Solimar Energy Limited
ASX : SGY
TSX VENTURE : SXS

Solimar Energy Limited

April 20, 2012 08:30 ET

Solimar Commissions Steam Generation Unit for Kreyenhagen Field Redevelopment

MELBOURNE, AUSTRALIA--(Marketwire - April 20, 2012) - Solimar Energy Limited (ASX:SGY) (TSX VENTURE:SXS) ("Solimar" or the "Company") has commissioned the building of a 20 MMBTU capacity, portable steam generation unit to be used in the second stage of oil production testing at the Company's 100% owned Kreyenhagen field during 2012. Construction of the steam generation unit, with a budgeted cost of approximately US$500,000 (including applicable tax), has a lead time of about 5 months. The steam unit will be required for a second stage, steam assisted cyclic oil production test ("Huff and Puff") program, following an up to 3 month duration first stage of "Cold Flow" testing that will commence during May, 2012. This particular project will target the shallow Temblor Sandstone heavy oil resource which has been independently assessed to contain unrisked oil resources of up to 79 million barrels of oil in place net to Solimar's working interest*. The Kreyenhagen field area also contains shale oil exploration upside and a smaller light oil and gas accumulation that will be assessed by future work programs.

Solimar recently completed a C$1.1 million placement (the "Placement") at C$0.09 per share to strategic investors in Canada and Switzerland principally to fund the construction of the steam generation unit and the overall testing operations at the Kreyenhagen Field. Further details about the Placement were released to the ASX and Canada on 9 April, 2012.

Highlights

- Commodity prices (high oil and low gas) have created a robust commercial environment for a redevelopment of the shallow Kreyenhagen oil field. California heavy crude currently trades at a premium to WTI.

- Commitment to the steam generation unit illustrates the Company's growing confidence in the field redevelopment.

- Huff and Puff steam enhanced production testing is to follow an initial primary or Cold Flow testing phase.

- The steam assisted test is designed to improve flow rates and prove that high recoveries of oil in place (up to 60%) could be achieved in a full field, steam assisted development.

- Equipment will be mobilised to commence the Cold Flow testing in May, 2012.

Commenting on the commitment to build the steam generation unit, Solimar CEO John Begg said :

"It's pleasing to continue achieving milestones toward a redevelopment of the Kreyenhagen oil field for which there is independently assessed, unrisked in place oil resources* net to the Company's working interest of up to 79MMBBLS of 13° -18° degrees API gravity oil*. The start of the initial "Cold Flow" or primary production testing program utilising a selection of 4 wells owned by the Company is imminent. This program is expected to run for approximately 3 months and then, using the same wells and the new steam generator, a cyclic steam or "Huff and Puff" testing program will be carried out. Solimar expects a full field development at Kreyenhagen to ultimately require a dedicated steam flood which will be designed based on the initial "cold flow" and "Huff and Puff "programs. These initial test programs to be carried out this year, combined with the drilling of shallow appraisal wells are expected to support booking of oil reserves. Steam flood projects in the San Joaquin Basin can achieve recovery of up to 60% of the oil in place. The Company's timing is excellent as the current strong oil price for heavy crude in the Valley, combined with a currently low gas price is providing commercial conditions for a steam based redevelopment superior to at any time in the history of this field."

Solimar is embarking on a two stage production testing program of up to 4 wells to gather key reservoir and production engineering information about the shallow Temblor Sandstone heavy oil reservoir. This will be used to assess whether the field can be initially developed as a low operating cost, cold flow production project and to model an optimum, full field redevelopment as an enhanced oil recovery or EOR project using steam injection.

The Company is encouraged by a commodity price environment that is currently pricing the benchmark heavy crude price in the San Joaquin Valley (Midway Sunset 13° degrees API) at over US$100/ BBL while gas prices are low, approximating US$2.70 / MCF in February, 2012.

The impact of these economic conditions are illustrated in the attached graphs, the data for which has mostly been derived from the US Energy Information Administration** and combined with Solimar's estimates of the indicative price impact on steam related operating costs per BBL.

The data plotted show that if the oil vs. gas price conditions that have evolved over the past three years in particular continues, there would be highly favourable economic conditions for a steam based EOR redevelopment of the Kreyenhagen project. Solimar's research indicates that conditions are robust even if relatively high ratios of steam injection relative to oil produced (Steam to Oil Ratio or "SOR") are required.

Note that based on California Division of Oil, Gas and Geothermal Resources (DOGGR) records the average API gravity produced by historic wells at Kreyenhagen (there are 22 legacy, vertical oil producers that produced on pump at rates between 1-21 BOPD) has been approximately 15° degrees API. This would attract an approximate US$1.28 / BBL premium to the Midway Sunset 13°degree gravity reference price according to a pricing formula regularly published by Chevron Oil Trading.

The differences between the three oil producing techniques planned for the Kreyenhagen field can be summarised as follows and are illustrated in the accompanying figure.

Primary or "Cold Flow" production

The shallow heavy oil zone is to be initially tested in up to 3 of the 4 existing wells in which the approximately 200 feet thick oil reservoir within the upper part of the Temblor Sandstone is preserved behind casing. Selected intervals will be perforated and the wells placed on pump. Historically, beam pumps were used in the field achieving initial flow rates of between 1 -21 BOPD with varying water cuts.

Solimar will be applying both standard type beam pumps and modern progressive cavitating pumps (PCP's) for this testing program that may continue for up to 3 months. The data will be examined to help design the following steam injection program. However if there is strong Cold Flow performance from any given zone or well, the production test may be prolonged.

Depending on the results, a first phase Cold Flow redevelopment of the field may be warranted which would be characterised by low well costs due to the shallow reservoir depths (less than 1,000 feet). Typical recoveries of less than 15% are achieved from cold flow operations in a heavy oil reservoir.

Cyclic Steam injection or "Huff and Puff" production

This will involve re-entering a selection of the wells utilised in the Cold Flow program and injecting steam into the perforated heavy oil zone (s). The duration of the steam injection and the volumes involved have been modelled, but will be refined with the benefit of the Cold Flow results.

A 20 MMBTU capacity, portable steam generator has been commissioned from Clayton Industries of Los Angeles with delivery within approximately 5 months. DOGGR permitting for the Huff and Puff program is in an advanced stage and is expected prior to delivery of the steam generation unit.

After the steam has been injected, the well is allowed to soak for a defined period before being allowed to flow back out the same well bore. This process may be repeated with the period of each steam and following production cycle dependent on the flow response.

The Huff and Puff steam process is designed to increase the mobility and hence flow rate of the oil and is generally classified as a recovery acceleration technique that if applied long term may achieve up to a 25 % recovery of the oil in place. Solimar's engineering modelling, as also assessed by Sproule*, indicates that a steam flood process will be a superior long term recovery mechanism for the Kreyenhagen field.

Full EOR or Steam Flood

Once sufficient data has been collected from the initial Cold Flow and Huff and Puff programs and confidence gained in moving the oil from the resource to reserves category, a comprehensive recovery program using a steam flood process can be more accurately modelled. This will also require access to whole core data and the Company is already advanced in permitting a program of shallow appraisal wells in the second half of 2012. These wells are planned to further appraise the extent of the oil field to support certification of additional reserves.

A steam flood will require the drilling of dedicated steam injection and producing wells and is more capital intensive than the other production methods. A commitment to this phase would however follow booking of reserves and the resulting upward revaluation of the project. Steam flooding requires a lengthy period of time when the main activity is injection of steam into the reservoir creating a steam chamber that increases the pressure and oil mobility. It is likely to involve horizontal production wells which in combination with the impact of the steam would be expected to result in flows and recoveries per well at multiples for that achieved under Cold Flow. For reference such wells in the nearby Coalinga field, an analogue to Kreyenhagen field, have achieved initial steam enhanced production rates of 50 - 100 BOPD and are expected to deliver recoveries of up to 60% of the oil in place.

Sincerely

John Begg, Chief Executive Officer

Solimar Energy Limited

References:

* Resource Assessment of Certain P&NG Holdings in the Kreyenhagen Area for Solimar Energy Limited (as of 31 October, 2011) - By Sproule Unconventional Limited. This report was highlighted in a release to the ASX and Canada on 18 November, 2011 and published in full on 22 November, 2011.

* Audit of Solimar Energy TSX-V listing compliance Technical report, California oil and Gas Projects, as of 30 June, 2011 - by Sproule Unconventional Limited. This report was released to the ASX and Canada on 22 November, 2011.

Copies of these reports are on Solimar Energy's website under "Investor Centre" and "Resource Reports".

** Website of the US Office of Energy Information administration, www.eia.gov.

To view the image associated with this press release, please visit the following link:

http://media3.marketwire.com/docs/sgykreyenhagen.jpg

Neither 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.

Contact Information

  • Solimar Energy
    Registered Office: 566 Elizabeth Street
    Melbourne, Victoria
    +61 3 9347 2409
    +61 3 9349 1186 (FAX)
    www.solimarenergy.com.au