Mark Arnold, CEO of Royalty Exploration, Discusses the Science Behind Drilling Success.
Zacks Private Prospect Petroleum is raising $10M to fund 12 exploration projects, using innovative technology owned by AGI. You have worked with this technology since 1995. Describe your history with AGI?
Mark Arnold I initially started as a customer of W.L. Gore & Associates, Inc., the developers of the technology on some environmental projects. The technology worked better than the other technologies that we were using. When Gore expanded into the exploration market we provided field services and later became a selling partner for them. I felt the technology could be expanded into the mineral exploration sector and worked with Gore to develop this application. In 2005 we formed Royalty Exploration, LLC based on a business model of using the technology to obtain participating ownership interest in oil and gas wells. Our drilling success was very high which led Royalty Exploration to acquire the technology from Gore in 2013. Royalty Exploration formed Prospect Petroleum in 2014 to explore and develop these 12 projects.
ZP Explain how Amplified Geochemical Imaging technology works?
MA The AGI Technology uses sophisticated geochemical processes in exploration and discovery of petroleum and mineral accumulations through the identification of surface or near-surface traces of hydrocarbons and other gases. The technology is based on a passive gas sampler, the AGI Module, which is installed in the soil 2-3 feet deep for 21 days. The module collects very low concentrations of 90 different target hydrocarbon gases in parts per billion concentrations. The laboratory results from the AGI Modules are interpreted using advanced statistical modeling techniques to identify and map areas of potential hydrocarbon reservoirs.
ZP How does this improve upon existing methods of soil analysis and drilling site evaluation?
MA The AGI Module’s ability to collect very low levels of gases (parts per billion) leaking from the reservoirs 24 hours a day over the 21 day exposure period is far more sensitive and advanced than other surface geochemical methods.
ZP How has AGI increased the success rate for drilling?
MA It provides a direct indication of hydrocarbons which can then be combined with seismic and other geologic information to select the most prospective locations to drill. Historically when a well is drilled on a prospective area identified by the geochemical survey approximately 90% of the time they encounter enough hydrocarbons to complete the well.
ZP How has it reduced the risk of dry wells?
MA When a well is drilled in an area without a positive geochemical anomaly, more than 90% of the time no oil or gas is discovered.
ZP What are the limits of this technology—what can’t it tell you?
MA The technology can’t tell how deep the oil or gas is below the surface. That is why it is combined with seismic and other geologic data to determine the depth.
ZP Is this technology as effective below salt or offshore as it is in more conventional onshore projects?
MA We have tried the technology under 8000 ft. of salt in Egypt and were skeptical that we would see the reservoir but we found it. We have started using the technology more offshore and see this as a big growth area. We use the same sampling method offshore in up to 100 feet of shallow water. In deeper waters offshore, we also use a sediment core sample and have had really good success.
ZP Besides the detection of oil and gas reserves, what are the other uses for AGI’s technology?
MA The technology is very effective at detecting and mapping the extent of environmental contamination in soil, water and air from hundreds of chemical compounds. It also can be used to explore for buried metallic mineral deposits like copper, gold and silver.
ZP Prospect Petroleum has already researched 6 drilling areas and located 12 potential projects. Why did you select these areas in particular?
MA These 12 projects were developed by reviewing 1,000s of miles of seismic data and mapping and compilation of 1,000s of well logs from the project areas. These projects were selected based on strong geological and geophysical indicators. Additionally, many of these projects are adjacent and up-dip from significant past oil and gas production. We believe that these are high quality prospects and we have chosen a sufficient quantity of projects to increase the company’s chance for success. We will initially begin to conduct the geochemical surveys in Alabama during the winter and spring months. The Colorado and Wyoming surveys will be conducted in the summer.
ZP Do these targets require hydraulic fracturing?
MA No, these are all conventional targets that do not require hydraulic fracturing.
ZP Tell us your favorite oil and gas success story. What has been your most successfully producing project to date?
MA The Smackover Formation in Southern Alabama has been extremely successful for us. The AGI Technology has performed extremely well in identifying these oil wells. The principals of Prospect Petroleum have been involved in over 70 successful wells in the Smackover that have collectively produced approximately 10 million barrels of oil and still have many years of production left.
ZP How many wells have you managed directly versus working with an operator?
MA Our business model is to work with high quality operating partners to manage the drilling and operation of the wells. These operating partners have specialized regional experience that provides the most cost-effective management of the operations. I have been actively involved with our operating partners in the selection of the well locations, monitoring the drilling, and making the final decisions on over 200 wells.
ZP Oil prices are currently low due to market oversupply—do low oil prices offer an opportunity for investors?
MA The advantages of investing during periods of low oil prices include: lower lease and acquisition costs; lower royalty burdens for leases; and lower drilling costs. I like to take the contrarian view—when prices drop, that’s when you want to be most active as an investor. It takes 18 months to develop these projects. Investing when prices are low means that you will be ahead of the game and drilling at a higher price margin.
ZP Do you see the U.S. as continuing on a path of energy independence and will our Oil & Gas reserves support that?
MA I do. Most of the growth has been in shale wells using fracturing but these are expensive drilling projects and this growth has slowed recently. Our projects are lower cost. There are still large reserves accessible with conventional methods. The global demand will continue to grow. Exxon recently projected a 35% increase in global demand by 2040.
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