Long Term Oil Marketing Arrangement Signed
Calvalley, along with its joint venture partners Reliance Industries Limited and Hood Oil Ltd., have entered into a long-term crude oil purchasing agreement with Reliance Industries (Middle East) dmcc ("RIME"), company based in Dubai, UAE. RIME is affiliated with Reliance Industries Limited. This agreement is based on a "take or pay" arrangement. The price has been set at the Yemen Official Selling Price ("OSP") less $U.S.0.50 per barrel. The OSP is based on the dated Brent price, and is historically OSP has fluctuated between Brent plus $0.30 to Brent minus $1.50. The February OSP was a Brent plus $0.30. This agreement will remain in force for 18 months and is renewable at the option of the parties.
Calvalley, on behalf of its joint venture partners, sold 60,000 barrels of oil in January, 2007 and is committed to selling 270,000 barrels in March, 2007. These figures represent the joint venture partners' share of oil production only and are net of all royalties and share of production attributed to the Government of Yemen.
Work Program and Budget
The Block 9 joint venture presented its 2007 Work Program and Budget of approximately $200 million US dollars to the Government of Yemen's in December, 2006. The Program calls for an active exploration and development plan, including the main transmission pipeline, completion of existing Hiswah wells, the drilling and completion of four new wells in the Al Roidhat field, reservoir modeling and maintenance, continued expansion of the producing capacity of the Hiswah field. Three additional development wells in Hiswah have been approved and further approvals are anticipated following the initial compilation of reservoir modeling data. Several exploration wells are also planned together with an additional acquisition of 300 to 400 kilometers of 2D seismic lines.
Pipeline Construction Tendering Process
Work continues with respect to the construction of a 250 kilometer 16" pipeline that will transport crude oil from Block 9 to Block 18 for furtherance to Ras Isa marine terminal for export. Requests for prequalification tender applications have been advertised. The prequalification of candidates for the engineering, procurement and construction and management ("EPCM") has been approved by the Government of Yemen and the tender packages have been distributed. Concurrently, the Company is now receiving submissions relating to prequalification for the EPC (pipeline construction only) tender. Once these tenders are received and the contracts awarded, work related to the aforementioned contracts will commence thereafter.
Individual testing of Hiswah wells recently commenced through a test separator package. The results of this campaign will assist in building the characterization model for the reservoir simulation study and aid in evaluating the Production Enhancement Pilot Project (PEPP) designed to increase & optimize well productivity. While this testing negatively affects daily production volumes near term with wells being temporarily shut in for pressure build ups (PBUs), the information provides far more valuable long term benefits in areas of reservoir management and production optimization by way of potential enhancement from multilateral legs, acid stimulation and hydraulic fracturing. This campaign will serve as basis for secondary recovery mechanism utilizing water and gas injection methodology.
Block 9 crude oil deliveries averaged over 7,000 barrels per day during December. This dropped to 6,300 bopd and 4,900 bopd in January and February, respectively as an extensive well testing program, described above, took some of the wells off of production for pressure build-up testing.
Central Processing Facility (CPF) and Camp Facilities
Construction of the Central Processing Facility continues. The pipe rack and the testline are completed and approximately 90% of the field gathering system, group separator and treater connections are completed. The site camp is being expanded with living quarters for an additional sixty workers. The living quarters and the kitchen have arrived and are awaiting installation.
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