Since the end of last year, Cardinal has held intermittent negotiations and general discussions with its Joint Activity partner, Ukrnafta, and its major shareholders regarding the reinstatement of Cardinal's subsidiary, Carpatsky Petroleum's, net profit interest in the RC Field and in four development wells drilled by Ukrnafta. An agreement has not been reached and the Company does not expect one until after the Ukrainian parliamentary elections on March 26th.
Under the new swap agreement with Ukrgaz Cardinal gains increased ownership and operational control of the Bilousivsko-Chornukhinska (BC) license area, increasing its working interest in six undeveloped wells previously in JAA #429 from 50% to 100%. Cardinal also obtains 50% of one additional workover candidate in the North Yablunivska (NY) license. In turn, Ukrgaz gains an increased interest in four wells, reducing Cardinal's interest in them by 50%. Cardinal acquired the three licenses - Dubrivska (DB), Bilousivsko-Chornukhinska (BC) and North Yablunivska (NY) – through its acquisition of Rudis Drilling Company (Rudis) in October 2005.
The net effect to Cardinal of the swap is that its average working interest in the wells subject to the swap rises to approximately 76% from 64%, with a corresponding net revenue increase of 16%. As part of the agreement, Cardinal and Ukrgaz will adjust their capital contributions to the JAA accordingly. After accounting adjustments and profit distributions, it is anticipated that the net cost to Cardinal will be a maximum of approximately $400,000.
The transaction, which is effective from January 30, 2006, increases Cardinal's total proved and probable reserves by 1.8 million barrels of oil equivalent (MMBOE) to 29.3 MMBOE.
Taking into account the well swap, Cardinal has identified eleven development drilling locations and seven well workovers in the BC and NY license areas. The 2006 / 2007 development program on the BC and NY license areas include seven well workovers and the initiation of drilling operations on seven of the eleven development locations, with four of those expected to be completed prior to year-end 2007. The forecasted capital investment to develop these locations is $25 to $42 million, dependant upon the number of wells drilled, the extent of western equipment utilized and the availability of finance, with an anticipated 2,500 to 3,000 barrels of oil equivalent per day increase to current net production levels by the end of 2007.
At present, the BC #13 workover has been completed and is now producing approximately 50 barrels of condensate per day. Site work on the drilling locations for the BC #3 and NY #4 development wells has begun. The NY #203 workover has begun, and the BC #111 and BC #9 workovers are expected to commence operations in the second and third quarters of 2006 respectively. The results of the Dubrivska # 2 exploratory well are expected in the second quarter of 2006.
"We will continue to deliver on our strategy to add properties that are operated by Cardinal which offer significant upside to our portfolio," said Chairman and Chief Executive Officer Robert J. Bensh. "Our team has the opportunity to enhance our asset base with increased exposure to gas in the Ukraine, while adding further development drilling opportunities under Cardinal's control."
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