WesternZagros 3rd Quarter Results

Highlights

WesternZagros is currently exploring for crude oil and natural gas in the Kurdistan Region of Iraq and the Company currently has no reserves or production. WesternZagros' revenue is comprised entirely of interest earned on cash and cash equivalent balances and short-term investments. WesternZagros' highlights and activities to November 18, 2010 include the following.

Operations

- During the drilling of a sidetrack at the Kurdamir-1 well in the second quarter of 2010, WesternZagros encountered a high pressure hydrogen sulphide (H2S) bearing, hydrocarbon zone. The well was shut in on April 25, 2010 while attempting to stabilize this zone. WesternZagros commenced well control operations on May 15, 2010, after the drill string parted.

- The upper 450 metre portion of the parted drill string was recovered in early July 2010. The hydraulic workover rig, known as a snubbing unit, that had been in use was subsequently removed and well control operations resumed using conventional techniques. A further 1,655 metres of drill string was recovered in early August 2010, with approximately 800 metres remaining in the well bore.

- WesternZagros safely and successfully completed well control operations at the Kurdamir-1 well on October 14, 2010. The open hole was plugged and cemented up to a depth of approximately 2,500 metres. No further drilling is planned for the Kurdamir-1 well at this time.

- Cased hole testing of the Lower Oligocene commenced at the Kurdamir-1 well on October 16, 2010. The first cased hole test was completed at depths between 2,365 and 2,415 metres. The test achieved a maximum flow rate, after acidization, of 18.3 million cubic feet per day of gas and a maximum yield of 86 barrels of high quality, 62 degrees API natural gas liquids (condensate), per million cubic feet of gas. No formation water was recovered during the testing. In addition, a mixture of light crude oil and condensate was recovered during the test prior to acidizing the formation. After acidizing the well, the Company interprets that the high gas flow rates and pressures prevented further oil flow. The second cased hole test is currently being performed in a zone between 2,455 and 2,470 metres to confirm the presence of the potential oil leg below the discovered gas and condensate in the Oligocene formation.

- The gross costs for Kurdamir-1 as of September 30, 2010 were approximately $121 million ($73 million net to WesternZagros). These gross costs include approximately $66 million of incremental costs associated with well control and sidetrack activities ($40 million net to WesternZagros). The Company is pursuing reimbursement of a significant portion of these costs under an insurance claim. WesternZagros, as operator, has notified the KRG of a force majeure event under the terms of the PSC related to the well control and subsequent sidetracking operations associated with Kurdamir-1. Under the terms of the PSC, when a force majeure event occurs, the time resulting from any such delay and the time necessary to repair any damage resulting from the delay will be added to any time period provided under the PSC, including the first exploration sub-period.

Exploration

- WesternZagros advanced its analysis of the Sarqala-1 well re-entry opportunity in order to test the Miocene Jeribe Formation. The analysis suggests strong oil potential, analogous to the same formation in the nearby Qamar-1 well, which flowed 2,200 barrels of oil per day.

- WesternZagros completed a basin modelling study that indicates oil was expelled from the late Cretaceous and early Tertiary source rocks during the time hydrocarbon traps were forming. As such, this study confirms the potential for oil discoveries within the Production Sharing Contract Area.

- WesternZagros is re-evaluating the hydrocarbon potential beneath the Kalar thrust as part of its overall prospective resource re-assessment of its PSC lands. WesternZagros also continues to compile seismic data and information from wells on the exploration blocks adjacent to its Production Sharing Contract Area. WesternZagros is integrating this new information, along with the reprocessed seismic data on its Production Sharing Contract Area, into its seismic interpretations to further define and update its prospects and lead inventory.

Financial

- As at September 30, 2010, WesternZagros had $50.5 million in working capital.

- WesternZagros' share of capital expenditures for the nine months ended September 30, 2010 associated with its PSC activities and other capitalized costs was $49.8 million, prior to insurance recoveries. Year-to-date expenditures for 2010 include $46.2 million of drilling-related costs; $0.7 million of geological and geosciences related work; $1.9 million of supervision and local office costs; $0.3 million of PSC-related costs; and $0.7 million of corporate-related expenditures. As at September 30, 2010, the Company has recorded estimated insurance recoveries of $37.0 million, net of deductibles, related to the year-to-date well recovery costs incurred at Kurdamir-1.

Insurance

- WesternZagros initiated an insurance claim in the first quarter of 2010 related to well control operations at Kurdamir-1, which commenced when the well was drilled into a high pressure formation in the Gulneri seal. These operations continued after a subsequent additional high pressure zone was encountered in the Aaliji seal. The Company received initial confirmation of coverage for the claim from the insurers during the second quarter of 2010. The claim continued through the third quarter of 2010,including well recovery costs incurred until October 14, 2010, when the Company began completion and testing of the Lower Oligocene formation.

- As at September 30, 2010, WesternZagros had received $15.7 million in insurance proceeds from the insurers. The Company estimated an additional receivable of $21.3 million for interim claimable costs as at September 30, 2010. These costs, under the terms of the insurance policy, are subject to review and approval by the adjuster as appointed by the insurers. The Company continues to submit interim insurance claims as allowable costs are incurred and paid. Subsequent to September 30, 2010, the Company received $1.2 million in insurance proceeds and has received approval for a further payment of $6.3 million.

- The Company's maximum limit of coverage for the current insurance claim is $45 million, of which approximately $38.2 million has been incurred up to October 14, 2010, when the completion and testing of the Lower Oligocene formation began. This leaves approximately $6.8 million available for a future Kurdamir re-drill.

Comments are closed.