AAOG – Djeno Unmasked AAOG are “looking to produce from the Djeno using 103”

Well I’ve been on some holidays for the month of April. During that time most of my shares have been pretty stable.

However my first focus has been on AAOG.

As per my past Blogs, I’ve been a massive fan of Djeno. In my opinion AAOG’s 103 drill was the most misunderstood on AIM in the last few years. The success of finding a column of oil in the Djeno beneath the cap should have re-rated AAOG. The failures of the rig to drill further were disappointing, however it shouldn’t take anything away from what was a massive success. Many share pundits became openly sceptical that anything except a few oil shows had been found, along with a difficult to produce Mengo and small section of R2 sands.

Back in February, pundits also claimed the company had no cash and needed to raise more money urgently. Wrong!

Open on record predictions from AAOG of 1500bopd from the Mengo/R2 have been made to counter this, as well as firm denials of any fundraising plans.

Of the $8-9m owed to AAOG from SNPC, a payment plan has been entered into, with the 3^rd payment due to be made in the next 10 days, bringing over £1m into the bank account of AAOG already, a further half a million every month and a very thin monthly expenditure.

AAOG’s plan from the first quarter to produce from the Mengo/R2 was pending the arrival of the one time simulation kit that was due to arrive in April and give first oil in April.

After being shut in for 45 days, the 103 well was opened at the end of March and Djeno oil flowed readily to the surface, under “considerable” pressure. AAOG commissioned a company to look at producing from 103, under the preconceived idea of producing from the Mengo/R2. After Djeno oil first flowed, a decision was taken to include the Djeno reservoir into the CPR to be released this month.

The market should have cottoned on to the importance of the Djeno flowing at this stage, however it didn’t.

Djeno: One of the world’s most sought after oils. A premium is paid for Djeno oil, due to its high quality and ease of processing. It’s also very low in sulphur. Most oils around the world are lucky to get Brent minus 2-3 dollars. A few oils get true Brent price. Djeno is one of only a handful of oils that get a premium to Brent, rising to Brent plus 30 cents in April due to very strong demand.

The Djeno reservoir is highly productive. With a natural gas mechanism, the Djeno field is highly pressurised. It’s low sulfure nature and ability to flow, means that it naturally flows, normally at a rate of 5000bopd and doesn’t have the tendency to reduce in flow unlike more waxy oils, until the reservoir is depleated.

We know that producing 1500bopd from Mengo/R2 would be fantastic, plenty of money in the coffers (1m a month), paying for other drills. Mengo/R2 has a decline rate after the first year or so, but it would pay for Djeno drills.

The first change to the plan to Mengo/R2 occurred with the cryptic note from Fincap that AAOG were deciding whether to produce from Djeno or Mengo?

We know that Djeno flowed, that in itself was unexpected. But surely it was a just a bit of oil and couldn’t compare with the 1500bopd from Mengo/R2?

Fast forward to after my holidays and yesterday I asked David out right about 103. His reply, “Yes, as a result of analysis of the data and also the oil coming to surface, the engineering team is looking at how to produce from the Djeno in 103C.”

Yes, we could have a major delay from this decision but.... Switching to production that won’t decline, switching to production that is one of the most sought after oils in the world and most importantly switching to production which will clearly derisk 104 and beyond would be fantastic news.

To exploit the 5000bopd from a clean Djeno hit, then as per the RNS, the topside facilities would need upgrading and truck transportation wouldn’t be able to cope. If Djeno flows at 1500-2000bopd (as we’ve just hit a bonus upper section), then the topside will likely be able to cope with the pressure values (hence the 45 day test). We would also be able to cope with the transportation with very limited new topside, it will easily be able to be choked back.

All of this might take time though and the market is not kind. Good news then that David also added that the new plan will be produced and communicated to the market next week, with work to start shortly after that.

Maybe, the market will start to realise then that AAOG is serious and not faking it about 103. Maybe the CPR will show the market how large these new horizons are. But when the oil is flowing and folks should remember that the hole is drilled and production facilities in place, the market won’t be able to be sceptical any more….