CanArgo Reaches Agreement with Georgian Govt on Gas Purchase

CanArgo Energy has reached agreement with the Georgian government on issues relating to the purchase of gas. CanArgo also announced interim test results from its recently drilled N22H horizontal well. Following a meeting between the Prime Minister of Georgia, Zurab Nogaideli and CanArgo's Chief Executive Officer, Dr David Robson, agreement was reached on the general terms for the purchase of natural gas produced by CanArgo in Georgia.

For some time, CanArgo has been considering the appraisal of several gas discoveries which exist in its acreage around Tbilisi, as well as exploration of additional prospects. Progress on gas exploration and development has been hampered by the lack of certainty of payment in the gas market; however CanArgo has now received confirmation that the Georgian government will enter into suitable take-or-pay contracts to purchase gas produced by CanArgo and thereby underwrite such payments. This removes a large element of the commercial risk in gas exploitation and will allow CanArgo to move forward with gas projects.

CanArgo believes that there is considerable potential for gas in the area (a view shared by independent consultants) and is now planning to move ahead with the appraisal of the West Rustavi R16 gas discovery south of Tbilisi. This well tested a small gas column in the regionally prolific Cretaceous reservoir, encountering the gas-water contact. Seismic mapping indicates that this well was drilled down dip on what could prove to be a very large structure with potential for a substantial gas deposit. Given the assurances CanArgo has now received from the Georgian government, CanArgo plans to appraise this discovery. An appraisal well on the Kumisi prospect, up dip of the R16 discovery well, is now planned in Q3 of this year. In the event of success, it would aim to place the well on production as soon as possible while a full development of the deposit took place. The prospect is close to existing gas pipelines and infrastructure, and is only some 17 kilometres (10.6 miles) from the large Gardabani thermal powerplant. CanArgo has a 100% interest in the production sharing contracts covering the Kumisi prospect.

Whilst the new gas sales agreement provides additional drilling possibilities for testing large prospects in our licenses, the current development focus very much remains the planned 15 well under-balanced horizontal drilling program on the Ninotsminda and Samgori Fields.

On the Ninotsminda N22H horizontal well, recently drilled by the US service company Weatherford as the first under-balanced coiled tubing well drilled in Georgia, testing has been taking place over the past two weeks. This well was drilled in the north-east of the Ninotsminda Field, an area where the reservoir is regarded as being of lower overall permeability, with the build-up section of the well penetrating the gas cap. Whilst drilling under-balanced Weatherford measured gas production from the well at rates in the range of 560 to 700 thousand cubic metres (20 - 25 million standard cubic feet ("MMscf")) per day with the well effectively un-choked. A slotted liner has been run over the production interval and the well tested at various choke sizes. Initially the well flowed mainly gas, with production of approximately 150 thousand cubic meters (5.3 MMscf) per day of gas and 85 barrels of oil and condensate (968 barrels oil-equivalent(1) ("boe")) on a 16 mm (40/64ths in) choke, and a flowing tubing head pressure of 60 atmospheres (882 psi). As testing continued the oil rate has tended to increase and the gas rate has fallen, with the oil rate increasing to 140 barrels per day, and the gas rate decreasing to 92,000 thousand cubic metres (3.25 MMscf) per day (681 boe). Based on evidence from other wells in the Field which are perforated near the gas cap, CanArgo believes that this trend will continue with an increase in oil and a decrease in gas production. The well is now shut-in for a pressure build-up test after which production will continue to be monitored whist the well flows into the field gathering system. Preliminary build-up analysis indicates that the permeability in the well is indeed low, but with the absence of apparent fractures during drilling the oil leg, the probability is that this well is flowing from the matrix of the reservoir, rather than from fractures. The vertical well N22 from which the under-balanced horizontal section was drilled, was producing at 42 bopd prior to being shut-in.

The Weatherford under-balanced coiled tubing drilling unit has now been mobilised to the N100 well location, again on the Ninotsminda Field, to drill the N100H2 horizontal well. Additional equipment has been mobilised to Georgia by Weatherford in order to address some of the technical problems encountered while drilling the N22H well. It is anticipated that drilling will commence during the first week of April. The N100 area has been a much more productive area of the Field than the N22 area, and as such it would be expected that the N100H2 well should be more productive than N22H.

Dr David Robson, CEO of CanArgo commented, "I am extremely pleased to have reached agreement with the Georgian government which allows us to move forward with our gas appraisal and exploration program. In my view the Prime Minister has adopted a very positive approach with regard to investment into the oil and gas sector in Georgia. The Georgian government's support will allow us to invest in gas projects within our production sharing contracts. Whilst this is of considerable importance for CanArgo, it could also be important in meeting Georgia's energy needs and reducing its dependence on imported gas."

On the subject of the N22 well, Dr. Robson said "Whilst the interim results from the N22H well are encouraging, further production testing is to be carried out before we will have a complete analysis. Given its location in what we believe to be a tighter part of the field, and the observed high gas flow rates whilst drilling, the production potential of these tighter zones appears to have been enhanced by the under-balanced drilling, with significant increases on rates obtained previously. Clearly we will need to see the longer term production history of the well in order to draw any firm conclusions. We look forward to the results of the N100H2 well, which by contrast, is being drilled in a historically more productive area of the field. Of course the N22H well is just the first in our planned program of 15 horizontal wells, and the ultimate development will be a mix of higher rate "fracture" producing wells, and lower rate but steady "matrix" producing wells".