Auctus Advisers Research Note, 12 April 2023
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Blow-out at State 36-2 under control. The fracture network could be very large
- The State 36-2 LNW-CC well experienced a significant well control incident. The well is now under control. Because of the nature of the hydrocarbons (gas and condensate), the surface impacted by hydrocarbon residue is mostly limited to the well pad and the area immediately around it. Impacted soil will be removed and the required remediation is expected to be limited.
- During the incident, the well’s safety valve failed and subsequently the ram on the BOP did not close properly. The company is investigating the root cause of the failures.
- Zephyr’s incident management process managed the response to the incident very well. Utah state regulators were notified and were on site shortly after the beginning of the incident and approved the different steps taken by the company to contain the flow. This is very important in our view, as it mitigates future risk that the state authorities take punitive action against the company.
- Zephyr has a well control insurance in place. As experienced by Tullow a few years ago in Ghana, this can cover containment and remediation costs, and while it is early days, Zephyr is working closely with its insurance provider (including by utilizing the insurers preferred well control group).
- While the well has been “killed”, at present Zephyr does not expect to have to redrill the well in order to production test it. This assessment is supported by the fact that the well did not have to be redrilled after having been brought under control following the kick while drilling experienced in January. This suggests that even if the insurance does not cover the additional costs associated with the blow out, they remain manageable within the context of the company’s balance sheet.
- The well test is expected to resume in the coming weeks, subject to closer evaluation and potential additional preparatory well work. Pending further details on next steps and the flow test results of the State 36-2 well, we have not changed our forecasts.
- Our target price of £0.20/sh is unchanged.
