SOG is a wholly state-owned oil and gas company reporting to the Ministry, which holds the production licenses to a number of fields in the Kulob Area in southern Tajikistan over which Tethys is currently negotiating a Production Sharing Agreement ("PSA"). The IOA allows Tethys to commence initial production operations in the Kulob Area whilst the Tajikistan government finalizes certain necessary legislative changes to enable the recently adopted Production Sharing Legislation to become effective. Once this is completed Tethys intends to progress and finalize negotiations on the PSA, and the Ministry recommended that the IOA be entered into as a precursor to the execution of the PSA and to provide assistance to Tethys in obtaining a PSA for the Kulob Area.
Under the IOA TTL will invest funds for specific oil and gas rehabilitation operations, which will commence with a relatively small investment. This work may involve perforating and re-perforating wells, sidetracking and working over of some wells, upgrading facilities and well-bore treatment as well as other techniques to improve production. The IOA covers fields in Southern Tajikistan specifically including the Beshtentyak, Uznohor, and South Pushion oilfields and the Khoja Sartez gas condensate deposit (the "Fields"). Further fields and areas may be added to the IOA by mutual consent and TTL has the exclusive right to carry out such activities on the Fields. Existing field production will go to SOG, but any incremental additional production generated by work under the IOA will be split between TTL and SOG. TTL will receive 75% of all additional production of oil and gas until it has recovered all of its costs. SOG will receive the remaining 25% of oil and gas produced during this cost recovery period. After TTL has recovered its costs it will receive 70% of the additional production and SOG will receive 30%. TTL will have the right to sell its production to whomsoever it wishes and there are no price restrictions on these sales by the State.
The Beshtentyak field is located 28 miles (45 km) north of Kulob and is currently producing approximately 75 barrels of oil and limited gas production. The field was discovered in 1970 and there are currently 24 operational wells, 6 of which are currently producing at limited potential due to lack of investment and technology. The reservoirs are Paleocene limestone and dolomites in a narrow anticlinal structure at a depth of up to 6,500 feet (approximately 2,000 meters), the oil is 33 - 35 degrees API low sulphur crude, and flow rates of up to 800 bopd and up to 7 million cubic feet per day (MMscf/d) of gas (200 thousand cubic meters per day (MCM/d)) have been achieved from wells in the past. No deep drilling has been carried out on the field to date.
Also included in the IOA is Khoja Sartez, a gas condensate accumulation located some 8 miles (13 km) to the west of Kulob. This deposit is developed on the flank of a clearly visible large salt dome and is at a much earlier stage of development than is Beshtentyak. Drilling has only been carried out in the surface layers to a depth of some 5,580 feet (1,700 meters). Tethys believes that the deeper layers and other flanks of the dome have the potential to contain substantial volumes of gas condensate. Four wells have been drilled on the structure and a modern gas processing facility was installed but all the wells are currently shut-in due to lack of investment and adequate technology. The Khoja Sartez deposit seems similar to some of the large salt dome related prospects in the southern part of the Kulob Area. Additional information in respect of the Fields included in the IOA will appear on our website.
As well as these opportunities for early oil and gas production and cash flow through rehabilitation of existing fields covered by the IOA, experience on these fields will give Tethys valuable additional data on the characteristics and potential of such deposits, as well as establishing an operating organization in the area. The initial work program will be finalized within the next month with operations commencing as soon as possible thereafter. At least 10 well workovers will be in the initial work program.
Tethys believes that there is an opportunity for large discoveries of both oil and gas exploration in the "virgin" territory of the Afghan-Tajik basin, a continuation of the prolific Amu Darya basin, in Tajikistan. Tethys believes that the Kulob Area of Southern Tajikistan offers very significant potential with existing discoveries in a proven hydrocarbon system with several different source rocks, reservoir rocks and large structures created both by tectonic activity and active salt movement. In January 2007, Tethys signed a Protocol of Intent with the Tajikistan government to negotiate a PSA for the large Kulibsky (Kulob) area of southwest Tajikistan and in early March 2007, the Tajikistan government introduced production-sharing legislation for the first time, which lays the fiscal and commercial framework for such a PSC. In June 2007 Tethys extended the term and scope of its Protocol and the IOA also re-enforces the Ministry's support for the planned PSA.
Tethys also announced that it would not be moving forward with plans to acquire the Aral Vostochniy exploration area in Kazakhstan. On May 10, 2007, Tethys entered into agreement to acquire the Kazakh limited liability partnership which had been awarded the exploration contract for the Aral Vostochniy area for an initial payment of US$2.5 million plus 1.5 million ordinary shares in Tethys and with certain future bonuses based on commercial discoveries. Work program commitments over the next six months were estimated at US$2.5 million. This agreement was conditional upon Tethys raising at least US$25 million in its recent IPO (which was achieved), and upon certain extensions and changes acceptable to Tethys being made to the obligation work program on the area being agreed by the seller with the appropriate Kazakh authorities. These extensions and changes to the work program were necessary in order for to carry out the obligation work program in a realistic time frame and to make this program cost effective. The seller has now informed Tethys that it is unlikely that such changes will be agreed with the appropriate Kazakh authorities in the foreseeable future and this together with other issues means that it is not in a position to meet its obligations under the conditional agreement. As such it has been agreed to terminate the agreement by mutual consent. None of the purchase price has yet been paid, and the ordinary shares issued into escrow with respect to this transaction will now be forfeit.
Dr David Robson, Chairman, President and Chief Executive Officer of Tethys, commented, "This Investment and Operating Agreement further strengthens our relationship with the Tajikistan government and allows us to commence work on production enhancement on existing fields whilst we continue our discussions on the PSA. This IOA should allow early cash flow from our projects in Tajikistan whilst we work towards realizing upside through exploration activities under the planned PSA. We believe that Tajikistan offers huge potential upside in exploration for large oil and gas prospects and we are excited to be commencing operations there with the view to shooting seismic early in 2008 and to drill a well the same year following execution of the planned PSA. In Kazakhstan we are terminating the agreement we had in place to acquire the rights to the Aral Vostochniy exploration area. Whilst we are disappointed that the sellers could not fulfill their obligations we are currently evaluating several other projects in Kazakhstan which could significantly enhance the value of the company with respect to near-term development, as opposed to longer term exploration projects of which we already have several exciting projects both in Kazakhstan and in Tajikistan ongoing at present. In addition this will free up capital to allow us to potentially extend our short-term cash flow projects both in Kazakhstan and now in Tajikistan"
Tethys is focused on oil and gas exploration and production activities in Central Asia with activities currently in the Republic of Kazakhstan and more recently the Republic of Tajikistan. This highly prolific oil and gas area is rapidly developing and Tethys believes that significant potential exists in both exploration and in discovered deposits.
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