Stratic Files 2Q07 Results and Provides Operations Update

Stratic Energy has filed its second quarter 2007 financial statements along with the accompanying Management's Discussion and Analysis. Commenting on the previous quarter and forward outlook, Kevin Watts, President and Chief Executive Officer, said: "We are pleased with the progress made on all our projects over the last quarter, particularly in Italy, where we believe we have a common interest with ENI, which holds the adjacent acreage, in moving the Longanesi / Abbadesse gas discovery speedily towards development approval, and where we expect to reach agreement shortly on the key commercial terms of unitization. We have a very active program over the coming months, with two key North Sea wells on Crawford and Breagh, and a number of development decisions on key projects expected around the end of the year. We also look forward to our Black Sea, Turkey, gas fields reaching full production levels with the start up of the Ayazli and East Ayazli fields expected in the next month."

Operations update

The following operations update is extracted from Management's Discussion and Analysis ("MD&A") of the operating and financial results of Stratic Energy for the quarter ended June 30, 2007. It should be read in conjunction with and is qualified by reference to that report, including as regards forward-looking statements. All figures herein have been prepared in accordance with Canadian generally accepted accounting principles and are reported in US Dollars, unless otherwise stated.


The primary focus for Stratic in the second quarter 2007 remained completion of phase 1 of the development of the Company's gas discoveries in Turkey and progressing the Company's portfolio of undeveloped oil and gas discoveries towards development decisions, as well as adding further similar opportunities to the asset portfolio. Stratic achieved three especially notable milestones in the quarter.

On April 24, 2007 the Company completed the acquisition of Grove Energy Limited ("Grove") under a Plan of Arrangement. The acquisition resulted in the issuance of 85.4 million voting common shares of the Company, valuing the transaction at US$102 million based on Stratic's share price at the time. Grove holds petroleum and natural gas properties principally in Italy, Netherlands, UK and Tunisia. The Grove portfolio provides new potential developments in Italy (the Longanesi, formerly Abbadesse, gas discovery) and in the Netherlands sector of the North Sea (the Horizon West oil discovery), which should augment Stratic's production growth over the next two to three years. Together with certain Grove staff and key contractors who have been retained, these assets have now been integrated into the Stratic business. The acquisition of Grove also provides further attractive appraisal and exploration opportunities, principally in the UK Continental Shelf ("UKCS"), Italy (Po Valley and Sicily Channel) and Tunisia. The interests, which Grove also held in oil and gas properties onshore Romania and Slovenia are not considered core to the enlarged portfolio and are likely to be disposed of in due course.

Completion of the acquisition of Grove resulted the issue of 23,018,520 common shares of the Company at C$1.35 per share as a result of conversion of the subscription receipts issued in March 2007, raising $26 million net of expenses.

On May 24, 2007 production commenced from the South Akcakoca Sub Basin gas development, in the Black Sea, offshore Turkey. Production from the Akkaya field commenced at an initial gross rate of 17.5 mmscf per day (2.2 mmscf per day net to Stratic). Despite some project delays, first gas was achieved within less than three years from the first discovery made with the Company's farm-in well in 2004, a creditable achievement in this previously undeveloped region. The resulting net cash revenues, while relatively modest in the context of Stratic's current portfolio of assets, will provide a useful contribution to funding future operations. Work to bring the Ayazli and East Ayazli fields on stream, in order to raise production to the operator's target for the project, of 50mmscf per day, is underway.

On June 21, 2007 Stratic's common shares were admitted to trading on the AIM market of the London Stock Exchange to supplement the primary listing in Toronto. This should enhance the profile of the Company in an important financial center, leading over time to a broadening of the investor base.

Good progress was also made in the UKCS on the development plan and host platform selection for the West Don satellite oil field and in securing a rig to drill an important appraisal well on the Crawford re-development project later this year.

Aside from the acquisition of Grove, there were no major changes to Stratic's portfolio of oil and gas properties in the quarter ended June 30, 2007.

Subsequent to the end of the quarter, Stratic's main operating office has relocated to new premises in London, which will provide a more efficient base for managing day-to-day operations across the enlarged asset base.

United Kingdom sector of the North Sea

The West Don oil field (block 211/13b; West Don unit: Stratic 17.25%) continued to make progress towards development sanction. The Basis of Design, with two initial production wells and one water injection well, has now been agreed. A pre-unitization agreement with owners of the adjacent block was concluded in the quarter, to establish field equity shares for field life; Stratic's share of the field is set at 17.25%. Proposals were received from the owners of two potential off-take routes for receiving and processing the produced crude oil; these are being negotiated with a decision due shortly. A tender was issued for the three well development-drilling program scheduled for 2008.

The current project schedule envisages the staged submission of sections of the Field Development Plan and Environmental Impact Assessment over the balance of this year and Government sanction around the end of 2007 or early 2008, leading to first oil in first half 2009. The critical path of the schedule is primarily driven by the timing and extent of the topsides modification required on the selected host platform and certain long lead equipment purchases. Gross proved and probable reserves in the West Don field have been independently verified at 20.4 mmbbls, of which Stratic's share is 3.5 mmbbls.

Appraisal of the Crawford oil field (block 9/28a Area B; Stratic 19.00%) now looks likely to be accelerated to 2007, with the partnership in the final stages of securing a slot with a heavy-duty jack up rig in the fourth quarter. A recent drill site seabed coring survey has confirmed that the rig is able to operate at the spud location. Operatorship of the Crawford asset has now transferred from Petrofac to Fairfield Energy.

The Crawford appraisal well is an important test to confirm the production potential of the Triassic reservoir in the North of the field, thereby reducing the remaining key risk ahead of approval for re-development of this field. The operation may, subject to equipment availability, involve fraccing and testing the well prior to its suspension as a future producer. The success case would see the partnership planning for sanction of the development in the second half of 2008, with first oil potentially a year later. This schedule would depend on selection of appropriate host infrastructure and sourcing drilling units for the development wells. Gross contingent resources for Crawford have been independently verified at 30.8 mmbbls of which Stratic's share is 5.9 mmbbls. It is likely that the previously-secured option for a SEDCO rig to drill the Crawford appraisal well in the second quarter 2008 will be retained for other drilling opportunities.

In September 2007, the Ensco 85 jack-up unit is due to spud the Breagh appraisal well (block 42/13; Stratic paying 20% to earn 10%). Appraisal of the Breagh gas discovery is an opportunity acquired through the Grove acquisition, with substantial potential upside should the first well be a success. A previous well drilled by Mobil in 1997 encountered 98 feet of gas pay but it is suspected that formation damage due to reaction of the completion fluids with reservoir mineralogy prevented a commercial flow rate from being established. The new well will be drilled with oil-based mud through the reservoir interval to try and avoid damaging the formation, with the test rate again being the key appraisal objective. Breagh is a new play type in the Southern North Sea with reservoir in the Carboniferous Scremerston sandstone formation. Assuming this well is successful, it is likely to be followed up in 2008 with a further well to test upside potential to the East of this location.

At the Cairngorm oil discovery (blocks 16/2b & 16/3d, Stratic 50% and operator) interpretation of the new 3D dataset over the blocks has led to a preliminary prospect inventory, with further planned work on the pre-stack depth migrated seismic dataset and reservoir modeling of the Cairngorm granite formation to assist the partnership in firming up location(s) for a possible drilling program in 2008. Infill seismic data is being purchased over the Quad 15 blocks containing the Bowmore discovery (Stratic 30%) acquired earlier in the year through the UKCS 24th licensing round to refine the prospect inventory for the area in preparation for drilling in 2008. Seismic studies on the Quad 210 acreage indicate a strengthening prospect inventory.

Netherlands sector of the North Sea

The Horizon West potential oil development (P8a; post unitization Stratic 48%) was acquired through the Grove transaction. Studies completed in the quarter, principally by Chevron, the operator of the adjacent P9 Horizon oil field, suggest that the preferred development concept will be an extended reach well drilled from the P9 platform. The development plan is expected to be presented to partners in September with the formal project sanction early in 2008.

The Dutch State oil company EBN has, as expected, notified Stratic of its intention to participate in the P8a development, and so all costs will now be shared on the revised equity ownership, with Stratic at 48%.

Technical work has commenced to review the F Quad blocks (F14, F18, L01b) operated by Stratic (Stratic 100%, 60% post EBN back-in) which contain several undeveloped oil discoveries which warrant re-evaluation in the light of technological advances and changed economics since they were first made many years ago. An agreement is in the process of being finalised with Wintershall and Gaz de France which gives Stratic access to 100% of the shallower oil- bearing discoveries on their adjacent acreage (F16, F17) in exchange for giving up ownership of the deep gas prospectivity on Stratic's F Quad blocks.


Through the acquisition of Grove Energy, Stratic has acquired the San Marco permit (Stratic 100% and operator) and the Casale Cocchi permit application in the Po Valley, onshore Northern Italy, both containing part of the Longanesi (formerly Abbadesse) gas discovery. This was the key asset in the Grove portfolio and is the largest onshore gas discovery made in Italy in the last decade. Since completion of the Grove acquisition, Stratic has engaged in negotiations with ENI, operator of the adjacent San Potito concession into which the field also extends, to resolve issues which were previously holding up the joint development of the discovery. Good progress has been made in these discussions.

The proposed way forward is for Stratic and ENI to unitize their interests in the field and undertake a joint development, rather than follow the traditional but more complicated route in Italy of "unification" of concessions. This is likely to be based on an interim cost-sharing split between the different permit holders, but with subsequent re-determinations of each permit's interest in the gas-in-place in the field. It is anticipated that initial cost sharing percentages and the key components of the unitization will be agreed shortly. Development planning work continues in parallel with these negotiations.

Meanwhile, exploration work on other prospects in the San Marco and Savio permits continues with a view to firming-up locations for drilling in 2008. Stratic holds 100% of the San Marco permit (through Grove) and has rights to earn a 50% interest in the adjacent Savio permit by funding an exploration well. Technical and economic work to enable the prospects on San Marco and Savio to be ranked for drilling in the first half of 2008 is currently underway, and work on the adjacent Longastrino permit is proceeding.

Grove also holds interests in offshore acreage in the Sicily Channel (GR 15 & GR 16 permits, Stratic 100%, operator). Further seismic data is likely to be acquired over these permits in conjunction with extensions to the current exploration periods to permit full evaluation of their prospectivity.


Gas sales from Stratic's offshore Black Sea gas development (Stratic 12.25%) commenced on May 24, 2007. Initial production is from three wells on the Akkaya Field with production from the East Ayazli and Ayazli fields to follow shortly. Production start-up on East Ayazli has been delayed due to a requirement to repair the East Ayazli spur line, which ties the East Ayazli tripod into the main transportation line to shore. It is anticipated that this repair will be completed within days, with production from the two East Ayazli wells coming on stream thereafter. The Ayazli tripod deck is awaiting load out to the field, with installation and initial production from that field expected in late August.

Gross production rates of 17.5 mmscf per day, in line with targets, were achieved from Akkaya but have subsequently been choked back to maintain a lower operating pipeline pressure to facilitate repair activity on the East Ayazli spur line. Accordingly, current gas production rates are around 13 mmscf per day. Once the repair to the spur line is completed and Ayazli is brought on stream, gross production levels are expected to increase to 50 mmscf per day, in line with the previous operator estimates.

TPAO is now the operator for the Black Sea project and has undertaken conceptual studies for the phase 2 development of the deeper water Akcakoca discoveries. This development is likely to involve a separate facility at Akcakoca, with a limited platform drilling facility, tied-back to the existing Ayazli-Akkaya Phase 1 production system, with first production potentially commencing in mid 2009.

Development planning work on the preferred option continues and it is likely that a front-end engineering and design contract will be awarded within the next three months. The range of potential reserves for this phase of development is wide, reflecting the small number of wells drilled to date and the remaining exploration prospectivity in the deeper water region. The partners are working together with the objective of optimizing the development, with a decision on commerciality likely by the end of the year.

Partners in the venture are shortly to decide on the next exploration activity in the area, most likely the drilling of Eskikale, an exploration prospect located some 4 kms to the north west of the Akcakoca field. This well would be drilled with the Southern Cross semi-submersible rig, which is now back in Turkish waters.


On Block XVII (Stratic 35%, operator) acquisition of over 1,100 km of new 2D seismic data was completed in July 2007, ahead of schedule and under budget. Processing of the new data and reprocessing of legacy seismic data is now underway, with interpretation results expected around year end. Subject to maturing a suitable prospect for drilling and securing a rig, an exploration well is provisionally planned for mid 2008.


On the onshore Chorbane permit (Stratic 100%, operator), acquisition of 220 km seismic has been completed. An extension of the current license period to December 2007 has been agreed to allow interpretation of the new 2D seismic ahead of a decision to enter the drilling phase of the license.

On the offshore Kerkouane (Stratic 100%, operator) permit, discussions with the authorities to secure a license extension are in progress.


Following drilling of the Menadra-1 well as a dry hole in 2006 and consequent downgrading of prospectivity, the Mamora and Moulay Bousselham permits have been relinquished, with all work commitments having been satisfied on both blocks. The company is seeking a farm-in partner on the Guercif Beni Znassen permit (Stratic 40%) with a view to converting part of the reconnaissance permit into a formal exploration permit.


No significant activity was undertaken on the permits in Romania or Slovenia.