WesternZagros to Start Production at Sarqala

Following approval of its declaration of commerciality by the Kurdistan Regional Government (KRG), WesternZagros Resources has announced that it is moving to develop the first of its two significant light oil discoveries.

Once its development plan for the Sarqala field is approved, the Company expects to produce up to 10,000 barrels per day (bbls/d) of light, sweet oil in the second half of 2014.

After 10 years of rewarding exploration in the Kurdistan Region, WesternZagros is turning its discoveries into production that is destined for the domestic market and potentially the Kurdistan Region’s export markets via the new pipeline,” said Simon Hatfield (pictured), Chief Executive Officer of WesternZagros. “This monumental step marks a new era in our Company history that was recently defined by the KRG’s approval of our declaration of commerciality on the Sarqala Discovery.

We are focused on promptly generating productive value from the Sarqala field for our shareholders and the people of the Kurdistan Region, and undertaking development planning for our giant Kurdamir Discovery, which contains mean contingent resources of almost a billion barrels of oil equivalent,” Hatfield said.

Moving to production and cash flow

The Sarqala-1 well, which produced up to 5,000 bbls/d during a nine-month extended well test in 2011-12, already has production facilities in place. WesternZagros is completing a workover on this well that is expected to take production capacity up to 10,000 bbls/d. Additional development wells at Sarqala, including the Hasira-1 well currently being tested, are expected to deliver additional volumes through planned expansions to initial production facilities that have a design capacity of up to 35,000 bbls/d.

WesternZagros will submit a Garmian Block development plan, outlining future development wells, production facilities and support infrastructure, to the KRG by June 21, 2014. Independent reserves evaluators have audited estimates that, as at February 8, 2013, the Sarqala Discovery contained gross unrisked mean estimates of 463 million barrels of oil equivalent in prospective resources and 24 million barrels of oil in contingent resources. Future expansion phases will be determined by the success of a forthcoming development drilling campaign to delineate the prospective resources.

On the neighbouring giant Kurdamir Discovery, development planning to bring this find into production is a longer-term initiative that requires extensive geological and operational evaluation, as well as engineering and financial planning. Three Kurdamir exploration wells have defined an oil and natural gas-charged structure that contains gross unrisked mean estimates of 541 million barrels of oil in contingent resources, and a further 1.3 billion barrels of oil in prospective resources. WesternZagros expects to file a declaration of commerciality for the Kurdamir Discovery within the next 12 months.

“As we move to this development phase, WesternZagros is focused on optimizing and monetizing the value of its discoveries through a variety of means, which includes working with our partners and the KRG to generate near-term production from Sarqala, as well as exploring the greatest value creation opportunities available from our suite of resources,” Hatfield said.

Transition to development

As part of transitioning to development, WesternZagros, its co-venturer, Gazprom Neft, and the KRG have agreed to end exploration activities on the Garmian Block following the completion of the Hasira-1 well. As such, the Company has no further exploration expenditure obligations and will now be able to apply its focus and financial resources on development. Under the agreement with the KRG, the partners have relinquished the areas of the Garmian Block that are not covered by the development plan. The development plan area includes the Sarqala and Hasira discoveries. The relinquished area includes Chwar, Qula, Quilijan and Baram, which are considered non-core to WesternZagros’s development plans.

Optimizing drilling rig contracts

During the preparation of the development plan and its approval by the KRG, and in order to minimise short-term expenses, WesternZagros is in advanced discussions with the KRG and Gazprom Neft to temporarily assign two of its contracted drilling rigs elsewhere for the remainder of 2014. Under this arrangement, the rigs would return to the Company’s Garmian Block for development drilling on Sarqala in early 2015 once the development plan is approved and additional development locations are prepared.

Financing Alternatives

WesternZagros as at December 31, 2013, had net working capital of approximately $97million, which is sufficient to fund planned operations in 2014. As development plans advance, the Company will evaluate funding options with a mind to maximizing value creation for shareholders. Options may include accessing the debt and/or equity markets, additional partnerships, farmouts or other strategic arrangements.

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