Bahamas Petroleum Company (BPC) has signed a drilling contract with Stena Drilling for the provision of a rig for its Perseverance #1 well, located offshore The Bahamas, thereby ditching its previous plans to use a Seadrill-owned rig for this well.
BPC in March postponed its Perseverance #1 drilling operation from H1 2020 due to the massive, unprecedented, and adverse impact of the spread of the COVID-19 virus.
Drilling operations were rescheduled from May/June to October 2020 onwards.
Although it initially planned to use one of Seadrill’s rigs for the Bahamas well, BPC said in an update on Tuesday it has now entered into a definitive contract with Stena Drilling for provision of a drilling rig as soon as 4Q 2020.
As a result of this contract with Stena Drilling, BPC said it was able to reduce the cost estimate for its first exploration well in The Bahamas.
Simon Potter, Chief Executive Officer of Bahamas Petroleum Company, said: “This decision – to lock in a rig now, at an already favourable rig rate, rather than try and second guess what markets and availability will look like later in the year – speaks to our intent to ensure Perseverance #1 is drilled at the soonest opportunity and provides the necessary certainty needed for operational planning“.
Potter also added: “Importantly, the commercial parameters in the rig contract have allowed us to not only revise down significantly the anticipated well cost, but also clears the way to revisit our funding strategy with adequate time to ensure we have the funds available as and when we need them, on the best possible terms”.
Force majeure
Under its license, BPC’s obligation is to drill an exploration well before the expiry of the current exploration period, which is due on 31 December 2020.
Due to coronavirus delays, BPC in March submitted a force majeure notice to the Government of The Bahamas.
Based on the licence terms and regulations, the company expects that the current exploration period of its licences will extend until at least April 2021. However, given the likely further continued Covid-19 related disruption, the company has sought clarification from the Government on an extension to at least June 2021.
In order to avoid undertaking drilling activities during the peak of the Bahamian hurricane season, which traditionally ends in November of each year, BPC has been working to reschedule its drilling plans, including all critical supply and service contracts, along with finance arrangements, towards a revised operational objective of drilling Perseverance #1 in the period December 2020 to April 2021.
Contract with Stena Drilling
BPC entered into an agreement with Stena Drilling for the provision of a sixth-generation drilling rig, which may be any of the Stena IceMax, Stena Forth, or Stena DrillMax or, subject to agreement, any other suitable Stena rig.
The rig contract is fully termed, binding and unconditional, and provides the certainty of a firm time slot for the delivery of a drilling rig on location in the window of 15 December 2020 to 1 February 2021.
The contract with Stena replaces the previous contract for a drilling rig that the company anticipated entering into with Seadrill and provides for improved terms, notably, an all-in rig cost, including managed pressure drilling system, lower than that previously anticipated.
The rig to be provided by Stena is of an equivalent or higher specification to that which would have been provided by Seadrill, and thus the company’s existing drilling plan and Environmental Authorisation will, subject to some rig-specific updating, continue to be applicable for Perseverance #1 drilling operations.
On signing of the rig contract, BPC has paid to Stena an initial down payment amount of $250,000 and the companies have started working together collaboratively to prepare for drilling activities in the drilling window on the basis of any one of the identified Stena drilling rigs.
At any time after 1 September 2020 but prior to 1 November 2020, Stena must provide to BPC a commencement notice, which notice must specify the specific drilling rig to be deployed by Stena, the location(s) which that drilling rig will be mobilised from / demobilized to, and the date within the drilling window on which that drilling rig will arrive on location and be ready to start drilling operations.
If Stena fails to deliver a commencement notice by 1 November 2020, or if, following delivery of a commencement notice, Stena fails to provide the nominated drilling rig, a penalty of $7.5 million will become payable by Stena to BPC.
The duration estimated to complete the well is approximately 30 -45 days.
BPC is to pay a fixed lump sum mobilization fee of $2 million at such time as Stena delivers a commencement notice to BPC. Once the rig arrives on location BPC is to pay for the operating use of the rig, inclusive of the use of the managed pressure drilling system.
In aggregate, the total value of payments to be made by BPC to Stena in respect of use of the rig, inclusive of mobilization, is estimated to range between $8 million and $11 million depending on the duration of drilling activities.
Well cost estimate reduced
BPC previously estimated the total cost of drilling operations for the Perseverance #1 well to be in the range of $25 million to $30 million.
The revised firm pricing and operating parameters encapsulated in the rig contract, as well as broader industry conditions exerting downward pressure on pricing, has provided an opportunity for the company to revisit the cost of the Perseverance #1 well, with a revised estimated cost now in the range of $21 million to $25 million.
At the same time, potential operational contingencies relating to real-time drilling results are essentially unchanged, such that on a like-for-like basis, the total cost of Perseverance #1 is now estimated to be up to $30 million in total, representing an approximate reduction of 15 per cent to the previous well cost estimate (of up to $35 million).
Over and above this revised estimate, the company has also now scoped a further $3 million – $5 million of provisional cost elements relating to an expanded range of formation evaluation work, that the company previously identified but that can now be undertaken at the company’s election in a success case, subject to capital availability.
In summary, BPC now estimates the total cost of Perseverance #1 to be in the range of $21 million to $25 million, a material reduction from the most recent prior comparable estimate.
Well funding
According to BPC, potential funding sources established by the company prior to the Covid-19 shut down continue on foot, and, if available and drawn (and when aggregated with the company’s existing cash holdings), would more than meet the company’s overall funding needs for Perseverance #1.
In addition, BPC is now actively seeking to revisit all potential funding sources for Perseverance #1, with a view to optimising the availability and cost of its funding.
This includes continuing to pursue a farm-in, and farm-in discussions remain on foot with a number of parties. Consequent on the signature of the rig contract, Stena Drilling has also been granted certain options to invest in BPC or the project.
Overall, given that drilling operations will not start until at least 15 December 2020, the company now has in excess of six months to refine, implement and complete its optimal funding strategy.
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