Frontera Resources has announced final results for the year ended December 31, 2008 and results from the quarterly period ended March 31, 2009, and provided a review and update of its operations in Block 12, Georgia.
First Quarter 2009 Results
Shallow Fields Production Unit
Mtsare Khevi Field: Development drilling at the Mtsare Khevi Field commenced in August 2008, with 14 wells being completed to date as part of an initial 20-well drilling campaign. All 14 wells found and tested hydrocarbons, with nine wells initially coming on stream as oil wells and the other five wells being reserved as potential gas producers. Daily oil production, year to date, has ranged from 103 barrels per day to 149 barrels per day and averaged 120 barrels per day as operations at this new field development continue to mature. Oil processing facilities powered by produced gas have been installed in the field to reduce operating costs.
Future plans include continued development drilling and further appraisal drilling to continue to delineate the limits of the field, as well as to evaluate the undeveloped oil production potential from identified deeper horizons. In addition, a study is underway to quantify recoverable gas reserves and identify options for producing the discovered gas commercially into the nearby national gas grid.
The Mtsare Khevi Field is located in the western portion of Block 12 with multiple objective reservoirs situated at depths between 200 meters and 1,100 meters. The field was discovered and partially delineated with multiple exploration wells from 1989 to 1994, but never developed and produced. After completing a field study in 2007 that indicated this field potentially contains as much as 5 million barrels of recoverable oil reserves, Frontera designed a plan to bring the shallow reservoirs from the Akchagil formation into production. Additional reserve potential exists in deeper Miocene age sandstone horizons that have previously tested and flowed oil. This potential is currently under study and is expected to become a focus of future operations to fully develop the Mtsare Khevi Field.
Mirzaani Field: At the Mirzaani Field, a new drilling campaign commenced late last year with the first well, Mirzaani #2, resulting in the discovery of a new, undeveloped extension of the Mirzaani Field known as Mirzaani Field Northwest. This extension of the field had been identified as undeveloped based on new field mapping completed in 2008. The Mirzaani #2 well finished drilling in late February 2009, and analysis of drilling results and production testing began in March 2009. This testing is currently ongoing and is expected to be completed by mid-August 2009.
The Mirzaani #2 well encountered seven reservoir intervals that, based on analysis of data obtained while drilling, logs and the results of production testing to date, indicate approximately 157 net meters of oil and gas bearing sands within the well. Good quality 33 degree API oil has been sampled from testing thus far, together with associated gas.
Frontera now estimates that, based on integration of data obtained from the Mirzaani #2 well into existing field mapping, the Mirzaani Field Northwest contains potentially significant volumes of recoverable oil reserves within multiple reservoir intervals situated at depths between 800 and 1,300 meters. Plans are being made to appraise the Mirzaani Northwest Extension as well as to deepen existing wells within the field proper in order to access horizons that remain undeveloped below the Mirzaani Field proper. In total, early analysis by the company indicates there may be as much as 600 million barrels of total oil in place, with individual well recovery factors yet to be determined from ongoing testing of the Mirzaani #2 well and the planned appraisal drilling.
Discovered in 1932, the Mirzaani Field has historically produced approximately 7 million barrels of oil, but contains many undrilled locations across the structure. The Mirzaani #2 well is the first new well to be drilled in the field since 1972. In 2006, Frontera acquired approximately 100 kilometers of new seismic data over the field area as part of an effort to re-map and identify new potential associated with the field. Work is currently ongoing to update reserve estimates and results from the Mirzaani #2 well will contribute to this new assessment.
Nazarlebi Field and Patara Shiraki Field: The company commenced a drilling program at the Nazarlebi Field and Patara Shiraki Field in July 2008 with an objective of producing shallow reservoirs situated between 10 meters to 100 meters. After drilling 20 wells, further development drilling as designed was deemed to be uneconomic due to the dramatic decline in world oil prices. As a result, Frontera is redesigning this development program to expand drilling depths beyond 100 meters to as much as 300 meters in order to target deeper zones, with higher pressure and flowrates.
Frontera's field studies have concluded that significant undeveloped reserve potential of as much as 5 million barrels of recoverable reserves exists in oil bearing reservoirs situated at depths from 10 meters to 1,200 meters within the Shiraki formation at the Nazarlebi and Patara Shiraki Fields. These fields are situated adjacent to one another in Block 12.
Summary: The Shallow Fields Production Unit has achieved a 50% increase in production to date since the start of the fourth quarter of 2008 as a result of ongoing operations, with production ranging from 140 barrels per day to 210 barrels per day. It is located in the central portion of Block 12 and represents what the company believes to be an extensive trend of low-cost, low-risk oil and gas reserves. Containing four discovered yet undeveloped or underdeveloped fields that have additional exploration potential, objectives are considered to be traditional, well-known reservoirs of Pliocene and Miocene age that are situated at depths from 10 meters to 1,500 meters.
Taribani Field Unit
Frontera successfully completed fracing operations at the Dino #2 development well (April 2008) and the T-#45 well (May 2008) within the Taribani Field Unit, and subsequently conducted extensive, long-term production testing of both wells within Zone 9 reservoirs at a depth of approximately 2,300 meters.
Analysis of the test results has confirmed that the completion techniques applied to these two wells have eliminated historically challenging sediment production from reservoir formations, thereby demonstrating long-term sustainable reservoir productivity. In addition, associated reservoir engineering analysis has determined that frac completions can successfully enhance production performance from the reservoir formations present at Taribani. However, analysis has also suggested that the applied fracs were not as effective as planned. As a result, the company believes that future frac completions can be more effectively designed and applied to increase sustained production volumes from individual reservoir horizons. Frac completions are designed to enhance well flow rates and ensure sustainability of production by creating artificial fractures in the productive zones. Finally, analysis of results has also determined the viability of commingling horizons 9, 14 and 15 in future wells into single well completions to further enhance individual well productivity and recovery.
Over time, sustained aggregate production from the wells in Zone 9 has stabilized at approximately 55 barrels per day. Based on the long-term production tests and associated analysis described above, the company believes the Dino #2 and T-#45 wells are capable of producing at optimized rates substantially higher than current production.
Drilling of the next planned well, TS#1, as well as planned remedial and optimization work at Dino #2 and T-#45, was initially delayed to early 2009 in order to incorporate optimized engineering and frac completion designs. However, due to the continued challenges in the international financial markets and the dramatic and sustained decline in oil prices, the company is currently considering options for a redesigned schedule for continued development drilling and remedial and optimization work.
The Taribani Field is a large, undeveloped oil field covering an area of approximately 80 square kilometers with productive horizons situated in Miocene and Pliocene age reservoirs. These reservoirs are located at depths between 2,200 meters and 3,500 meters. The independent consulting firm of Netherland, Sewell & Associates has assigned 118 million barrels of P3 reserves from Zones 9, 14, 15 and 19 within the field. Additionally, Netherland, Sewell & Associates has assigned as much as 36 million barrels of unrisked resource potential associated with five deeper horizons in the field.
Basin Edge Play Unit
The completed depth migration reprocessing of an 80 square kilometer 3D seismic survey associated with the "C" Prospect has confirmed the previous structural interpretation and provided an enhanced understanding of the prospectivity associated with this prospect. This work has also confirmed a larger than originally identified structure and reconfirmed the basis for continued drilling operations to reach the primary Cretaceous age objectives of this important prospect.
The company's previously estimated schedule to secure an alternate rig for continuation of drilling operations at the "C" Prospect's Lloyd #1 well is currently being redesigned in consideration of the continued challenges in the international financial markets. Options for continuation of exploration efforts at this significant prospect are currently under consideration.
Frontera's Basin Edge Play Unit is located along the northern border of Block 12 and represents what the company believes is one of the newest and potentially most prolific exploration plays in the Upper Kura Basin. Netherland, Sewell and Associates estimate total unrisked resource potential to be in excess of one billion barrels of recoverable oil within the unit's two major prospects ("B" and "C").
Of this total, prior to the acquisition of new seismic data suggesting an even larger structure, the "C" Prospect was estimated to contain as much as 300 million barrels of recoverable oil from primary reservoir targets and as much as 250 million barrels from secondary reservoir objectives. Frontera's primary reservoir targets are located in the Cretaceous age carbonate rocks, with secondary reservoir targets in the Tertiary age clastic rocks as well as Jurassic carbonates.
Year Ending December 31, 2008
For the year ending December 31, 2008, Frontera incurred a net loss of $78.8 million, or $1.09 per share on a fully-diluted basis. This loss compares to a net loss of $19.7 million, or $0.28 per share for the fiscal year 2007. The increase is due primarily to an impairment of $47.9 million on oil and gas properties in 2008.
Revenues from crude oil sales for 2008 were $4.8 million, an increase of $2.9 million from $1.9 million during the same period in 2007. The increase in revenues was primarily attributable to timing of crude oil sales, as crude oil produced in the second half of 2007 was not sold until early 2008.
Operating expenses were $74.6 million in 2008, an increase of $55.1 million from $19.5 million in 2007, primarily due to higher DD&A costs. The increase in DD&A of $47.9 million in 2008 as compared to 2007 is attributable to an impairment provision due to the ceiling test write-down. Field operating costs increased $3.7 million in 2008 due to the higher cost and volumes of oil sold in 2008.
General and administrative expenses increased $3.6 million to $18.5 million for 2008 from $14.9 million in 2007. The increase was primarily due to higher legal expenses in connection with arbitration proceedings and higher personnel costs associated with our operations.
Frontera realized other expenses of $9.1 million in 2008 compared to other expenses of $2.1 million in 2007. The increased expenses are attributable to higher interest expenses as a result of the convertible note placement in July 2008.
Quarter Ending March 31, 2009
For the three months ending March 31, 2009, the company incurred a net loss of $7.9 million, or $0.11 per share on a fully-diluted basis. This loss compares to a net loss of $6.1 million, or $0.09 per share for the corresponding three months of 2008. The increase is due primarily to higher operating expenses and other expenses.
Revenues from crude oil sales during the first three months of 2009 were $1.7 million. There were no crude oil sales during the corresponding quarter in 2008.
Operating expenses were $6.9 million during the three months ending March 31, 2009, an increase of $2.2 million from $4.7 million in 2008. Field operating and project costs accounted for most of this increase. Such costs increased $1.8 million to $2.3 million during the first quarter of 2009 due to higher personnel costs and the cost of oil sold in the first quarter of 2009.
The company began implementing a cost cutting plan during the three month period ending March 31, 2009, that will, among other things, reduce personnel and minimize use of outside services commensurate with the focus on the Shallow Fields Production Unit and the lower level of activity at the other business units.
Total other expenses increased to $2.7 million in the three month period ended March 31, 2009, from other expenses of $1.5 million in the three month period ended March 31, 2008. The $1.2 million increase is primarily attributable to an increase of interest expense of $0.9 million and $0.3 million decrease in interest income.
The company's consolidated financial statements for the fiscal year ending December 31, 2008, contained a going concern qualification from its independent registered public accounting firm. The company's ability to continue as a going concern is discussed in more detail in Note 2 to the financial statements.
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