Serica Energy (UK) Limited P.1568 Relinquishment Report Block 110/2d UK East Irish Sea August 2012
1 Header Licence: P.1568 Round: 25th UK Licensing Round Block: 110/2d Licence Type: Traditional Equity: Serica Energy (UK) Limited 100% Firm Work Programme (*): Contingent Work Programme (*): The Licencee shall reprocess 160 km 2 of 3D seismic data to PreSDM The licencee shall drill one well to 1330m or 30m below any GWC encountered in the Sherwood Sandstone, whichever is the shallower, provided that he shall not be required to do so and the Licence shall expire at the end of the Initial Term if the Minister confirms in writing hat he agrees that it would not be an appropriate use of resources, having regard to the information available to him, to the objective of maximising successful and expeditious exploration and exploitation of the UK's hydrocarbon resources, and in particular, any definition of a valid depth closure on the seismic data supported by structural conformity of amplitude brightening will be a factor in the Secretary of State's decision. (*) Firm and Contingent work programmes were waived by DECC (see 2 Synopsis). 2 Synopsis Pre-Serica Synopsis Block 110/2 was originally awarded to Hydrocarbon Resources Ltd. (now part of Centrica), in March 1972. In 1974, the first well (110/2-1) was a major gas discovery, and a subsequent programme of appraisal drilling proved up part of the South Morecambe and all of the North Morecambe multi-tcf gas fields on-block. In March 1978, 50% of Block 110/2 was relinquished, amounting to 121.90 km 2 to the west of the South and North Morecambe gas fields. This area was subsequntly re-licenced as Block 110/2b in July 1989 to Burlington Resources. Further drilling on Block 110/2b resulted in the discovery of the Dalton gas field (110/2b-9, in 1990), Crossans gas field (110/2b-10, in 1992) and Hodder gas field (110/2b-11, in 1993). In July 1996, 50% of Block 110/2b was relinquished, amounting to 60.95 km 2 to the west of the Dalton gas field. Burlington Resources retained the remainder of Block 110/2b containing the Dalton, Crossans and Hodder gas fields, as well as a small part block (110/2c) in the north, containing a possible southerly extension of the Millom gas field. Serica Synopsis The remainder of Block 110/2 was not re-licenced until 12th February 2009, when Serica Energy UK Limited was awarded Block 110/2d under traditional licence P.1568 in the UK 25th Licensing Round. The location of Block 110/2d is shown in Figure 2.1. The licence carried a firm work programme comprising: 1. the reprocessing of 160 km 2 of 3D seismic data to PreSDM, and 2. a contingent work programme comprising an exploration well drilled to 1330m or 30m below any GWC encountered in the Sherwood Sandstone, whichever is the shallower. 1 Header 1
Figure 2.1 Block 110/2d (P.1568) Location Map The licence application for block 110/2d was made in May 2008, which was prior to the drilling of Serica's Conan Prospect in nearby block 113/26b. Three leads were mapped over Block 110/2d; Watson South, Watson North and Watson East. These are illustrated in the depth and amplitude maps on Top Ormskirk Sandstone Formation (Top Sherwood Sandstone Group), Figure 2.2. Serica's application was based on a similar seismic amplitude response to Conan over the largest lead; Watson South. The seismic depth conversion and geological interpretation required to generate a structural closure over Watson South was challenging, but the high success rate of drilling seismic amplitudes in the East Irish Sea gave encouragement to test the theory. Nevertheless, the uncertainties were sufficient for DECC to re-iterate in their letter of award to Serica (dated 15th January 2009) that a decision on a contingent well would be subject to... definition of a valid depth closure on the seismic data supported by structural conformity of amplitude brightening... (see also 1 Header, above). The Conan well (113/26b-3) was drilled by Serica in May 2010 and did not encounter hydrocarbons within the Ormskirk Sandstone Formation (Sherwood Sandstone Group) reservoir. The depth conversion model applied to the prospect pre-drill was found to be incorrect. Furthermore, the seismic amplitude anomaly seen over Conan was due to a 40ft anhydrite bed above the reservoir, rather than the presence of hydrocarbons. The results of the Conan well have greatly impacted the seismic interpretation across Block 110/2d. Following the Conan well results, Serica carried out a complete re-mapping of the block based on velocity and amplitude re-modelling. The results showed that the largest lead, Watson South, did not close in depth under any realistic geological scenario and could therefore not be worked up to the status of a drillable prospect. The character of the amplitude anomaly at top 2 Synopsis 2
Figure 2.2 2008 Block 110/2d Depth and Amplitude Mapping on Top Ormskirk Sandstone Formation. Mapping undertaken as part of UK 25th Licence Round; May 2008 reservoir is similar to that over Conan, suggesting that it is most likely due to the presence of anhydrite, rather than porous gas-bearing reservoir sandstone. Watson North reserves are now estimated to be just 9.5 bcf (P 50 ), while Watson East reserves have reduced to almost nothing (0.3 bcf), see 5 Reserves. An economic analysis of Watson North was undertaken and 9.5 bcf was found not to support a subsea tie-back to North Morecambe, as the expected reserves required to justify a contingent exploration well would need to be over 20 bcf. Given the lack of a drillable structure at Watson South, in combination with the very small and sub-economic structures at Watson East and Watson North, Serica decided to relinquish Block 110/2d and therefore sought from DECC a waiver on the contingent well commitment. The firm commitment to reprocess seismic data to PreSDM would have improved the imaging of the seismic data over the prospects, but would not have fundamentally changed the depth conversion model. As the size and effectiveness of the prospects is due to depth conversion, Serica sought in addition from DECC a waiver on the firm PreSDM seismic reprocessing commitment. Serica's request for these waivers was set out in a letter to DECC dated 25th May 2012. In a reply dated 2nd July 2012, DECC agreed that a waiver of the contingent well, and hence also the seismic reprocessing, was justified on technical grounds. 2 Synopsis 3
3 Exploration Activities Database The seismic database used in the evaluation of Block 110/2d comprises 717 km 2 of 3D seismic data from the British Gas BG-94 3D survey covering the North Morecambe, South Morecambe and Millom gas fields and adjacent areas. This has been merged with a further 265 km 2 of 3D seismic data from the Arco AR-113 survey, located to the north of the North Morecambe gas field. In addition to the seismic data, Serica has purchased well logs (wireline data) from all released exploration and appraisal wells drilled within the East Irish Sea Basin. Pre-Application Mapping Prior to application, Serica had undertaken regional seismic mapping across the East Irish Sea Basin, including Block 110/2d as well as Serica Blocks 113/26b and 113/27c that contained the Conan Prospect. The Conan Prospect was characterized by a very bright amplitude at Top Ormskirk Sandstone Formation (Top Sherwood Sandstone Group) level. Serica's seismic mapping, in combination with petrophysical analysis of well data, showed that bright amplitudes, where drilled, were coincident with gas-bearing, porous sandstone reservoirs. A similar bright amplitude anomaly was present in Block 110/2d, across the largest Watson South lead, although such amplitudes were absent from the smaller Watson North and East leads. The Watson North and East leads comprised modest closures in two-way time and depth, but the Watson South lead did not close in time and required substantial variations in overburden velocities in order to achieve a depth closure. That said, velocity variations responsible for significant time-depth anomalies have been proven within the basin; for example across the nearby Calder gas field. Furthermore, Serica's Conan Prospect did not close in time. A depth closure over Conan was believed to be facilitated by lateral variations in halite thickness within the Mercia Mudstone Group overburden, as well as differences in mudstone velocity between the upper and lower parts of the Mercia Mudstone Group. Implications of the Conan Well (113/26b-3) The results of the Conan well (113/26b-3), drilled by Serica in May 2010, prompted a thorough geological and geophysical re-evaluation of Block 110/2d. The Conan well encountered water-wet Ormskirk Sandstone Formation (Sherwood Sandstone Group) reservoir significantly deeper than prognosed. The depth conversion model applied to the prospect pre-drill was found to be incorrect. Furthermore, the seismic amplitude anomaly seen over Conan was found to be due to a 40ft anhydrite bed above the reservoir, rather than the presence of hydrocarbons within the reservoir. Depth Re-Mapping Detailed overburden well log correlations and re-mapping of the seismic data across Block 110/2d in 2012 showed that the pre-application mapping undertaken in 2008 had been flawed for several reasons. The Base Upper Mercia Mudstone Group did not honour many of the well ties within the deeper grabens, resulting in an unrealistically deep pick for the lower velocity Upper Mercia Mudstone Group interval. Furthermore, a simplistic uniformly low velocity had been assigned to this interval, whereas in reality, the velocity would be expected to vary with both depth and lithology. In deeper parts of the graben, local preservation of the youngest halite (Wilkesley Halite Member) could result in a higher velocity than expected. The 2012 re-mapping used a geologically-constrained shallower Base Upper Mercia Mudstone Group pick, in combination with a two-layer Mercia Mudstone Group velocity model utilising well data from 95 wells within the basin, and demonstrated that the Watson North and South leads were considerably smaller than had been anticipated in the pre-application mapping (see Figure 3.1). Furthermore, it was not possible to generate a structural closure to separate the South Watson lead from the Dalton gas 3 Exploration Activities 4
Figure 3.1 2012 Depth Mapping on Top Ormskirk Sandstone Formation. Re-mapped in 2012 prior to relinquishment decision. field without invoking anomolous interval velocities in excess of 28% above the average. No wells in the area show velocity variations of this magnitude except where igneous intrusions are present. Amplitude Re-Mapping In addition to depth re-mapping, Serica undertook further rock physics modelling to better understand the nature and significance of amplitude variations at Top Ormskirk Sandstone Formation (Sherwood Sandstone Group). The top Ormskirk Sandstone is invariably a decrease in impedence for brine, gas and oil filled reservoir cases. Amplitudes at the top of the Ormskirk Sandstone is controlled by (i) low impedence in the reservoir below the mapped top reservoir interface, and (ii) high impedence in the lithologies immediately above the mapped top reservoir interface. Low impedence in the reservoir can be caused by the presence of gas, or high porosity (e.g. aeolian sandstone) lithologies, or a combination of both. The two effects can be difficult to distinguish. In the East Irish Sea Basin, many amplitude anomalies are known to be caused by the presence of gas within thick (>5m), high porosity (>15%) aeolian sandstone units. High impedence immediately above the reservoir can be caused by exceptionally hard lithologies. In the northern part of the East Irish Sea Basin, the Ormskirk Sandstone reservoir is typically overlain by a thin interval of siltstone (the Tarporley Siltstone Formation) at the base of thick halite beds within the Lower Mercia Mudstone Group. Normally, this interval is "impedence neutral" with respect to the underlying reservoir. However, hard, high-impedence dolomite and anhydrite beds are locally present. In the case of the 113/26b-3 Conan well, an anomolously thick (40ft) high-impedence anhydrite bed within the Tarporley Siltstone Fomation was the cause of the high amplitudes at the top of the Ormskirk Sandstone Formation. 3 Exploration Activities 5
Amplitude mapping of the Conan Prospect prior to drilling had utilized a window above and below the top Ormskirk Sandstone Formation that was unable to differentiate between internal fluid and porosity effects within the reservoir and lithological effects above the reservoir. Consequently, the amplitudes across Block 110/2d were re-mapped using a method that contrasted the effects of impedence variations above and below the top reservoir interface ((peak*trough above)-(trough below)). The results (see Figure 3.2) showed a strong negative amplitude response across the South Watson lead, which was very similar to the character of the amplitudes seen across the Conan Prospect. This was in stark contrast to strong positive amplitude resonses seen in gas bearing reservoirs including parts of the North and South Morecambe, Dalton, Hodder, Crossans, Calder and Millom gas fields and the Rhyl gas discovery. This amplitude analysis, in combination with the depth re-mapping, was critical in the downgrading of the Watson South lead and the decision to relinquish the block. Figure 3.2 2012 Amplitude Mapping on Top Ormskirk Sandstone Formation. Re-mapped in 2012 using (Peak * Trough Above) - (Trough Below) 3 Exploration Activities 6
4 Prospectivity Analysis Reservoir The key reservoir target in Block 110/2d, is the Ormskirk Sandstone Formation (Sherwood Sandstone Group), of Triassic age. This is the producing reservoir in all of the gas fields in the East Irish Sea Basin. It is thickly developed and regionally widespread, and its presence is not considered a risk in Block 110/2d. However, reservoir quality varies enormously with lithofacies. Fluvial sandstone lithologies tend to be relatively fine-grained with high quantities of detrital clay and are consequently more prone to diagenetic cementation. These reservoirs tend to exhibit moderate to poor porosity and permeability. In contrast, aeolian sandstones tend to be coarser grained, well-sorted and are less prone to diagenetic overprinting. These reservoirs exhibit excellent porosity and permability characteristics. Extensive seismic mapping across the basin, in combination with petrophysical analysis of well data and rock physics modelling, has demonstrated that thick (>5m), porous (>15%), gas-bearing aeolian sandstones are recognizable on seismic data in the form of top reservoir amplitude anomalies (3 Exploration Activities). However, Serica's recent 113/26b-3 (Conan) well has shown that top reservoir amplitude anomalies can also be caused by hard lithologies within the immediate overburden interval. Remapping of top Ormskirk Sandstone amplitudes using an approach that differentiates between effects from above and below the top reservoir interface (see 3 Exploration Activities) has shown that amplitudes present across Block 110/2d (particularly across the Watson South lead) are likely to be caused by hard lithologies in the immediate overburden rather than porous, gas bearing sandstones in the reservoir. Source & Migration The source rocks for hydrocarbons within the East Irish Sea Basin comprise coal measures and organic rich shales within the underlying Carboniferous Westphalian and Namurian strata. Westphalian and Namurian strata have been penetrated by a number of wells within the basin. The source rocks are prolific, having sourced the multi-tcf North Morecambe and South Morecambe gas fields, and their presence and maturity in Block 110/2d is not considered a risk. Migration of hydrocarbons into early-formed structures has occured since peak maturity during the late Mesozoic, along with some later mobilization into younger structures as a result of Tertiary uplift and inversion. High levels of nitrogen and carbon dioxide in some East Irish Sea Basin fields and discoveries are believed to be related to igneous activity in the form of the Fleetwood Dyke Complex. However, a direct cause and effect relationship is difficult to establish. In the absence of further information, it seems reasonable to assume that levels of nitrogen and carbon dioxide will be similar to the modest levels seen in the nearby North Morecambe, South Morecambe and Dalton gas fields. Seal In the northern part of the East Irish Sea Basin, the top of the Ormskirk Sandstone reservoir is (with the exception of a very thin Tarporley Siltstone interval) directly overlain by thick halites within the Lower Mercia Mudstone Group. Serica's dry hole analysis suggests that in this area, including Block 110/2d, any valid depth structures should be gas-bearing on account of this nearperfect top-seal. Further south, within the southern part of the East Irish Sea Basin, halites within the basal part of the Lower Mercia Mudstone Group thin and pinch out, and here, a number of dry holes can be attributed to thin thief zones within the overburden. This is not considered to be a risk in Block 110/2d. Trap Trap definition in the form of depth conversion sensitivity is the single most important risk factor for the Watson North, Watson East and Watson South leads. 4 Prospectivity Analysis 7
Traps in the East Irish Sea Basin invariably comprise conventional dip or fault and dip-closed structures at top Ormskirk Sandstone Formation (top Sherwood Sandstone Group) level. Given a robust closure in depth (plus a near-perfect top-seal, prolific source rock and widespread goodquality reservoir; see above), any valid structure should be gas-bearing. In Block 110/2d, three leads were mapped on 3D seismic data prior to the UK 25th Round Licence Application in May 2008 (Figure 2.2). These leads, named Watson North, Watson East and Watson South, and are illustrated in seismic lines Figure 4.1 and Figure 4.2. Watson North and Watson East comprise relatively modest structures in both two-way time and depth. However Watson South does not close in time or depth but forms a structural nose climbing southwards up towards the Dalton gas field. Seismic re-mapping in 2012 using a more robust approach to depth conversion (see 3 Exploration Activities above) has resulted in a down-sizing of the Walton North and Walton East leads (see the 2012 Depth Map; Figure 3.1). This is reflected in the down-grading of potential gasin-place and reserves for these leads (see 5 Reserves). Furthermore, it has not been possible to demonstrate any depth closure over Watson south using any reasonable geological and overburden velocity model. Figure 4.1 WSW-ENE Seismic Line through Watson North Lead and Watson East Lead 4 Prospectivity Analysis 8
Figure 4.2 N-S Seismic Line through Watson North Lead and Watson South Lead 5 Reserves Gas-in-place and recoverable reserve volumes for the Watson South, Watson North and Watson East leads are tabulated below: 2008 Mapping 2012 Re-Mapping GIIP (bcf) Recoverable (bcf) GIIP (bcf) Recoverable (bcf) WATSON SOUTH LEAD P 90 27.8 21.7 0 0 P 50 50.4 42.2 0 0 P 10 84.6 77.9 0 0 WATSON NORTH LEAD P 90 16.4 12.8 6.5 5.3 P 50 29.6 25.0 11.5 9.5 P 10 49.7 45.8 20.2 16.6 4 Prospectivity Analysis 9
2008 Mapping 2012 Re-Mapping WATSON EAST LEAD P 90 5.3 4.1 0.2 0.2 P 50 9.7 8.2 0.4 0.3 P10 16.2 15.0 0.7 0.6 An economic analysis of the largest remaining lead (Watson North) was undertaken. A P 50 recoverable reserves of 9.5 bcf was found not to support a subsea tie-back to North Morecambe, as the expected reserves required to justify a contingent exploration well would need to be over 20 bcf. 6 Summary and Conclusions Serica's 2012 Depth Map on Top Ormskirk Sandstone Formation (Top Sherwood Sandstone Group) across the whole of Block 110/2d is illustrated in Figure 6.1. The map shows the location of the Watson North and East leads, as well as the location of the Watson South lead, which does not close in depth. Figure 6.1 Block 110/2d Depth Map on Top Ormskirk Sandstone Formation. Mapping undertaken in 2012, prior to relinquishment 5 Reserves 10
Serica has elected to relinquish Block 110/2d (P.1568), based upon the following reasons: 1. a lack of a valid depth closure across the key lead (Watson South) under any reasonable geological circumstances, 2. a seismic amplitude anomaly across the key lead (Watson South) that, following the drilling of the 113/26b-3 dry hole on a similar amplitude anomaly, was most likely to be due to the presence of anyhydrite rather than porous gas-bearing reservoir, 3. following seismic re-mapping, sub-economic P 50 recoverable reserves calculated at 9.5 bcf and 0.3 bcf on the remaining Watson North and Watson East leads respectively. Given the lack of a drillable structure at Watson South, in combination with the very small and sub-economic structures at Watson North and Watson East, Serica sought and was granted from DECC waivers on the contingent well commitment and firm PreSDM seismic reprocessing commitment (see 2 Synopsis). 7 Clearance Serica's evaluation of Block 110/2d (P.1568) has utilized 717 km 2 of 3D seismic data from the BG-94 3D survey covering the North Morecambe, South Morecambe and Millom gas fields. This data, acquired in 1994 as a proprietary survey, is now publically released. 6 Summary and Conclusions 11