Mr. Jim McFarland reports
VALEURA ANNOUNCES JOINT VENTURE IN TURKEY
Valeura Energy Inc. has executed a farmout agreement with Aladdin Middle East Ltd. (AME) and Guney Yildizi Petrol Uretim Sondaj Muteahhitlik ve Ticaret AS (GYP) (collectively AME-GYP), two affiliated oil and gas exploration and production companies operating in Turkey and controlled by the Turkey-based Sayer Group.
Under terms of the agreement, Valeura will farm into one production lease containing the Kahta heavy oil field and eight exploration licences operated by AME-GYP and located in southeastern Turkey within the Zagros fold belt, which extends into Turkey from Iraq and Syria and encompasses one of the most prolific hydrocarbon basins in the world.
Summary of key terms
Valeura expects to invest a minimum of $8.8-million (U.S.) (phase I) over the next four months split approximately along the following lines: Kahta reservoir study ($500,000 (U.S.)); recompletion of two indicated oil discovery wells to establish producibility ($900,000 (U.S.)); 2-D seismic acquisition ($3.4-million (U.S.)); and the drilling of one exploration well ($4-million (U.S.)).
Completion of phase I expenditures will earn Valeura the following beneficial interests: 25 per cent in the Kahta production lease (17,446 gross acres); 25 per cent in three Karakalise exploration licences (the Group A licences) (303,799 gross acres); and 12.45 per cent in five Rubai exploration licences (the Group B licences) (419,098 gross acres).
Valeura has the option to increase its earning expenditures up to a total of $17.6-million (U.S.) (phase II) prior to the end of 2011 in a flexible mix of additional seismic, exploration and appraisal drilling, and potential redevelopment work at Kahta to increase its beneficial interests on a sliding scale basis up to 50 per cent in Kahta, 50 per cent in the Group A licences and 29.9 per cent in the Group B licences.
For earning purposes, Valeura's expenditures are treated as total amounts and can be transferred between the asset groups (Kahta, Group A licences and Group B licences).
Valeura intends to complete a comprehensive reservoir study on Kahta in phase I to determine the potential to increase production and reserves through the application of 3-D seismic, modern drilling and completion technologies such as horizontal drilling and multistage hydraulic fracturing, well recompletions, step-out delineation and exploration drilling, and secondary recovery techniques that could be partially financed with phase II earning expenditures. The current term of the production lease expires on March 26, 2012, but can be extended for 10 years on application.
Valeura's phase I and potential phase II earning expenditures on the exploration licences are aimed at maximizing retention of prospective licences prior to expiry. In the case of the Group A licences, the term of each of the three licences expires on Nov. 30, 2010, unless each licence production can be established from an existing discovery well or from a new exploration well that is spudded by this date, and ultimately results in a discovery, in which case the exploration term on that particular licence can be extended for three years. In the case of the Group B licences, four of the licences expire on June 26, 2011, and one on Nov. 30, 2011.
AME-GYP will operate the joint venture under industry-standard joint operating agreements with close technical and operational consultation with Valeura.
AME-GYP is one of the largest acreage holders in Turkey, is an experienced E&P operator in the country and the region, and owns and operates 11 drilling and workover rigs, which provides the joint venture with immediate access to drilling and completion equipment at competitive costs.
Valeura expects to finance the phase I expenditures and any potential future phase II earning expenditures from existing cash reserves.
"This is an exciting opportunity for Valeura which provides us with a strategic toehold in Turkey and the MENA region/Mediterranean basin, a key focus area in our previously announced international growth plan, and is a foundation we can build on," said Jim McFarland, president and chief executive officer. "The assets are located near existing infrastructure and have development, exploitation and exploration potential through the application of modern technology and new ideas.
"Turkey has one of the most attractive fiscal and royalty regimes in the world, with a flat 12.5-per-cent royalty rate and a 20-per-cent corporate tax rate. The country is an important energy supply corridor for Europe and is itself heavily dependent on energy imports and, as a result, domestic and international markets are available for production at world prices.
"Kahta is a technology play that is right up our alley and could set up a number of other opportunities in heavy oil reservoirs in Turkey. The exploration component of the farm-in has a range of moderate and high-impact opportunities in underexplored areas near world-class oil fields in Iraq and Syria. The approaching expiries on the licences provided us with a window of opportunity to negotiate this agreement in a way that included a diversified mix of opportunities at a competitive price."
Ecvet Sayer, chairman of GYP and executive vice-president of AME, said, "We are pleased to be working with Valeura in a strategic E&P partnership that with success has the potential to grow in Turkey and the region."
Valeura was assisted in securing the agreement by Onoc Inc., an arm's-length Calgary-based company with extensive business relationships in Turkey. Under the consulting services agreement with Onoc, a 1.5-per-cent success fee on the deal value will be payable in shares (subject to TSX Venture Exchange approval). Based on a deal value of $8.8-million (U.S.), the fee will be $132,000 (U.S.), which would double if the full optional earning expenditures are implemented.
Description of assets and potential work programs
The farm-in assets are summarized in a table and described more fully.
FARM-IN LANDS IN TURKEYLease/licence No. Gross area Expiry Participating interests (acres) date(2) (acres)(1) Valeura AME-GYP OthersProduction leaseKahta oil field 658 17,446 March, 2012(3) 8,723 8,723 - ---- -------- -------------- ------- -------- -------Exploration licencesGroup AKarakilise 2674 119,265 November, 2010 59,632 59,633 -Karakilise 2677 122,997 November, 2010 61,498 61,499 -Karakilise 2678 61,537 November, 2010 30,768 30,769 -Exploration licencesGroup B(4)Rubai 2598 123,266 June, 2011 36,856 43,267 43,143Rubai 2599 121,331 June, 2011 36,278 42,587 42,466Rubai 2600 119,970 June, 2011 35,871 42,109 41,990Rubai 2601 27,137 June, 2011 8,114 9,525 9,498Rubai 2759 27,394 November, 2011 8,191 9,615 9,588 ---- -------- -------------- ------- -------- -------Total Turkey 740,343 285,931 307,727 146,685 ---- -------- -------------- ------- -------- -------(1) Assuming maximum potential earning under Valeura and third partyfarm-in agreements.(2) Under Turkish petroleum law, the term of each of these explorationlicences, all of which are in their eighth and final year, can beextended on a licence-by-licence basis for an additional three yearsif a producible discovery is confirmed on that particular licence bythat time or an exploration well is spudded by that time whichultimately proves to be a discovery.(3) Under Turkish petroleum law, the term of the Kahta production leasecan be extended for an additional 10 years to March 26, 2022, on application.(4) Under the overarching drilling requirements of the petroleum district, a well must be spudded in one of the five Group B licences by Jan. 25, 2011, which includes a 90-day grace period from Oct. 25, 2010, that may be granted under the regulations, and every six months thereafter to maintain all of the licences in good standing during the remaining exploration term.
Kahta heavy oil field
The Kahta heavy oil field is owned and operated by AME-GYP and is located on production lease No. 658. The field was discovered in 1957 and produces 11-degree API gravity oil from a Cretaceous-aged carbonate reservoir at a depth of about 3,100 feet. Approximately 4.9 million barrels of oil have been produced to date under primary recovery operations. Thirty-six wells have been drilled in the field, of which only eight wells are currently active, producing a total of less than 40 barrels of oil per day at a high watercut.
As part of the phase I earning program, Valeura will lead and finance a comprehensive geological and reservoir engineering study at a cost of approximately $500,000 (U.S.) to determine the potential to increase production rates and oil recovery through various means including: (1) more effective primary recovery operations through application of 3-D seismic, recompletions, new vertical and horizontal drilling, multistage hydraulic fracture stimulation, and fluid pumping enhancements; (2) the potential for step-out drilling to extend the limits of the field or to add satellite fields; and (3) the potential to implement secondary recovery operations.
This study will not only be helpful in determining the redevelopment potential at Kahta but should also be useful in evaluating other potential heavy oil opportunities in analogue reservoirs in Turkey.
Group A licences
The Group A licences include three contiguous exploration licences collectively referred to as the Karakilise licences (Nos. 2674, 2677 and 2678) which are held 100 per cent by AME-GYP. In total, the licences cover an area of 1,229 square kilometres (303,799 acres) in southeast Turkey near the city of Diyarbakir on the Tigris River.
Licence 2674
In licence No. 2674, Valeura intends to fully finance approximately 250 km of new 2-D seismic to expand the prospect and lead inventory and to high grade a potential drilling location to be spudded by Nov. 30, 2010. A seismic crew will begin shooting seismic in early September, 2010. Estimated cost of the seismic is approximately $3.1-million (U.S.) (gross) which would be financed by Valeura on a 100-per-cent basis in phase I.
An AME-GYP drilling rig is in the area and available to drill such a well. The exploration target would be in the Ordovician-aged Bedinan formation at a depth of approximately 8,200 feet. The estimated cost of a well is $4-million (U.S.) (gross) which would be financed by Valeura on a 100-per-cent basis in phase I.
Valeura is encouraged by AME-GYP's success on the adjoining licence to the east, where light oil was discovered in Ordovician sandstones in the Arpatepe-1 well drilled in 2008. This discovery established a new play concept and potential play fairway extending into licence No. 2674. Two additional successful wells have been drilled at Arpatepe.
Licence 2677 and 2678
In licence No. 2677, AME-GYP drilled the Karakilise-1 well in 2003 which produced 50,000 barrels of light oil (33-degree API gravity) from Cretaceous-aged Mardin carbonates from a depth of approximately 8,100 feet before production was suspended in 2006, and the well deepened to 10,100 feet to test the Ordovician-aged Bedinan formation. This deep test was unsuccessful but the well was cased with a seven-inch liner and is currently suspended. The current plan is to re-establish production in the Mardin carbonates by carrying out a recompletion program in September, 2010, to perforate additional indicated Mardin pay. If production is re-established, it is expected that the exploration term for that licence can be extended for three years. The estimated cost of the recompletion program is approximately $600,000 (U.S.) (gross), which Valeura expects to finance on a 100-per-cent basis in phase I.
Seismic control on the adjacent licence No. 2678 is very limited. A few lines in the planned 2-D seismic program on licence No. 2674 will be extended onto licence No. 2678. This may identify a viable prospect or justify additional seismic acquisition to define a potential drilling location.
Group B licences
The Group B licences include five contiguous exploration licences collectively referred to as the Rubai licences (Nos. 2598, 2599, 2600, 2601 and 2759). In total, the licences cover an area of 1,696 square kilometres (419,098 acres) in southeast Turkey near the juncture of the Turkey, Iraq and Syria borders.
AME-GYP had held these licences on a 100-per-cent basis but, in July, 2010, it announced a farmout of up to 35 per cent on a staged basis in the Group B licences to a third party, which had the effect of limiting the extent of earning available to Valeura.
Licence 2598 and 2599
AME-GYP drilled an indicated heavy oil discovery at the northeast Ogunduk-1 well on licence No. 2599 in August, 2009, in Cretaceous-aged Mardin carbonates at a depth of approximately 6,670 feet. Drill stem tests yielded 19-degree API gravity oil but the well was not completed at the time. Under the phase I earning program, Valeura is obligated to finance 50 per cent of the cost (estimated $300,000 (U.S.) net) to re-enter and deepen the well, log the open hole, run casing, and perforate, acidize and production test the well. This program commenced in mid-August, 2010. If the recompletion program confirms a producible discovery, it is expected that the exploration term on licence No. 2599 can be extended for three years.
Assuming a successful production test at northeast Ogunduk-1, a small 40 km 2-D seismic survey will likely be carried out in licence No. 2598 and 2599 to identify an appraisal drilling location. Such a seismic program would likely be financed on a 50-per-cent basis by Valeura as a phase I earning expenditure ($300,000 (U.S.) net).
The estimated cost to drill a well is $4-million (U.S.) (gross). Valeura has the option to finance 50 per cent of such a well as a potential phase II earning expenditure. Spudding of such a well by Jan. 25, 2011, would satisfy the petroleum district drilling requirement (see Note 4 in the table).
Licence 2600
Licence No. 2600 holds two potential high-impact prospects. The Bostanci prospect underlies a large undrilled surface anticline which extends onto an adjoining licence to the east and partly into Iraq and Syria and is located only 39 kilometres west of the large Tawke oil field in Iraq. Tawke is a recent 2006 discovery underlying a large surface anticline. Target drilling depth at Bostanci would be about 9,000 feet.
Some 2-D seismic acquisition and/or geochemical sampling would likely be required to mature a drillable location at Bostanci which Valeura may finance on a 50-per-cent basis as a phase I earning expenditure ($40,000 (U.S.) net).
A large Cretaceous-aged carbonate reef prospect named Cizre is also of interest on licence No. 2600 and is located approximately 20 kilometres north of Bostanci. Additional seismic would likely be required to locate a potential drilling location on this prospect.
Valeura has the option to finance a portion of any drilling costs in licence No. 2600 as a phase II earning expenditure. An exploration well would need to be spudded by June 26, 2011, and prove successful to extend the licence term by three years.
Licence 2601 and 2759
Additional seismic would be required on licence Nos. 2601 and 2759 to determine whether a drillable prospect can be identified before June 26, 2011, or Nov. 30, 2011, respectively.
We seek Safe Harbor.