WesternZagros: Targeting over 1 billion barrels of oil in next drill campaign

WesternZagros Sarqala-1 well testing

WesternZagros (CVE:WZR) is a Canadian based oil exploration and development company that is exploring for oil and natural gas in Iraq. The Company holds a Production Sharing Contract with the Kurdistan Regional Government in the Kurdistan Region over the Kurdamir and Garmian Blocks that cover 2,120 square kilometres or 500,000 acres, and form one of the largest and very prospective exploration areas in the region. Both Blocks are located on the same trend as the super giant Kirkuk oil field which is 75 kilometres to the northwest.

The Company has already completed one well on each Block, where both wells discovered significant quantities of hydrocarbons. The last well tested by the Company flowed light oil at rates of over 9000 barrels per day. An independent audit completed by Sproule International confirms prospective resources at over 1.75 billion barrels of oil equivalents, including 1 billion barrels of oil.

In 2005, the Company was one of the first operators to commence oil exploration in Kurdistan, securing a large and strategic landholding that lay along trend from Iraq’s northern oil fields. A Production Sharing Contract was executed at a time when Kurdish authorities were at loggerheads with the central government in Baghdad, who refused to accept the legality of these oil deals.

In early 2011, the Iraqi Government announced formal recognition of the Kurdish Production Sharing Contracts that were previously in doubt, and allowed oil exports from Kurdistan to resume. The Kurdish authorities then presented their first export statement to the Iraq Federal Finance Ministry for over 5 million barrels of oil that had been delivered for export, which was officially recognized in May, by the first payout from the Ministry of approximately US$243? million, constituting 50% of net revenues on that oil.

Iraq is currently exporting 2.25 million barrels per day, from record production of 2.7 million barrels per day, with Kurdistan contributing approximately 180,000 barrels per day of this total, and planning to increase this to 200, 000 barrels per day by the end of this year.

WesternZagros has amended its Kurdish interests by splitting them into two Blocks, while retaining their 40% interest in both areas. The northern Production Sharing Contract is now known as the Kurdamir Block, covering 340 square kilometres and has Talisman Energy (TSE:TLM) as operator, and contains the Kurdamir-1 discovery well.

WesternZagros is operator of the southern Production Sharing Contract, which is now called the Garmian Block, and covers 1,780 square kilometres. This area contains the Sarqala-1 discovery, along with the Mil Qasim, Qulijan and Baran prospects.

The Kurdamir-1 well was completed under the terms of the original Production Sharing Contract, and was drilled to a depth of 4,077 metres through the crest of the Kurdamir structure, penetrating 1,919 metres of gross hydrocarbon shows. The first hydrocarbon intersection occurred at a depth of 2,142 metres, and penetrated a 327 metre column of oil and gas in the Oligocene reservoir, the second intersection penetrated a 634 metre oil and gas column in the Eocene reservoir, and the third intersection penetrated a 752 metre oil column in the Cretaceous reservoir. Testing of the Oligocene reservoir confirmed the discovery of light oil and a large gas cap.

Drill stem tests flowed 27.5 MMcf/d of gas, and 1,172 bbls/d of 61° API natural gas liquids, with the well predicted to produce over 50 MMcf/ day of gas and 2,240 bbls per day of condensate from the Oligocene alone. Prospective resources of oil in the Oligocene are estimated at 85 MMbbls at P90, 260 MMbbls at P50, and 560 MMbbls at P10. Contingent resources of gas are estimated at 505 BCF at P90, 850 BCF at P50, and 1,420 BCF at P10; and condensate at 22 MMbbls at P90, 33 MMbbls at P50, and 48 MMbbls at P10.

Major oil upside remains in the deeper and untested Eocene reservoir, with an estimate of 18 MMbbls at P90, 86 MMbbls at P50, and 273 MMbbls at P10; and the deepest untested Cretaceous reservoir with 59 MMbbls at P10, 152 MMbbls at P50, and 340 MMbbls at P10.

The Kurdamir structure is part of a much larger reservoir system that extends for at least 20 kilometres and is being intersected in the Topkhana-1 Well, being drilled by Talisman and located 12 kilometres to the northwest, where Western Zagros has no interest. The current Mean Prospective Resources on the WesternZagros owned Kurdamir Block is estimated at 585 MMbbls, and may potentially be part of one of the world’s biggest oil fields. The Bai Hassan oil field which is located 125 kilometres to the northwest, contains 2.2 billion barrels of oil, and has a similar structure to Kurdamir-Topkhana.

The Kurdamir-2 is positioned 2 kilometres from Kurdamir-1, is planned to spud in the fourth quarter of 2011, and will test the flank of the structure, drilling through the Oligocene, Eocene, and Cretaceous formations.

Sarqala-1 was recently drilled on the larger Garmian Block and intersected multiple oil zones in the Upper Fars sandstone reservoir, and in the deeper Jeribe and Oligocene carbonate reservoirs, terminating at 4,357 meters within the Oligocene reservoir. A sidetrack was run across the Jeribe formation, where initial testing flowed light 40° API oil at rates of over 9,000 barrels of oil per day, without any stimulation or water production, and has en completed as a potential oil producer. The Prospective Resources for the Jeribe oil reservoir have been estimated at 9 MMbbls for P10, 66 MMbbls for P50, and 248 MMbbls for P10, and will be updated following further testing.

The Mil Qasim-1 well is anticipated to spud next month, and will be located 3 kilometres from Sarqala-1, and positioned on the crest of the Upper Fars Sandstone reservoir. This will be a shallow and simple hole drilled to a depth of 2,400 metres, seeking to intersect the same multiple zones of oil bearing sandstones encountered in Sarqala-1, which encountered high pressure 35 to 42° API oil.

Following the results of Kurdamir-2, it is likely that the Company will drill Qulijan-1, which is an exploratory step out well on a structure that is approximately 12 kilometres long and is next to the Kurdamir structure, but is located within the northwest corner of the Garmian Block.

Mil Qasim-1, Kurdamir-2, and Qulijan-1 will target over 1 billion barrels of oil equivalents, and have the potential to become world class producers.

The Production Sharing Contract that applies on both blocks entitles the contractor group to recover costs and then garner a minimum of 16% to maximum of 35% of oil profits, and between 20% and 40% of gas profits. The profit margins reduce on a linear scale as the revenues from the production of hydrocarbons increase above the costs incurred.

The oil that has been recovered on both blocks is a proven light and low sulfur oil that is highly desirable to enhance export blends, as 69% of Iraq’s reserves are 27° API or heavier. Western Zagros expects to be producing its first oil revenues from Sarqala-1 by the end of the current year, from extended well testing, with oil trucked to Kirkuk for export via local pipeline.

The Company currently has cash of $78.5 million, but will require additional funds to complete its current three well program. Ongoing exploration success, with the potential to develop a world class oil field, and the smoothing of relations between Kurdistan and the Central Government will underpin this effort.