Petrolifera drilled a total of 47 wells, all on its Puesto Morales/Rinconada Concession in the Neuquén Basin, Argentina, during the year. This drilling resulted in 33 oil wells, two natural gas wells, three water injector wells, two dry holes, four non-productive or suspended wells and three wells were being completed at year end.
At Puesto Morales, a total of 35 wells were drilled, resulting in 25 oil wells, two natural gas wells, three water injector wells, two dry holes, one suspended well and two wells were on completion at year end. At Rinconada, a total of twelve wells were drilled, resulting in eight oil wells, three non-productive or suspended wells and one well was being completed at year end. This brings to over 60 the number of wells drilled on the Concession since first drilling was initiated in late 2005.
A major undertaking during 2007 was the design, construction and activation of the company’s infrastructure and production facilities. This included gathering lines, water treatment facilities, water disposal facilities, a high pressure natural gas pipeline and initiation of a waterflood at Puesto Morales North.
Petrolifera’s sales grew considerably during 2007. All sales were of production in Argentina. Crude oil sales increased 33 percent over 2006 levels, to average 7,921 barrels per day. Much of the improvement occurred during the early part of the year, when flush production from new Sierras Blancas discoveries at Puesto Morales contributed to record quarterly sales, cash flow from operations before changes in working capital and near-record earnings. Subsequently, production curtailments for natural gas conservation purposes, water incursion at a key high productivity well (1013), pressure depletion awaiting the waterflood and delays and equipment shortages affected production levels.
Natural gas sales were stronger at modestly better prices during 2007, awaiting the startup of the waterflood and completion of the company’s high pressure natural gas pipeline to Medanito. Sales rose 80 percent to average 2.1 mmcf/d in 2007.
Production
On an equivalent basis, Petrolifera’s 2007 sales rose 34 percent to average 8,279 boe/d compared to 6,171 boe/d in 2006, the company’s first full year of operations. Fourth quarter sales were 7,042 boe/d.
Petrolifera expects robust growth in production and sales in 2008 as increased natural gas volumes are marketed at improved average prices and as new drilling and the impact of the company’s recently activated pressure maintenance or waterflood program at Puesto Morales is felt. Also, the company is optimistic about the risk adjusted potential of its planned exploration program in Argentina during the current year as it continues to evaluate new Jurassic Sierras Blancas and Loma Montosa prospects at Puesto Morales as well as Cretaceous Centenario opportunities on its Puesto Morales block as well as at its Gobernador Ayala II concession, on which a 3D seismic program was recently completed. This latter block lies just east of and on trend with an area being developed by another Canadian company.
Capital Expenditure
Petrolifera has announced a 69 well, $76 million capital budget for Argentina during 2008. This planned program will include extensive drilling at Puesto Morales/Rinconada, seismic and drilling on Vaca Mahuida, drilling on the Gobernador Ayala II concession and 3D seismic and drilling on the recently confirmed Puesto Guevara Concession in Rio Negro Province, Argentina. Petrolifera now owns 493,310 net acres of oil and gas rights in Argentina, the equivalent of 21 townships in Western Canada. The total does not include any interest which Petrolifera may ultimately hold in the Salinas Grande concession in La Pampa Province. Currently, the company is operating with three rigs and four service rigs.
The company’s Argentinean budget will continue to be evaluated in the context of the actual outcome of exploratory drilling results and the evolving policy framework for the country. Recently announced price controls for crude oil and continuing control of natural gas prices below fair value will impact on anticipated cash flow, especially if refineries attempt to transfer imposed burdens on to producers. It is apparent that if increased deregulation was to occur, improved cash flow from operations before changes in working capital would likely result in higher levels of reinvestment in Argentina. Since Petrolifera commenced drilling operations in late 2005, the company has invested approximately $100 million in the country.
Plans are advancing for early drilling in Colombia. Petrolifera has identified three prospective drillable prospects on its Sierra Nevada I License in the Lower Magdalena Basin. Discussions to secure a drilling rig for a July/August commencement of activities are continuing. A seismic program is also anticipated in 2008 on the company’s Turpial Block in the Upper Magdalena Basin. Staffing is underway and an office has been established in Bogota, Colombia. Petrolifera controls over one million acres of petroleum and natural gas rights in Colombia, fast becoming one of the exploration hotspots in South America for the oil and natural gas industry. An initial 2008 capital budget of $8 million has been established for Colombia; this may be expanded depending upon results and as mentioned, developments in Argentina, although regardless the company has the wherewithal to expand its Colombian budget as warranted by opportunities that develop.
Petrolifera’s 2008 Peru capital budget has been established at $56 million, to cover the cost of extensive seismic programs on both Ucayali Block 107 and on Maranon Block 106 and for the drilling of the company’s first well on Block 107. These are both jungle blocks with attendant high costs of exploration, including for access and when drilling, for helicopter support. Petrolifera’s seismic program on Block 107 is proceeding very favorably, with 62 percent of lines cut at year-end 2007; 60 percent of shot holes have been drilled and 24 percent of lines have been shot. Early indications from received data are considered excellent and the company is proceeding with preparation of its Environmental Impact Assessment (”EIA”'94) applications for a number of drilling locations. The data will be received, interpreted and reviewed for selection of the preferred prospects, which are anticipated to have considerable potential.
As with Colombia, discussions for a suitable heli-transportable rig are advancing to the contract negotiation stage, initially for a two-well commitment. Drilling is tentatively anticipated for approximately October 2008, subject to regulatory approval of the company’s drilling EIA.
Expenditures
Major expenditures were made during 2007 on field facilities including for water treatment and disposal, a waterflood or pressure maintenance facility and a high pressure natural gas pipeline to Medanito from Puesto Morales. Over $100 million of capital expenditures are anticipated for the full year. These investments are expected to result in restoration of the company’s production and sales growth during 2008, aided by continued drilling activity in Argentina (including on new blocks at Gobernador Ayala II, Vaca Mahuida and Puesto Guevara) where the company controls over 493,000 net acres of petroleum and natural gas rights.
Seismic and drilling is also anticipated in 2008 in Colombia and in Peru on what are anticipated to be high potential prospects. The company is financially self-sufficient with adequate cash, anticipated cash flow and available credit to fund an anticipated $140 million capital program in 2008.