential within the EL. In the case of success and subject to the discovered volumes, these are potential tie-back developments to the Heron facility or standalone developments benefitting from synergies with the existing Heron infrastructure. Included in this activity is the Gazelle-1 discovery which is now interpreted to have defined the periphery of the closure on the edge of the Tosun Sub-basin play trend, which offers an additional 30 MMbbls of upside resource potential that can follow the initial Heron development.

Despite Mongolia’s remoteness, drilling and associated facilities costs are low by comparison with elsewhere in the world. A 3,000m exploration well can be drilled for as little as US$2 to US$4 million.

Petro Matad is now seeking a strategic partner to join them in the planned development and appraisal programme and earn material equity in the new exploitation licence by contribution to the initial Heron development drilling programme, estimated to cost up to US $15 million plus up to US $5 million for the new 200 km2 3D seismic also being planned to unlock new potential to the south of the existing Heron field.

Upstream Projects for the Global Transition

Whether the world likes it or not, hydrocarbons will still be needed even envisaging the most optimistic energy transition. At the time of writing, with COP26 under way, the world’s leaders are still trying to agree what measures they should be targeting by 2050 (or in China’s case 2060), in order to limit the rise in global temperatures. Limited progress seems to have been made in agreeing exactly how they intend to achieve this, other than a phasing out of coal over the coming decades.

Future Demand for E&P Projects

The transition will need to include hydrocarbons, and in particular gas, to bridge the gap until alternatives which are both achievable and affordable, are developed to replace them in the next 30 or so years. Gas is clearly significantly less emissive than coal which still powers some of the largest economies and by switching one for the other would come very close to reducing the emissions by the 30% climate change experts consider is necessary to keep global temperature rises below 1.5°C by 2050. 

The lack of funding following the commodity price crash in 2014, increasing environmental, social and governance (ESG) influence on investors and the last two years of the Covid-19 pandemic has significantly dented the global upstream sector’s traditional exploration capability. The key question is whether the remaining capability can meet the future demand and unlock the new oil, and increasingly gas resources, that will be needed for the transition. As commodity prices inevitably increase with tightening supply and new upstream investment returns with improved profitability, it is expected that market money will again become available to fund the search for the hydrocarbons needed to achieve the energy transition. 

Lower risk, near-term cash-flow projects (albeit ESG compliant) will almost certainly be the first investments to attract funding, and there are many projects available now that would already have secured funding in a more buoyant market. Associated exploration will also return in time, assuming prices stay high, as investors seek the financial ‘blue-sky’ rewards that exploration and production (E&P) can generate. This is likely to include a contribution from E&P companies as their cash flow and profits increase and can again be risked to replace and grow resources.

The Asian Opportunity

In some of the world’s fastest growing economies with the highest energy demand growth (currently reliant on the most emissive fossil fuels including coal), Envoi has already seen evidence of renewed interest in E&P projects and recognition that now is an excellent time to participate before a potential new exploration cycle gathers pace. In this regard, Envoi’s client, Petro Matad, has recently been awarded an Exploitation Licence for their Block XX in Mongolia which allows them to focus on development of their Heron and Gazelle discoveries with existing nearby infrastructure. These assets will benefit from immediate access to the strong, local, Chinese market just across the border. Surely this would be better for the environment than using coal upon which much of the region currently relies.

NE Mongolia (Tamtsag Basin) Block XX Exploitation Licence: Key Information for Investors

  • Development of 3D defined 2019 Heron-1 discovery (flowed 821 bopd on test) at the southern end of the Tamtsag Basin.
  • Established export route from existing fields ensures early revenue potential (2022) from CPR defined 19 MMbo contingent resource potential in Heron-1 discovery well.
  • Combined 32 MMbo (P50) contingent and prospective (with 200+ MMbo upside) resource in Heron and Gazelle discoveries, and large additional upside in several undrilled leads.

Petro Matad Ltd, the London AIMlisted company, has commissioned Envoi to identify a strategic partner to join them in the appraisal and development of two discoveries made in 2019 in the northern part of their large, 100% owned and operated, Block XX Exploration Licence. Situated in the Tamtsag Basin of NE Mongolia, which is historically the most productive part of the country, Block XX lies at the southern end of the basin where Petro Matad’s successful Heron-1 discovery in 2019 was in effect an appraisal of the existing T19-46-3 discovery made in 2009 immediately to the north in the adjacent Block XIX Licence operated by PetroChina. This was the southernmost discovery in the Toson Uul Sub-basin where the first of many discoveries were made by SOCO in the late 1990s and sold to PetroChina in 2005. They have since drilled numerous wells and defined new closures as well as fully developing the Cretaceous-aged Tsagaantsav and Zuunbayan Formation plays of the existing fields found in the Tamtsag Basin. Regionally, these are a geological extension of the proven Hailar Basin that has been producing oil across the border in China since the 1980s, following exploration dating back to the 60s (Regional maps).


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