Zargon Oil & Gas Ltd. Provides Operational Update and Releases 2011 Year End Reserves
Friday, Feb 17, 2012Zargon Oil & Gas Ltd. (TSX:ZAR) ("Zargon") is pleased to provide fourth quarter production statistics, an operational update and report its 2011 year end reserves. Zargon intends to release its 2011 audited financial results on March 9, 2012, before market open.
Zargon's production averaged 9,278 barrels of oil equivalent per day in the fourth quarter and was three percent higher than the preceding quarter and was essentially unchanged from the corresponding 2010 quarter. Oil and liquids production averaged 5,619 barrels per day in the 2011 fourth quarter, a five percent increase from the prior quarter and a three percent increase from the corresponding 2010 quarter. Natural gas production averaged 21.96 million cubic feet per day, a one percent decrease from the previous quarter and a six percent decrease from the corresponding 2010 quarter. Fourth quarter 2011 oil and liquids production represented 61 percent of total production based on a 6:1 equivalent basis.
For calendar 2011, Zargon's production averaged 9,131 barrels of oil equivalent per day, comprised of 5,469 barrels of oil per day and 21.97 million cubic feet of natural gas per day.
Zargon's fourth quarter field capital program totalled $23.7 million (unaudited) and included the drilling of 9.0 net oil wells and 2.5 net dry holes. The fourth quarter Alberta Plains North drilling program was highlighted by three vertical infills at Bellshill Lake and one horizontal multi-frac well at Hamilton Lake. Operated wells in the Williston Basin core area included three Midale horizontal drainage wells at the Weyburn and Elswick, Saskatchewan properties.
In 2011, three multi-frac horizontal locations were drilled at the 47 section wholly-owned Hamilton Lake property. After an average of five months of production, January 2012 production for the three wells averaged 48 barrels of oil per day per well with a 73 percent water cut. Unlocking the potential of Hamilton Lake's large oil-in-place resource with stimulated horizontal wells and a reactivated waterflood will be a high priority in 2012. In the first quarter of 2012, two wells have been drilled and completed and will be production tested shortly. Two additional wells are scheduled for this summer and additional locations are expected to be drilled this fall and winter. Success at Hamilton Lake could lead to more than 30 additional horizontal oil locations. The McDaniel 2011 year end report has not booked any of these undeveloped Hamilton Lake Viking multi-frac horizontal locations.
In addition to Hamilton Lake, 2012 capital will be directed to the Killam property, where a three well horizontal development drilling program will be completed in the first quarter. This program will be followed by the implementation of a pilot waterflood and further delineation drilling. With further de-risking, the Killam property is expected to be a significant oil exploitation project that could require as many as 20 horizontal drainage wells to optimally exploit under a waterflood scheme. The McDaniel 2011 year end report has booked only three of these undeveloped Killam Glauconite horizontal locations.
Additional 2012 Alberta expenditures will be directed to oil exploitation projects at Bellshill Lake and Taber. At Bellshill Lake, further infill drilling plus oil treating and water disposal upgrades are expected to deliver increased oil production and reserves. Similarly at Taber, capital will be allocated to drill infill horizontal producers and to expand and enhance waterflood recoveries through additional injection well conversions.
In the Williston Basin, we are working three types of oil exploitation projects. In 2011, the majority of our Williston Basin drilling were Midale drainage locations, which are characterized by low permeability reservoirs that are generally partially pressure supported by either weak aquifers or, in some cases, by non-operated offsetting mature waterfloods. Production from Midale type wells are characterized by relatively low rates, moderately high water cuts, but shallow production declines. Ultimately, as many as 30 of these drainage locations are expected to be drilled over the next three years at the Weyburn, Elswick, Midale, Ralph and Steelman properties. The McDaniel 2011 year end report has booked only two of these undeveloped Williston Basin Midale horizontal drainage locations.
Exploiting un-drained Frobisher seismically defined targets is the second type of Williston Basin oil exploitation project that is being pursued. These Frobisher targets are characterized by higher permeability rock with full aquifer pressure support. Successful wells have high initial oil production rates, but high initial declines as the flank water encroaches on the wells. The economics of these Frobisher programs can be very robust, as demonstrated by our 17 well 2009-2010 Steelman Frobisher program where McDaniel assigned average proved and probable reserves in excess of 75 thousand barrels of oil per well. Over the next three years, we expect to drill a minimum of 15 Frobisher locations on already identified structures at the Weyburn, Steelman and Mackobee Coulee properties. The McDaniel 2011 year end report has not booked any of these undeveloped Williston Basin Frobisher horizontal locations.
Our final Williston Basin exploitation project entails the unlocking of thick Mississippian low permeability carbonate targets through horizontal multi-frac wells in conjunction with the implementation of full-field waterfloods. In particular, Zargon has significant "tight oil waterflood potential" with considerable oil-in-place resources in the low permeability Daly, Virden, Workman and Truro properties. In 2012, we will advance the de-risking program for these long term opportunities with a second Truro multi-frac location and a two well multi-frac horizontal injector-producer pilot waterflood at Daly, Manitoba. The McDaniel 2011 year end report has booked only one of these undeveloped Williston Basin "tight oil" multi-frac horizontal locations.
Throughout 2012, we will systematically drill oil locations high-graded from our large inventory of oil exploitation projects. The 2012 first quarter drilling program will include two Hamilton Lake Viking stimulated horizontal locations, three Killam Glauconite horizontal locations, three Frobisher type locations at Weyburn and Steelman, Saskatchewan and one stimulated horizontal location at Truro, North Dakota.
Finally, in recent years our business has been challenged by rapidly increasing operating costs as we integrated the properties from five corporate and one large property oil acquisition. Now, with a refocused business plan with eight clearly defined oil exploitation initiatives (Hamilton Lake, Killam, Bellshill Lake, Taber, Williston Basin Midale, Williston Basin Frobisher, Williston Basin tight oil waterflood, and Little Bow ASP), we have an opportunity to high grade our property footprint and concentrate on cost containment initiatives. To this end, we will continue to sell non-strategic oil properties if attractive valuations can be realized. Also, during this period of low natural gas prices, we will complete a comprehensive review of our natural gas properties to identify well shut-in, facility consolidation and other fixed cost saving opportunities that will permit improved returns when natural gas prices improve.
Little Bow Alkaline Surfactant Polymer ("ASP") Project
Earlier this year, Zargon announced that it would proceed with detailed engineering, regulatory applications and the procurement of long-lead time equipment for the Little Bow Upper Mannville I pool ASP project. This tertiary oil recovery project entails the injection of chemicals in a water solution into a partially depleted reservoir to recover incremental oil reserves. The project schedule anticipates first chemical injections in July 2013, with a significant oil production response forecast to occur by January 2014. In their year end review, McDaniel assigned 4.15 million barrels of oil equivalent of probable undeveloped reserves to Zargon's working interest in Phases 1 and 2 of the project. Future costs to develop the first two phases of the project are estimated at $103.5 million and are comprised of $47.8 million for the field and related capital (2012-2015) and $55.7 million for the cost of the chemical injections (2013-2019). Incorporating all future capital (including chemical costs), the Little Bow ASP Phase 1 and 2 finding and development cost is estimated to be $24.98 per barrel of oil equivalent. Targeted field netbacks for the Little Bow ASP Phase 1 and 2 project are in the $50 to $60 per barrel of oil range.
In 2012, Zargon is projecting to spend $21 million of Phase 1 Little Bow ASP capital with 75 percent of the expenditures occurring in the second half of the year. An additional $11 million of capital expenditures is forecast to be spent in 2013, with the remainder of the capital costs relating to the project's Phase 2 implementation scheduled for 2014 and 2015.
2011 Capital Expenditures and 2012 Capital Budgets
Reflecting a very active fall and early winter oil exploitation drilling program, Zargon spent $71.7 million (unaudited) on field activities in 2011. These expenditures were offset by a net $23.4 million (unaudited) of property dispositions and resulted in net 2011 field capital expenditures of $48.3 million (unaudited).
Excluding the Little Bow ASP project, Zargon's 2012 field capital budget has been reduced by $10 million from previous guidance of $65 million to $55 million as we redirect a portion of our capital spending to long term ASP tertiary oil opportunities that will provide stable mid-decade production volumes. Similar to 2011, this field capital program will be partially funded by non-strategic property dispositions, as we improve our property focus and footprint. Our current budget calls for $10 million of net property dispositions and results in a net $45 million of non-ASP capital expenditures.
Consistent with our 2010-2011 strategy, the 2012 field programs are directed entirely to oil exploitation activities. In Alberta, the 2012 field capital program will focus on Hamilton Lake Viking oil exploitation, Bellshill Lake increased fluid withdrawals, Killam Glauconite oil pool development, Taber South waterflood expansion and the Little Bow ASP project development. In the Williston Basin, the capital program will focus on Midale horizontal drainage locations, Frobisher undrained targets and early de-risking expenditures for waterflooding tight oil carbonates with multi-frac horizontal wells.
Including the Little Bow ASP project, Zargon's 2012 capital budget has been reset at $66 million and is comprised of $21 million of ASP related expenditures and the net $45 million of field capital expenditures. As at the end of the 2011 fourth quarter, Zargon's debt net of working capital is $109.5 million (unaudited), a level that represents 61 percent of Zargon's $180 million syndicated loan facility.
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