N Africa-focused SDX puts 2020 behind it: Interview

As for many producers struggling with logistics and border crossings, COVID-19 slowed down operations and cut demand for their output. North-Africa focused SDX had a challenging 2020, CFO Nick Box told NGW in an interview: its Moroccan gas is sold directly to end-users, which cut their demand last year as they had to navigate the chaos caused by the pandemic. But now things are picking up again with higher production for the year on the cards.

"In March-May 2020 three customers accounting for 50% of daily consumption were required to close their factories owing to COVID-19 restrictions. These customers began taking gas again in late May and were back at full consumption rates by year end 2020. It was not a good time for gas marketing. However they are all back on again now and our output is projected to be 8%-12% higher this year than before Covid-19. One client has built a second plant in the country's free trade zone, which has been taking gas since early January. There is also untenanted capacity in the FTZ that could see future tenants buy our gas," he said.

"The need to ensure a hopper of projects to meet future medium term demand such as this means that SDX drills wells on a 'just in time' basis. The first three wells out of five will help us meet annual contract quantity We do not want to invest ahead of time. We will drill one or two more," he said.

Egypt steady

The company is also active in Egypt, where, Box says, South Disouq has been a "very steady source of income" and a "great cornerstone asset" since November 2019. The gas price, which remains fixed for the duration of the 25-year licence, is $2.85/'000 ft³ ($2.65/mn Btu).

There is only one offtaker: the state marketing company EGAS, which takes care of grid fees as well as gas supply and marketing.

SDX has drilled one well and now plans to drill a well in the second compartment of the Ibn Yunus field. This effectively accelerates cash flow and keeps the processing plant at close to capacity. The company has had successes with five out of seven wells drilled.

Box said: "The second well – Hanut IX – was identified after further reinterpretation of SDX's 3D seismic over the concession. With the help of 3D seismic, we have identified a number of further prospects in the Kafr El Sheikh. Hanut has P50, unrisked prospective resources of 139bn ft³ with a chance of success of 33%. We will drill that in Q3 and we think it could be significant for shareholders, if successful.

"We remain the sole equity holder in SD12-X as IPR declined to join us and so we will benefit from that. IPR did opt to join us in Hanut, where we have 55% and IPR has 45%. If the well fails, SDX's share of the costs of the well would be $1mn but the risk-reward balance is something we think is appropriate for our company. It is low-cost exposure and the Nile Delta is a good area.

"The success rate improves as the technical team build up a library of seismic; they can make changes to the well design, based on their earlier experiences with wells. Hanut is not the end: there are six or seven prospects, totalling 233bn ft³ at P50 unrisked, prospective resources but Hanut accounts for most of that. The others are 20-25bn ft³ but because of the proximity to infrastructure, these would make money even at as little as 10bn ft³. We can invest cashflow in wells, they are very economical.

"For now we will seek to develop our organic portfolio, although we continue to screen a number of business development opportunities. There was strong production in Q1 and the next six to nine months are going to be exciting. Last year, work continued in Egypt without skipping a beat, EGAS taking all the gas and condensate we can offer."

Despite the prospects for improved sales, the share price is languishing at a six-month low. Box says this may be due to the relinquishment of a portion of acreage in Morocco on which it drilled an exploration well in 2020 (LMS-2).

The LMS-2 well could not be tested at the time of drilling owing to COVID-19 restrictions requiring the evacuation of the rig team but subsequent analysis has shown that the reservoir encountered by the well has low permeability and is unlikely to flow conventionally. The licence that the well was drilled on is expiring in July 2021 and will not be renewed, Box said.