Timan Reviews 3Q Developments in Western Russia, Caspian Basin
Timan Oil & Gas has provided an overview of its ongoing Russian operations for the third quarter. Timan's main assets are in the Timan-Pechora region of Western Russia and the Caspian basin.
Timan operates the Nizhnechutinskoye (NGPT) and Khudayelskoye (KNG) fields in Timan-Pechora and through its interest in Geotermneftegas (Geoterm) has two licenses, Izberbash and Sulak in the Caspian Sea offshore from Dagestan.
The NGPT Field, located in the Timan-Pechora region of Russia, consists of three reservoirs which we refer to as NGPT I, NGPT II and NGPT A. Based on flow rates from existing wells, we believe enhanced oil recovery
methodologies will be required to attain commercial production levels for this field. The NGPT I reservoir is located at a depth of 28-150 meters and contains light sweet crude oil of low viscosity, which is unusual for the relatively shallow depths of the reservoir. We operate the NGPT Field under a combined exploration and production license which is effective until April 2024. The NGPT Field has a net land position of 215 km2.
In close proximity to the NGPT Field, we hold an exploration license for an as yet unexplored area, Timanskiy-4. The Timanskiy-4 license area covers a total area of 1,053 km2. The NGPT Field is located near developed transportation infrastructure, including the important Transneft pipeline, which runs through the NGPT Field, service and communication facilities and experienced local service providers. The NGPT Field also benefits from its relative proximity to Moscow (the field being approximately 1,200 kilometres northwest of Moscow) and relatively favorable weather conditions (such as no permafrost) allowing for year-round crude oil production operations.
NGPT I Reservoir
The extent of the reservoir and the structural closure has been well defined by well penetrations, core data, logged well test results and seismic data. The boundary of the reservoir has not been identified to date, however, and the field could extend beyond the licensed area. NGPT I is unusual because it is relatively shallow, 28-150 meters in depth, but contains a low viscosity crude oil in multiple layers with a net pay thickness averaging ten meters. Normally at these depths crude oil degrades due to oxidation and becomes thick and viscous, but in NGPT I the crude oil has been preserved due to the presence of shales of the Domanikovsky formation above the reservoir.
As of June 26, 2006, NGPT I was estimated to contain 39.6 MMbbls of Proved Reserves and 191.3 MMbbls of Proved and Probable Reserves. Since acquiring our licence for NGPT I in 2005, we have spent £11.3 million in capital investment. We have also invested in developing field infrastructure, equipment and improved field accessibility by laying a network of intra-field service roads.
NGPT II and NGPT A Reservoirs
NGPT II and NGPT A contain heavier, more viscous crude oil than that found in the NGPT I reservoir and are located at a depth of approximately 130-170 meters below the surface and therefore also being relatively shallow, these reserves contain heavy crude oil. NGPT A extends over much of the NGPT Field, while the underlying NGPT II is more variable with more restrictive distribution.
We believe the reservoir characteristics of the NGPT II and NGPT A reservoirs are promising candidates for cyclic steam injection and continuous steam-flooding, which will both increase recovery and make the crude oil less viscous and enhance flow into the well bores. Both methods are common in developing heavy crude oil reservoirs and there are many fields in the region currently developed with the aid of steam injection, including the nearby Yarega field. The application of this method is well understood and the relevant service infrastructure for this procedure exists in this area.
NGPT Development Plan
The NGPT I development plan contemplates utilising water injection enhanced oil recovery methodologies to establish high density well coverage over the field, using a ratio of three production wells to one injection well, a nine-spot pattern, on a specified well spacing, expected to be approximately 200 meters, although this may vary depending on the results of the pilot program. The plan involves the use of multiple rigs over a number of years so that a meaningful production rate can be achieved during the early stage of field development. Produced water is expected to be treated and injected back into the reservoirs with the goal of reducing sourcing costs and potential environmental liabilities.
In the first half of 2007, we commenced our pilot program targeting the NGPT I reservoir to test water injection
enhanced oil production methodologies on the field using 200 meter spacing. This program involved drilling 25 wells (21 production wells and four water injection wells). Once we drilled and completed the wells, we placed the wells on natural depletion for an average of two and half months. We experienced maximum daily production levels on 12 out of our 25 wells of 5 bbl/d or better during the natural depletion stage.
When we commenced the water injection process which lasted an average of approximately four months, nine out of the 21 wells experienced maximum daily production of 5 bbl/d or better. However, on an average daily production basis, only two out of 21 wells met our expectations of 5 bbl/d. We encountered a number of issues in well completion and isolation which prevented us from attaining our expected results. During the completion of the wells, the perforating process is thought to have caused weakening of the cement bond between the casing and the hole allowing water from an aquifer above the NGPT I reservoir to flow into the well bore.
We engaged the services of BLZ-Geotechnik GmbH ("BLZ"), who are experienced in the drilling and completion of shallow oil and water wells. The agreement provides for BLZ to drill wells, provide pumping services and the lease of a drilling rig and crew. BLZ will also train our staff so we will be in a position to use our own staff and rigs to execute our future development plans. In consultation with BLZ and our technical consultants, G.E.O.S., we believe we now know how to solve the well completion and isolation issues.
The Board has approved an operational plan based upon the receipt of $50 million funds from the recently announced loan facility. The Company's immediate plan is to recommence drilling operations at NGPT in the middle of November 2008. The Company intends to undertake an extended pilot program involving the drilling of an additional 25 wells, expanding the NGPT Pilot Program Area to 50 wells in aggregate. This is expected to be completed by the end of this year. The Company will continue its two-year cooperation with BLZ , the German drilling contractors, utilizing new techniques approved by G.E.O.S, the German production consultants, as identified from the results of the previous pilot scheme.
We intend to have MLL review the results of the extended pilot program and other field development work and provide an updated reserve report in due course.
NGPT II and NGPT A
We believe the reservoir characteristics indicate that NGPT II and NGPT A are candidates for steam injection recovery methods given the heavy, viscous nature of the crude oil found in these reservoirs. In the steam injection process, heat from the injected steam improves the viscosity of the crude oil allowing it to flow more easily into the well bore. We have drilled two wells to test steam injection recovery methodologies on these reservoirs. NGPT II and NGPT A are similar to other reservoirs located in surrounding fields that produce crude oil using steam injection enhanced oil recovery.
The test wells drilled into these reservoirs will, subject to financing, undergo a series of closely monitored steam injection cycles which will be used by us to finalise the completion methods, steam injection rates and cycle length before proceeding to full field development. The field development plan assumes a five-spot pattern involving approximately one producing crude oil well for each injection well.
We intend to initially focus our development activities on first developing the shallower NGPT I reservoir. We believe recently enacted changes in the Russian mineral extraction taxation regime pertaining to fields containing crude oil of a certain viscosity and a record of extraction will allow NGPT II and NGPT A to take advantage of zero taxation for the foreseeable future. Natural gas will be used to generate the steam for the steam injection development wells. The natural gas will be sourced internally from NGPT I production.
The KNG Field is located approximately 300 kilometers from the NGPT Field and has a net land position of 180 km2 with crude oil reserves located primarily at depths of 100-700 meters and 4,000 meters. The field is comprised of four reservoirs: three shallow reservoirs, located at depths of between 100-700 meters and one deep reservoir located at a depth of approximately 4,000 meters.
The shallow reservoirs in the KNG Field have high gravity crude oil estimated at 13 degrees API that is also of high viscosity. We believe that steam injection will be required for production wells in these reservoirs. The deep reservoir contains two prospects, both of which have been penetrated by a well. We do not believe the deep reservoir will initially require enhanced oil recovery methodologies because of its high pressure, low expected crude oil gravity of 31 degrees API, low expected viscosity and the high expected permeability of the formation.
KNG Field Development Plan
During 2007, we drilled two appraisal wells targeting the shallow formations of the KNG Field in compliance with the obligations under our exploration license. It is anticipated that a portion of the funds from the first tranche of the loan facility recently agreed will be used to continue exploration and development on KNG in 2009 although additional funds will be required beyond that. Further details will be provided in due course.
The KNG exploration license does not allow for commercial production and expired in March 2008. KNG applied on February 6, 2008 to the appropriate authorities in order to ultimately obtain a production license. The issue of the Certificate of Commercial Discovery by Rosnedra in March 2008 was an important step in receiving approval of the production license which we expect to be issued towards the end of 2008.
Through our 80% ownership interest in Docom, we hold an indirect interest in its subsidiary, Geoterm. Our principal Geoterm assets are the Sulak and Izberbash block exploration and production licenses located in two shallow areas in the Middle Caspian Sea Basin with a net land position of 1,280 km2. The Ministry of Natural Resources has estimated that the Izberbash and Sulak blocks contain Russian C3 resources of approximately three billion barrels of crude oil.
Initial reserves estimates for Sulak should be completed during 2009 following our review of relevant seismic data. No wells have been drilled on either licensed area to date.
The Geoterm blocks are also favourably positioned to distribution access points, with the Azerbaijan-Northern
Caucasian-Novorossiysk branch of the Transneft pipeline only ten kilometers away and in close proximity to the
Caspian oil terminal in Makhachkala. Geoterm's blocks are adjacent to crude oil and natural gas fields which are already in production. A new Baku to Ceyhan pipeline has been constructed which has the capacity to transport one million barrels per day. The Western Caspian region is well connected to the Russian pipeline network, with key pipelines to Novorossiysk in Russia and export terminals and refineries on the Black Sea. Additionally, rail transport is also well developed in the region and is an established method of shipping crude oil products.
Geoterm Exploration Program
During 2007, the Group continued to acquire and interpret seismic data on the licenses. From the results of the work on the Izberbash block, the Group indentified six prospective targets or future drilling, the largest of which has been estimated to contain Category C3 resources (Russian reserves classification) of approximately 1.6 billion barrels of oil. We have been evaluating our exploration options including seeking an experienced farm-in partner for these licenses which would reduce our exploration risk.
Apart from these assets, Geoterm also operates a relatively small scale geothermal heat and hot water supply business to local municipalities and organizations in Dagestan. These activities constituted a significant amount of our revenue for 2006 and 2007. However, in the future, once NGPT begins producing, we do not anticipate that these activities will generate a significant proportion of our revenue.
Our Co-operation Agreement with Zapsibgazprom OAO, A Gazprom Subsidiary
In October 2007, we signed a non-binding memorandum of cooperation with Zapsibgazprom OAO, a subsidiary of Gazprom OAO. This agreement sets out certain principles of potential strategic cooperation between us and Zapsibgazprom regarding the development of our current and future assets. The main principles for future discussion include participation by Zapsibgazprom in the exploration of our crude oil and natural gas portfolio, commercial production and development of our NGPT, KNG and Geoterm assets and, cooperation for equipment procurement, staff training and technical and operational support needed in drilling and building necessary infrastructure for exploiting our NGPT, KNG and Geoterm assets. Subject to a definitive binding agreement, Zapsibgazprom may elect in the future to invest in our share capital. In December 2007, we established a working group which includes members of our management team and Zapsibgazprom that is tasked with negotiating a potential agreement.
Negotiations with Azerbaijan's State Oil Company (SOCAR)
In October 2007, we completed preliminary negotiations with SOCAR over the provision of a jackup drilling rig and related offshore drilling facilities. SOCAR has confirmed a decision in principle to provide our subsidiary Geoterm with an exploration option on the jackup rig Khazar. Subject to contract, this should allow us to proceed with exploration drilling on the block held under the Izberbash license. We view it as strategically important to secure a drilling rig in the Caspian Sea, particularly at a time when these rigs can be very difficult to procure due to high demand.