Otto Energy enters Gulf of Mexico

Byron Energy has entered into a binding participation agreement with Otto Energy whereby the latter will pay a part of drilling costs to gain a stake in Byron’s three U.S. Gulf of Mexico projects. 

This agreement covers three of Byron’s existing projects, with Otto contributing up to $17.3 million in drilling costs and past expenditure recovery, as part of a staged farm out program, to advance the three projects.

Byron said on Friday that the injection of this funding through a staged program will substantially reduce its need for capital and could ultimately lead to three new wells being drilled by Byron during 2016, offering Otto an accelerated entry into the basin.

Under the agreement, Otto pays a disproportionate share of drilling costs to earn 50% of Byron’s interest in three projects: South Marsh Island 6, South Marsh Island 70/71 and Bivouac Peak, in the Gulf of Mexico.

Byron also said that, after drilling of the program’s initial SM 6 #2 well, Otto will then have a short option period to elect to participate in the SM 71 #1 well; in the event Otto elects to participate in SM 70/71, Otto will reimburse Byron for a portion of past costs on the SM 6 lease and the SM 70/71 leases. After the drilling of SM 71 #1 well, Otto will have earned an option to participate in the drilling of the first well on Bivouac Peak leases.

If all three wells are ultimately drilled, the end result will bring $17.3 million in funding for Byron’s existing projects. Should Otto elect not to participate in further drilling after the drilling of SM 6 #2 well, Otto will not earn the option to participate in the SM 70/71 leases and the agreement will cease.

Otto will also have the option of participating for up to a 50% interest in one new asset acquired by Byron, if any, through to March 2017 by paying 66.67% of related drilling costs or acquisition costs, and proportionate treatment of related expenses.

Byron recently hired the Hercules 264 rig to drill one well at SM 6, followed by an optional well at SM 71 beginning in the March 2016 quarter.

SM 6

Under the agreement, Otto will participate in the drilling of the SM 6 #2 well during the March 2016 quarter. Otto will pay 66.67% of the estimated dry hole costs to earn a 50% working interest in the SM 6 lease. Otto’s promoted exposure will be capped at $5.3 million of the estimated $8 million dry hole cost, after which both companies will bear their own proportionate interests. At earning depth, Otto will have the right to elect to participate in the drilling of the SM 71 #1 well. Upon a positive election at SM 71, Otto will reimburse Byron for past costs at SM 6 of $2.1 million as well as past costs at SM 70/71 of $0.9 million.

SM 71

At SM 71, Otto will pay 66.67% of the expected $4.5 million dry hole costs to earn a 50% working interest in the SM 71 and SM 70 leases. Otto’s promoted drilling exposure will be capped at $3 million, after which both companies will bear their own proportionate interests. At earning depth, Otto can elect to participate in Byron’s Bivouac Peak Project.

Bivouac Peak

Should Otto decide to participate in Byron’s recently acquired Bivouac Peak leases, Otto will pay 66.67% of Byron’s share of the drilling costs to earn a 45% share of the Bivouac Peak leases. Otto’s drilling contribution will be capped at $6 million based on a dry hole estimate of $10 million. Otto will also reimburse Byron for 50% of Byron’s past costs in the project at the time of election.

In total, Otto will potentially contribute $14.3 million in drilling costs and approximately $3 million in past cost reimbursements, if all three wells are drilled and Otto elects to participate in all three projects.

Byron Energy CEO, Maynard Smith, said: “We are pleased to welcome Otto as a co-venturer, initially at SM 6 and potentially at SM 70/71 and Bivouac Peak.”

Smith also added: “The Otto-Byron transaction is well timed to take advantage of the substantially lower drilling and service costs in the current environment.”

Byron expects to spud the SM 6 #2 well during the first quarter of 2016. That well will be followed immediately by the SM 71 #1 well assuming Otto elects to participate in the drilling of the SM 71 #1 well. Byron said it has initiated permitting on both wells and expects approvals by mid-January 2016.

Permits

Byron added it has also filed a Development Operations Coordination Document (DOCD) with BOEM which will allow it to modify the existing SM 6 caisson, lay a flow line to the SM 10 “A” platform where hydrocarbons will be separated, and transported to market for sale.

Along with that DOCD application, Byron has requested a Suspension of Production from BSEE for the SM 6 lease which will extend the lease term to give Byron time to design, install and hook up new facilities. Byron concluded by saying that a key component of this process is a Production Handling Agreement between Byron and the offset operator at SM 10, Fieldwood Energy LLC.