PetroNeft Cites Operational Success in '08, Bumps Up Russian Reserves

PetroNeft Resources has reported its preliminary results for the year ended December 31, 2008.

Operational Highlights

  • 3 wells drilled in 2008
  • 16 % increase in 2P reserves to 70 million bbls
  • 51% increase in 3P reserves to 529 million bbls
  • Board sanction of development of Lineynoye and West Lineynoye oil fields in June 2008
  • Production due to commence second half 2010, subject to development financing
  • License exploration obligations completed

Financial Highlights

  • Equity placing US $17.2 million in July 2008
  • Capital Expenditure US $25.5 million
  • Discussions with International Banks ongoing regarding development financing
  • Reductions in cost of development and funding requirements achieved
  • Appointment of Canaccord Adams Limited as joint broker with Davy
  • Expanding Institutional shareholder base

Dennis Francis, CEO of Petroneft commented, "This has been another year of operational success. We have now met all our license exploration commitments, and our drilling successes have made us certain that, given the necessary project financing, License 61 will be a profitable producing asset for a number of years.

"Outside of License 61, we have and remain in contact with a number of parties regarding potential value enhancing transactions. With the stabilization and positive long term outlook on the oil price, as well as the considerable savings achieved in development costs, we have every reason to look to the future with confidence."

Chairman's Statement

Since the formation of PetroNeft in 2005, our primary strategy for building a long term profitable company has been to focus on rapid exploration and early production of oil from License 61 in the Tomsk Oblast in Western Siberia. A secondary strategy, as resources allow, is to acquire new assets, both exploration and producing, that will help the Company to grow beyond License 61. The worldwide recession and turmoil in the financial and commodities markets in 2008 have slowed, but not stopped, our progress on these strategies. We have built a strong foundation from which to grow as economic conditions improve, based upon sound technical data, a successful and systematic exploration program, compliance with government requirements, detailed planning for production development and good working relationships with the financial and equity markets.

Exploration success and further reserve upgrade

Our successful exploration drilling program on License 61 continued in 2008 with the Korchegskaya No.1 discovery at the Kondrashevskoye oil field, the Lineynoye No. 8 delineation well and the discovery of a new but as yet untested Lower Jurassic oil zone in the West Korchegskaya No.1 well. These wells, together with an exciting program to re-examine and re-interpret the data from the pre-existing exploration wells on License 61 to look for by-passed or previously unidentified oil bearing zones have resulted in yet another significant upgrade to PetroNeft's reserves. Our proved and probable (2P) reserves have increased by 16% to 70 million barrels of oil and proved, probable and possible (3P) reserves are now estimated at 529 million barrels of oil, 51% greater than the prior year. The 2008 drilling program also completely fulfilled our exploration obligations for the full 25 year term of License 61, although we will continue to explore in the License area for years to come.

Oil field development

The successful Lineynoye No. 8 delineation well allowed the Board to sanction the development of the Lineynoye and West Lineynoye fields in June 2008. This would permit the development of 2P reserves of more than 47 million barrels of oil (as estimated by Ryder Scott; the Russian State Reserves Committee estimates about 60 million barrels of oil of comparable C1 + C2 reserves in these fields).

Preparations were nearing completion to mobilize pipeline, drilling and production equipment to begin the development as soon as project financing became available. The funding of the project was delayed in October 2008 by the collapse of the financial markets. The Board is confident that funding will become available later in 2009, however the delay means production will not now commence until 2010 instead of 2009 as previously planned.

We are taking advantage of this delay to seek ways to reduce the cost of the development, both by redesign and by securing some of the lower priced goods and services now available due to a slowing of competing projects and to substantially more favorable rouble/dollar exchange rates. With the cost reductions the project economics should be robust enough to allow development to proceed in the current lower oil price environment, once debt financing becomes available again.

To obtain more reservoir and well performance data from our fields to aid in optimizing the project design, we have once again conducted a winter pilot production program, trucking the oil over winter roads to two small refineries in the Tomsk Oblast. In addition to the Lineynoye No. 6 and No. 7 wells that were produced in early 2008, we have added the original discovery well, Lineynoye No. 1, which was successfully re-entered in 2008 and equipped for production. Lineynoye No. 1 flowed at a stabilized rate of 271 bopd without artificial lift or reservoir stimulation, confirming the original test results from 1972. In addition to gaining valuable well and reservoir performance data, the winter pilot production in early 2009 has paid for all of our operational costs plus a modest profit, while providing additional operating experience for our personnel.


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