WesternZagros Third Quarter 2012 Operational and Financial Results

21 Nov 2012 07:30 ET

Marketwire Canada - NFD

NOT FOR DISTRIBUTION TO U.S. NEWSWIRE SERVICES OR DISSEMINATION IN THE UNITED STATES

WesternZagros Resources Ltd. (TSX VENTURE:WZR) ("WesternZagros" or "the Company") announced today its operating and financial results for the third quarter ended September 30, 2012, and additional key highlights and activities to date. The financial statements and the accompanying MD&A are available at www.westernzagros.com and on SEDAR at www.sedar.com.

Headlines

--  Flow rates of up to 3,450 barrels per day ("bbl/d") of light, 38 degree    API oil and 8.8 million cubic feet ("MMcf/d") of natural gas were    achieved from the 20 metre perforated interval, the first and deepest of    the three planned cased-hole tests in the Oligocene reservoir of    Kurdamir-2. The final rate was achieved on a 72/64" choke with a    wellhead flowing pressure of 810 psi. No formation water was detected.--  Contingent resources expected to increase based on the new proven lowest    known oil level in the Kurdamir-2 well at 2,590 metres, 28 metres deeper    than reported following the initial open-hole test conducted in March    2012. The Oligocene oil leg encountered in this well is now interpreted    to be 146 metres minimum thickness (previously interpreted to be 118    metres).--  Extended well test ("EWT") production from the Sarqala-1 well restarted.    Sarqala-1 is now producing approximately 5,000 bbl/d of oil, which is    being trucked from Sarqala to Khurmala and delivered into the export    market. Payment terms are expected in accordance with the September 13,    2012 Oil Agreement between the Federal Government and the KRG.--  2D and 3D seismic acquisition program over the Sarqala, Mil Qasim, Zardi    complex and Chwar structures commenced on November 1, 2012 and is    anticipated to finish mid-March, 2013.--  Gazprom Neft chosen to be the Third Party Participant ("TPPI") in the    Garmian PSC, with a 40 percent interest. WesternZagros received a net    amount of $56 million in back costs from Gazprom Neft and retains    operatorship of the Garmian Block.--  As at November 19, 2012, over 2.4 million hours of work have been    performed safely and WesternZagros has achieved a total of 756 days    without any Lost Time Incidents ("LTIs"). On October 24, 2012, the    Company achieved the milestone of two million man hours without an LTI.--  Oil discovery confirmed in Eocene reservoir at Kurdamir-2. A single    cased-hole test was performed over a net perforated interval of 108    metres and resulted in the flow of light, 45 degree API oil at sub-    commercial flow rates. No formation water was encountered.--  Oil discovery confirmed in Cretaceous reservoir at Kurdamir-2. The    Cretaceous Shiranish testing program consisted of three cased-hole tests    over a 221 metres gross interval and resulted in the flow of light, 39    to 40 degree API oil at sub-commercial rates.--  Private placement completed with Crest Energy International LLC    ("Crest"), of Houston, USA, at Cdn$1.40 per share for $57 million at an    approximate 10% premium to the August 4 closing price.--  $114 million in working capital at end Q3 2012.--  Capital expenditures estimate for the fourth quarter of 2012, including    the requirement for the Company to fund 50 percent of Garmian activities    and 60 percent of Kurdamir activities to be in the range of $30-40    million.

Commenting on the third quarter results and subsequent events, WesternZagros's Chief Executive Officer, Simon Hatfield said,

"During the third quarter, we successfully increased our funding for our aggressive exploration program. We look forward with great anticipation to the additional testing results from the Kurdamir-2 well and an active upcoming year as we secure drilling rigs and long lead items to advance the Hasira, Baram, Upper Bakhtiari and Kurdamir wells in 2013. The recent re-commencement of the Sarqala EWT has achieved a new operational milestone for the Company as we have now produced over 1 million barrels of oil."

Operational & Financial Review

At the Kurdamir-2 well, the operator, Talisman (Block K44) B.V. ("Talisman"), and WesternZagros successfully completed the first of three planned cased-hole tests in the Oligocene Formation of the Kurdamir-2 well. The test targeted 20 metres of fractured reservoir below the main porous zone. This zone tested at stabilized rates of up to 3,450 bbl/d of light 38 degree API oil and 8.8 MMcf/d of natural gas over a two-day period. The final rate was achieved on a 72/64" choke with a wellhead flowing pressure of 810 psi. No formation water was detected. The Company's expectation of an increase in its contingent resources is based on the now proven lowest known oil in the Kurdamir-2 well at 2,590 metres, 28 metres deeper than reported following the initial open-hole test conducted in March 2012. The Company now interprets the Oligocene oil leg encountered in this well to be 146 metres minimum thickness (previously interpreted to be 118 metres). The test results also validate that the prospective resources contained in the Oligocene extend still further down the structure and this will be further evaluated in the upcoming Kurdamir-3 well to be drilled once current operations on Kurdamir-2 are completed. The operator will continue the testing program of two additional Oligocene intervals at Kurdamir-2.

On November 8, 2012, WesternZagros restarted the EWT at the Sarqala-1 well after approval was received from the KRG. The Company is now producing approximately 5,000 bbl/d of oil, with the crude oil being trucked from Sarqala to Khurmala and delivered into the export market. Payment terms are expected in accordance with the September 13, 2012 Oil Agreement between the Federal Government and the KRG.

A 3D seismic acquisition program over the Sarqala, Mil Qasim and Zardi complex structures commenced on November 1, 2012 and is anticipated to finish mid-March, 2013. The program consists of using vibroseis operations to acquire 325 square kilometres of 3D seismic. In addition, WesternZagros is also acquiring 60 kilometres of 2D seismic at Chwar to better define this low risk, Jeribe oil opportunity.

On August 1, 2012, the Company announced that the KRG assigned Gazprom Neft Middle East B.V. ("Gazprom Neft") as the Third Party Participant ("TPPI") with a 40 percent interest in the Garmian Production Sharing Contract ("Garmian PSC"). WesternZagros received a net amount of $56 million in connection with the TPP assignment. Operatorship remains with WesternZagros, which maintains its 40 percent interest, until the commencement of the development period under the PSC. WesternZagros and Gazprom Neft will each fund 50 percent of costs on the Garmian Block effective from June 1, 2012.

As at November 19, 2012, over 2.4 million hours of work have been performed safely and WesternZagros has achieved a total of 756 days without any Lost Time Incidents ("LTIs"). On October 24, 2012, the Company achieved the milestone of two million man hours without an LTI.

During the drilling of the Eocene reservoir section at the Kurdamir-2 well, an interpreted oil bearing, fractured reservoir section with gross thickness of 275 metres was encountered similar to the Eocene reservoir section encountered in the Kurdamir-1 well. On October 31, 2012, the Company reported the successful completion of its Eocene reservoir testing program and proved an oil discovery in the Eocene reservoir. A single cased-hole test was performed over a net perforated interval of 108 metres and resulted in the flow of light, 45 degree API oil at sub-commercial flow rates. No water leg was encountered and no formation water was recovered during the test. Following an acid fracture stimulation, the well flowed back a mixture of oil, emulsion and spent acid. This finding provides another piece of evidence that the Kurdamir and neighbouring Topkhana structure share a common oil accumulation in the Eocene reservoir in addition to the Oligocene reservoir. This was the first test of the Eocene reservoir and the Company will engage in further study to optimise completion techniques in order to unlock this resource. Based upon both this new information and the fact that no formation water was encountered while drilling this Eocene reservoir section, the Company does not expect the revised mean estimate of gross unrisked prospective resources for the Eocene reservoir of 278 million barrels ("MMbbl") to change materially as a result these test results.

On June 29, 2012, the Kurdamir-2 well reached final total depth of approximately 4,000 metres within the Cretaceous-age Shiranish reservoir. The Shiranish reservoir, as penetrated, is comprised of a gross interval of 510 metres of naturally-fractured marlstones and limestones. Testing has been completed in this deepest of the three stacked reservoirs drilled by the Kurdamir-2 exploration well. On October 12, 2012, the testing confirmed an oil discovery in low permeability fractured limestones of the Cretaceous-age, Shiranish Formation, adding to the previously announced major oil discovery in the Oligocene reservoir. The Shiranish testing program consisted of three cased hole tests over a 221 metres gross interval and resulted in the flow of light, 39 to 40 degree API oil at sub-commercial rates. The Company is encouraged that the Shiranish testing program recovered oil from a depth that is significantly deeper than the limit of closure of the Kurdamir structure at the Cretaceous level as mapped from seismic data. This finding supports the observation that the Shiranish reservoir, in a similar fashion as the Oligocene and Eocene reservoirs, is also involved in a considerably larger trap and that Kurdamir and the neighbouring Tophkana structure share a common oil accumulation. Further evaluation, including additional analyses of the test results, followed by the planned 3D seismic program, will be required to better understand if the Shiranish is likely to have commercial reservoir characteristics. The Company expects that the estimate of prospective resources for the Cretaceous reservoir will be revised downward, although it is not expected to materially change the estimate of prospective resources of the whole Kurdamir prospect. The combined audited unrisked mean estimate for all three reservoirs on the Kurdamir prospect is 1,609 MMbbl of prospective oil resources, 11 per cent of which (181 MMbbls), is attributed to the Cretaceous.

On August 6, 2012, the Company signed a strategic investment agreement (the "Agreement") with Crest Energy International LLC ("Crest"), of Houston, USA. Under the Agreement, Crest purchased, through a non-brokered, private placement, 40,714,286 Common Shares in the Company at $1.40 per share for $57 million. Crest now owns 9.88 percent of the Company's issued and outstanding Common Shares following closing of the private placement. This price represented an approximate 10 percent premium to the August 4, 2012 closing share price. Under the terms of the agreement, Eric Stoerr, a representative from Crest has been appointed to the WesternZagros board of directors.

For the fourth quarter of 2012, WesternZagros estimates its capital expenditures, including the requirement for the Company to fund 50 percent of Garmian activities and 60 percent of the Kurdamir activities to be approximately $30-40 million. This includes approximately $8-10 million for the planned testing of the Oligocene reservoir at Kurdamir-2; $8-11 million for designing, planning and procurement of the necessary long lead materials for the Kurdamir-3, Hasira-1, Upper Bakhtiari, Baram and Qulijan wells; $5-8 million for the seismic programs on the Garmian and Kurdamir Blocks; $3-5 million for planning and procuring the permanent facilities for Sarqala; $3 million for in-country support costs and other PSC expenditures for both the Kurdamir and Garmian Blocks; and approximately $3 million for corporate and general and administrative costs. This excludes any costs or proceeds from the anticipated resumption of crude oil sales from the extended well test at Sarqala-1.