Delta Hydrocarbons B.V. ("Delta"), a Partner with Eurogas International and Atlas Exploration Worldwide Ltd. ("APEX"), in the Joint Venture, has notified Eurogas International and APEX of its desire to sell its non-earned interest under the agreements pertaining to Delta's farm-out on the Sfax Exploration Permit and the Ras El Besh Concession in Tunisia.
Discussions are underway between the Partners. To date, Delta has spent approximately US $110 million out of its US $125 million commitment under the terms of the farm-out agreements. The 50% participating interest that was assigned to Delta under the agreements is subject to reversal if the US $125 million level of expenditure is not attained.
The Sfax Exploration Permit (the "Permit") covers an area of approximately one million acres which includes four oil discoveries in three geological formations including the REB3 well that was drilled in 2008 and tested 27 degrees API oil over a 10 meter thick pay section in the Reineche formation. Large areas of the Permit remain under-explored and, since 2004, the Partners have acquired 948 km2 of 3D seismic to delineate structures in the central and northwest portion of the Permit area. The participating interests in the Sfax Exploration Permit and the Ras El Besh Concession are Eurogas International at 22.5%, APEX at 27.5% and Delta at 50%.
On January 20, 2009 the Tunisian Hydrocarbon Committee approved a two year extension on the Sfax Exploration Permit which will extend the primary term to December 8, 2011. The extension becomes official upon being publicly gazetted, which is expected to occur in the near future. The Partners have committed to drill one exploration well during this extension period.
The 2009 work program and US $12.8 million budget on the Sfax Exploration Permit and Ras El Besh concession have been approved, subject to agreement between the Partners on technical matters. The work program includes a 380km 2D seismic program to follow up on the REB3 well drilled in 2008 that had the oil show in the Reineche formation. This same formation produces oil and gas from two fields north of the Permit boundary that are located 15 kilometers from REB3. The area is in shallow waters that have been sparsely evaluated due to the high cost of transition zone seismic acquisition. Vintage 2D lines suggest the presence of structures that provide a trap mechanism for Reineche oil pools. As further review is completed the work program may be adjusted. The ultimate timing of the work program will depend upon availability of contractors and crews.
The Partners are re-evaluating the Salloum oil prospect as the next drilling candidate on the Sfax permit. SAM 1, an exploration well located 1.5 kilometers off the east coast of Tunisia, was drilled in 1991 by a previous operator and tested 1800 bpd of 42 degrees API oil with no water. The Salloum structure is adjacent to two producing oil fields that produce from the same targeted formation. Revised mapping based on the 3D seismic program acquired in 2007 suggests the Salloum structure extends towards the shoreline and can be drilled from an onshore location.
The Partners have notified Seawolf Oilfield (Cyrus), Ltd., the owner of the Delta Queen drilling rig which was contracted for the drilling of the REB3 well, that the Partners are disputing various charges associated with the drilling of the well. In January 2009, the Partners filed an application for arbitration as per the provisions of the drilling contract. An arbitration process has commenced. The Partners contend that the drilling equipment provided by the Delta Queen was in poor condition which resulted in significant delays and cost overruns.
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