International Petroleum Quarterly Activity Report for the Quarter Ending September 30
HIGHLIGHTS
US$1.9 million cash at bank at 30 September 2011.
Discovered two oilfields at the Krasnoleninsky Project in Western Siberia – one at Well No. 1 and the other at Well No. 2.
Reached a final depth of 2,019 metres at Well A-8 at the Company’s Kazakhstan Project, however since no hydrocarbons were found, it was plugged and abandoned.
Entered into a Share Purchase Agreement to acquire 100% of the shares in Vamaro Investments Limited, which holds licences for geological study of subsoil, prospecting and extraction of oil and gas within the territories of the Yuzhno-Sardakovsky block and the Zapadno-Novomolodezhniy block in the Khanty-Mansiysk Autonomous Region in Western Siberia, Russia.
Entered into a memorandum of understanding to acquire 75% of the Druzhny Project in the Tomsk Region of Western Siberia, Russia.
A$45 million receivable from Nkwe Platinum Limited by 31 December 2011, following varied terms to the Asset Sale Agreement.
Subsequent to the quarter end, appointed Merriman Capital, Inc. to assist with application to list on OTCQX International in New York.
CORPORATE
Acquisition of the Vamarov Project – Western Siberia, Russia During August 2011, the Company entered into a Share Purchase Agreement (“Vamaro Agreement”) to acquire 100% of the issued share capital of Vamaro Investments Limited (an entity incorporated in Cyprus) (“Vamaro”) (“Vamaro Acquisition”). Vamaro is the holder of:
(a) 100% of the issued share capital of Yuzhno-Sardakovsoye LLC (an entity incorporated in Russia), which holds a licence for geological study of subsoil, prospecting and extraction of oil and gas within the territory of the Yuzhno-Sardakovsky block in the Khanty-Mansiysk Autonomous Region in Western Siberia, Russia; and
(b) 100% of the issued share capital of Zapadno-Novomolodezhnoye LLC (an entity incorporated in Russia), which holds a licence for geological study of subsoil, prospecting and extraction of oil and gas within the territory of the Zapadno-Novomolodezhniy block in the Khanty-Mansiysk Autonomous Region in Western Siberia, Russia,(together, the “Vamarov Project”).
The Company has studied the data from the Vamarov Project, including an independent assessment of the original oil in place and the volume of remaining recoverable oil, and believes that the Vamarov Project may contain up to 55 mmboe of proved and probable (“2P”) reserves. This internal estimate is based on the original oil in place as estimated by the independent assessment, but uses different recovery factors, which the Company believes are appropriate for production using hydraulic fracturing techniques in the region.
13 wells have been drilled on the Zapadno-Novomolodezhniy block and the Company is currently evaluating wells to work over and bring into production, subject to completion of the Vamaro Acquisition, by the end of December 2011. A communication corridor passes through the northern part of the ZapadnoNovomolodezhniy block and includes pipelines and a hard-surface all-weather road, which can be used throughout the year, and a power transmission line.
8 wells have been drilled on the Yuzhno-Sardakovsky block and commencement of oil production in this block is expected to occur in the first quarter of 2012. The nearest oil pipelines are 16 km from the block and the nearest hard-surface road is 11 km from the block.
Subject to Shareholder approval to be sought at the Company’s General Meeting on 9 November 2011, in consideration for the acquisition of Vamaro the Company has agreed to pay US$3 million in cash and issue 55,000,000 Shares (“Vamarov Consideration Shares”) to the shareholder of Vamaro. In accordance with the terms and conditions of the Vamaro Agreement, the Company will also assume certain liabilities of Vamaro, including US$1 million (payable by 9 November 2011) and a further US$4 million (payable by 27 December 2011).
Settlement of the Vamaro Acquisition is subject to a number of conditions precedent, including due diligence and obtaining regulatory and Shareholder approvals (together, the “Conditions”). Settlement of the Vamaro Acquisition will occur as soon as practicable following satisfaction of the Conditions.
Acquisition of the Druzhny Project – Western Siberia, Russia
During August 2011, the Company entered into a memorandum of understanding to acquire 75% of the issued share capital of OOO VostokNefteGaz (an entity incorporated in Russia) (“VNG”) (“VNG Acquisition”). VNG owns an exploration licence in the Tomsk region of Western Siberia (the “Tomsk Exploration Licence” or the “Druzhny Project”).
In consideration for the VNG Acquisition, the Company agreed to:
(a) issue 6,666,667 Shares (“VNG Consideration Shares”) to the shareholder of VNG; and27 October 2011 – 3 –
(b) fund all of the exploration work necessary to fulfil the minimum work programme as stipulated in the Tomsk Exploration Licence.
Completion of the VNG Acquisition is subject to receipt of shareholder approval to be sought at the Company’s General Meeting on 9 November 2011.
If deposits are discovered, the Company intends to carry out an operational estimate of hydrocarbon reserves and file the estimate for Russian state expert evaluation not later than six months after the production well test date.
The Company plans to meet the requirements of the minimum work programme by carrying out at least 1,000 line km of 2D seismic survey during the winter of 2011/12.
The VNG Consideration Shares will be subject to escrow until the earlier of:
(a) a commercial discovery having been made in the Tomsk Exploration Licence;
(b) VNG having acquired an oil-producing asset in the Tomsk region of Russia; or
(c) a period of five years from the date of settlement of the VNG Acquisition.
With effect from completion of the VNG Acquisition, the Company will be the Operator of VNG.
Krasnoleninsky Project – Western Siberia, Russia
The Company, through its wholly-owned subsidiary IPL Siberia Ltd, owns a 75% equity interest in Souville Investments Ltd (“Souville”). Souville is the 100% legal and beneficial holder of Irtysh-Neft, a Russian company having exploration rights to four blocks in Western Siberia (“Krasnoleninsky Project”). Assuryan Assets Ltd holds the remaining 25% interest in Souville and, by extension, the Krasnoleninsky Project. The four blocks comprising the Krasnoleninsky Project cover a total area of 1,467 km² and are located in the Khanty-Mansiysk Region in Western Siberia, the largest oil-producing region of Russia.
The 1,467 km² area comprising the Company’s four licence blocks has been extensively surveyed by 2,446 line-kilometres of closely-spaced 2D seismic data, which identified more than thirty prospects, including five “superstructures”. Within these superstructures, there are a number of potential reservoirs, ranging in age from Paleozoic to Cretaceous, stacked upon each other, offering the potential of multiple producing zones in a single well. In a report to evaluate the hydrocarbon resource potential dated 12 May 2011, Ryder Scott Company-Canada, an independent oil and gas consultant, estimated the unrisked prospective (undiscovered recoverable) resources of the four blocks at 169 (Low Estimate), 260 (Best Estimate) and 385 (High Estimate) million barrels (1). Based on the undiscovered unrisked resource estimates and scoping type resource economic evaluation reports from Ryder Scott and the oil shows in Well No. 1 and Well No. 2, the Company believes that the Krasnoleninsky Project has significant exploration potential.
In May 2011, drilling at both Well No. 1 and Well No.2 reached the target depths of 2,850 metres and 2,930 metres respectively and oil was found during drilling of both wells. The results of the interpretation of electrical logging of Well No. 1 and Well No. 2 were obtained in June 2011, and the interpretation of the electrical logging indicated that the Bazhenov and Tyumen suites are oil-bearing. In addition, the interpretation of the Palaeozoic suite indicated that the fractured zones in both wells are potentially oil bearing.
During August 2011, the Company discovered an oilfield at Well No. 2. Oil commerciality was established in the J4 formation at the interval between 2,740 metres and 2,745 metres of Well No. 2, from which an unstimulated daily inflow of 6 cubic meters of oil was received. Using the data from this test, the Company has estimated oil flow rates after hydraulic fracturing to be 202 barrels per day (low case), 419 barrels per day (base case), and 508 barrels per day (high case) from this interval only.
Later in August 2011, the Company also discovered an oilfield during testing of Well No. 1. Oil commerciality was established in the J2-3 formation at the interval between 2,647 metres and 2,665.5 metres of Well No. 1, from which an unstimulated daily inflow of 5.5 cubic metres of oil was recorded.
In September 2011, changes were made to the expiry dates and other terms of the four exploration licences, covering the four blocks. The expiry date of all four licences has been extended to 31 December 2015 and the following licence commitments have been added:
1. Licence over block 7: second exploration well to be completed by 31 July 2015 (i.e. in addition to Well No. 1 that has already been drilled);
2. Licence over block 8: second exploration well to be completed by 31 July 2015 (i.e. in addition to Well No. 2 that has already been drilled);
3. Licence over block 9: second dependent exploration well to be completed by 31 July 2015 (i.e. dependent on the successful outcome of the first exploration well); and
4. Licence over block 10: second dependent exploration well to be completed by 31 July 2015 (i.e. dependent on the successful outcome of the first exploration well).
During October 2011, the Company completed the testing programme at Well No. 1 and Well No. 2.
The Company currently plans to conduct a stimulation programme in these two wells in January 2012 and commence oil production thereafter, and intends to issue a reserve report for the Krasnoleninsky Project in accordance with the industry standard SPE-PRMS standards by the end of December 2011.
The current approved work program requires the drilling of two wells on the Krasnoleninsky blocks by 30 June 2012 and the drilling of two additional wells by 30 December 2012 (“Current Work Program”). The Company satisfied the first part of this requirement by drilling Wells No. 1 and No. 2 during 2011 and plans to satisfy the second part of the Current Work Program by drilling Wells No. 3 and No. 4 in licence blocks 9 and 10 respectively during the first half of 2012.
Kazakhstan Project – Republic of Kazakhstan
The Company, through its wholly owned subsidiary, North Caspian Petroleum Ltd operates and owns a 50% interest in subsoil use rights for the exploration of hydrocarbons in an early stage project in Kazakhstan (“Alakol Licence Area” or “Kazakhstan Project”). The remaining 50% is owned by Remas Corporation LLP, a privately owned Kazakhstan company.
The Alakol Licence Area is located in eastern Kazakhstan and borders the western boundary of the People’s Republic of China. The main target reservoirs in the Alakol basin are carbonates or sandstones of Paleozoic age occurring at depths ranging between 1,600 and 3,500 metres. The Alakol basin is considered to be similar to the Junggar and Zaisan basins, which are both proven oil-containing basins, across the border in China.
Artesian wells in the area are associated with oil seeps and films of oil, proving the Alakol Basin has generated hydrocarbons. Seismic data indicates that potential Jurassic and Triassic reservoirs are present as stratigraphic traps on the flanks of Paleozoic-age volcanic intrusions or basement highs. In a report to evaluate the hydrocarbon resource potential dated 6 June 2011, Ryder Scott estimated the unrisked prospective (undiscovered recoverable) resources at 935 (Low Estimate), 1,379 (Best Estimate) and 1,980 (High Estimate) million barrels.
In June 2011, the Company commenced drilling Well A-8, the fourth well to be drilled in the Alakol Licence Area. Seismic data indicated that potential Jurassic and Triassic reservoirs were present as stratigraphic traps on the flanks of Paleozoic-age volcanic intrusions or basement highs.
At the end of July 2011, a final depth of 2,019 metres was reached at Well A-8. Well logging data has been evaluated and drill stem testing of prospective intervals has been carried out. Well A-8 was the first well to test the geological model that formed the basis of the Ryder Scott Report and, while it confirmed that reservoir-quality sands are present on the flanks of Paleozoic-age volcanic intrusions or basement highs, no hydrocarbons were found in this well. Consequently, during August 2011, the Company plugged and abandoned Well A-8.
Currently, the Company plans to carry out a 3D seismic program of approximately 500 km² during the second half of 2012 in order to gain a better understanding of the potential reservoirs and stratigraphic traps in the area before drilling further exploration wells.
BUSINESS DEVELOPMENT OPPORTUNITIES
Whilst the Company is focused on exploration at its existing Krasnoleninsky Project and Kazakhstan Project, and at its soon-to-be-acquired Vamarov Project and Druzhny Project, it continues to review other provinces for opportunities to acquire additional exploration and/or production projects.