Petrolifera Spuds La Pinta Well at Colombia's Sierra Nevada Concession

Petrolifera Petroleum Ltd.

Petrolifera Petroleum announced that on Friday, January 23, 2009 the company spudded its La Pinta 1 well on its 100 percent-owned Sierra Nevada Concession in the Lower Magdalena Basin onshore Colombia. The well is now drilling ahead and is expected to require approximately 45 days to reach the projected total depth of approximately 13,000 feet.

The La Pinta 1 well is located approximately 600 meters from the Guamito-1 well, which was drilled by a major oil company in 1975; this well tested very light gravity 46.7 degree crude oil but was not extensively production tested at the time due to lack of facilities and infrastructure and was later suspended. A subsequent testing effort in 1983 by another operator was unsuccessful due to casing problems and Guamito-1 was abandoned.

The primary objective of the La Pinta-1 well is to reevaluate the originally tested intervals of the nearby Guamito-1 well and to evaluate
additional zones not tested in the original wellbore. The well is situated on the Sierra Nevada License, which comprises approximately 200,000 acres or about nine townships. It also offsets and is contiguous with the approximate 800,000 acre (approximately 35 townships) Magdalena License, which is anticipated to be awarded to Petrolifera in February, 2009.

If warranted by drilling results and log analysis, testing is anticipated to require a further 45 days once the well has reached total depth.

Operational Update

Argentina

Despite difficult economic and commodity pricing conditions which have emerged in recent months, Petrolifera has maintained a steady level of activity consistent with its production, revenue and cash flow base. On a preliminary unaudited basis, crude oil and natural gas liquids sales during the fourth quarter of 2008 are estimated to have averaged 6,877 bbl/d primarily from the Puesto Morales Norte, with additional modest contributions from producing crude oil wells at Rinconada and Puesto Morales Este Fields.

The company's unaudited December 2008 sales of crude oil and natural gas liquids averaged 7,231 bbl/d, a level positively impacted by incremental inventory sales, which are anticipated to develop and occur from time to time during 2009 as market conditions evolve in response to changing economic circumstances in Argentina.

Unaudited fourth quarter 2008 crude oil and natural gas liquids sales volumes were consistent with third quarter 2008 sales volumes and five percent above the same period in 2007, buoyed in part by the waterflood at Puesto Morales Norte. Our unaudited average 2008 crude oil and natural gas liquids sales volumes of 6,891 bbl/d decreased 13 percent from 2007 average daily sales volumes, when flush production was still being experienced in certain wells in the Puesto Morales Norte field immediately following their completion.

On an equivalent basis, sales volumes for the fourth quarter of 2008 are estimated, on a preliminary unaudited basis, to have averaged 7,786 boe/d, an increase of 11 percent over the same period in 2007. Unaudited total equivalent daily sales volumes for 2008 of 7,881 boe/d are down a modest five percent compared to 2007 total sales volumes. All references to barrels of oil equivalent (boe) are calculated on the basis of 6 mcf : 1bbl. Boes may be misleading, particularly if used in isolation. This conversion is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

The relatively flat sales volume levels reflect the continuing impact of the company's waterflood at Puesto Morales Norte and contributions from new discoveries during the year, primarily at the 1082 well directionally drilled under the Embalse and from the new pool discovery in the LM2 zone at Puesto Morales Este. In the company's opinion, the full impact of the waterflood remains to be realized with resolution of certain related challenges, including evidence of rising water cuts. These recovery techniques and new production offset the ongoing impact of normal declines in well productivity. Nevertheless, production levels have remained stable and associated revenue, net revenue and cash flow from operations before changes in working capital ("cash flow" or "cash flow from operations") enabled the company to
conduct an active capital program throughout 2008 while maintaining its financial integrity.

The company recently executed a new domestic crude oil sales agreement with a multinational purchaser in Argentina. This agreement is anticipated to result in competitive and satisfactory crude oil selling prices for the first quarter of 2009 and is designed to reflect both current market conditions in Argentina and the movement of crude oil prices in international markets.

Industrial natural gas markets remain stable with some prospect of considerable higher prices in this unregulated market possible in 2009.
Petrolifera anticipates the commencement of a four-well drilling program on its wholly-owned Gobernador Ayala II concession in La Pampa Province, Argentina during the first quarter 2009 to evaluate a like number of seismically-defined prospects on the block. The acreage is situated east of and on trend with recent discoveries and development activity by another Canadian operator in the region. Further drilling on the Vaca Mahuida and Puesto Guevara lands will await completion of interpretation of 3D seismic shot late in 2008, with drilling more likely in late 2009 or early 2010.

The company's facilities at Puesto Morales have operated effectively throughout 2008 and operating costs have remained at acceptable levels, even with additional fluid handling associated with the waterflood program. One or more additional infill wells may be drilled at Puesto Morales during 2009, although the field is substantially developed for crude oil, with some added drilling probable if crude oil prices improve during the next year or so. With a fully-developed field, an operative waterflood and either self-financed or partner financed exploration programs at Gobernador Ayala II, Vaca Mahuida and Puesto Guevara, Petrolifera anticipates a prudent and cautious approach to its 2009 activity in Argentina.

Colombia

In addition to its previously-described drilling activity at La Pinta, Petrolifera is in the late stages of completing a combination of 2D and 3D
seismic over its Turpial License in the Middle Magdalena Basin onshore Colombia. This block offsets large oil fields which have produced significant volumes of heavy and medium gravity crude oil for many years. Little, if any, modern activity has occurred on this well positioned Block and early seismic results are considered encouraging. This is the type of project Petrolifera favors -- near known production, evidence of good reservoir, little modern activity and accessible to nearby infrastructure.

Peru

Petrolifera has conducted extensive 2D seismic over its Ucayali Block 107 onshore Peru and interpretation of this seismic has resulted in a variety of prospects and leads with potential for both crude oil and natural gas accumulations. While there is no assurance these prospects will yield commercial hydrocarbons, the company is enthusiastic about its findings and anticipates conducting a series of data room reviews in upcoming months with a number of qualified and interested third parties, with a view to farming out an interest in this concession prior to drilling later in 2009.

Seismic acquisition is currently underway on Block 106 in the oil-prone Maranon Basin of northern Peru. A number of approaches have been made to Petrolifera by third parties also interested in farming-in to this significant acreage block. Petrolifera also anticipates being awarded Block 133 offsetting Bock 107 to the west. This License will provide Petrolifera with important protection acreage in relation to prospects, leads and planned drilling activity on Block 107.

Other

Petrolifera was pleased to see a long-overdue final resolution of the Asset Backed Commercial Paper ("ABCP") controversy in Canada. The company recently received over $1 million of accrued interest, calculated after deducting legal costs associated with the resolution agreed and approved under the Canada Business Corporations Act and the Company Creditors' Arrangement Act. This is the first interest payment we have received since the market for ABCP froze in 2007. We also anticipate being issued and receiving new notes to replace those acquired in the open market prior to August 2007 and also completion of a revised credit facility with a Canadian chartered bank, which will allow us to categorize related borrowings as long-term. This will result in an improvement in Petrolifera's working capital. Also, we anticipate an expansion of the credit facility to approximately 75 percent of the face value of the notes. This will further increase our liquidity by approximately $10 million. The estimated fair value of the ABCP replacement notes will be assessed in the context of our year end 2008 financial and operating results and audit thereof.

As previously announced, Petrolifera anticipates involvement in over $80 million of gross capital programs during 2009, although net cash outlays by the company are anticipated to approximate $30 million if planned farmouts and recovery of sunk costs can be achieved in this difficult market environment.

At current production levels and prices, this would result in a considerable increase in cash balances during 2009, with a view to accomplishing a debt reduction program, in keeping with deleveraging objectives. Major farmouts and cash recovery of sunk costs are anticipated to be associated with the company's large Peruvian acreage blocks. This approach is consistent with the company's announced strategy of favorably leveraging off its significant ground floor ownership by enhancing the value of acreage blocks through
technical work and bringing in industry partners for the high cost drilling and development programs. Discussions with industry partners are now being scheduled, having completed key technical work. The availability of a heli-transportable rig currently drilling for the company in Colombia is a key element contributing to the appeal of being able to conduct work on a timely basis, as such rigs are in short supply in Peru at this time. Base camp preparations in Peru are already underway and drilling is more likely to occur in the second half of 2009 once environmental approvals are in hand.

The combination of cash flow from operations, working capital, unused credit capacity and anticipated proceeds from the cost recovery components of farmouts is anticipated to result in continuing improvements in Petrolifera's financial condition throughout 2009, in the absence of any unusual events or the further deterioration of conditions in the oil industry, worldwide and in the jurisdictions in which Petrolifera operates in South America. We continue to examine business combination opportunities to better enable the company to
prosper and expand in coming years as exploration potential is evaluated and realized. We anticipate that capital markets will be difficult for a considerable period of time, thus dictating a prudent and self-sufficient approach to capital programs until there is clear evidence of improvement with associated sustainability and visibility.


 


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