Solimar Energy Limited
ASX : SGY
TSX VENTURE : SXS

Solimar Energy Limited

February 21, 2012 08:30 ET

Solimar Energy Limited: Production Testing to Commence at Kreyenhagen Oil Field

MELBOURNE, AUSTRALIA--(Marketwire - Feb. 21, 2012) -

NOT FOR DISTRIBUTION TO UNITED STATES NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES

Highlights

  • A primary "cold flow" production testing program using up to 4 existing wells is due to commence in April, 2012 at Solimar's 100% owned Kreyenhagen oil field in the San Joaquin Basin.
  • These wells have up to 200 feet of oil bearing reservoir in the Temblor Sandstone. This shallow reservoir has independently assessed unrisked oil in place net to Solimar's working interest of up to 79.1 MMBO* of 13 to 18 degree API oil.
  • A cyclic steam injection or "huff and puff" pilot program will follow the cold flow testing using these existing wellbores to measure the uplift in productivity that can be achieved with secondary, steam enhanced production.
  • Results from both the primary "cold flow" and secondary "huff and puff" steam injection pilot will be used to generate a full field development plan to optimize recovery from the field. High recoveries of similar gravity oil have been achieved from the Temblor Sandstone in the nearest producing analogue, the giant Coalinga oil field.
  • The Kreyenhagen leases contain two additional reservoirs for which considerable upside for resources of light oil has been independently estimated. The Kreyenhagen Shale which is the main source of oil in the surrounding fields and the Avenal Sandstone from which flows of light oil and gas have been recorded from several wells in the project area.
  • Based on recent internal studies of historic well data a zone within the overlying Monterey Shale, the main regional unconventional oil reservoir in the Basin, has also proven productive in the area and offers further upside.
  • Current high prices for California heavy oil (plus US$100 per BBL) and low US domestic gas prices (approx. US$2.7 per MCF) have created a robust commercial environment for heavy oil production and development.

Solimar Energy Limited (ASX:SGY)(TSX VENTURE:SXS) is pleased to provide the following update regarding the Company's 100% owned and operated Kreyenhagen oil field development project located in the San Joaquin Basin, California.

Kreyenhagen Project - Temblor oil reservoir

Kreyenhagen is a multi-faceted oil project on the western side of the San Joaquin Basin that contains a partially developed heavy oil (13° to 18° API gravity) field in a shallow, high quality sandstone reservoir known as the Temblor Sandstone.

Unrisked in place oil resources totalling 47.9 MMBBLS (Best Case) and 79.1MMBBLS (High Case)* net to the Company's working interest have been independently assessed and detailed in releases made by the Company on November 18 and 22, 2011.

The oil is contained in an approximately 200 feet thick upper sandstone pay zone overlain by the Monterey Shale (McClure Shale member) and with a base seal provided by an intra-Temblor Sandstone shaley layer. The oil reservoir outcrops along the west side of the field, where it is believed to be capped by a biodegraded tar mat then plunges steeply underground to the east. The oil column within the structure is 1,200 feet thick based on existing well control. Due to the shallow depth of the oil reservoir (less than 1,500 feet in the appraised part of the field) future development drilling costs are expected to be low. Some 22 historic, vertical wells have been drilled into the field that were flowed at unstimulated, "cold flow" oil rates of between 1-21 bopd using standard type beam pumps.

Solimar will be conducting 2 phases of production testing as pre cursors to planning a full field development. A distinction is made between the "cold flow" or primary production phase and a thermally enhanced or secondary production phase using steam to increase the mobility and recovery of the oil. Heavy oil fields in California are commonly produced using steam with the necessary energy provided by burning gas. The increased operating costs are then offset by both higher well flow rates and high oil recovery.

Currently, commercial conditions are very favourable for a steam enhanced redevelopment of the Kreyenhagen field as there is a large differential between the price being achieved for California heavy oil ($102 per BBL average during January 2012 for Midway - Sunset reference 13 deg API gravity oil) and low prices for natural gas (California Composite $2.7 per MCF during January 2012).

The "cold flow" production operations are set to commence by early April 2012. These operations will involve re-entering up to 4 vertical wells that were drilled in 2007 to deeper targets and suspended without testing of the primary Temblor reservoir. The cost of these operations is expected to be approximately US$500,000. Solimar proposes to perforate a number of different zones within the thick oil reservoir and using Progressive Cavity Pumps ("PCPs"), test each zone for flow potential. If these tests are successful the Company may drill additional vertical and horizontal wells to accelerate early production from the field using these low operating cost, "cold flow" production techniques. Several additional well pads have already been prepared.

Following the cold flow operations which may run for up to 3 months, using a selection of the same wells the Company will conduct a cyclic steam or "huff and puff" production testing program to measure the response of the Temblor oil reservoir to steam. The steam will be provided by a portable steam generation unit fuelled by propane that will also be trucked to site. Huff and puff operations involve the injection of a quantity of steam into the reservoir, shutting in the well for a period allowing the steam to take effect, then producing back up the same well bore. These operations can then be repeated with the duration of the individual cycles determined by the productive performance. Ultimately Solimar expects a full field development to require a more comprehensive steam flood operation such as that being very successfully applied to the nearby Coalinga field that has produced over 900 MMBBLs of similar gravity heavy crude from shallow depths (as little as 300 feet from surface) in the Temblor Sandstone. Steam assisted oil recoveries at Coalinga are reported to have passed 40%. Potential steam enhanced oil recoveries at Kreyenhagen, after comparison with Coalinga data, have been independently estimated at 35% (Best Case) and 60% (High Case)*.

Horizontal drilling, also yet to be applied at Kreyenhagen may have a further beneficial effect on both cold and steam enhanced production rates and the recovery of oil per well.

Other oil reservoirs and upside

In addition to the Temblor there are three other oil reservoirs in the project acreage that collectively offer large upside. These also outcrop in the western part of the project area and are in descending order the Monterey Shale (McClure Shale Member), The Kreyenhagen Shale and the Avenal Sandstone.

The Monterey Shale directly overlies the Temblor and is the main, highly prolific unconventional oil reservoir in the south of the basin. As part of field development planning a recent internal review of historic well data shows that a number of wells achieved primary production from a zone near the base of the shale. It is not yet clear whether the productive interval was a sandy unit within the shale or whether the flows were achieved from fracturing in the shale. The volumetric implications of this information have yet to be assessed by the Company.

Underlying the Temblor is the Kreyenhagen Shale which is the principal source rock for the approximately 3 Billion BOE of oil and gas in surrounding fields recorded by the California Division of Oil, Gas and Geothermal resources (DOGGR) and for the oil in the Temblor at Kreyenhagen. The shales are very thick (over 1,000 feet in the east of the acreage) and data published by the United States Geological Survey (USGS) combined with geochemical data from the 2007 wells shows that the project area lies within a rich part of the Kreyenhagen Shale fairway. Potential oil in place of 35.9 MMBBLs (Best Case) and 59.4 MMBBLS (High Case)* have been independently estimated for a nominal 640 acre area (or 1 square mile land section) near to well control in the project area. This indicates unrisked potential for 100's of MMBBLs of in place oil resources in the project which will be the subject of a future, separate evaluation program to see whether the oil can be commercially extracted. A core hole program is planned as the first step in evaluating the oil shale potential prior to the drilling of dedicated test wells.

The lowest reservoir in the sequence is the Avenal Sandstone from which light oil and gas has been tested from a number of wells in the project. The Company plans to re test the Avenal as part of the cold flow production testing program. Potential oil in place of 3.7 MMbbls (Best Case) and 13.5 MMBBLS (High Case) have been independently assessed for the Avenal. Importantly also, gas flows of up to 200,000 SCF/D have been recorded from the 2007 wells. The test program is being designed to assess whether this reservoir could be a cheap, in situ source of gas with further economic benefit for the anticipated steam enhanced development of the Temblor oil accumulation.

Commenting on the progress toward commencing development activity at the Kreyenhagen project, Solimar CEO John Begg said:

"The more work the Company carries out at Kreyenhagen the more potential value we recognize. The cold flow production testing program due to start in April will provide invaluable information to plan for what the Company anticipates will be a high recovery, steam enhanced field development modelled on neighbouring fields. Additionally it may demonstrate that a low cost, primary production phase of development is commercially viable and can be brought forward."

COMPETENT PERSONS STATEMENT: The information in this report has been reviewed and signed off by Will Satterfield B.S., M.A. who is a petroleum geologist with over 24 years of relevant experience within the oil and gas sector.

Sincerely

John Begg, Chief Executive Officer

Solimar Energy Limited

*Reference: 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. A copy is on Solimar Energy's website under "Investor Centre" and "Resource Reports".

Kreyenhagen Project - A Multi-Faceted Oil Development and
Exploration Project

To view Kreyenhagen Project - Location Map (schematic location of Solimar projects in yellow) please visit the following link: http://media3.marketwire.com/docs/Solimar1.pdf

To view Kreyenhagen Project - Schematic cross-section, please visit the following link: http://media3.marketwire.com/docs/Solimar2.pdf

To view Potential Oil Payzones* interpreted from well data (Mud logs and E-logs), please visit the following link: http://media3.marketwire.com/docs/Soli3.pdf

ABN 42 112 256 649

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