Heritage has announced the publication of its annual financial report for the twelve months ended December 31, 2008. All figures are in US dollars unless otherwise stated.
Tony Buckingham, Chief Executive Officer, commented, "Heritage has achieved tremendous operating success during 2008 and early 2009, leading to a world-class oil discovery in Uganda and very encouraging results from the Miran West-1 well in the Kurdistan Region of Iraq, which is currently being tested. We also achieved increases in production and expanded our portfolio of properties. Looking ahead, we believe we have the financial and technical capability, combined with the management flexibility, to pursue opportunities to enhance the interests of our shareholders."
CHIEF EXECUTIVE'S REVIEW
Operational success has dramatically transformed Heritage. Our outstanding drilling successes in Blocks 1 and 3A in the Albert Basin, Uganda, mean we are now confident that sufficient volumes have been discovered to justify a major development. The work programme on the Miran Block in the Kurdistan Region of Iraq was accelerated following the completion of a seismic survey in the second quarter of 2008. The Miran West-1 well, which commenced drilling on December 21, 2008, reached a total depth of 2,935 meters on March 25, 2009. This well encountered oil shows over an interval of 1,100 metres with excellent oil shows over the three targeted reservoir intervals. A series of tests is being performed over a gross interval of approximately 500 meters. These achievements, coupled with listing on the Main Market of the London Stock Exchange and the corporate reorganization that raised the Company's profile as a significant player in the international oil and gas industry, puts us in excellent shape for the achievement of near- and long-term growth in production and reserves and also in shareholder value.
2008 was a year of extreme volatility in international crude oil markets, with price fluctuations of a magnitude never seen before. Fortunately, as primarily an exploration company with international projects in proven light oil basins, Heritage was not dramatically affected by short-term price volatility and we remain confident that the longer-term outlook for oil and gas is positive. The world will continue to need hydrocarbons which will require new production from remote and challenging regions. At Heritage we remain committed to seeking out such opportunities and managing political and operational risk with a diverse portfolio and a prudent mix of exploration, development and production.
Our long-standing strategy of being an early entrant in prospective regions, demonstrating our management and technical expertise, and our commitment to building working relationships with local and international companies and governments, gives us the flexibility to react quickly to changing circumstances.
The combination of aggressive investment, prudent risk management and operating excellence has yielded exceptional results throughout 2008 and into 2009. This includes our discovery of the world-class Buffalo-Giraffe field in Block 1, Uganda where we are the operator with a 50% interest.
The world-class Kingfisher field in Block 3A was discovered in 2007. This significant discovery was surpassed with the discovery of the large Buffalo-Giraffe field, in Block 1, in January 2009. On current estimates, the Buffalo-Giraffe field has an area of approximately 48 square kilometers and an oil column of 140 meters. The structure may extend even further to include the Buffalo East prospect, creating a very large structure of up to 90 square kilometers. Initial estimates for the Buffalo-Giraffe field are recoverable resources of approximately 350 million barrels (gross), which is not only a major field in itself, but also significantly de-risks the many other potential targets in the block.
Operations in this basin have continued to achieve a 100% success rate as, to date, 21 successful exploration and appraisal wells have been drilled with all encountering hydrocarbons. Further appraisal work on the Kingfisher discovery produced some exciting results in 2008 with a record production test, for any well drilled in Uganda, of 14,364 bopd. Additionally, the same three reservoir intervals were encountered in all of the wells and, significantly, the areal extent of the field was increased as oil was found structurally higher than anticipated in the Kingfisher-3 appraisal well.
The Albert Basin will remain a high corporate priority in coming years as the recent drilling successes have raised the estimated resources of the basin above the threshold required for commercial development. This is transformational for Heritage. With a gross licence area in Uganda and the DRC in excess of 12,000 square kilometers -- equivalent to approximately 55 North Sea blocks -- the Albert Basin is now estimated to have multi-billion barrel reserve potential. We are considering a number of fast-track development scenarios for the Albert Basin, including the possibility of a phased development with first production in 2011 by utilising the existing railway network in East Africa. We are also considering an export pipeline to the coast as well as a scheme to service local markets.
In addition to the Kingfisher drilling activity, mapping of recent seismic data has identified a number of prospects offshore in Lake Albert within the Heritage operated Block 3A, including the structurally attractive Pelican prospect and the large Crane prospect. An offshore drilling programme that will include the Crane and Pelican prospects is currently expected to begin in the first half of 2010.
Heritage farmed-in to four licence areas in Tanzania in mid-2008, with a total area of approximately 25,000 square kilometers. In early 2009, Heritage completed the acquisition of 2D seismic in-fill data on two blocks in Tanzania. Future drilling locations will be identified once the data has been processed and interpreted.
The Middle East
Kurdistan Region of Iraq
The Kurdistan Region of Iraq is another primary focus area for Heritage, with the potential to find multi-billion barrels of oil. Based on excellent quality seismic data acquired by Heritage during 2008, management has confirmed that the Miran Block contains two anticlines that have the potential to contain billions of barrels of oil in place from multiple potential reservoir targets. Drilling of the Miran West-1 well began in December 2008, a significant accomplishment given that Heritage was awarded the licence less than 15 months prior, in October 2007.
In March 2009, we announced drilling of the Miran West-1 well had completed and reached a total depth of 2,935 meters. The well encountered oil shows over an interval of 1,100 meters, with excellent oil shows in the three principal proven reservoir formations in the region (the Shiranish, Kometan and Qamchuqua). Good quality light sweet oil was recovered to surface as part of the drilling operations. A series of drill stem tests over a gross interval of approximately 500 meters are being conducted during April 2009. A further announcement will be made when all tests have been completed.
The operating environment for oil and gas companies in the Kurdistan Region of Iraq remains relatively stable and secure, and Heritage management believes that any outstanding issues between the government of Iraq and the Kurdistan Regional Government will be resolved satisfactorily. To that end, the two parties formed a series of committees to resolve issues. There has been considerable progress recently with the likelihood that first oil from Kurdistan will be exported this year.
Following our exceptional success in Uganda and very encouraging drilling results in the Kurdistan Region of Iraq, we decided to sell our non-core 10% interest in Block 8 in Oman for $28 million, plus $400,000 in working capital adjustments. We believe that greater value can be generated by using this cash to finance accelerated work programs in Uganda and the Kurdistan Region of Iraq.
In December 2008, Heritage received government approval for a farm-in to the Zamzama North Block in the Sindh Zone (Zone lll) in southern Pakistan. Heritage is the operator and was awarded a 48% participating interest in the block. This has extended Heritage's operations in Pakistan, which also include a 54% interest in, and operatorship of, the Sanjawi Block in the Baluchistan Zone (Zone II) in Pakistan. This block contains a number of large anticlinal structures which could be potentially significant drilling targets.
Development of the Zapadno Chumpasskoye Licence in western Siberia, in which Heritage holds a 95% equity interest, continued during 2008. A third exploration and appraisal well was completed in the first half of 2008, and average daily oil production increased to 379 bopd in 2008. Peak production of 900 bopd was achieved but the field was shut-in between December 2008 and February 2009 following a temporary reduction in the domestic oil price in Russia. Production has since recommenced at a level of approximately 150 bopd but we expect this to increase over the year.
In summary, Heritage has achieved tremendous operating success during 2008 and early 2009, leading to a world-class oil discovery in Uganda and very encouraging results from the Miran West-1 well in the Kurdistan Region of Iraq, which is currently being tested. We also achieved increases in production and expanded our portfolio of properties. Looking ahead, we believe we have the financial and technical capability, combined with the management flexibility, to pursue opportunities to enhance the interests of our shareholders. We look forward to making substantial further progress and increasing shareholder value in both the near- and the long-term.
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