Falcon is a global energy company with projects in Hungary, Australia & South Africa

Developing large acreage positions of unconventional and conventional oil and gas resources

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Message: An Interview once upon a time.....

An Interview once upon a time.....

posted on Mar 26, 2009 07:14AM

It's good to in retropect to read an old interview with Marc Bruner and reflect in what he had to say then.... Up to the reader to make their own conclusions but his claim to be a pioneer for unconventional gas is undisputed and an interesting mention on targetting the Szolnok..... Azz

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O&G. We all know that the global supply of fossil fuels is dwindling. As CEO of an exploration company, what is your experience of the impact of this on the industry to date – is it becoming harder to find new opportunities to tap?

MB. The global supply of fossil fuels is finite, but what is interesting is that new extraction methods and other technologies have caused the oil and gas industry to reconsider the amount of resources available. It’s certainly true that it is more difficult to find new conventional petroleum resources and the industry is dealing with it in two primary ways. First, the industry is increasingly turning to exploration and development of unconventional resources. The Mako Trough basin centered gas accumulation (BCGA) that Falcon is presently exploring in Hungary is a great example of this. The Mako Trough isn’t a new discovery, but the technology and skill required to develop it are new.

Second, the industry is focusing on increasing the reserves from known fields. Technological improvements and continued exploration have resulted in much better reserve growth. In fact, approximately 85 percent of additions to petroleum reserves in the US now come from existing fields. The North Sea is a great example of successful reserve growth in Europe.

O&G. How are companies responding to this, and to future prospects – are they looking further afield, deeper underground or diversifying their business perhaps?

MB. We’re seeing more companies focus a lot more effort and investment in exploring and developing unconventional resources. In Canada, for example, the industry in the last year has begun to produce more heavy oil than light oil. Despite the higher costs to produce heavy oil, the large resource base available has led the industry in this direction. Companies like Falcon are increasingly taking lessons learned in exploring for unconventional resources in North America and applying them to overseas prospects.

O&G. What are the principal problems you commonly face in exploiting new resources – are the challenges principally technical in nature or are there political or regulatory issues you have to deal with?

MB. The greatest challenge our industry faces is the limited availability of equipment and people to explore the opportunities. Rigs and other equipment for drilling and completions, pipe, steel and everything required for these projects are in high demand and low supply at present. The lack of people with the necessary technical expertise in geology, engineering, drilling and related fields is another huge hurdle. Over the last 20-25 years our industry has lost between 750,000 and a million people with these skills and college enrollment in these areas remains low at present.

Geopolitical concerns can’t be overlooked. Consider Chevron’s experience in the Sudan or the recent events in Venezuela, where petroleum production has been nationalized. It’s very important to conduct an evaluation of political risks to ensure stable regimes and stable markets before investing in new projects. National oil companies control a large majority of the world’s resources, which limits where others can explore. We’re very pleased with our experience in Hungary. Hungary’s membership in the European Union and its energy deregulation policies provide a very high level of political and market stability that is favorable to our efforts.

O&G. How are new technologies enabling us to exploit resources more fully or at lower cost?

MB. Technology has played a tremendous role in creating additional reserves. The advances in drilling, fracturing and completion technologies developed over the last 10-15 years have made many unconventional resource plays technically and economically viable. We also have the advent of sophisticated geophysical exploration techniques like 3D seismic that allow us to identify good drilling targets before engaging in a drilling program. The latest advances including mud systems, and improved vertical and horizontal drilling techniques are also allowing companies to increase reserves in existing fields in addition to seeking new opportunities elsewhere. On the production side, the latest smart wells have real time monitoring, allowing for maximum production efficiency.

O&G. You have a background in unconventional methods of exploiting natural resources. In your view are oil & gas corporations doing enough to research and employ less conventional means?

MB. There is a large opportunity to apply the unconventional and continuous resource extraction technologies pioneered in the US to other parts of the world. We’ve already seen these technologies expand from the Rocky Mountain region of the US to the Gulf Coast in plays like the Barnett Shale. We’ve also seen it move to the east coast in the Appalachian Basin. It’s also expanded from tight gas plays to include BCGAs, shales and coalbed methane. Overall, gas plays are the emphasis in the industry, as we’ve seen drilling on new gas wells exceed drilling on new oil wells.

O&G. How do you think your approach to exploration and development has differed from the norm and how successful has that been?

MB. My experience began in helping to pioneer exploration and development of unconventional resources in the Rocky Mountain region. When we began many of those prospects, they were considered to be high risk in nature. Now if you look at many of those plays, they are considered to be low geological risk plays. I began working in the Powder River Basin years ago and our approach helped to make the area very successful in terms of per well recoveries. We have also seen big successes in the Pinedale Anticline and the Jonah Field where recoverable gas is now in the range of 10 trillion cubic feet (Tcf).

We took projects that were considered revolutionary at the time and have made them more commonplace. Now we’re drilling at the bottom of basins rather than the tops of anticlines. Those basin plays are now continuing in the Uinta, Williston and San Juan. Overseas, opportunities now include places like Jordan and of course our project in the Mako Trough in Hungary.

O&G. To date, you’ve largely centered your interests on Hungary and Romania – why is this, and do you plan to expand operations in Central and Eastern Europe?

MB. Falcon is primarily focused on our operations in Hungary because the opportunity is so large. Hungary depends heavily on natural gas for its energy needs. In 2004, 45 percent of all its energy consumption came from natural gas. At the same time, Hungary imports over 75 percent of all of the gas it consumes, and most of that comes from Russia. Last year, an independent evaluation estimated with 90 percent probability the recoverable contingent resources on our licenses at 21.8Tcf of gas. We have plenty to keep us busy in developing the Mako Trough BCGA resources.

O&G. Where do you see most potential going forward – do you have a strategy in place for tapping into that?

MB. We firmly believe in the opportunities presented by unconventional resources. Our strategy and business model is to first identify a large unconventional resource, second to build a large land position, and third to apply advance drilling and completion technology. Once this is done, the project transforms into a simple resource play with tremendous upside potential.

An unconventional resource opportunity

In 2005, Falcon Oil & Gas acquired exploration licenses covering over 575,000 acres in south central Hungary between the country’s two largest oil fields. Geologists who are experts in unconventional gas plays believed that the land is underlain by a large basin centered gas accumulation (BCGA) within a formation known as the Makó Trough.

BCGAs are a special group of continuous-type gas accumulations that are generally much larger than conventional accumulations and typically occupy the central deeper parts of sedimentary basins. BCGAs can cover from tens to hundreds of square miles. The Makó Trough is approximately 50km across. While BCGAs have been successfully explored and developed in North America in the past decade, the Makó Trough is believed to be the first BCGA under development in Europe.

Defining the Makó Trough BCGA

After evaluating 2D and 3D seismic and other data, Falcon identified Pusztaszer-1, Makó-6 and Székkutas-1 as its initial drilling locations, secured long-term contracts for two Crosco drilling rigs, and began drilling in October 2005. By June 2006, Falcon had reached total depth on all three wells. All three wells penetrated the Algyö, Szolnok and Endröd formations and encountered significant gas shows. Falcon subsequently drilled two new exploration wells, Magyarcsanad-1 and Makó-7. Falcon’s initial five wells reached total depths ranging from approximately 3500-6000 meters. At a total depth of 6085 meters, Makó-7 is the deepest well ever drilled in Hungary.

Having delineated some boundaries of the Makó Trough BCGA, Falcon is now focused on the technically challenging task of completing its first wells in the Makó Trough. One technical challenge facing the company is the high pressure and extremely high temperatures encountered in the Makó Trough. At a total depth of 5692 meters, Makó-6 has bottom-hole pressures at 17,100psi and temperatures at 238˚C. Falcon has contracted with APA, experts in high temperature and high-pressure operations, for the completion design strategy and with ApexPE for their BCGA fracture treatment expertise.

Another challenge has been that the strong demand for drilling and completion equipment and materials in Europe has made it difficult to obtain commitments from service companies for appropriate work-over equipment and materials. To overcome this issue, Falcon has begun to utilize the two Crosco rigs that it has under long-term contracts for testing and completions, in addition to using the rigs for the drilling program.

Targeting the Szolnok for continuous development

Falcon is proceeding under an aggressive and comprehensive BCGA evaluation plan initially targeting the Szolnok segment of the BCGA gas system. The Szolnok is the horizon in the Makó Trough that is believed to contain the largest portion of the resource and is most analogous to the well-established BCGA projects in the US, such as the Pinedale Anticline in Wyoming. With its Hungarian wells averaging 3000-4500 meters in the center of the basin, Falcon expects the Szolnok development plan to include drilling and completion costs averaging approximately $10 million per well for the initial wells and $7 million for the full cycle development wells, the same trend of cost reduction due to operational improvement and economy of scale demonstrated in the established North American BCGA developments.

The Szolnok development plan began in January 2007 when drilling of Falcon’s sixth well (Makó-4) was initiated. Makó-4 will be the first dedicated ‘shallow’ well clearly inside the hydrocarbon-generating area of the Makó Trough BCGA. This location is approximately 5km southeast of the Makó-6 and 13km northwest of the Magyarcsanad-1 well, both of which had significant gas in the Szolnok as interpreted from electric and mud logs. Following the Makó-4, Falcon plans to drill, case and complete three additional Szolnok tests with multiple fracture stimulation treatments over as large an interval of the gross pay section as possible, followed by flow-testing and tying into the existing Falcon pipeline.

While the Szolnok formation likely contains more than 70 percent of the gas resource, Falcon believes significant resources (greater than 1Tcf) also exist in the deeper Endröd, Basal Conglomerate and Synrift formations.

Independent resource evaluation

Falcon commissioned an independent evaluation intended to describe and quantify its Makó Trough resource. Announced in September 2006, the independent evaluation by The Scotia Group, Inc. estimated that the recoverable contingent resource of the Makó Trough was likely (90 percent probability) at least 21.8Tcf. The evaluation estimated a 50 percent probability of 54.9Tcf.

In December 2006, Falcon received approval of its Geological Closing Report from the Hungarian Mining Authority, based on the recommendation of the Hungarian Geological Survey, which covers the estimated resource underlying Falcon’s licenses. This action indicates the Hungarian government has validated Falcon’s geological and technical evaluation and conclusions about the existence, extent and potential recoverable volumes of gas within the Makó Trough BCGA.



Hungary’s energy landscape

Hungary and its European neighbors are watching Falcon’s progress with great interest. Hungary imported 78 percent of the 0.51Tcf of natural gas it consumed in 2004. Most of the country’s gas imports come from Russia. Due to the large potential size of the Makó Trough resource, its successful development could lead Hungary to energy self-sufficiency for several decades. Falcon believes that the Makó Trough BCGA, when fully developed, could also allow Hungary to export natural gas elsewhere in the region.

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