Ivanhoe Updates Exploration, Development Projects

Ivanhoe issued an operational update on the company's major initiatives and outlined the company's priorities to advance domestic and international projects toward production.

"Ivanhoe Energy is well positioned to take advantage of current economic conditions and continue to advance the development of our heavy oil and conventional oil and gas projects in key resource regions around the world," President and Chief Operating Officer David Dyck said.

"We have a diverse portfolio of high-quality assets and can report some very positive developments. Our primary approach to financing our ongoing activities is focused on identifying and securing joint-venture partners to join us in our projects. Where applicable, we also are considering financing at the subsidiary company level for specific projects, which would establish a significant level of self-sufficiency within the subsidiaries for financing and to fund ongoing capital expenditures."

Notable gas exploration achievements in China's Zitong Block

Sunwing Energy, Ivanhoe Energy's 100%-owned Asia-focussed subsidiary, successfully completed two hydraulic-fracture stimulation programs on the Yixin-2 and Zitong-1 wells in China's Sichuan Province. The results of these treatments, and subsequent flow testing, have confirmed that stimulation of these high-pressure reservoirs can be achieved and that multi-stage stimulation technology, combined with horizontal drilling technology, can be applied in the Zitong Block.

The company's drilling and stimulation activities have resulted in positive achievements in the evaluation of the reservoirs in the Zitong Block. The company has successfully produced gas at measurable rates in both the Xu-4 and the Xu-5 formations. We have demonstrated our ability to successfully conduct a high-pressure hydraulic fracture in both reservoirs and place proppant in these fractures, providing valuable information for the design and execution of future fracture treatments in horizontal wellbores. The data recorded to date in the vertical wellbores provide sufficient information to model expected production performance in a horizontal wellbore. While permeabilities of the reservoirs result in rapidly declining flow rates and pressures in the pre-stimulation testing, these rates of decline are consistent with pre-stimulation flows in most tight sands. In fact, the actual recovery of gas in all of Sunwing's tests exceeded results of pre-stimulation testing in many tight-gas projects in North America. The company is confident that the results of the current testing will allow successful design and implementation of horizontal wellbores with subsequent stimulation using the latest technology for multi-stage fracture stimulations.

Sunwing is planning a 150-square-kilometer, 3-D seismic program to cover certain areas of the Guan Structure, the Guan East Structure and part of the Wen Structure to help plan and design a horizontal well-path for two horizontal wells - one each in the Guan and Wen structures. The company also will review the potential to drill a Guan East well with a horizontal leg as a first-stage test of the regional gas play, or re-enter the Zitong-1 wellbore to complete a horizontal section in the Xu-4 Zone. This program will be carried out over the next 24 months and will provide the groundwork for development of the Zitong Block.

Results of the work carried out to date have reinforced Sunwing's original resource estimates for the Zitong Block and the company is working toward implementing its onward program as soon as possible.

Gerald Moench, President of Sunwing, said the company believes that the Zitong Block contains between 0.3 (P90) and 1.7 (P10) trillion cubic feet of total gas initially-in-place, with a best estimate (P50) of 0.75 trillion cubic feet. "The successful development of this block will have a dramatic impact on the value attributable to Ivanhoe Energy and we are working towards implementing a development program as soon as possible."

Sunwing is the operator of the 659,840-acre (1,031-square-mile) Zitong exploration block in Sichuan and holds a 90% contractor interest in a Petroleum Contract with PetroChina Company Limited. Mitsubishi Gas Chemical Company, of Japan, holds the remaining 10% interest. Sunwing is currently conducting further evaluation to permit classification of the resource numbers quoted into more specific categories pursuant to National Instrument 51-101, to estimate the recoverable portion of these in-place volumes and to determine their commerciality. In the meantime, there is no certainty that it will be commercially viable to produce any portion of these resources

Yixin-2 well

On December 21, 2010, Sunwing announced a natural-gas discovery at its Yixin-2 well, which tested at initial pre-stimulation flow rates of up to 13,000 Mcf/d. The well was drilled to a vertical depth of 4,165 meters (13,660 feet) into the Xu-4 reservoir and was the first of two wells drilled in Phase II of the exploration period to satisfy certain contractual commitments on the block.

Following the post-perforation clean-up flow, and a short shut-in period, the Yixin-2 well was flow tested at a controlled rate of between 1,250 to 1,500 Mcf/d for a 48-hour period, then shut-in for a 21-day pressure build-up period to obtain critical pressure data and to organize high-pressure pumping equipment to carry out a fracture stimulation of the Xu-4. A 100-ton hydraulic-fracture stimulation utilizing high strength proppant was later successfully conducted on the Xu-4 formation.

The well was flow tested for a 30-day period through a test separator and currently is shut-in on a 60-day final pressure build up. During this flow period, 47% of the frac fluid used to stimulate the well was recovered. The initial gas flow rate after fracturing was approximately 800 Mcf/d at a flowing pressure of 7,100 psi. The final flow rate before shut-in was 73 Mcf/d at a flowing pressure of 86 psi. Following the post-frac flow test, down hole electronic recorders were run with the current shut-in period to extend to mid- to late-July. Results of the build-up, as well as the flow-test data, will provide critical reservoir information necessary for forward planning and in discussions with our partner, PetroChina.

The post-fracture stimulation results observed are not uncommon in tight-gas sand reservoirs; the rate declines the longer the well is flowed as more of the tighter formation matrix is tested. The key to unlocking the potential of tight-gas reservoirs is to generate induced fractures to provide sufficient surface flow area to maintain a constant commercial inflow of gas. The fracture operation on Yixin-2 was pumped as planned and, from initial indications, the well has an effective induced fracture system. Preliminary indications are that the permeability of the Xu-4 in this particular part of the Zitong Block may be lower than originally estimated. Initially, Ivanhoe had hoped the Xu-4 could be effectively stimulated in a vertical wellbore; however, these initial post-frac results suggest horizontal wells with multi-staged fracture stimulations are the preferred exploitation strategy to not only access sufficient natural fractures but also to create additional fractures to achieve the desired, stabilized inflow rate.

Zitong-1 well

The Zitong-1 well was drilled in the Guan Structure to a vertical depth of 4,294 metres (14,084 feet). It originally was designed to test the potential of the deeper Xu-2 through a horizontal wellbore. Sunwing perforated and evaluated the Xu-2 Zone. After a brief flow and build-up test, it was determined that this zone was very tight in this particular location. As a result, Sunwing chose to concentrate on other up-hole zones. Since the well intersected the Xu-5 reservoir section and also the Xu-4 at shallow depths, Sunwing proceeded to test both zones in the vertical wellbore. Early in 2011, Sunwing perforated the Xu-4 formation and allowed the well to flow at a final rate of 680 Mcf/d, with a flowing wellhead pressure of 2,196 psi. The flow and build-up test indicated low permeability away from the wellbore and Sunwing decided to isolate the Xu-4 and move up-hole to test the Xu-5 Zone.

The Xu5 Zone was perforated, acidized and flowed, with a final flow rate of 510 Mcf/d at a flowing tubing pressure of 1,214 psi. A post-perforation/acidization flow and build-up test on the Xu-5 Zone showed an effective permeability estimated at 0.0075 mD, well within the acceptable parameters for successful tight-gas plays in other regions, such as North America and the Middle East. The initial recorded reservoir pressure was 10,636 psi which would be considered to be over-pressured.

In May 2011, Sunwing stimulated the Xu-5 Zone with a 200-tonne fracture treatment using high-strength proppant. The zone has been on flow test since then. The well flowed to a test separator and recovered approximately 62% of the frac fluid before any measurable gas rates were recorded. Initial gas flow rates after fracturing measured up to 287 Mcf/d at pressures of up to 1,682 psi. The well was completed with 114.3-mm (4½-inch) tubing to conduct the high-rate fracture treatment; however, due to the larger tubing, the well encountered liquid unloading problems. Sunwing utilized coil tubing and nitrogen to clean the water from the wellbore to allow continued flow testing of the well. At present, the well may have a "water block" in the reservoir that has been preventing the in-flow of gas into the wellbore. Preparations are underway to inject a sufficient volume of nitrogen into the formation in an attempt to remove or reduce the effect of the apparent water block. Water blocks in low-permeability formations can occur following stimulation. Following the nitrogen injection and following blow down, the well will be flow tested and then shut-in for an extended pressure build up.

Preparations for first well on Mongolia's Nyalga Block

Sunwing has recently instructed its drilling contractor to mobilize the drilling rig and associated equipment to the first selected location in the Nyalga Basin in Mongolia. Mobilization activities will take approximately one month to complete. Sunwing will spud its first Mongolian oil well on a 15 sq km structure identified by 2D seismic in late July. The second drilling location will be centered on an adjacent structure with follow-on locations contingent on progressive drilling success. The current focus of exploration represents just a small portion of the total basin area. Detailed evaluation and testing, as required, will be conducted on our initial wells following drilling.

While existing seismic data has assisted in the selection of the first two locations, Sunwing intends to acquire additional 2D seismic on other portions of the block, and if necessary, acquire 3D seismic to better assess future drilling locations and trapping systems. The drilling rig has been contracted for two initial locations, with an option for three additional wells in 2011, weather permitting. Drilling on these two structures should provide a reasonable assessment on the overall potential of the Block which is over 12,000 sq. km in size with very little seismic detail. Given the main Mongolia to China railway and highway crosses through the eastern side of Block XVI, logistical activities can leverage off this proximity to existing infrastructure.

Tamarack heavy-oil project progressing through Alberta's regulatory approval process

The Tamarack Project is continuing to progress through the Province of Alberta's regulatory approval process. The application was submitted to the government in October 2010 for the development of an integrated in-situ heavy-oil project to be built in two phases, each of 20,000 barrels per day, with an ultimate production capacity of approximately 40,000 barrels per day (bitumen basis).

Regulators completed their initial reviews of the Tamarack submission and, as is customary, provided the company with an initial set of Supplemental Information Requests (SIRs) in May 2011. Ivanhoe Energy is preparing responses that it plans to submit to the regulators in Q3, 2011. The company is continuing to work with numerous local and aboriginal stakeholders and identify economic and employment opportunities for residents of area communities. Progress to date indicates that the Tamarack Project remains on track for approval expected in the second-half of 2012.

Tamarack is a 6,880-acre contiguous block located approximately 10 miles (16 kilometers) northeast of Fort McMurray. Ivanhoe Energy holds a 100% working interest in the project, subject only to a 20% back-in right held by Talisman Energy, which expires in July 2011. Ivanhoe recently completed a $50 million public offering, a portion of which will be used to repay Talisman's convertible promissory note.

Tamarack engineering update

Tamarack project engineering and execution plans continue to progress smoothly in anticipation of regulatory approval. Design of the surface facilities is ongoing with AMEC-BDR, with completion of the Front-End Engineering and Design (FEED) anticipated in the fall of 2011. Detailed engineering will begin in the fourth quarter of 2011 once the FEED has been completed. The project execution plan is being developed and will use best-in-class construction methodologies.

Successful upgrading of Pungarayacu oil creates Ecuador JV interest

Ivanhoe's Pungarayacu Project is located on the eastern foothills of the Andes Mountains. It is easily accessible via a network of existing infrastructure. An oil pipeline with spare capacity runs through the lease block. Block 20 is one of only a few that has been classified as strategically important by the Ecuadorian government for full field development. The presence of hydrocarbons has been known since the 1980s; however, up until now, viable extraction and upgrading solutions that address environmental concerns have been elusive. Ivanhoe Energy's HTL process has the potential to address these sensitivities and, in doing so, provide economic development for the people of Ecuador.

The Pungarayacu field has been independently estimated to contain between 4 to 12 billion barrels of Original Oil in Place (OOIP), which according to the Canadian Oil and Gas Evaluation Handbook are classified as Undiscovered Resources. This potentially significant resource has attracted interest by multi-national corporate entities, as well as national energy companies. Interests of all key stakeholders are being respected as development work proceeds. In early development work, Ivanhoe Energy successfully recovered 9o API heavy oil during 2010 that was taken to the company's Feedstock Test Facility in San Antonio, Texas, for testing. Ivanhoe Energy successfully upgraded the Pungarayacu heavy crude to 17o, which meets local pipeline specifications. This represented a significant milestone for the project and created a renewed interest among potential joint-venture partners.

Ivanhoe Energy also plans to assess the southern border of the existing field. A geologic interpretation suggests the heavy-oil field may extend southward to a far greater extent than previously expected. Geologic evidence suggests that a deeper, lighter oil play exists on the block. The objective of Ivanhoe's currently 2-D seismic program is to determine the likelihood of geological trapping systems that would support these views.

Ivanhoe is continuing to make good progress on its previously disclosed 190-kilometer 2-D seismic program and expects the initial phase of shooting and processing will be completed in early July this year. The seismic data will assist in the selection of future appraisal drilling locations. The seismic program fully complies with all Ecuadorian regulatory requirements and has the approval of local stakeholders after extensive consultation.


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