Petrolifera Reports 72% Reserves Increase

Petrolifera Petroleum Limited

Petrolifera Petroleum Limited said that its proved oil reserves have increased 72 percent during 2006 to 10.3 million barrels, after production of approximately 1.5 million barrels through October 31, 2006.

Proved natural gas reserves increased 544 percent to 18 Bcf during this same period, after production of approximately 335 mmcf of natural gas. On a barrel of oil equivalent ("boe") basis, using a conversion rate of six mcf per barrel of crude oil, Petrolifera's proved reserves, after production, are estimated to have increased 106 percent during the year to 13.3 million boes. Readers are cautioned that the conversion used in calculating barrels of oil equivalent is based on an energy equivalency conversion method primarily applicable to the burner tip and does not necessarily represent a value equivalency at the wellhead. Furthermore, boes may be misleading if used in isolation. Estimations of reserves and future net revenue constitute forward-looking statements.

These estimates were contained in a recent reserve report with an effective date of October 31, 2006, prepared for the company by DeGolyer and MacNaughton Canada Limited ("D&M"), independent petroleum engineers of Calgary, Alberta. The report ("October 2006 D&M Report") was prepared using assumptions and methodology guidelines outlined in the Canadian Oil and Gas Evaluation Handbook ("COGE Handbook") and in accordance with National Instrument 51-101 ("NI 51-101"). References herein are also made to a March 31, 2006 D&M Report ("March 2006 D&M Report") and to the December 31, 2005 D&M Report ("December 2005 D&M Report"), results of which have previously been provided by Petrolifera. D&M estimated proved ("P"), proved and probable ("2P") and proved, probable and possible ("3P") reserves.

The increase in the company's proved reserve base is entirely attributable to the successful drilling program conducted by the company on its Puesto Morales Block in the Neuquén Basin onshore Argentina, where a total of thirteen wells have been drilled and completed as oil wells or indicated oil wells since late 2005. The October 2006 D&M Report did take into account the recently drilled 1024 well which encountered an oil/water contact in the Sierras Blancas and was completed after testing approximately 250 bbl/d of light oil from a previously untested up hole Sierras Blancas zone. However, it did not take into account the results of two recently drilled wells, 1018 and 1019, which are located in the northeastern and central eastern portion of the Block, nor the impact these results could have on follow-up drilling.

Currently, a previously untested formation above the Sierras Blancas is being production tested in the 1019 well; Petrolifera has already tested the Sierras Blancas at flow rates of approximately 250 bbl/d following stimulation and cleanup. The Punta Rosada Formation was wet at this location, indicating a structural culmination separate from that situated to the west of this well. However, there are structurally higher locations identified on this culmination, which could result in oil-bearing Punta Rosada in proposed follow-up locations.

The 1018 well has reached total depth and has been logged and cased as an indicated multi-zone hydrocarbon discovery. This well will be tested once operations are completed at the 1019 well. The drilling rig is now scheduled to move to a new location, either 1032 situated southwest of 1019, or 1052, situated southwest of the 1018 indicated oil well.


The October 2006 D&M Report provided an estimate of the company's proved, probable and possible reserves together with forecasts of future net revenue, calculated after deduction of royalties, operating or production costs, future development costs for wells and facilities (both crude oil and natural gas) and future well abandonment costs, but before indirect costs including administrative and miscellaneous expenses and before income taxes. Estimated future net revenue (undiscounted and discounted at 10 percent) does not necessarily represent the fair market value of the company's reserves. The price assumptions underlying the estimates were prepared by D&M and there is no assurance that forecast price and cost assumptions will be attained and the variance could be material.

            Oil and Gas Reserves Based on Forecast Prices and Costs - October 31, 2006
	                           Gross working      Net working
	                             interest          interest          Future net
	                             remaining         remaining         revenue -
	                             reserves(1)       reserves(1)       before tax
	                          Light             Light               Un-     Disc-
	                          Crude   Natural   Crude   Natural    disc-   ounted
	    Reserve Category       Oil      Gas      Oil      Gas     ounted     10%
	                          mbbls     mmcf    mmbls     mmcf      $MM      $MM
	    Total proved(2)      10,335   18,036    8,940   15,601      293      237
	    Probable(3)           7,692   12,226    7,053   10,575      244      176
	    Total proved plus
	     probable(2)(3)      18,027   30,262   15,993   26,176      537      413
	    Possible(4)           1,057      419      514      363       34       20
	    Total(2)(3)(4)       19,084   30,681   16,507   26,539      571      433

	    (1) "Gross Reserves" are the Corporation's working interest share before
	        deducting royalties and without including any royalty interests of
	        the Corporation. "Net Reserves" are the Corporation's working
	        interest share after deduction of royalty obligations, plus the
	        Corporation's royalty interests in reserves.
	    (2) "Proved" reserves are those reserves that can be estimated with a
	        high degree of certainty to be recoverable. It is likely that the
	        actual remaining quantities recovered will exceed the estimated
	        proved reserves.
	    (3) "Probable" reserves are those additional reserves that are less
	        certain to be recovered than proved reserves. It is equally likely
	        that the actual remaining quantities recovered will be greater or
	        less than the sum of the estimated proved plus probable reserves.
	    (4) "Possible" reserves are those additional reserves that are less
	        certain to be recovered than probable reserves. It is unlikely that
	        the actual remaining quantities recovered will exceed the sum of the
	        estimated proved plus probable plus possible reserves.
	    (5) The pricing assumptions used reflect the quality of the company's
	        crude oil produced and sold in the October 2006 D&M Report with
	        respect to present values of future net revenue (forecast) are set
	        forth below and are as at October 31, 2006. D&M is an independent
	        qualified reserves evaluator appointed pursuant to NI 51-101.

	    D&M Forecast Prices
	                           Light and Medium Crude Oil        Natural Gas
	                                Argentina Crude             Argentina Gas
	    Year Forecast             Oil Price ($Cdn/bbl)         Price ($Cdn/mcf)
	        2006                          44.89                      1.52
	        2007                          44.89                      1.81
	        2008                          42.95                      2.08
	        2009                          41.67                      2.08
	        2010                          40.09                      2.08
	        2011                          40.90                      2.08
	        2012                          41.71                      2.09
	        2013                          42.54                      2.09
	        2014                          43.40                      2.09
	        2015                          44.27                      2.09
	                                                        2.10 in 2016 and then
	     Thereafter                        +2%              2.00 flat thereafter

The D&M price deck in the October 2006 D&M Report is considerably reduced from that contained in the December 2005 D&M Report and even more so in relation to the price deck utilized in the March 2006 D&M Report. For example, crude oil prices assumed for 2006 were reduced by $8.22 per barrel in the October 2006 D&M Report to $44.89 per barrel as compared to the price of $53.12 per barrel assumed in the March 2006 D&M Report, a reduction of over 18 percent. The third quarter 2006 actual selling price for crude oil was $49.49 per barrel. Also, provisions for capital requirements have expanded considerably since the forecasts incorporated into the December 2005 D&M Report and the March 2006 D&M Report. Future capital requirements and abandonment charges over the forecast life of the proved reserves in the October 2006 D&M Report aggregate $44.3 million, compared to only $17.8 million in the March 2006 D&M Report and $17.1 million the December 2005 D&M Report. These amounts rise to $59.2 million for 2P reserves and $63.1 million for 3P reserves and are charged against future revenue in the calculation of future net revenue. Provision for these higher expenditures reflect the expansion of the company's reserve base and resultant drilling and facility and pipeline development plans.

Petrolifera has concrete plans for continued active drilling for both crude oil and natural gas on its Puesto Morales Block and the company anticipates this drilling will continue to impact on its prospective estimated reserve volumes. Future net revenue and present value calculations will continue to fluctuate substantially in accordance with the estimated future prices for both crude oil and natural gas in the jurisdictions in which the company operates.

These calculations are obviously lower in the most recent report due to the overriding influence of reduced price expectations despite reserve volume increases, especially in the proved category.

The Company's proved and probable ("2P") reserves of crude oil in the October 2006 D&M Report were estimated to be approximately 20 percent below those estimated in prior reports, while 2P natural gas reserves were estimated to be approximately 135 percent higher than in earlier reports. On a boe basis, 2P reserves in the October 2006 D&M Report were within one percent of the December 2005 D&M Report and within six percent of the March 2006 D&M Report. Possible reserve estimates were lowered in the most recent report.

Other Developments in Argentina

Petrolifera's current production is approximately 11,850 bbl/d of crude oil and 1.5 mmcf/d of natural gas.

Petrolifera has contracted a second service rig and a second drilling rig from a US-based drilling contractor and both rigs are now in customs in Argentina, awaiting processing and handling prior to being released for utilization on the Puesto Morales/Rinconada Concession. It is expected these will be available in the near future. Once available, Petrolifera intends to convert the existing contracted service rig to a shallow drilling rig. This will enable Petrolifera to use this equipment to initiate drilling operations on the Rinconada Block, where drilling depths for new wells are generally expected to be about 1,000 meters. Drilling should be underway in Rinconada in early 2007.

The company has been notified by the existing drilling rig contractor that it intends to withdraw its services after completion of the next Petrolifera well, to meet outstanding obligations to another oil company. As a consequence, Petrolifera has already made arrangements to secure another new drilling rig from the aforementioned US contractor. This recently manufactured rig is enroute to Argentina and should be available to Petrolifera in a timely manner to enable the company to achieve its drilling objectives in 2007.

Considerable progress has been made in the construction of the company's facilities and pipeline at Puesto Morales. Please refer to the company's website and under the heading Operations click on the link Argentina and scroll down to view a series of recent pictures of various component parts of these facilities.

First oil is anticipated to be delivered on or about December 1, 2006 through the company's six-inch pipeline, which connects to major crude oil transmission lines in the region before being transported to market. Initial volumes will be around 3,700 - 4,000 bbl/d from northern wells with further volume increases anticipated upon finalization of the company's treatment plant at increased capacity, required due to the success of Petrolifera's 2006 drilling program. This success necessitated a scaling up of this plant and related water pipeline, with resultant minor delays. In the interim period, until these expanded facilities are fully finalized, Petrolifera still has the ability to continue trucking approximately 12,000 additional barrels of crude oil production per day to third party plants.

Also, the company anticipates it will imminently more than double its current natural gas sales to approximately 3.5 mmcf/d, delivered to a regional buyer through a low pressure line until a new high pressure line connecting to major transmission lines is completed. This is anticipated for the spring 2007. In the interim, excess solution gas volumes will be used for fuel gas to minimize venting and then will be combined with additional volumes from new Quintuco natural gas wells, to be drilled in 2007, for delivery to identified and available industrial markets. It is anticipated an initial sales price of approximately US$ 2.10 per mcf will be secured for these volumes. Petrolifera is also proceeding with the design and then construction of a natural gas plant to strip out natural gas liquids; this is anticipated to be operative by the third quarter 2007.

The company's 3D seismic program over the northern portion of the Rinconada Block has been initiated and will be followed by a further program on the southern portion of Rinconada and then by a new program on the southern portion of the Puesto Morales Block. It is hoped new leads and prospects will emerge from the interpretation of this data. Discussions continue with interested parties about the Salinas Grande I Block in La Pampa Province, Argentina. Petrolifera is attempting to resolve the ownership question related to this acreage.


In recent months, Petrolifera has been engaged in the field on both the Maranon and Ucayali Blocks, with activity related to completion of environmental studies, global positioning work to confirm the actual location in the jungle of both old wells and seismic, geological and geochemical investigations, pre-planning for geophysical surveys on both blocks and in preparations for an extensive airborne gravity and magnetic survey over the Ucayali Block. This aeromag/gravity survey has been delayed by minor bureaucratic considerations but is expected to start in the near future. Petrolifera's goal is to be in a position to initiate seismic surveys on both blocks during 2007, with a view to establishing drillable prospects and to initiate drilling, if possible, by year-end 2007 on Block 107.


Petrolifera has recently received constructive feedback from the authorities in Colombia about its applications to secure three new blocks in that country. The company is awaiting formal confirmation of awards.

The company continues to be well-financed with growing production, cash flow and no debt. An active capital expenditure program approaching $150 million is envisaged for 2007, including an active drilling and construction program in Argentina. Staffing has been expanded, primarily in Argentina and Petrolifera is now officially recognized as the operator of the Puesto Morales Concession.