Azabache Energy Inc.

Azabache Energy Inc.

December 29, 2010 19:13 ET

Azabache Announces Results of Workover on Ojo De Agua X-1 Well on Covunco License in Neuquen Basin, Argentina and Trading Update

CALGARY, ALBERTA--(Marketwire - Dec. 29, 2010) -


Azabache Energy Inc. ("Azabache" or the "Company") (TSX VENTURE:AZA) announces that it has concluded the workover of its OAX1 well with no conclusive results. The original well had been drilled by YPF (the former Argentine state-owned company) in 1969 and was at the time classified as having "Gas Reserves" after testing 1.85 MMcf/d of dry combustible gas from the Lajas Formation, a reservoir mainly composed of 30 meters gross thickness of sands with interbedded shales and average porosity of 6%. The prospect itself is represented by sand units truncated by an unconformity at the top of the Lajas Formation over a remarkable structural nose. According to the Company's 2010 National Instrument 51-101 reserves evaluation, contingent resources calculated for only one of the sand units in the prospect range from 20 to 50 BCF (P90 and P10, respectively).

The workover enlarged perforations and attempted to test the gas flow in the OAX1 well. During the workover, the Company found strong indications of well deviation not previously reported which were subsequently confirmed by logging (average deviation 6º and 160 m as maximum apart from vertical) as well as evidence of casing leakage problems.

The test was not steady, with an average natural flow of water of 17 m3/d, static level between 165 m and 462 m, water temperature between 25 and 33ºC, and salinity at 10 g/l. Preliminary analysis suggests the water could have come from shallower formations containing fresh water through the casing leakages mentioned above. The well also produced plugs of rotten mud with gas bubbles, indicating potential formation damage. As performing further operations under these conditions would have been risky and expensive with low probability of success, the Company stopped the workover.

While disappointed with the results of the workover, with the data collected management advises that Azabache is evaluating a new appraisal well, in a location 600 m North of OAX1 well and 80 m up dip in the structure. Discussions with Azabache's partner in the Covunco Norte Block, Colhue Huapi S.A. ("Colhue") regarding timing, costs and their future participation in this new appraisal well are currently taking place. Azabache has granted Colhue a two week extension for Colhue to decide whether to increase its working interest or remain at 20%.

Claudio Larotonda, CEO and President of the Company, said:

"it was unfortunate to find the OAX1 well in such a bad state. The leakage in casing, poor cement condition and presence of water while testing did not allow for a proper evaluation of the capacity of the well to produce gas. We believe that spending more money in a well in this current condition is not worthwhile. However, the potential formation damage, the presence of gas and pressure, and the potential size of the structure encourages drilling a new well up dip in the same structure. We are in discussions regarding the drilling program with our partner presently. Our partner will decide soon if they will remain with their present 20% working interest or if they will increase their working interest to 50% by drilling the exploration well. Azabache will not be able to build the pipeline and put the OAX1 well and the OAX2 well in production until we prove the potential of this prospect. However another mechanism for transportation, gas trucking, is again being considered by the Company to produce the OAX2 well alone until the new appraisal well is drilled and completed."

Cease Trade Order

As announced on November 5, 2010, the Company was subject to cease trade orders issued by the Alberta Securities Commission ("ASC") and Ontario Securities Commission ("OSC") for failing to file its financial statements for the year ended June 30, 2010 (the "Financial Statements") on or before October 28, 2010. The Company is pleased to announce that the ASC and the OSC have revoked their cease trade orders. The Company has submitted its application for reinstatement of trading to the TSX Venture Exchange, which application is currently under review.

This press release shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of the securities in any state in which such offer, solicitation or sale would be unlawful. The securities have not been registered under the United States Securities Act of 1933, as amended, and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

This press release contains forward-looking statements. More particularly, this press release contains statements concerning the Company's exploration and development, its future operations and the completion of its drilling programs. The forward-looking statements contained in this document are based on certain key expectations and assumptions made by Azabache, including with respect to the anticipated timing for completion of drilling, the participation of other parties in its planned operations and the results of its exploration and development activities. Although Azabache believes that the expectations and assumptions on which the forward-looking statements are based are reasonable, undue reliance should not be placed on the forward-looking statements because Azabache can give no assurance that they will prove to be correct. Since forward-looking statements address future events and conditions, by their very nature they involve inherent risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors and risks. These include, but are not limited to, the failure to obtain necessary regulatory approvals, risks associated with the oil and gas industry in general (e.g., operational risks in development, exploration and production; delays or changes in plans with respect to exploration or development projects or capital expenditures; the uncertainty of reserve estimates; the uncertainty of estimates and projections relating to production, costs and expenses, and health, safety and environmental risks), commodity price and exchange rate fluctuations. The forward-looking statements contained in this document are made as of the date hereof and Azabache undertakes no obligation to update publicly or revise any forward-looking statements or information, whether as a result of new information, future events or otherwise, unless so required by applicable securities laws.

The term "BOE" may be misleading, particularly if used in isolation. In accordance with National Instrument 51-101, a BOE conversation ratio for natural gas of 6 mscf: 1 bbl has been used which is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

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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