WesternZagros Resources Ltd.

TSX VENTURE : WZR


WesternZagros Resources Ltd.

March 13, 2014 09:35 ET

WesternZagros Announces Fourth Quarter 2013 and Year End Results

CALGARY, ALBERTA--(Marketwired - March 13, 2014) -

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WesternZagros Resources Ltd. (TSX VENTURE:WZR) ("WesternZagros" or "the Company") announced today its operating and financial results for the fourth quarter and year ended December 31, 2013, and additional key highlights and activities to date. The financial statements, the Management Discussion and Analysis, and the Annual Information Form are available at www.westernzagros.com and on SEDAR at www.sedar.com.

Headlines:

  • The KRG approved the Company's declaration of commerciality on December 23, 2013 triggering the start of the development period on the Garmian Block.
  • The Company completed audited resource estimates for the Kurdamir discovery incorporating both the 3D seismic acquired during the year and Kurdamir-3 test results, confirming gross contingent resources in excess of 1 billion barrels of oil equivalent.
  • The Hasira-1 well was drilled through the targeted Jeribe and Oligocene reservoirs, with initial results confirming light oil in the Jeribe reservoir, and is currently being prepared for testing operations.
  • WesternZagros ended 2013 with $97.2 million in working capital, sufficient for funding the completion of its exploration and appraisal activities on the Garmian and Kurdamir blocks.

WesternZagros's objective is to manage the pace and scale of investment and development to maximize the value of the Garmian and Kurdamir Blocks for the Company's shareholders. Key elements of achieving its objective include maintaining best in class operating procedures and protocols to help ensure safe operating practices and remaining attractive in the capital markets by demonstrating operational success and maintaining prudent and conservative financial discipline.

In 2014, WesternZagros will focus on completing the remaining exploration and appraisal activities, and advancing development plans on the Garmian and Kurdamir blocks. Emphasis will be on advancing a phased development plan that include early production systems with the potential for staged expansions to deliver significant production rates of both oil and gas. The Company continues advancing opportunities with its co-venturers and the KRG on the development of gas at both the Garmian and Kurdamir discoveries. This follows the Kurdistan Region's initiatives to provide gas to domestic markets, including power plants, and for development of export gas markets, including required pipeline infrastructure.

WesternZagros will continue to evaluate the various alternatives available to it to satisfy its future funding needs while it progresses the development plans. These alternatives may include accessing the debt and/or equity markets, additional partnerships, farmouts or other strategic arrangements.

Operations Summary

Operated Joint Venture: Garmian Block

  • The Company declared the commerciality of the Sarqala Discovery on December 23, 2013, which the KRG has subsequently approved. Design work is underway on future development plans for the oil resources in the Sarqala area.
  • During 2013, the Company and Gazprom Neft established a dedicated team for preparing development plans for the Sarqala Discovery. This team has commenced preliminary engineering work for expanded production facilities with a design capacity of up to 35,000 barrels of oil per day ("bbl/d").
  • The Hasira-1 well has reached a total depth of 4,181 metres, drilling through both the Jeribe and Oligocene reservoirs. Results to date have confirmed light oil in the Jeribe reservoir. The Company has completed logging operations in the Oligocene reservoir and is preparing to commence testing operations. Additional testing in the Jeribe may be conducted subject to the Oligocene test results.
  • As part of transitioning to development, WesternZagros, Gazprom Neft, and the KRG have agreed to focus future activities on development of the discoveries on the Garmian Block subsequent to the completion of testing at Hasira-1. WesternZagros and Gazprom Neft are now preparing development plans for submission on the production areas at Sarqala, which includes Mil Qasim and Hasira, and the remainder of the acreage has been returned to the KRG.
  • At Sarqala-1, a workover commenced in March 2014 to increase the production capability above the current capacity of 5,000 bbl/d anticipated up to 10,000 bbl/d. Once the Sarqala development plan is approved, the Company anticipates KRG approval to commence oil sales into the domestic or export market via the new pipeline.
  • Processing of the 3D seismic data over the Sarqala and Mil Qasim oil discoveries was completed in the fourth quarter of 2013 and interpretation is underway. The use of this new 3D seismic data will allow future wells to more accurately pinpoint fracture locations in reservoirs resulting in higher reservoir deliverability.
  • An open-hole test of this reservoir at the Baram-1 well confirmed a gross interval of 73 metres that flowed 42 degree API light oil and water at an approximate rate of 600 barrels per day. The wireline log and test data obtained indicate the test was conducted across an oil-water contact in low permeability reservoir. Subsequently, the Baram well will be relinquished as it is considered non-core to WesternZagros's development plans.

Non-Operated Joint Venture: Kurdamir Block

  • WesternZagros updated its contingent and prospective resource estimates for the Oligocene reservoir in the Kurdamir structure based on new information obtained from the Kurdamir-3 well and the interpretation of 3D seismic data. The revised resources assessment has been audited by the Company's independent reserves evaluator, Sproule International Limited, as of February 10, 2014, resulting in a revised mean estimate of gross unrisked contingent resources ("Mean Contingent Resources") of 750 MMBOE, an increase of five percent from those previously recognized. On an oil basis, the Mean Contingent Resources are now 386 million barrels of oil ("MMbbl"). The combined Mean Contingent Resources estimates for the Oligocene and Eocene reservoirs in the Kurdamir Block are now 976 MMBOE and 541 MMbbl of oil.
  • The revised mean estimate of gross unrisked prospective resources ("Mean Prospective Resources") for the Oligocene reservoir at Kurdamir is now 1,084 MMbbl of oil, effectively unchanged from a previous estimate of 1,076 MMbbl of oil.
  • During 2013, the Company and Talisman established a dedicated team for preparing the declaration of commerciality and development plans for the Kurdamir Discovery.
  • The Kurdamir-3 appraisal well confirmed light oil (37 degree API) in the upper part of the Oligocene reservoir. Flow rates averaged between 450 and 900 bbl/d. This was lower than expected due to a lower density of fractures encountered in the Oligocene reservoir compared to those found in Kurdamir 1 or 2.
  • Kurdamir-3 test results, together with pressure data and log data, are interpreted to have identified an oil water contact at approximately -2049 metres sub-sea ("mSS"). The previous interpreted lowest known oil at the Kurdamir-2 well was at -2016 mSS.
  • The Kurdamir 3D seismic survey started in January 2013 and was completed in July 2013. It covered 184 square kilometres and also extended into the neighbouring Topkhana Block (operated by Talisman) to more clearly define the Oligocene, Eocene and Cretaceous reservoirs. Completion of processing the data is anticipated in the third quarter of 2014 and processing is underway.

Outlook

In 2014, WesternZagros will focus on the completion of the appraisal and development activities and the advancement of development plans on the Garmian and Kurdamir blocks. With the approval of the declaration of commerciality on the Garmian Block, the Company is progressing towards bringing production on from its Sarqala discovery and anticipates that this will happen subsequent to the submission of the development plan. On the Kurdamir Block the Company is completing the appraisal program and is bringing in test production equipment to conduct a further 30 day flow test in the Kurdamir-2 well in the second quarter of 2014, while at the same time working with the operator on the submission of a declaration of commerciality and development plan.

As part of transitioning to development, WesternZagros, its co-venturer, Gazprom Neft and the KRG have agreed to end exploration activities on the Garmian Block following the completion of the Hasira-1 well. As such, the Company has no further exploration expenditure obligations and will now be able to apply its focus and financial resources on development. Under the terms of the Declaration of Commerciality, the partners will relinquish prospects in the Garmian Block that are not covered by the development plan, such as Chwar, Qula, Quilijan and Baram, which are considered non-core to WesternZagros's development plans.

During the preparation of the development plan and its approval by the KRG, and in order to minimise short-term expenses, WesternZagros is in advanced discussions with the KRG and Gazprom Neft to temporarily assign two of its contracted drilling rigs elsewhere for the remainder of 2014. Under this arrangement, the rigs would return to the Company's Garmian Block for development drilling on Sarqala in early 2015 once the development plan is approved and additional development locations are prepared.

The Company and Gazprom Neft, are advancing the development plan and have established a dedicated team to complete this work by the submission deadline of June 21, 2014. Current facilities at Sarqala can support production levels of at least 10,000 bbl/d, and a workover of the Sarqala-1 well has commenced with the objective of increasing the production capability up to 10,000 bbl/d. These facilities may also be expanded to handle any additional volumes of crude oil that Hasira-1 may support if testing is successful from that well.

The second phase of the development will focus on the construction of centralized production facilities and future wells for the Sarqala discovery that could support up to 35,000 bbl/d of oil production. Additional phases for the Sarqala discovery may be added as future wells appraise the ultimate extent of the reservoir. Work is continuing on opportunities to utilize the associated natural gas from any future crude oil production to minimize the flaring.

On the Kurdamir Block, a declaration of commerciality is anticipated to be made within the next 12 months. The Company continues to work with Talisman on the completion of the appraisal program and pre-development planning. Activities during 2014 will include completion of the interpretation of the 3D seismic program over the Kurdamir structure, the 30 day extended well test at the Kurdamir-2 well (anticipated in the second quarter of 2014), and securing a site and long lead materials for a future horizontal well. In preparing the development plan the Company is on applying the same phased approach that is being utilized on the Garmian Block, with early production achieved using the extended well testing equipment. Subsequent phases will then focus on the construction of centralized production facilities and the drilling of development wells targeting initial production levels of 25,000 to 35,000 barrels per day. Additional phases will then be completed as further development wells are drilled on the approximately 1 billion barrels of gross unrisked contingent resources of oil equivalent.

The Company's portion of planned expenditures related to Garmian Block activities for 2014 include $15 million for the completion of the Hasira-1 and Baram-1 wells, $5 million for the Sarqala-1 workover, $5 million for the Kurdamir-2 EWT activities, $15 million for Garmian and Kurdamir development planning, $20 million for supervision, local office costs and other Garmian and Kurdamir PSC-related costs, and $10 million for other Corporate costs.

Liquidity and Capital Resources

As at December 31, 2013, WesternZagros had $97.2 million in working capital, which is sufficient for funding the completion of its exploration and appraisal activities on the Garmian and Kurdamir blocks. WesternZagros invests its cash and cash equivalents and short-term investments with major Canadian financial institutions with investment grade credit ratings and in Government of Canada instruments in accordance with an Investment Policy approved by the Board of Directors. The other income generated during 2013 was comprised entirely of interest earned on cash and cash equivalent balances and short-term investments.

WesternZagros and its co-venturers on the Garmian and Kurdamir blocks are currently preparing staged development plans with early production systems to supply both oil and natural gas to either the domestic or export markets. With the submission of the development plan on the Garmian Block, which is anticipated by the end of the second quarter of 2014, WesternZagros will be requesting to commence the production and sale of crude oil from Sarqala-1.

Further funding will be required by WesternZagros as it moves from exploration into the development stage on its properties. WesternZagros is continually evaluating the various alternatives available to it to satisfy such future funding needs while it progresses the development plans. These alternatives may include accessing the debt and/or equity markets, additional partnerships, farmouts or other strategic arrangements. In determining which course of action to pursue, the Company will monitor and assess all relevant factors, including the following:

  • The timing of submission and approval for development plans;
  • The expected timing and scope of development activities;
  • The ability to export or to sell into the domestic markets oil and natural gas in accordance with the economic terms of the PSCs;
  • The ability to generate cash flow from early production;
  • The current conditions in the financial markets, including the potential for further market instability;
  • The ability to access debt, and the costs thereof, for development activities in Kurdistan; and
  • The timing for repayment of outstanding debt.

Conference Call

WesternZagros will host a live audio conference call on Thursday, March 13, 2014, to discuss its transition to development in the Kurdistan Region and its Q4 and 2013 year end results. The investment community is invited to participate in the conference call, which will begin at 8:30 A.M. Mountain Standard Time (MST) (10:30 AM EST / 2:30 PM GMT). You may participate in the call by telephone at 647-788-4922 or toll free at 1-877-223-4471.

A replay of the conference call will be available on the Company website, www.westernzagros.com, following the call. A digital recording of the conference call will be available for replay two hours after the call's completion and may be accessed by telephone at 1-416-621-4642 or 1-800-585-8367 and entering the passcode: 11365199.

About WesternZagros Resources Ltd.

WesternZagros is an international natural resources company focused on acquiring properties and exploring for, developing and producing crude oil and natural gas in Iraq. WesternZagros, through its wholly-owned subsidiaries, holds a 40 percent working interest in two Production Sharing Contracts with the Kurdistan Regional Government in the Kurdistan Region of Iraq. WesternZagros's shares trade in Canada on the TSX Venture Exchange under the symbol "WZR".

This news release contains certain forward-looking statements relating to, but not limited to, operational information, future appraisal and development plans and the timing associated therewith, future production capability and capacity of wells and facilities, estimated commitments under the Company's Production Sharing Contract for the Kurdamir area ("Kurdamir PSC") and Production Sharing Contract for the Garmian area ("Garmian PSC"), and planned expenditures. Forward-looking information typically contains statements with words such as "anticipate", "estimate", "expect", "potential", "could", or similar words suggesting future outcomes. The Company cautions readers and prospective investors in the Company's securities to not place undue reliance on forward-looking information as, by its nature, it is based on current expectations regarding future events that involve a number of assumptions, inherent risks and uncertainties, which could cause actual results to differ materially from those anticipated by WesternZagros. Readers are also cautioned that disclosed test rates and results are not necessarily indicative of long-term performance or of ultimate recovery.

Forward looking information is not based on historical facts but rather on management's current expectations as well as assumptions made by, and information currently available to management, concerning, among other things, outcomes of future well operations, plans for and results of extended well tests and drilling activity, future capital and other expenditures (including the amount, nature and sources of funding thereof), future economic conditions, future currency and exchange rates, continued political stability, timely receipt of any necessary government or regulatory approvals, the successful resolution of disputes, the Company's continued ability to employ qualified staff and to obtain equipment in a timely and cost efficient manner, the participation of the Company's co-venturers in joint activities, and the ability to sell production and the prices to be received in connection therewith. In addition, budgets are based upon WesternZagros's current appraisal and development plans and anticipated costs, both of which are subject to change based on, among other things, the actual outcomes of well operations and the installation and commissioning of facilities, unexpected delays, availability of future financing and changes in market conditions. Although the Company believes the expectations and assumptions reflected in such forward-looking information are reasonable, they may prove to be incorrect. Forward-looking information involves significant known and unknown risks and uncertainties. A number of factors could cause actual results to differ materially from those anticipated by WesternZagros including, but not limited to, risks associated with the oil and gas industry (e.g. operational risks in exploration and production; inherent uncertainties in interpreting geological data; changes in plans with respect to capital expenditures; interruptions in operations together with any associated insurance proceedings; the uncertainty of estimates and projections in relation to costs and expenses and health, safety and environmental risks), the risk of commodity price and foreign exchange rate fluctuations, the uncertainty associated with any dispute resolution proceedings, the uncertainty associated with negotiating with foreign governments and risk associated with international activity, including the lack of federal petroleum legislation and ongoing political disputes in Iraq in particular.

In addition, statements relating to "resources" contained herein are deemed to be forward-looking statements, as they involve the implied assessment, based on certain estimates and assumptions that the resources described can be economically produced in the future. Terms related to resource classifications referred to herein are based on the definitions and guidelines in the Canadian Oil and Gas Evaluation Handbook which are as follows. "Prospective resources" are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from undiscovered accumulations by application of future development projects. Prospective resources have both an associated chance of discovery (geological chance of success) and a chance of development (economic, regulatory, market, facility, corporate commitment or political risks). The chance of commerciality is the product of these two risk components. The estimates referred to herein have not been risked for either the chance of discovery or the chance of development. There is no certainty that any portion of the prospective resources will be discovered. If a discovery is made, there is no certainty that it will be developed or, if it is developed, there is no certainty as to the timing of such development or that it will be commercially viable to produce any portion of the prospective resources. "Contingent resources" are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations using established technology or technology under development, but which are not currently considered to be commercially recoverable due to one or more contingencies. Contingent resources have an associated chance of development (economic, regulatory, market and facility, corporate commitment or political risks). The estimates referred to herein have not been risked for the chance of development. There is no certainty that the contingent resources will be developed and, if developed, there is no certainty as to the timing of such development or that it will be commercially viable to produce any portion of the contingent resources.

All resource estimates presented are gross volumes for the indicated reservoirs, without any adjustment for the Company's working interest or encumbrances. A barrel of oil equivalent ("BOE") is determined by converting a volume of natural gas to barrels using the ratio of 6 million cubic feet ("Mcf") to one barrel. BOEs may be misleading, particularly if used in isolation. A BOE conversion ratio of 6 Mcf:1 BOE is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Given that the value ratio based on the current price of oil as compared to natural gas is significantly different from the energy equivalency of 6:1, utilizing a conversion on a 6:1 basis may be misleading as an indication of value. The Company's Statement of Oil and Gas Information contained in its Annual Information Form dated March 13, 2014 ("AIF"), filed on SEDAR at www.sedar.com contains additional detail with respect to the resource assessments and includes the significant risks and uncertainties associated with the estimates and the recovery and development of the resources, and, in respect of contingent resources, the specific contingencies that prevent the classification of the resources as reserves. In addition, combined mean estimates of resources that are presented in this MD&A are an arithmetic sum of the mean estimates for individual reservoirs and each such individual mean estimate is the average from the probabilistic assessment that was completed for the reservoir. Readers should refer to the AIF for a detailed breakdown of the high (P10), low (P90) and best (P50) estimates for each of the individual reservoir assessments as audited by the Company's independent reserves evaluator.

NEITHER THE TSX VENTURE EXCHANGE NOR ITS REGULATION SERVICES PROVIDER (AS THAT TERM IS DEFINED IN POLICIES OF THE TSX VENTURE EXCHANGE) ACCEPTS RESPONSIBILITY FOR THE ADEQUACY OR ACCURACY OF THIS RELEASE

WESTERNZAGROS RESOURCES WAS RECOGNIZED AS A TSX VENTURE 50® COMPANY IN 2012 AND 2013. TSX VENTURE 50 IS A TRADE-MARK OF TSX INC. AND IS USED UNDER LICENSE.

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