Strategic Oil & Gas Ltd

TSX VENTURE : SOG


Strategic Oil & Gas Ltd

October 16, 2009 13:56 ET

Strategic Announces Joint Venture Partner for Maxhamish Area, NE British Columbia Regional Oil Play; Acquisition of Southern Alberta Oil Properties, and Private Placement Financing

CALGARY, ALBERTA--(Marketwire - Oct. 16, 2009) - Strategic Oil & Gas Ltd. ("Strategic" or the "Company") (TSX VENTURE:SOG) provides an update of its activities:

MAXHAMISH, NORTHEAST BRITISH COLUMBIA

In February, 2009, Strategic announced that it had entered into a farmout agreement ("the Farmout Agreement") with a major independent Canadian corporation in the Maxhamish region of Northeast British Columbia. This Farmout Agreement provides the Company access to over 50,000 acres of highly prospective acreage in the Liard Basin, 125 km north of Fort Nelson, an area with significant hydrocarbon production.

The terms of the Farmout Agreement are:

  1. Drilling 2 wells by the end of March, 2010, with each well drilled earning a 100% interest in the well prior to payout, then reverting to a 65% working interest after payout.
  2. A work optimization program of $1.0 million to be performed on 5 existing oil wells by March, 2010. This will allow Strategic to earn 65% in these 5 wells, with estimated production of approximately 100 bopd. This includes interests in equipment and pipelines.
  3. Each well earns a 65% interest in 4 sections of land and provides the ability to drill an additional 16 wells on the earned lands.
  4. Covers an area of over 50,000 acres.

Maxhamish Joint Venture Partner

Strategic is pleased to announce that a participation agreement ("Participation Agreement") has been signed with a prominent Calgary based company who will become a partner with Strategic in this Maxhamish Farmout Agreement. The Participation Agreement is subject to standard corporate and regulatory approvals. 

The terms of the Participation Agreement are:

  1. Strategic and this partner will become 38.5%/61.5% partners in the Farmout Agreement.
  2. The partner agrees to compensate Strategic for its extensive work done to date on the Maxhamish area by paying for Strategic's share of the costs to drill, complete and tie-in the first two wells and $1,000,000 in optimization costs.
  3. The partner will become operator of the area and is a leader in drilling and completing multistage horizontal wells. 

The advantages to Strategic bringing in a partner are:

  1. Strategic will be carried on the cost of drilling two wells.
  2. A partner allows more flexibility to accelerate the drilling program. 
  3. This partner has the ability to reduce costs of drilling due to its size.
  4. The partner's experience with horizontal drilling and multi-stage frac technology should lead to earlier success in unlocking the tight sand formation.
  5. Provides Strategic with an experienced operating team, to complement Strategic's strong sub-surface team.

The Maxhamish Field

The Maxhamish region has been producing natural gas for many years from the Chinkeh zone and more recently the Mattson zone. Strategic has completed a technical evaluation of the oil pool offsetting to the west of the Maxhamish Chinkeh gas pool which is currently producing over 21 mmcf/d. Total petroleum initially-in place (PIIP) is estimated to be over 400 MMbbls in this oil pool by an independent engineering consulting company. Five vertical wells are shut in but are capable of producing over 100 bbls/d in total from the oil pool. Strategic's technical team has been evaluating the regional geology for over 18 months and has concluded that it holds potential as a crude oil regional resource play in a friendly fiscal environment. The Maxhamish lands included in the farmout consist of the oil lands to the west of the current Maxhamish gas field. The primary zone that Strategic plans to focus its short term effort is the Chinkeh Sand. This zone is comparable to the Cadomin formation in Alberta, a prolific hydrocarbon zone. The Chinkeh zone only exists west of the Bovie Fault, a major geological fault zone that separates the Horn River basin to the east, from the Liard Basin in which the Maxhamish field exists. Strategic plans to use horizontal multi-stage fracturing to exploit the reserves in the oil field. Flow characteristics are significantly better than shale plays (such as the Bakken), as the Chinkeh is a continuous sand sheet. The Company is anticipating 200,000 to 250,000 bbls of reserves per well, with average first year production rates of 150 to 200 bbls per day.

Attributes of the Maxhamish Field

After payout and earning, Strategic will own a 25% working interest in the lands, its partner will own 40% and the Farmor will maintain a 35% interest. The farmout provides Strategic and its partner with:

  1. A dominant land position in the area.
  2. An undeveloped aerially extensive light oil play (API of 40°) in the Chinkeh sand formation. 
  3. Untapped oil potential of over 400 million barrels of total PIIP.
  4. Access to a significant land base in an area with natural gas potential from multiple zones, including shale zones.
  5. Drill ready locations for this winter.
  6. Infrastructure in place.
  7. The lands are adjacent to the Liard Highway that provides year round access to the area.
  8. British Columbia provides an attractive fiscal region with incentives for exploring and developing infrastructure.
  9. A long tenure on the lands, with only minor land expiries before 2014.

Mr. Arn Schoch, President of Strategic, summarizes this play, "We are extremely excited to be able to enter into this oil resource play, with a dominant land position, in an area which our technical team has been evaluating for over 18 months that has been independently assessed as containing over 400 million barrels of total PIIP.

ACQUISITION OF SOUTHERN ALBERTA OIL PROPERTIES

Strategic has entered into a letter of intent ("the LOI") to purchase 100% working interest medium gravity oil properties in the Taber and Conrad areas of southern Alberta. The proposed transaction represents 140 bbls/d (July 2009 average production) of crude oil production and 5,000 acres of undeveloped land. The purchase price is $5.10 million, subject to normal industry closing adjustments.

The transaction is subject to the completion of due diligence, negotiating a formal purchase and sale agreement, obtaining the necessary third party consents and governmental and regulatory approvals.

Terms of the LOI

  1. A purchase price of $5,100,000 to be paid through a combination of $4,000,000 cash and $1,100,000 of units of Strategic, with the number of units issued to be based on the final pricing of the Private Placement announced below. 
  2. Acquisition of 100% working interest, medium gravity oil properties, petroleum and natural gas rights, associated wells and facilities in the Taber and Conrad areas of Southern Alberta.
  3. Current production of 140 bbls/d, split equally between Taber and Conrad properties.
  4. Long reserve life index of 8.0 years, proved plus probable.
  5. Extensive proprietary 3-D seismic coverage over the properties.
  6. 30 producing oil wells.
  7. Independent estimated reserves-based on volumes and values at December 31, 2008 (GLJ Petroleum Consultants Ltd.):
    1. Proved :339,000boeValue-$5.6 million based on 10% PV
    2. Proved + Probable:424,000 boeValue -$6.9 million based on 10% PV
  8. Acquisition of over 5,000 acres (8 sections) of land, with over 50% undeveloped.
  9. Includes 100% owned facilities, including central batteries, tanks, water handling facilities and flow lines. 
  10. Closing is expected to occur by the first week of November, 2009 with an effective date of October 1, 2009.

Description of properties

Taber

Taber represents a 100% working interest in a mature medium gravity oil property. It comprises 11 oil wells and a production facility which currently produces 70 bbls/d of 27 degree API oil from the Glauconite and Sunburst/Sawtooth Formations. These wells have been on-stream for several years and have a shallow decline rate of less than 10%, with a corresponding long reserve life of 8 years. The property has extensive 3-D seismic coverage over the lands. There are proved reserves assigned at December 31, 2008 of 160,000 boe and proved plus probable reserves of 208,000 boe. 

Conrad

Conrad represents a 100% working interest in a mature medium gravity oil property, just south of the Taber property. It comprises 19 oil wells and a production facility which currently produces 70 bbls/d of 24 degree API oil, primarily from the Sawtooth Formation. These wells have been on-stream for several years and have a shallow decline rate of less than 10%, with a corresponding long reserve life of 8 years. The property has extensive 3-D coverage over the lands. There are proved reserves assigned at December 31, 2008 of 179,000 boe and proved plus probable reserves of 216,000 boe. 

Mr. Arn Schoch, President of Strategic summarizes this opportunity, "This acquisition provides Strategic's technical team with the opportunity to recover significant additional reserves from a mature field at a low entry cost." 

Plans for development at Taber and Conrad

With the Taber and Conrad properties, Strategic acquires oil properties producing 140 bbls/d, which at current prices can provide annual cash flow of greater than $1.5 million. Initially, the Company expects to add incremental production by minor workovers and pump changes, typical of mature oil properties. Strategic's technical team, with its strong sub-surface technical abilities, combined with its past success at adding significant incremental reserves in mature oil properties, believes there are significant incremental reserves to be recovered. Currently, less than 10% of the total PIIP estimated to be approximately 10 MMbbls has been recovered from the field, and it is Strategic's belief that this recovery can be doubled or tripled, adding up to 2 MMbbls of proved reserves to Strategic over time. Based on preliminary studies, the Company believes there is by-passed pay at Taber from areas that have not been drained by the current well configuration. Additional seismic and reservoir modelling will determine the locations, but it is anticipated that drilling two or three wells, combined with workovers can add over 500 bbls/d of production in the near term. Additional review will determine the potential for a water optimization program at Taber and Conrad. Additional work at Conrad is expected to add incremental volumes from workovers, pump changes and selective drilling. The Taber and Conrad pools are also good candidates to gain additional oil recovery from tertiary flood schemes such as Alkaline/Surfactant/Polymer (ASP) chemical flooding that is being utilized on several other fields in the area, and have been used by the Company's technical team previously. Ultimate recovery of oil could be increased to 40% from these methods.

Benefit to Strategic

This acquisition fits well with Strategic's Maxhamish, northeast British Columbia horizontal oil resource play. Maxhamish is currently a winter access only area, so Taber and Conrad, with all year round access will allow for a balanced capital program. In addition, the current cash flow and low risk opportunities to significantly grow production and cash flow will be positive for Strategic.

PRIVATE PLACEMENT ANNOUNCED

In order to provide the necessary financing for Maxhamish and Southern Alberta, Strategic has engaged Macquarie Capital Markets Canada Ltd., of Calgary, Alberta, as sole Agent ("the Agent") to assist it in a best efforts private placement financing to raise gross proceeds of up to $11,000,000. The financing is comprised of up to $8,000,000 of units, each unit consisting of one common share and one common share purchase warrant entitling the holder to acquire one additional common share for a period of one year from closing and up to $3,000,000 by the issue of common shares issued on a flow-through basis. The terms and pricing of the financing will be made in the context of the market. The Company has also granted to the Agent an option to increase the amount of units sold by up to $2,000,000 prior to closing. Net proceeds from the financings will be used to fund the 2009-2010 winter development drilling program on the Maxhamish farmout lands in northeast British Columbia, for the Southern Alberta property acquisition and related drilling, and for general corporate purposes. These financings are subject to regulatory approval and all securities issued pursuant to the financing will be subject to a four-month hold period.

About Strategic

Strategic is a junior oil and gas company with producing properties located in Northwest and Central Alberta. Production is currently 200 to 225 boe/d with additional production expected to be brought onstream during the fourth quarter of 2009. 

Strategic's highly regarded subsurface technical team is primarily focused on implementing development plans for the Maxhamish project while reviewing other high impact prospects in Western Canada and international regions.

Further information with respect to the Company is available on its website at www.sogoil.com.

Forward-looking information

Certain information set forth in this document, including management's assessment of future plans and operations, contains forward-looking statements. By their nature, forward-looking statements are subject to numerous risks and uncertainties, some of which are beyond our control. Those risks include, without limitation, the effect of general economic conditions, risks associated with oil and gas exploration, development, production, marketing and transportation, loss of markets, industry conditions and competition, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other industry participants, the ability to access qualified personnel and oilfield services, decisions by regulators and the ability to access sufficient capital from internal and external sources. Readers are cautioned not to place undue reliance on the forward-looking statements as the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise and actual results, performance or achievements could materially differ from those expressed or implied in such forward-looking statements and accordingly, no assurance can be given that any of the events anticipated by forward looking statements will transpire or occur, or if any of them do so, what benefit Strategic will derive therefrom.

Boe presentation

Barrel ("bbl") of oil equivalent ("boe") amounts may be misleading particularly if used in isolation. All boe conversions in this report are calculated using a conversion of six thousand cubic feet of natural gas to one equivalent barrel of oil (6 mcf=1 bbl) and is based on an energy conversion method primarily applicable at the burner tip and does not represent a value equivalency at the well head.

Total Petroleum Initially in Place (PIIP)

There is no certainty that any portion of the estimated PIIP will be discovered. If discovered, there is no certainty that it will be commercially viable to produce any portion of the estimated PIIP. Additional drilling and analysis is required to develop a resource on the property.

Neither the TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.

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