The Knights Landing Project is on a 14,000-acre block in Sutter and Yolo counties. NEG, the operator, discovered natural gas in four new wells drilled on the project in 2003. Under the terms of the farm-in agreement, Ivanhoe will purchase an interest in the four wells, build pipelines to the four wells, and drill up to 20 additional wells in the area for US$3.8 million. Ivanhoe's interest in the entire project will be 50% after recovering its costs on an accelerated basis.
Each of the four wells drilled by NEG encountered between four and six gas zones. To date, NEG has tested only the bottom zone of each well using choke sizes between 6/64th inches and 12/64th inches. The combined, constrained production test flow rate for the four wells was 2.05 million cubic feet per day. Once the wells are connected to the gas-gathering system, Ivanhoe plans to increase the flow of the wells to attain the maximum, stabilized, long-term rate of production. Prices for gas from the project area are about 85% of the California Border price, which is currently approximately US$5.15 per million BTU.
"The acquired assets provide the company with near-term gas production, additional low-risk drilling and exploitation opportunities in this highly productive gas area," said Mr. Martin. "We will continue to pursue investment opportunities to increase production and reserves consistent with our growth strategy."
Ivanhoe plans to participate in drilling of an initial 10 development wells offsetting the four producing wells and 10 additional exploration wells in the lease block. The drilling program is scheduled to begin in April and be completed in November. Depending upon success, an additional drilling program of similar size may be considered in 2005. Each completed well is expected to cost approximately US$200,000. The primary objective of the drilling is the Starkey Sand formation, which is an established producing reservoir in the region that lies between depths of 2,000 and 3,500 feet.
The Sacramento Basin is a major gas producing area located in northern California. In 2002, the region produced 81 billion cubic feet of gas from 83 fields and more than 1,000 producing wells. The nearest field of significance to the Ivanhoe project area is the Knights Landing field which was discovered in 1981 and has produced over 20 billion cubic feet of natural gas.
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