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Kekra - 01: Making sense of the hype

Date: 21st January, 2019

By:
Muhib ur Rasool
Muhib.Rasool@akseerresearch.com

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Kekra-01: Making sense of the hype
Kekra-01 is being drilled with a gap of 9 years since the last offshore exploratory well; Shark-01; turned out to be
dry. The well could potentially be a turning point of Pakistan’s E&P landscape.
A substantial amount of hype has been created around the recently
commenced offshore exploratory drilling of Kekra-01 in Offshore
Indus-G block. We, hence, thought it would be useful to reach out
to industry experts and conduct some international benchmarking,
to better understand prospects of Kekra-01 in the most objective
manner possible. We share our findings in this piece.
▪ Kekra-01 – What is the potential?
‒ We understand that Kekra-01 is a highly attractive prospect and
currently the best in the Offshore Indus basin. Having said that, in E&P
nomenclature “a highly attractive offshore prospect” means there is a
20% chance of a discovery.
▪ Implications of Kekra-01 for Pakistan’s E&P landscape
‒ Offshore Indus-G is the most important sign post to watch for
Pakistan’s E&P industry. Kekra-01 is Pakistan’s first offshore well after
the unsuccessful Shark-01 which was drilled in 2010.
‒ A successful discovery could change the landscape of Pakistan’s E&P
industry and significantly enhance exploratory activities in Pakistan’s
Offshore basins. Government may follow this by a fresh round of
auction for new exploration blocks in the Offshore Indus Basin.
‒ On the flip side, incase Kekra-01 turns dry, it would likely lead to
another decade of dullness in Pakistan Offshore Exploration landscape.
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What is Known in Public Domain? So far!!!
▪ Kekra-01 is a high risk – high return exploratory well in Offshore
Indus-G. ENI (operator), ExxonMobil, OGDC and PPL own 25%
working interest in the block.
▪ Indus G-block is around 5,800 meters deep from the sea level,
about 230-km off the Karachi coast.
▪ The operator of the block, ENI, has chartered Saipem 12000
rig/ship to drill the exploration well. The well's diameter is 18 to
24 inches. It is expected to be completed in a period of two
months at a cost of USD 70-80mn.
▪ The well is anticipated to yield gas flows which can be as big as
Sui field, with estimated reserves of 3 to 8 tcf, or 25-40 percent
of Pakistan's total gas reserves. All of the 17 wells drilled in
Pakistan’s offshore so far were dry wells.
▪ It will take 2-3 months before companies can have an idea
about the flows. In March, Exxon Mobil and ENI plans to send
specimen to their headquarters. Between April to May, there will
be a reasonable idea whether this well is a success or failure.
▪ If the well is found to be commercially viable its commencement
of production may take several years depending upon
availability/setting up of necessary infrastructure.
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Kekra-01: Making sense of the hype
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ExxonMobil acquired 25% stake in Offshore Indus-G in FY18. This stake was originally held by UEP until Jun-17.
Exxon’s sudden entry into Offshore Indus-G is the main driver behind the hype around the well.

‒ ExxonMobil’s recent acquisition of 25%

stake in Offshore Indus – G is one of the
main reasons behind the hype in the media
regarding the block’s discovery potential.
However, a careful assessment of the
background behind Exxon’s Entry in
Pakistan adds a lot of clarity to this hype.

‒ ExxonMobil’s entry into Offshore Indus – G

was spearheaded by ENI as part of quid-
pro-quo arrangement in return for ENI’s
sale of 25% stake in Mozambique gas field
(80 tcf) to ExxonMobil for USD2.8bn.

‒ As per Industry norms, ExxonMobil was

required to acquire some stake in a few
exploration blocks (to contribute in risk
sharing) in parallel to its acquisition of a
stake in Mozambique Gas field.

‒ OGDCL, PPL, UEPL and ENI each had a 25%

stake in Offshore Indus-G until June 2017.
During FY18 UEPL relinquished its 25%
stake in the block to other partners which
subsequently transferred it to Exxon.
Source: Pakistan Petroleum Information Service

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Kekra-01: Making sense of the hype
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Exxon’s choice of Indus-G could well have been driven by its similarity with Zohr, a gas field ~3,500 km away in Egypt’s
offshore and operated by ENI. Drawing parallels with Zohr can help assess potential of Indus-G incase of a discovery

▪ Why Exxon chose Offshore Indus-G? Drawing Parallels Zohr Gas field Indus-G
Structure Carbonate Buildup Carbonate Buildup
‒ Exxon would ideally have had the option to choose from a multitude of
ENI’s exploration licenses. Its choice of Offshore Indus-G could well Size of Structure 100 sq km 425 sq km

have been driven by the fact that the structure / prospect of Offshore Ocean depth 1,450 meter 2,000-2,500 meter
Indus-G is similar to another discovery of ENI, the Zohr field in
Total depth 4,131 meter 5,500 meter
Offshore Egypt (30tcf). Egypt’s Zohr field can, thus, be used as a proxy
Distance from Port 190 km north of Port Said 230 km from Karachi port
to get some understanding about Indus-G field.
Total wells drilled 10 n.a
‒ The field was discovered in 2015 by ENI. Zohr field marked the first
time a carbonate buildup in ultra deep ocean was found as a Capex till Production Start USD 12bn n.a

producing formation. This added new paradigms to offshore drilling in Capex over Project life USD 16bn n.a
the region.
Processing Plant Cost USD 3.5-4 bn n.a

▪ Drawing Parallels with Zohr Gas fields yield attractive prospects GIP Reserves 30 tcf n.a
for Kekra-01 Recoverable Reserves 22 tcf P10: 8 TCF | P90: 3 TCF

‒ With the size of Carbonate buildup in Indus-G, being more than 4.0x Recovery Factor 73% n.a
that of Zohar, pre drilling reserves estimate (P90) of Kekra-01 at 3.0 tcf
Gross Gas Column 628 meters n.a
seems on the conservative side. However, its difficult to make a proper
Net Pay 430 meters n.a
judgment at this stage with the scant information available in public
domain. Current Production 2.0 bcfd n.a

‒ For instance, Zohr’s recovery factor (73%), an input in reserves Peak Production 2.7 bcfd n.a

estimation, is more than twice the global average for gas fields (30%). Estimated Reserves Life 22 years n.a

Source: Akseer Research

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Kekra-01: Making sense of the hype
Developing an offshore gas discovery takes 4-5 years but ENI has recently been breaking this benchmark by a wide
margin. Nevertheless, capex would run into billions of dollars incase gas is discovered in Kekra-01
▪ Assessing the development costs
‒ If we benchmark with Zohr gas field, a gas discovery of 4.0 tcf would potentially
require a capex of USD1.0bn in the processing infrastructure and another USD
2.0 bn in exploration and production assets. We believe USD300mn post
discovery capex quoted in local media is not the total project cost.
‒ Globally, an offshore gas discovery of this size can take 5 years to start
production. However, ENI has recently been setting new records (and breaking its
own) in offshore development project completion. Zohr gas field started
producing within 2.3 years, 1 year ahead of schedule, and reached 75% of its
peak potential of 2.7bcfd within 3.1 years of discovery. An oil discovery would
likely require even lesser time.
▪ Current status of drilling
‒ The well was spud on 13th January and the last drilling status report of PPIS
showed depth of 2,657 meters against a target of 5,460 meters. These depth
figures are measured from the sea surface. Our channel checks indicate that
actual drilling depth from sea bed was 250 meters. The ocean depth in Offshore
Indus G is between 2,000 to 2,500 meters.
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Pre Drilling Reserves Estimate
▪ There are four types of reserves estimates that are
calculated at the drilling stage and each indicates the
reserves sizes that could potentially exist in case of a
discovery.
▪ P90 reserves: There is at least a 90% probability
(P90) that the quantities actually recovered will equal
or exceed this estimate.
▪ P50 reserves: There is at least a 50% probability
(P50) that the quantities actually recovered will equal
or exceed the this estimate.
▪ P10 reserves: There is at least a 10% probability
(P10) that the quantities actually recovered will equal
or exceed this estimate.
▪ Mean of the above 3: At times, the average of
above 3 is also quoted as the potential.
Other key terms
▪ GIP (Gas in Place): refer to the total volume of gas
stored in a reservoir prior to production
▪ Recovery Factor: The recoverable amount of gas
initially in place, normally expressed as a
percentage.
Source: Akseer Research
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 Kekra-01: Making sense of the hype
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A discovery in Kekra-01 can have a sizeable EPS and valuation impact on listed E&Ps. However, the impact would
depend upon the size of discovery required capex and reserves/production ratio

▪ Assumption set ▪ EPS Impact of OGDC and PPL

‒ Our earnings impact calculation is based on the conservative reserves
estimation of 3tcf. We have benchmarked reserves to production ratio
with ENI’s Zohr gas field, which yields a reserves life of 20 years
‒ We have assumed production cost of USD 3.0 /boepd, and development
and production asset (including PPE) of USD 3.0bn for a discovery size of
3.0 tcf. Our PKR/USD assumption is 140 with a subsequent annual
devaluation of 5%. Oil price assumption is USD60/bbl in perpetuity.
‒ Indus–G falls under ‘Ultradeep’ Zone-0 price mechanism and will be
priced under Petroleum Policy 2012 (PP12). There will be no royalty in
first 4 years, after which it will be 5% for 5th year, 10% for 6th year and
12.5% for 7th year and onwards. Tax rate would be 40%.
‒ A 3 tcf gas discovery from Kekra -1 will likely translate into an EPS
impact of PKR 3.99 and 7.58 for OGDC and PPL, respectively for the
first year. This will amount to 18% of FY19E EPS for OGDC and 28%
of FY19 EPS for PPL.
‒ Impact on share price performance would likely be much bigger
than the EPS impact as an offshore discovery would add a
substantial exploratory upside to the companies. OGDC currently
owns stake only in Indus-G offshore blocks whereas PPL owns stake
in three offshore blocks.

EPS Impact on OGDC and PPL Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7

Revenue 37,625 37,625 37,625 37,625 37,625 37,625 37,625

Royalty - - - - 1,881 3,763 4,703

Production Cost 3,738 3,738 3,738 3,738 3,738 3,738 3,738

Dep & Amort. Expense 5,250 5,250 5,250 5,250 5,250 5,250 5,250

Tax 11,455 11,455 11,455 11,455 10,702 9,950 9,574

Net Profit 17,182 17,182 17,182 17,182 16,053 14,925 14,360

EPS impact - OGDC 3.99 3.99 3.99 3.99 3.73 3.47 3.34

% of FY19E EPS 18%

EPS impact - PPL 7.58 7.58 7.58 7.58 7.08 6.58 6.33

% of FY19E EPS 28%

Source: Akseer Research

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Kekra-01: Making sense of the hype
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A discovery in Kekra-01 can have a sizeable EPS and valuation impact on listed E&Ps. However, the impact would
depend upon the size of discovery required capex and reserves life (continued…)

▪ Kekra-01 could be a dry well too

‒ With benchmark success ratio of 20% (0%
so far for Pakistan offshore), a typical
offshore exploratory well is more likely to
turn dry rather than yield a discovery.
‒ Kekra-01 as a dry well will trim PKR 0.49 or
2% from OGDC’s FY19 EPS and PKR 0.97 or
3% from PPL’s FY19 EPS.
▪ Impact of discovery is highly sensitive
to reserves size and reserves life
Source: Akseer Research
‒ Our base case EPS calculation used the P90
reserves estimate of 3.0 tcf and reserves
life of 20 years by benchmarking it with
Zohr’s reserves life.
‒ A reduction in reserves life to 12 years
would increase the EPS impact on OGDC
and PPL by 67% due to larger annual
production flows.
‒ An increase in discovery size to 15 tcf (5.0x)
would augment EPS impact by a similar
quantum (5.0x).

Source: Akseer Research

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