Zephyr Energy : Auctus Advisers Research Note, 9 March 2023

Auctus Advisers Research Note, 9 March 2023

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State 16-2 well test to be extended while precipitate issues are addressed

• The State 16-2 well was initially flow tested at a choked back rate of 2 mmcf/d of natural gas and 100 bbl/d of condensate (433 boe/d), a measured rate which allowed the company to successfully commission surface facilities and improved flow assurance processes.
• As flow rates were increased above those levels, well performance became limited by fresh water pumping capacity and was subsequently impacted by the formation of down hole salt precipitate, an issue not uncommon with this type of completion. The precipitate, which blocked and subsequently cleared multiple times, impacted the well's flow capacity to achieve higher rates for an extended period of time.
• Zephyr was in the early stages of testing higher rates when its mandated flaring limits were reached. This will prevent further testing until the permits are updated or the well is put in production. The achieved constrained flow rate of 433 boe/d is probably the least that should be expected from the well once in production.
• The formation of salt precipitate in the tubing to a depth of ~8,000 ft (where the packers are located) was expected. Fresh water is injected in the annulus into the tubing from that depth to dissolve any salt precipitate. The formation of salt precipitate below the packers was not expected. Zephyr is assessing whether the precipitate issue is a function of continued flow back of completion fluids or a function of normal flowing conditions. If it is a result of normal flowing conditions, Zephyr is evaluating mitigation solutions which have been successful in other basins, and plans to extend the well test subject to regulatory approval.
• Pending further details on next steps and the flow test results of the State 36-2 well, we have not changed our forecasts. Our target price of £0.20/sh is unchanged. The precipitate formation is not expected to pose an issue at the State 36-2 well as it is testing the natural fracture network and will not be fracked. Zephyr plans to also drill a well in the oil- window of the basin that should not experience salt precipitate.

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