Ivanhoe has successfully drilled the Zitong-1 and Yixin-2 wells, located on the Zitong block in Southwest China, to total depth. The Zitong-1 well reached total depth at 4,294 meters (14,088 feet) in the Xu2 Formation and the Yixin-2 well reached total depth at 4,165 meters (13,661 feet) in the Xu3 Formation. The wells have been logged. Zitong-1 has been cased and cemented and the Yixin-2 well is currently running casing prior to cementing. A testing program for both wells is scheduled to commence in mid-December.
"Our enthusiasm continues to grow as we obtain more information from these two wells," said David Dyck, President and Chief Operating Officer of Ivanhoe. "We believe the Zitong Block is highly-prospective and has the potential for several trillion cubic feet of natural gas. As we proceed with our testing program at Zitong-1 and Yixin-2, and follow-up with a development program for the block, we aim to demonstrate the significant upside potential."
Testing program to start in mid-December
Initial testing of the Zitong-1 well, located on the 70-square-kilometer Guan structure, is expected to commence in the Xu2 Formation. Following the initial test period, Sunwing may elect to initiate a testing and stimulation program for a long term evaluation or drill a horizontal section to evaluate the ultimate potential of a stimulated horizontal wellbore. Given the thickness of the Xu5 and Xu4 sandstone package and the Xu2 sandstone, the Zitong-1 well is already believed to be an ideal candidate for horizontal well evaluation.
At Yixin-2, an initial short-term flow test of the lower section of the Xu4 Formation will be performed. The test data obtained will be used in the design of any ongoing stimulation program for this well.
"Ultimately, a successful gas test would be a transformative event for Sunwing and would allow access to all the other structures on the block," Mr. Moench said. "The other structures on the Zitong Block were drilled without the benefit of current technology and Sunwing's ability to access these additional structures, as well as evaluate other resource plays on the block, would significantly enhance the value of the Zitong Block."
Data from the initial tests will provide the necessary information to model and design the stimulation program for all zones in each well. Open-hole logs and geological data gathered during drilling already provide strong indication that the wells could be stimulated into a commercial production rate.
Over the next two months, and pending the results of the initial testing of the Zitong-1 and Yixin-2 wells, Sunwing's and PetroChina's technical teams will work together to develop a strategy to appraise the Guan and Yixin structures. As provided for in the Production Sharing Contract, Sunwing Energy, with the cooperation of PetroChina, will develop a strategy to appraise and develop the remaining Zitong Block potential including, but not limited to, any of the previously drilled structures.
Potential for production and cash flow in mid-2011
Gas produced from the Zitong-1 and Yixin-2 wells could be tied into an established local and regional gathering and sales distribution system located within four kilometers from each well. For long-term testing periods of over 30 days, the Zitong-1 and Yixin-2 wells could be tied-in to the local gas gathering system to allow for longer term performance monitoring and natural gas sales to PetroChina and cash flow to Sunwing by mid-2011.
Natural gas sales are regulated in China and current prices are approximately $5.00 per thousand cubic feet at the wellhead. As part of China's commitment to develop cleaner sources of energy, demand for natural gas is projected to continue to grow in the country.
Zitong-1 - Log data on Xu2 Formation
The upper Xu2 sandstone was encountered at 4,121 meters with high mud gas readings. Having reached the primary target, the complete Xu2 Formation was drilled, and the well reached total depth at 4,294 meters.
Data from the open-hole logs indicate a 99-meter sandstone section in the upper Xu2 Formation, from 4,121 meters to 4,220 meters, with high mud gas readings during drilling. These gas readings are consistent with offsetting wells drilled by PetroChina and Sunwing's prognosis for this section of the well. Within the upper Xu2 section, there is a 51-meter (168 feet) thick, coarser grained sandstone, with 5% average porosity and higher mud gas readings. This section will be the focus of initial testing. The upper Xu2 sandstone overlies a section in the Xu2 Formation between 4,220 meters to 4,275 meters with much less net sandstone, but it includes an additional 14 meters of net sandstone averaging 4% porosity.
As announced in an Ivanhoe Energy news release on November 1, 2010, data from the open-hole logs indicate that the shallower, Xu5 and Xu4 formations at Zitong-1 most likely share the same pressure regime, with a total sandstone and shale sequence of 357 meters, from 3,445 meters to 3,802 meters. Of primary interest in the lower Xu5 Formation, there are four units between 3,841 meters and 3,564 meters comprising up to 58 meters (190 feet) of net sandstone, with porosity ranging up to 13% and averaging approximately 7%. Of secondary interest in the Xu4 Formation, there are three units between 3,592 meters and 3,801 meters comprising up to 22 meters (72 feet) net sandstone, with porosity up to 8.5% and averaging 5%.
Yixin-2 - Log data on Xu4 Formation
Data from the open-hole logs at Yixin-2 indicate multiple stacked sandstones in the lower Xu5, Xu4 and Xu3 formations from 3,738 meters to 4,150 meters which had corresponding high mud gas readings during drilling. In the Xu4 Formation, log-calculated porosity values are low - up to 3% - with the section likely containing numerous fractures, as indicated from spikes in mud gas readings during drilling and from the open-hole logs. Rock quality in the lower Xu5 Formation is improved over the Xu4 Formation, with 18 meters net sandstone averaging 6% porosity encountered in the interval 3,740 meters to 3,773 meters.
Sichuan is the oldest and one of the most productive gas producing regions of China. Sinopec and PetroChina have made significant gas discoveries from the Xu-2, Xu-4 and Permian formations in blocks adjacent to Sunwing's Zitong Block.
Sunwing is the operator of the 659,840-acre (1,031 square miles) gas exploration block in Sichuan, and it holds a 90% Contractor Interest in a Petroleum Contract with PetroChina Company Limited. Mitsubishi Gas Chemical Company of Japan holds the remaining 10% Contractor Interest.
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