In summary, Petrolifera's Puesto Morales facilities and projects are all in a very advanced stage. Natural gas is being delivered at low pressure through the previously completed natural gas pipeline until compression is available and new non-associated natural gas wells are drilled and tied into the pipeline. While it is always difficult to predict the timing of completion of projects in any jurisdiction, in large measure Petrolifera's facilities should be substantially operative in November 2007 with the balance operative by year-end.
As a result, Petrolifera anticipates continued and accelerated production improvements during the balance of the year. However, given the difficulties in predicting the timing of events which impact on the company's production and sales levels in Argentina, management has determined it will no longer provide detailed guidance with respect to anticipated operating and financial results. This may be reconsidered once production levels have stabilized following the implementation of the company's pressure maintenance waterflood project at Puesto Morales and when there is less of an exploratory component to the company's activities in the areas from which it is producing and selling its crude oil and natural gas.
Puesto Morales, Argentina
Since mid-August 2007 Petrolifera has drilled, completed or tested eight wells at Puesto Morales and is currently drilling two new wells. Two of these wells - 1025 and 1037 - will be water injector wells. Six of the wells - 1031, 1033, 1036, 1042, 1043 and 1044 - have all been completed as light gravity crude oil wells and have all been placed on pump due to prevailing reservoir conditions or due to unstable flow rates without artificial lift. This is very common as areas achieve a certain level of maturity awaiting pressure maintenance. Their productivity and that of other flowing oil wells, which have been curtailed pending facilities completion, should be positively impacted once the waterflood project is initiated.
There are three other wells which are either drilling or awaiting completion - the 1006 well, which is drilling ahead in an up dip position to the original La Ramona well drilled by previous owners in 2003; the 1050 well, situated northwest of the 1061 and 1013 wells in the central lobe and southeast of the 1006 well; and the 1053 well, which offsets the excellent 1028 Centenario oil discovery on the eastern edge of the Puesto Morales concession and is standing cased, awaiting testing.
With the exception of the 1006 and 1050 wells, which are currently drilling, Petrolifera has not yet been able to drill and test its higher-potential exploratory locations on the Puesto Morales block, primarily as it has been awaiting the arrival on location of a larger, Chinese-built drilling rig to be operated by one of its drilling contractors. This delay has restricted the company's ability to drill wells in the northeastern portion of the Puesto Morales Block. These wells and others to the south must be drilled directionally due to the proximity of the surface locations to the Rio Colorado water reservoir or "embalse", which bisects the block. Petrolifera has to move the surface locations to ensure they will not be flooded during the rainy season with resultant high water levels. Also, regulatory issues and delays thus far in late 2007 have also limited Petrolifera's ability to drill some other high potential exploratory prospects on the southern portion of the Block. The aforementioned drilling rig is now anticipated on location in November and as a break-in period will be required for this new rig and crew, it now appears these high potential wells will be deferred until 2008.
Petrolifera has now drilled seven wells and is now drilling its eighth well on the large seismically-defined feature on its Rinconada Block in Argentina. These wells are being drilled primarily for light gravity Sierras Blancas crude oil from a depth of approximately 1,000 meters. Some additional zones or formations, including fractured basement, may also be oil-bearing and prospective producing horizons.
To date, the Rinconada (RN) 1001 discovery, RN 1005, RN 1006 (to distinguish it from Puesto Morales 1006) and RN 1010 (first step down dip from RN 1001) have been completed as oil wells, with RN 1005, RN 1006 and RN 1010 on pump at rates up to 150 bbl/d. The RN 1001 discovery continues to flow at rates up to approximately 150 bbl/d. Additionally, the RN 1009 well is currently being completed and the RN 1007 well (second step down dip from RN 1001) is standing cased, ready for testing. The RN 1029 well, drilled at some distance southwest of the RN 1001 well, has been suspended due to problems arising from poor subsurface hole conditions and a poor cement job when running casing. It did encounter encouraging oil shows while drilling and oil pay was calculated based on logs. The company is undecided whether to attempt a reentry to test or to drill a replacement well.
Petrolifera remains enthusiastic about the overall reserve potential of this significant new light gravity crude oil play and has dedicated one drilling rig and one service rig to the block to continue extending the aerial extent and associated reserves and production from the seismically-defined accumulation.
Petrolifera anticipates it will be able to drill approximately eleven more wells on the Puesto Morales Block and six more wells on the Rinconada Block during the balance of 2007, approximately ten less wells than originally budgeted, due largely to the late arrival of rigs.
Petrolifera has commenced an arbitration procedure with respect to securing its 50 percent interest in the Salinas Grande I concession in La Pampa Province, Argentina. The designated partners have been reluctant to complete the transaction as agreed, necessitating this action.
The former contract operator of the Puesto Morales Concession has commenced an arbitration procedure against Petrolifera, claiming wrongful dismissal and seeking financial compensation, including damages. Petrolifera is of the opinion the action is without merit and intends to respond and counterclaim. Potential damages are not quantifiable at this time, but in any event are not anticipated to be material to the company.
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