Volga Gas announced the following update on its exploration and development operations.
Urozhainoye-2 license area
The Yu. Romanovskaya #1 exploration well reached its initial target at a depth of 2,885 meters where the Bo layer was found to be thinner than prognosed and without hydrocarbons. Having completed logging operations, drilling is to continue to the primary target horizon at a depth of 3,800 meters. The rig used to drill the top section of the well will remain on location to drill the deeper section, in an operation that is expected to take about three months.
Uzenskoye oil field
Drilling is expected to commence shortly on the first of two sidetracks to existing wells on the Uzenskoye oil field in the Company's Karpenskiy License Area. The two wells are Uz #9 and Uz #4. Both wells are located at the edge of the field and are currently non-producing. The wells were previously planned to be converted into water injectors but recent studies showed that there is no need to have any water injection in the near future due to the presence of an active aquifer.
The planned bottom hole locations for the sidetracks are updip and infield from the current locations. It is expected that overall field production will increase substantially following the completion of these operations.
The Uzenskoye oil field is currently producing at a rate of approximately 1,200 bopd from four wells.
Dobrinskoye gas/condensate field
Drilling of a sidetrack to the existing well #22 on the Dobrinskoye field is expected to commence early in 2012 as planned. This well, which had been producing in 2010, has suffered water encroachment and has been shut in since June 2011. The well is to be sidetracked into the main reservoir and completed for production. On completion, Well #22 is expected to contribute a substantial proportion of future field production.
The Dobrinskoye field is currently producing from a single well, Well #26 and is currently producing at a rate of 6.0 mmcf/d gas plus 448 bpd of condensate.
Vostochny Makarovskoye gas/condensate field
Preliminary trials of a proposed sulfur processing system on gas from the Vostochny Makarovskoye ("VM") gas/condensate field have been conducted at the Dobrinskoye gas plant with successful results. The Company has commenced a program to upgrade the gas plant to provide additional capacity and sulfur treatment. It is expected that the upgrade will be completed during Q3 2012 and production from the VM field will commence shortly thereafter.
There are two existing production wells on the field: VM#1 and VM#2, both of which have been completed for production from the Evlansko-Livenskiy reservoir and connected to the plant. In addition, the Company plans to undertake the workover of another well, #30, as a producing well from the Bobrikovskiy reservoir. Well #30, which was drilled before Volga Gas acquired the VM license, achieved a flow rate of over 7.4 mmcf/d under flow test from the Bobrikovskiy reservoir. The plan is to place all three wells on production when the gas plant upgrade is completed. Further development drilling, including a sidetrack of the VM#4 well is planned for 2013 and beyond.
Pre-Caspian License Area
An exploration well, Mirnaya #2, is to commence drilling in the Pre-Caspian license area in 1Q 2012. As announced on August 1, 2011, the State Committee for Resources approved C3 resource estimates of 58 million barrels of oil equivalent on this prospect. The well is to be drilled to a target depth of 1,220 meters into a supra-salt target believed to be prospective primarily for oil.
Capital expenditure program
The planned capital expenditure program for the remainder of 2011 and for 2012, including all of the above activities, totals US $16.3 million, of which US $5.8 million is related to exploration and US $10.5 million to production and field development activities.
This capital program is expected to be funded from cash generated from operations and the Group's existing cash resources.
Mikhail Ivanov, Chief Executive of Volga Gas commented, "While we are disappointed not to have discovered oil in our secondary target with the YR#1 well, we are excited with the program of development drilling that we are commencing and especially with the project to bring the VM field into production. Successful completion of this program will enable Volga Gas to achieve substantially increased production in 2012, from the current total Group production of approximately 2,600 barrels of oil equivalent per day, and consequently increased cash generation."
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