Sterling Energy Half-Year Report

Sterling Energy (LSE: SEY) has just issued its half-year results, and its shares were trading up 4% on Friday morning.

The results statement included the following information regarding its operations in Iraqi Kurdistan:

Prospects and Outlook

In the Sangaw North block, onshore Kurdistan, an integrated interpretation of the 2D seismic and the data

acquired during the Sangaw North-1 well operations will be conducted to determine the potential of the block prior to recommendations to the joint venture group on future activity.

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Chairman’s Statement

For the last one and a half years, shareholders have waited patiently as the Company has managed the drilling activities at Sangaw North-1, an exploration well testing a large structure in the Kurdistan region of northern Iraq. That well has now been drilled and tested, and although the operations have been conducted safely, the outcome of un-commercial gas flow rates has been a disappointment. However, the Company has had the opportunity to test a very large upside potential with limited exposure to costs; the risk of unsuccessful wells is inherent in oil and gas exploration. All of the licence data, including those acquired during well operations, will now be integrated to determine the future potential in the area.

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Operations Review: Kurdistan, Iraq – Sangaw North

In the Sterling operated Sangaw North block (53.33% WI), the Sangaw North-1 exploration well was drilled to a total depth of 4,190m into the Triassic Kurra Chine formation and in the current reporting period three flow tests were conducted across intervals between the Triassic Kurra Chine and the Cretaceous Kometan formations. Gas was produced, along with formation water, at rates that are not commercial and the well has been plugged and abandoned.

DST-3 tested an open-hole interval from 3,338m to 4,190m across the Jurassic Mus and Butmah formations and the Triassic Kurra Chine formation. The well flowed at a stabilised rate of approximately 4.6 million standard cubic feet of gas and 7,280 barrels of formation water per day during a 12 hour flow period through a 96/64ths inch choke with a wellhead pressure of 470 pounds per square inch. Analysis of gas samples, following the flow test, indicated that 53 per cent of the produced gas was hydrocarbon gas with the remainder comprising 46 per cent hydrogen sulphide and 1 per cent carbon dioxide.

DST-4 tested a 100m cased hole interval within the Jurassic aged Sargelu formation. Formation gas and water were observed in small quantities at surface but sustainable flow rates were not achieved.

DST-5 tested a 100m cased hole interval within the Cretaceous aged Kometan formation. The well flowed at a stabilised rate of approximately 0.4 million standard cubic feet of gas and 4,500 barrels of formation water per day during an 8 hour flow period through a 60/64ths inch choke with a wellhead pressure of 280 pounds per square inch. Analysis of gas samples, during the flow test, indicated approximately 83 per cent of the produced gas was hydrocarbon gas with the remainder comprising 10 per cent hydrogen sulphide and 7 per cent carbon dioxide.

The current exploration phase of the Production Sharing Contract (“PSC”) for the Sangaw North area will end in November 2011 and the joint venture partnership may elect to enter the next exploration phase which will then run until November 2013; the Sangaw North-1 well has fulfilled the work commitment for this next phase. During the coming months Sterling will integrate and analyse the seismic, drilling, logging and testing data before making recommendations to the joint venture group.

The Korean National Oil Company is planning to drill an exploration well in 2011 in the adjacent PSC area, Sangaw South. The well is planned to be drilled on a similar structure to the one tested by the Sangaw North-1 well. Sterling is not a partner in the Sangaw South PSC but the results of this well may influence the Company’s view of the future potential of the Sangaw North PSC.

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