CanArgo: Greater Reserves Still Remain in Georgia Gas Field

CanArgo Energy Corporation's production at the Ninotsminda Field in Georgia averaged approximately 425 barrels of oil per day gross and approximately 2.36 million cubic feet (MMcf) (67.26 thousand cubic meters (MCM)) of gas per day for January 2008.

Further to an ongoing technical re-evaluation of the Ninotsminda Field, CanArgo believes that there are significant potential reserves remaining both within and surrounding the main field area and the company is working on a production enhancement strategy to increase the level of production subject to financing being available. Such strategy may include: the drilling of horizontal wells in the undeveloped eastern part of the field; drilling a new vertical well to exploit potential oil reserves in the Oligocene interval over the northern flank of the field; and utilizing new technology to access isolated reserves in shallower reservoirs overlying the main field area.

A gas pipeline connecting the region in which the Ninotsminda Field is located to the Georgian gas network was completed in February 2008. This infrastructure may provide CanArgo with access to an alternative market for its gas production and with potential for higher prices and regular sales.

For the past couple of years, rather than flaring the gas produced from the Ninotsminda Field, CanArgo's wholly owned subsidiary company, Ninotsminda Oil Company Limited (NOL), has supplied this gas at a low price to local villages as part of a social program. Despite the price being only $0.71 per thousand cubic feet ("Mcf") ($25.00 per MCM) there is a significant outstanding debt to NOC for the gas supplied. It was not socially or politically acceptable for NOC to terminate or restrict supply in order to force payment as these villages did not have access to an alternative supply of gas. With the connection of these areas to the domestic gas grid, both NOC and Georgian Oil and Gas Corporation (GOGC), who is also the state representative in the production sharing contract and sells its share of the gas together with NOC, believe that they are now in a better position to enforce payment and commercialize gas sales.

Following the completion of the gas connection, the existing gas sales agreement between NOC, GOGC and the local gas supply company has been amended to increase the price for gas to an average of approximately $2.72 per Mcf ($97 per MCM). The new price is based on a quantity of gas being set aside for domestic household consumption at $0.71 per Mcf ($25.00 per MCM) with the balance supplied to the gas distribution company at $4.73 per Mcf ($167.00 per MCM).

The amendment is effective from February 1, 2008 and the gross quantity of gas to be supplied under the agreement is approximately 2.12 MMcf (60 MCM) per day. At present, the local gas distribution companies in Georgia are State entities, but plans are in place to privatize all gas distribution companies in the near future. This is also expected to help with the payment for gas.

At the Manavi 12 well, the acid fracturing stimulation was successfully completed in January 2008 with pressure data suggesting that the formation had been fractured. The initial flow-back of frac fluids (spent acid and chemicals) contained encouraging shows of oil and gas, but following clean-up, the maximum oil cut observed was only 5-7%. It appeared that there was a significant water incursion into the wellbore with no indication as to the source of this excess water. It was noted that following the simple acid wash completed in April 2007, an oil cut of approximately 50% was observed. Before further testing could be done, it was necessary to replace the 5 inch frac string required for the stimulation operation with proper 2 7/8 inch production grade tubing as planned.

The original plan was to set a plug in the well using the Schlumberger coiled tubing unit which was onsite for the stimulation operation, however, a failure of the injector head led to the coil parting and dropping into the well. It took several days to retrieve the coil and it was only then realized that the plug had been damaged and lodged in the well. A wireline unit was mobilized from Baku to reset the plug. This was successfully completed, but on extraction of the frac string by CanArgo Georgia it became apparent that damage had also been caused to the completion which resulted in a modification to the final well completion being required. The production tubing is now in place and pressure tested and operations are progressing to retrieve the mechanical plug and continue with the well testing operation. In the meantime, Schlumberger has demobilised from the site.

As part of the testing program, a wireline-conveyed production logging tool will be run in the well to help locate fluid entry points to the well and provide downhole flow rate and pressure data during the test. This data will assist in the evaluation of well conditions and reservoir performance and help assess the overall potential of the well.

The MK72 exploration well completed by CanArgo in 2006 in the Norio Production Sharing Agreement area encountered hydrocarbons in both target horizons, but was never fully tested for operational reasons. In order to finance an appraisal well, the company has been pursuing a farm-out strategy for this acreage. Several oil and gas companies evaluated this opportunity in 2007 and a number of these are continuing farm-in negotiations with the company today.