Highlights (In US dollars unless otherwise stated)
• Arawak produced an average 9,088 bopd in Kazakhstan and Russia in the first quarter of 2007, an increase of 43% from average production of 6,369 bopd in the same period of 2006 and up 2% despite severe disruption from unusually harsh weather conditions from the average 8,872 bopd produced in the fourth quarter of 2006.
• Sales rose 31% to 826,973 barrels, from 631,805 in the first quarter of 2006 and 10% from 749,064 barrels in the last quarter of 2006.
• Funds from operations fell slightly to $8.6 million from the first quarter of 2006, due to higher costs and a fall in average prices received in Kazakhstan, but more than doubled from the $4.2 million generated in the fourth quarter of 2006.
• 3D seismic interpretation of the Besbolek field in Kazakhstan has been completed resulting in the identification of 4 new leads and 2 possible extensions of existing structures, as well as numerous new drilling locations. Initial results from the 71.5 sq km 3D seismic survey of Akzhar are also very encouraging.
• The central processing facility in Besbolek was completed on time and on budget in the first quarter, removing a bottleneck in potential production capacity from the Besbolek and Karataikyz fields.
• Gross output from North Irael, acquired in June 2006, averaged 1,769 bopd in Q1 2007, or 885 barrels net to Arawak, up from an average 619 bopd gross or 310 bopd net to Arawak in 2006 an increase of 185%.
• Due to delays in the receipt of permits, 3D seismic on the North Irael field has been postponed to next winter. It has been decided, however, to drill a further development well in the north part of the field discovered through
Operations Review
Arawak Energy Corporation made a good start to 2007 with average production from Kazakhstan and Russia reaching 9,088 barrels of oil per day (“bopd”) in the first three months of 2007, up 43% from 6,369 bopd in the first quarter of 2006 and up 2% from 8,872 bopd in the fourth quarter of 2006.
Sales rose 31% to 826,973 barrels from 631,805 in the first quarter of 2006 and 10% from 749,064 barrels in the last quarter of 2006.
Production would have risen further had it not been for extraordinary weather conditions in Kazakhstan, where snowfall in the Aktobe region reached record levels in February and March. Extreme snow storms caused a temporary halt in production at the Akzhar field in February and the subsequent thaw left the steppe roads to and from Akzhar and Besbolek in very poor condition throughout March. The thaw was exacerbated by heavy rainfall in mid-April which further impeded the Company’s ability to evacuate oil by truck to the KazTransOil pipeline system. These roads are only just starting to dry out. As a result, Kazakh production dropped to an average 4,767 bopd in the first quarter of 2007 from 4,838 bopd in the final quarter of 2006, while average Russian output of 4,322 bopd in the first three months of the year rose from 4,034 bopd in the fourth quarter of 2006. The recent improvement in weather in Kazakhstan has led to production once again reaching over 10,000 bopd, approximately 60% of which is contributed by Kazakhstan and 40% by Russia.
Royalties and taxes have increased on a per barrel basis due to a change in the sales mix in Russia away from domestic sales and towards export sales, which have a higher sales price but which are liable to export duty.
Production costs on a per barrel basis have also increased due to a combination of factors including the inclusion of higher cost production from Recher, local currency cost inflation in both Russia and Kazakhstan, and the effect of a weak US dollar pushing up local currency costs in US dollar terms. There was in addition some catch-up of costs that were under-accrued in Kazakhstan in 2006.
Arawak has completed an engineering study into the proposed pipeline from Akzhar to the KazTransOil system and this project has moved into the project design phase. Once completed, this pipeline will eliminate the need to truck oil from the Akzhar field and significantly reduce the impact of adverse weather on production from Akzhar, Arawak’s largest producing field in Kazakhstan.
Prospects for increased production in Kazakhstan were, however, boosted by the completion of a new Central Processing Facility at Arawak’s second biggest producing field in Kazakhstan, Besbolek. At a cost of around $700,000 and with a planned capacity to handle up to 5,000 bopd, the CPF came online to produce sales quality crude oil in the first quarter of 2007 and is currently able to process 3,000 bopd.
Meanwhile, to alleviate a potential bottleneck in access to the main KazTransOil export pipeline system for Besbolek and Karakaityz, the construction of a Company-owned custody point at the KazTransOil station is underway and scheduled for completion in the third quarter of 2007.
Also, in the first quarter, the Company has commenced the interpretation of the 3D seismic survey over the southern part of the Besbolek field and as a result has identified 4 entirely new leads and 2 possible extensions to existing structures, as well as numerous new drilling locations. In addition, early results of the 3D survey over the entire Akzhar block are very encouraging and the company aims to identify locations for at least 4 exploration wells by the end of the second quarter, to be drilled in the second half of the year.
Turning to drilling, two rigs are now active in Kazakhstan and the first two new wells of 2007 have been drilled in Akzhar during April. Further wells are being drilled in Akzhar and drilling has just commenced in Besbolek. The company remains on target to drill approximately 30 wells in Kazakhstan in 2007.
In Russia, Arawak continued drilling at the Sotchemyu-Talyu fields, following the re-interpretation in 2006 of existing seismic data. Two new wells were successfully drilled there in the first quarter of this year and are being put on production. Three rigs are currently active in our Russian fields.
At North Irael, difficulties in obtaining forest clearance permits have meant 3D seismic must be postponed until the winter but the Company intends to drill two new wells in the block based on 2D seismic. The first of these will be in the new structure discovered in 2006, but the second will be exploratory and attempt to prove up oil in a further identified and as yet un-drilled structure.
In Azerbaijan, 3D seismic over the Coastal block has been completed and 2D over the Central and Northern blocks is under way. well #61 in 2006, and to drill another exploration well before the end of 2007.
