• Active drilling continues
• Facilities nearing completion
• Q3 2007 sales improve over Q2 2007; year over year sales growth 90%
Petrolifera Petroleum Limited provides an operational update for its shareholders, detailing activity and certain operating results since our last operating update press release on September 12, 2007.
On an equivalent basis, successive period sales improved nine percent during the third quarter of 2007, compared to the prior quarter this year. Crude oil sales were up 8.3 percent to 7,195 bbl/d. Natural gas sales were up 26 percent to 2.2 mmcf/d, compared to 1.8 mmcf/d.
On a year-to-date basis, crude oil sales in 2007 were up 91 percent over 2006 to 8,376 bbl/d, while natural gas sales were up 57 percent to 1.9 mmcf/d. On an equivalent basis, sales grew 90 percent to 8,696 boe/d.
The improvement reflects the continuing impact of successful drilling at both Puesto Morales and Rinconada onshore in the Neuquén Basin, Argentina. However, results for 2007 do not yet fully reflect the productive capacity of the two areas, which continue to be evaluated with exploratory and development wells and await the impact of the company's pressure maintenance waterflood project on the northern and central pools at Puesto Morales. This project is in the final stages of completion and implementation.
Petrolifera's completion of its overall production facilities, including its waterflood project, its water injection program, its oil treatment plant and its high pressure natural gas pipeline has been affected by the assumption of direct operatorship upon discharge with cause of the prior contract operator, the arising and resultant necessity to redesign its plant to meet operational and regulatory requirements and by the shortage of critical key equipment, including the unavailability of high pressure valves, pump engines and compression on a timely basis. This was unfortunately exacerbated by the shortage of natural gas to industrial users during the recent winter months in Argentina.
Also, during the drilling of proposed water injection wells, oil bearing reservoir was encountered and resulted in certain of these wells being completed as oil wells, thereby ensuring optimum recovery from the identified pools over the life of the field. While this was a most favorable outcome to encounter and should assist in enhanced reserve recognition when the company's reserve reports are updated at year end 2007, new injector wells had to be drilled in down dip locations to ensure no recoverable oil was left in the ground.
In summary, Petrolifera's Puesto Morales facilities and projects are all in a very advanced stage. Natural gas is being delivered at low pressure through the previously completed natural gas pipeline until compression is available and new non-associated natural gas wells are drilled and tied into the pipeline. While it is always difficult to predict the timing of completion of projects in any jurisdiction, in large measure Petrolifera's facilities should be substantially operative in November 2007 with the balance operative by year-end.
As a result, Petrolifera anticipates continued and accelerated production improvements during the balance of the year. However, given the difficulties in predicting the timing of events which impact on the company's production and sales levels in Argentina, management has determined it will no longer provide detailed guidance with respect to anticipated operating and financial results. This may be reconsidered once production levels have stabilized following the implementation of the company's pressure maintenance waterflood project at Puesto Morales and when there is less of an exploratory component to the company's activities in the areas from which it is producing and selling its crude oil and natural gas.
Puesto Morales, Argentina
Since mid-August 2007 Petrolifera has drilled, completed or tested eight wells at Puesto Morales and is currently drilling two new wells. Two of these wells - 1025 and 1037 - will be water injector wells. Six of the wells - 1031, 1033, 1036, 1042, 1043 and 1044 - have all been completed as light gravity crude oil wells and have all been placed on pump due to prevailing reservoir conditions or due to unstable flow rates without artificial lift. This is very common as areas achieve a certain level of maturity awaiting pressure maintenance. Their productivity and that of other flowing oil wells, which have been curtailed pending facilities completion, should be positively impacted once the waterflood project is initiated.
There are three other wells which are either drilling or awaiting completion - the 1006 well, which is drilling ahead in an up dip position to the original La Ramona well drilled by previous owners in 2003; the 1050 well, situated northwest of the 1061 and 1013 wells in the central lobe and southeast of the 1006 well; and the 1053 well, which offsets the excellent 1028 Centenario oil discovery on the eastern edge of the Puesto Morales concession and is standing cased, awaiting testing.
With the exception of the 1006 and 1050 wells, which are currently drilling, Petrolifera has not yet been able to drill and test its higher-potential exploratory locations on the Puesto Morales block, primarily as it has been awaiting the arrival on location of a larger, Chinese-built drilling rig to be operated by one of its drilling contractors. This delay has restricted the company's ability to drill wells in the northeastern portion of the Puesto Morales Block. These wells and others to the south must be drilled directionally due to the proximity of the surface locations to the Rio Colorado water reservoir or "embalse", which bisects the block.
Petrolifera has to move the surface locations to ensure they will not be flooded during the rainy season with resultant high water levels. Also, regulatory issues and delays thus far in late 2007 have also limited Petrolifera's ability to drill some other high potential exploratory prospects on the southern portion of the
Block. The aforementioned drilling rig is now anticipated on location in November and as a break-in period will be required for this new rig and crew, it now appears these high potential wells will be deferred until 2008.
Rinconada, Argentina
Petrolifera has now drilled seven wells and is now drilling its eighth well on the large seismically-defined feature on its Rinconada Block in Argentina. These wells are being drilled primarily for light gravity Sierras Blancas crude oil from a depth of approximately 1,000 meters. Some additional zones or formations, including fractured basement, may also be oil-bearing and prospective producing horizons.
To date, the Rinconada (RN) 1001 discovery, RN 1005, RN 1006 (to distinguish it from Puesto Morales 1006) and RN 1010 (first step down dip from RN 1001) have been completed as oil wells, with RN 1005, RN 1006 and RN 1010 on pump at rates up to 150 bbl/d. The RN 1001 discovery continues to flow at rates up to approximately 150 bbl/d. Additionally, the RN 1009 well is currently being completed and the RN 1007 well (second step down dip from RN 1001) is standing cased, ready for testing. The RN 1029 well, drilled at some distance southwest of the RN 1001 well, has been suspended due to problems arising from poor subsurface hole conditions and a poor cement job when running casing. It did encounter encouraging oil shows while drilling and oil pay was calculated based on logs. The company is undecided whether to attempt a reentry to test or to drill a replacement well.
Petrolifera remains enthusiastic about the overall reserve potential of this significant new light gravity crude oil play and has dedicated one drilling rig and one service rig to the block to continue extending the aerial extent and associated reserves and production from the seismically-defined accumulation.
Other
Petrolifera anticipates it will be able to drill approximately eleven more wells on the Puesto Morales Block and six more wells on the Rinconada Block during the balance of 2007, approximately ten less wells than originally budgeted, due largely to the late arrival of rigs.
Petrolifera has commenced an arbitration procedure with respect to securing its 50 percent interest in the Salinas Grande I concession in La Pampa Province, Argentina. The designated partners have been reluctant to complete the transaction as agreed, necessitating this action.
The former contract operator of the Puesto Morales Concession has commenced an arbitration procedure against Petrolifera, claiming wrongful dismissal and seeking financial compensation, including damages. Petrolifera is of the opinion the action is without merit and intends to respond and counterclaim. Potential damages are not quantifiable at this time, but in any event are not anticipated to be material to the company.
The company's Board of Directors will meet on November 6, 2007 at which time it will review and authorize release of the company's Interim Report for the three months and nine months ended September 30, 2007, including detailed operating and financial results. At that time, the Board will also consider management's recommended capital program for the balance of 2007 and for calendar 2008 for all areas of the company's Argentinean operations, supplemented by proposed drilling and seismic on company-owned concessions and licenses in Peru and Colombia.
It now appears that Petrolifera will not fully expend its anticipated 2007 capital budget of $148 million, due to delays in Argentina as detailed herein. The full extent of the reduction in planned 2007 outlays will be conveyed in conjunction with the impending release of detailed financial and operating results on November 6, 2007.