OPERATIONS REVIEW
KURDISTAN
Sangaw North PSC (WI 53.33% & Operator)
The Sangaw North-1 exploration well, the first to be drilled on the Sterling operated Sangaw North Block, spudded on 1 February 2010. The well, targeting Cretaceous and Jurassic aged reservoir intervals has a planned depth of 3,660m and the well design allows drilling to a total depth of 4,160m to test deeper Jurassic and Triassic aged reservoirs. The decision to drill the additional deeper section will be based on drilling results encountered up to the decision point.
Whilst drilling the upper part of the Cretaceous reservoir section from 1,450m to 2,395m, through the carbonates of the Shiranish and Kometan Formations, gas shows and drill cuttings with fluorescence were observed, indicating the presence of hydrocarbons in the wellbore. The analysis of open hole wireline and image log data further suggested potential hydrocarbon bearing zones and open hole drill stem tests ("DST") were undertaken over two prospective intervals.
DST-1 tested an open-hole interval within the Cretaceous age Kometan formation. During the 6 hour flow period, an initial recovery of gas was followed by flowing water with minor gas content.
DST-2 tested an open-hole interval of the Shiranish formation, initially producing gas at an estimated flow rate of 4 mmscf/d along with some drilling fluids. However the gas flow decreased and was replaced with water, believed to be formation water, flowing at an estimated rate of 4,300 bbl/d. During a second flow period, the well initially produced water followed by gas at an estimated flow rate of 1 mmscf/d. However again the gas flow decreased and was replaced with water at an estimated rate of 750 bbl/d.
Following the intermediate testing program, the well was drilled below 2,395m to evaluate the lower part of the Cretaceous reservoir section. Whilst drilling at 3,396m, approaching the planned depth for setting a liner prior to drilling into the Jurassic reservoir targets, the well encountered a zone of high formation pressure. As a result hydrocarbon gas, containing approximately 0.5% hydrogen sulphide, entered into the wellbore and pressure was observed at surface.
The gas influx was contained, removed from the wellbore and flared. The drilling fluid in the wellbore was also replaced with heavier fluid to control the higher formation pressure encountered at the base of the well. During these operations, the drill pipe was adversely affected by the hydrogen sulphide within the gas, leading to the drill pipe parting at a depth of approximately 850m. Operations to retrieve the parted drill pipe resulted in the recovery of 1,100m of drill pipe, with no further recovery being possible.
The well was then side tracked in the open hole from a depth of 1,750m. The side track has been drilled to approximately 3,360m, and a liner has been run and cemented in place. The well is preparing to drill ahead to evaluate the Jurassic formations to 3,660m and is expected to penetrate the same formations from which gas containing hydrocarbons and hydrogen sulphide entered the well in the previous wellbore. Operations are being conducted using drill pipe resistant to the effects of hydrogen sulphide.
Drilling of the Sangaw North-1 exploration well has taken longer than initially anticipated due to the difficult drilling conditions encountered in the well. While the presence of commercial hydrocarbons has not yet been demonstrated, the Company is encouraged by hydrocarbon shows observed in the deeper Cretaceous section and the hydrocarbon gas observed at 3,396m in the previous wellbore from below a thick sealing interval in the upper Jurassic.
Sterling's best estimate of gross un-risked prospective recoverable resources for the Jurassic and Triassic reservoir targets is 3.8 tcf in the case of gas, with the equivalent estimated to be 500 mmbbl in the case of oil. Following the influx of gas at 3,396m, Sterling considers the chance of finding hydrocarbons in the Jurassic formations to be materially higher than the independent estimate of around 10% prior to drilling, and that gas with condensate is the most likely hydrocarbon to be discovered. However, there is currently not sufficient information from the well to directly determine the volume or type of hydrocarbons present.
Exploration success experienced by other operators confirms the highly prospective nature of the Kurdistan region. Heritage recently announced a major gas and condensate discovery at Miran West, 45km to the north, with gas in-place of 9 tcf and well flow rates from individual Jurassic intervals of 26 mmscf/d. Western Zagros reported contingent resources in Tertiary formations of 850 bcf of gas and 33 mmbbl of condensate following flow testing of the Kurdamir-1 well, 20km to the southeast of Sangaw North-1, at rates of 27 mmscf/d and 1,170 bopd condensate.
The first sub-period of the exploration phase of the PSC has been extended by one year to allow for the completion of drilling operations in the Sangaw North-1 well and the evaluation of the results of this well. The first sub-period, including the one year extension, will now continue until November 2011. The second, and final, sub-period of the exploration phase of the PSC has duration of 2 years.
CAMEROON
Ntem (WI 100% & Operator)
The Ntem concession area is a deepwater block situated in the southern Douala/Rio Muni Basin and lies adjacent to the northern maritime border of the Rio Muni province of Equatorial Guinea. Water depths range from 400m to 2,000m across the block. During the first term of the concession over 2,100km of 2D and 1,500km2 of 3D seismic data were acquired, along with the purchase of additional seismic and gravity data.
Sterling's financial obligations and work programme for the Ntem concession area are currently suspended under the force majeure provisions of the licence owing to an overlapping maritime border claim between Cameroon and Equatorial Guinea. However, both countries are actively working to resolve this issue and Sterling understands the border dispute may be resolved soon.
This large block is undrilled and is well placed with respect to both Tertiary and Upper Cretaceous plays. Many large leads and prospects have been identified following a detailed interpretation of the extensive 2D and 3D seismic database. Recent seismic attribute analysis and inversion studies reveal the presence of large and widespread submarine fans with good exploration potential. Sterling estimates that four of the Cretaceous prospects mapped so far have prospective recoverable resources of several hundred million barrels each. Sterling intends to farmout an interest in this licence.
Tertiary oil, gas and condensate discoveries made by Noble Energy to the north of the block are now under development, and further discoveries have been reported this year by Euroil (Bowleven); extending both the Tertiary and Cretaceous plays. These results highlight the prospectivity of these plays which are well developed in the Ntem block.
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