http://www.verenexenergy.com/
Libya
In building its corporate strategy and initial business plan in 2004, the Company set a target to expand its E&P portfolio to one or two other prospective countries outside its initial asset base in France. North Africa (Libya, Algeria, Tunisia and Egypt) (see Figure 4) was chosen as the prime region of interest given its underdeveloped hydrocarbon potential, the growing availability of opportunities as governments open their doors to further foreign investment, the geographic concentration and resulting opportunities for synergy and the experience and capabilities of the Verenex team. The Company was successful in establishing a position in Libya in the short space of seven months from the Company's inception.
North Africa Focus Areas
In January 2005, the Company's wholly owned subsidiary, Verenex Energy Area 47 Libya Limited ("Verenex Libya") participated in Libya's First Bid Round and submitted the winning bid to explore for oil and gas in Area 47, a 6,182 square kilometre block in the Ghadames Basin in northwest Libya as shown in Figure 5. Verenex Libya outbid eight other companies to win exploration rights in Area 47. Verenex Libya is the operator with a 50% interest and Medco International Ventures Limited ("Medco") holds the remaining 50%. Verenex Libya and Medco signed the Exploration and Production Sharing Agreement ("EPSA") with the Libyan National Oil Corporation ("NOC") on March 12, 2005. The EPSA was subsequently ratified by the Libyan Government with an effective date of March 30, 2005.
Area 47 - Libya
Verenex Libya was one of only 12 companies to win participation rights in the 15 Areas that were offered in the First Bid Round, which was the first since UN and US sanctions were lifted, and was the only successful Canadian company of the five that bid. There was very strong interest by companies from around the world including major international oil companies, many national oil companies and large independents. A total of 120 companies applied to be included on the list of qualified bidders of which only 63 were accepted.
The Second Bid Round was completed in October 2005 and proved to be even more competitive, with 23 new permits being awarded to some of the largest US and other international oil companies as well as a number of national oil companies. The Company purchased data and assessed a number of exploratory permits on offer in the Second Bid Round but chose not to bid.
The Third Bid Round was completed in December 2006, in which an additional 10 new permits were awarded. The Company did not participate in this bid round.
The Fourth Bid Round, which was focused on natural gas exploration, was completed in December 2007 in which six new permits were awarded. The Company did not participate in this bid round.
Verenex, through its ownership of Verenex Libya, remains the smallest company to have won operatorship of an exploratory permit in the four bid rounds completed to date in Libya.
Area 47 Work Program Commitments
The EPSA sets out the required minimum work program during the initial 5-year exploration and appraisal period and defines the terms for development, during a 25-year exploitation period, of any commercial discoveries made during the initial 5-year period.
Under the terms of the EPSA for Area 47, Verenex Libya and Medco are required to acquire new seismic, including 1,000 kilometres of 2-D and 200 square kilometres of 3-D, and drill three new field wildcat exploration wells during the 5-year exploration and appraisal period. All costs during this period, including the minimum commitment program and any additional seismic and drilling, will be borne 100% by Verenex Libya and Medco.
Area 47 Cost and Revenue Sharing Terms
The winning bid for Area 47 was based on a Production Allocation ("PA") to the contractor group (Verenex Libya and Medco) of 13.7%, with a signature bonus of US $250,000. The PA is the share of any future production from the area that is allocated to the contractor group (free of all taxes and royalties) from which the contractor group recovers its share of all capital and operating costs, including the 100% funded exploration and appraisal expenditures and its share of future development expenditures under the EPSA terms. The signature bonus was paid when the EPSA was approved and is not cost recoverable.
To put this winning bid for Area 47 in context, three of the 15 Areas in the First Bid Round were won with lower PA bids of 10.8%, 12.4%, 13.3%. In total, more than US $132 million was pledged in signature bonuses, ranging from zero to US $25.6 million per Area. In the Second Bid Round, the areas on offer were smaller than the First Bid Round and 16 of the 23 Areas were won with PA bids of less than 13.7%, with the lowest PA's being 6.8% for an area in the Murzuq Basin and 7.5% for two areas in the Ghadames Basin won by a Japanese consortium. In the Third Bid Round, seven of the 10 Areas were won with PA bids of less than 13.7%, with the lowest PA being 7.8% in the Murzuq Basin. In the Fourth Bid Round, three of the six areas were won with PA bids of less than 13.7%, with the lowest PA being 9.8% in the Ghadames Basin.
It is also noteworthy that the announced PA's in several re-negotiated older concessions that were nearing the end of their term are in range of 10-12%.
If a discovery is made and the parties (the NOC and the contractor group) unanimously agree that it is commercial, a joint operating company would be established to develop and operate the discovery. Development capital expenditures would be shared 50% by the contractor group and 50% by the NOC. Operating costs would be shared on the basis of the PA split, with the contractor group paying 13.7% of these costs and the NOC 86.3%. The NOC pays 100% of all royalties and Libyan taxes incurred on each discovery, including the contractor group share.
The cost sharing terms during the exploration and development phases under the EPSA are depicted in Figure 6.
EPSA Cost Sharing Terms – Area 47
The production and revenue sharing terms under the EPSA are depicted in Figure 7 as applicable to Verenex Libya (50% of the contractor group).
EPSA Production and Revenue Sharing Terms – Area 47
Once production begins, the contractor group is allocated 13.7% of project production of which Verenex Libya's share is 6.85%. As shown in Figure 7, after Verenex Libya recovers all of its costs, both historic and current, from its 6.85% PA share, as calculated annually, the remaining portion of the 6.85% PA share is allocated between Verenex Libya and the NOC. Verenex Libya's allocated share of this remaining portion is calculated as the product of two factors. One factor is based on Verenex Libya's prior year profitability from start-up (A factor) and the second is based on the current year total project production rate (B factor).
Said another way, the contractor group recovers all of its costs throughout the life of the project from so-called "cost petroleum" and receives an allocated share of the residual "profit petroleum" at any point in time that is inversely proportional to project production rate and contractor group profitability. The sum of cost and profit petroleum (including the NOC and Contractor shares of profit petroleum) for Area 47 is 13.7% of project production throughout the 25-year development period of the EPSA.
The NOC pays all royalties and taxes on behalf of the contractor group from the NOC's share of production.
Libya's Area 47
The Company's drilling success in Area 47 confirms the prospectivity of the permit and the quality of the petroleum system in this part of the Ghadames Basin. A robust inventory of more than 45 exploration prospects and leads has been developed to date based on an assessment of vintage 2-D seismic and well data that was made available by the NOC, new 3-D and 2-D seismic data acquired by Verenex Libya in 2006 and subsequent drilling by Verenex Libya. In December 2007, Verenex Libya completed the acquisition phase of a large 1,225 square kilometre 3D seismic survey in the eastern part of Area 47 that is expected to expand and mature the prospect and lead inventory in Area 47.
Verenex Libya has moved quickly to explore Area 47 and has achieved a number of firsts compared to the eight other companies which won operatorship of 15 exploration blocks awarded in the First Bid Round: first to drill; first to make an oil and gas discovery; and first to complete the minimum commitment program.
By the end of May 2007, Verenex Libya had already completed all of the minimum requirements under the EPSA, having shot approximately 480 square kilometres of 3D seismic and 1,708 kilometres of 2D seismic in 2006 and drilled three new field wildcat exploration wells over the September 2006 to May 2007 period.
Verenex Libya was able to move quickly with its exploration drilling program by securing long term contracts for drilling rigs (Ensign Rig 28 and KCA DEUTAG Rig T-19) in April 2006 and one service rig (KCA DEUTAG Service Rig 32) in August 2006. Currently Ensign Rig 28 is operating in Area 47, having spudded the first well at A1-47/02 at the end of September 2006. The second rig KCA DEUTAG Rig T-19 commenced drilling in Area 47 in October 2007. The service rig is being utilized primarily to complete and flow test new wells but will also be available to carry out workovers on existing wells and to drill water wells to provide water for drilling activities.
With completion of the 2007 3D seismic program in December 2007, Verenex Libya has covered approximately 28% of Area 47 with new 3D seismic.
Drilling and testing results as at December 2007 are described below and seismic and well locations are highlighted in Figure 8.
In summary, seven wells have been drilled and cased, including six new field wildcat ("NFW") exploration wells and one appraisal well, An eight well (second appraisal well) was spudded in mid-December 2007. Five of these wells have been fully tested, flowing light sweet crude oil at high rates, and have been announced by the NOC as oil discoveries. Testing of the remaining two drilled and cased wells is expected to be completed by the end of December 2007. The combined maximum measured test rate of the five announced oil discoveries is approximately 75,000 bopd (gross).
The maximum combined measured flow test rates in each of the wells described below are not necessarily indicative of the ultimate production rate and may be lower in any commercial development which will be determined from reservoir engineering studies that constitute part of the appraisal and development planning activities currently underway.
Area 47 - Drilled Wells & Prospect and Lead Inventory as at May 2008
A1-47/02 Well
Verenex Libya drilled, cored, logged and cased its first NFW exploration well A1-47/02 in 87 days over the September 2006 to December 2006 period. The well was drilled to a depth of 11,550 feet and found indications of multiple oil-bearing sandstone reservoirs within the Lower Acacus Formation, the primary exploration target, as confirmed by shows during drilling and logging results.
The well was tested with the service rig and flowed light sweet crude oil from 174 feet of perforations in three reservoir intervals in the Lower Acacus Formation at a maximum combined rate of 12,500 barrels of oil per day (gross) at choke sizes up to 128/64ths inch and 6,586 bopd at a more restrictive choke size of 32/64ths inch as requested by the NOC for their normalization purposes. These flow tests confirmed the quality and deliverability of the sandstone reservoirs discovered in the Lower Acacus in this well and provided information to calibrate wireline log and other formation evaluation results. Measured API gravity of the crude oil ranged from 37 to 47 degrees.
On February 6, 2007 the NOC announced that the A1-47/02 well was the first discovery on exploration blocks awarded in the First Bid Round in January 2005.
B1-47/02 Well
Verenex Libya drilled, cored, logged and cased its second NFW exploration well B1-47/02 in 62 days over the January to March 2007 period. The well was drilled to a depth of 11,030 feet and found indications of multiple oil-bearing sandstone reservoirs in the Lower Acacus Formation and in the Middle Acacus Formation, a secondary exploration target, as confirmed by shows during drilling and logging results.
The well was tested with the service rig and flowed light sweet crude oil from 312 feet of perforations in five reservoir intervals, including four intervals in the Lower Acacus Formation and one interval in the Middle Acacus Formation. The maximum combined measured flow rate was 23,800 bopd at choke sizes on particular intervals ranging from 40/64ths to 96/64ths inch. The well was also tested at a more restrictive choke size of 32/64ths inch at the request of the NOC and flowed at a combined rate of 9,500 bopd. Measured API gravity of the crude oil ranged from 37 to 42 degrees.
The NOC declared this as an oil discovery on July 23, 2007.
C1-47/02 Well
Verenex Libya drilled, cored, logged and cased its third NFW exploration well C1-47/02 in 47 days over the April to May 2007 period. The well was drilled to a depth of 9,900 feet and found indications of multiple oil-bearing sandstone reservoirs in the Lower Acacus Formation and in the shallower Aouinet Ouenine Formation, a secondary exploration target, as confirmed by shows during drilling and logging results.
The well was tested with the service rig and flowed light sweet crude oil from 188 feet of perforations in five reservoir intervals, including four intervals in the Lower Acacus Formation and one interval in the Aouinet Ouenine Formation. The maximum combined measured flow rate at choke sizes up to 96/64ths inch was 23,570 bopd (gross). The well was also tested at a more restrictive choke size of 32/64ths inch at the request of the NOC and flowed at a combined rate of 8,718 bopd. Measured API gravity of the crude oil ranged from 40 to 44 degrees.
The NOC declared this as an oil discovery on October 25, 2007.
D1-47/02 Well
Verenex Libya drilled, cored, logged and cased its fourth NFW exploration well D1-47/02 in 49 days over the May to July 2007 period. The well was drilled to a depth of 9,720 feet and found indications of multiple oil-bearing sandstone reservoirs in the Lower Acacus Formation and in the shallower Middle Acacus and Aouinet Ouenine Formations as confirmed by shows during drilling and logging results.
The well was tested with the service rig and flowed light sweet crude oil and associated natural gas from 157 feet of perforations in two reservoir intervals in the Lower Acacus Formation and the Middle Acacus Formation. The maximum combined measured flow rate at choke sizes up to 80/64ths inch was 7,742 bopd (gross) of light sweet crude oil and 13.7 million cubic feet per day ("mmcf/day") (gross) of natural gas. The well was also tested at a more restrictive choke size of 32/64ths inch at the request of the NOC and flowed at a combined rate of 3,845 bopd and 12.0 mmcf/day, respectively. Measured API gravity of the crude oil ranged from 32 to 59 degrees.
The NOC declared this as an oil discovery on December 10, 2007.
E1-47/02 Well
Verenex Libya drilled, cored, logged and cased its fifth NFW exploration well E1-47/02 in 45 days over the July to September 2007 period. The well was drilled to a depth of 9,639 feet and found indications of multiple oil-bearing sandstone reservoirs in the Lower Acacus Formation as confirmed by shows during drilling and logging results.
The well is currently being tested with the service rig.
F1-47/02 Well
Verenex Libya drilled, cored, logged and cased its sixth NFW exploration well F1-47/02 in 40 days over the September to October period. The well was drilled to a depth of 10,300 feet and found indications of oil-bearing sandstone reservoirs in the Lower Acacus Formation as confirmed by shows during drilling and logging results.
The well was tested with the drilling rig and flowed light sweet crude oil from an 18 foot interval in the Lower Acacus Formation. The maximum measured flow rate at a choke size of 96/64ths inch was 7,215 bopd (gross). The well was also tested at a more restrictive choke size of 32/64ths inch at the request of the NOC and flowed at a rate of 2,527 bopd. Measured API gravity of the crude oil was 45 degrees.
The NOC declared this as an oil discovery on December 3, 2007.
A2-47/02 Well
Verenex Libya drilled, cored, logged and cased its seventh well A2-47/02 (first appraisal well) in 57 days over the October to December 2007 period. The well was drilled to help delineate the size of the Company's first oil discovery found by the A1-47/02 well located 5.1 kilometres to the east. The A2-47/02 well was drilled to a depth of 10,400 feet with the Company's second contracted drilling rig KCA DEUTAG T-19 and found indications of hydrocarbons in the Lower Acacus Formation.
The well was tested with the drilling rig in December 2007 and the results are expected to be released once these are reviewed and approved by the NOC.
D2-47/02 Well
Verenex Libya spudded its eighth well D2-47/02 (second appraisal well) on December 13, 2007 with the Ensign Rig 28. This appraisal well is expected to help delineate the size of the Company's oil discovery at D1-47/02. Drilling is expected to be completed in late January/early February 2008.
Future Drilling
If the two currently contracted drilling rigs were to be fully deployed, Verenex Libya would be able to drill up to 12 exploration and appraisal wells per year. The Company is targeting to drill approximately 50 exploration/appraisal wells during the five-year Exploration Phase of the EPSA contract.
East 3D Seismic Program
Verenex Libya commenced the 1,225 square kilometre East 3D seismic program, as shown in Figure 8, at the end of July 2007 and the acquisition phase was completed in early December 2007. The 3D area encompasses more than 20 prospects and leads identified from the 2D seismic acquisition program completed in 2006. Fully processed and interpreted results are expected to be available in the second quarter of 2008. However, it is planned to process and interpret the northern section of the survey (approximately 40% of the total) by year-end 2007 to guide potential drilling in this area in early 2008.
Development Planning Activities
Verenex Libya has commenced preliminary engineering design and associated cost and schedule estimating for a potential early production system in the southern part of Area 47, where the first eight wells have been spudded/drilled, with a target of first oil at year-end 2009 at a production rate of 25,000 to 50,000 barrels of oil per day (gross). Verenex Libya has also commenced a third party assessment of contingent (discovered) and prospective (undiscovered) resources in Area 47 that, in part, will underpin the resource base assessment and economic valuation for the resources to be accessed in early production system.
Such a development scheme may include a number of oil discoveries, and under the EPSA terms, appraisal programs would need to be completed on these discoveries leading to the declaration of a commercial discovery (or discoveries) by the Area 47 Management Committee ("Area 47 MC"), which consists of members from Verenex Libya, Medco and the NOC. At that point, a Joint Operating Company would be established to build and operate the development scheme in which the NOC would have a 50% working interest.
Verenex Libya has submitted preliminary appraisal reports to the Area 47 MC for its first four oil discoveries at A1-47/02, B1-47/02, C1-47/02 and D1-47/02 as required under the EPSA. These reports incorporate results from the drilling, formation evaluation and flow testing programs and make recommendations on additional seismic reprocessing and interpretation, new seismic acquisition, reservoir analysis and additional appraisal drilling in areas adjacent to the discoveries to determine size and potential recoverable resources.
2007/2008 Work Program and Budget
The Area 47 MC has endorsed a 2007 budget outlook of US$120 to US$124 million (gross) (US$63 to US$65 million net to Verenex Libya). This budget includes the acquisition of 1,225 square kilometres of 3D seismic, 6.5 completed wells (seven spudded), six multi-zone flow tests, additional casing and tubing inventory for the drilling program and general and administrative costs for the Tripoli office and selective technical support from the Corporation's Calgary offices.
Verenex Libya's Tripoli office, which is the operational base for Area 47 activities, has a complement of 29 people including 21 Libyans and 8 expatriates.
The work program and budget for 2008 was reviewed and approved by the Area 47 MC in October 2007. The approved 2008 budget of up to US$158 million (gross) includes the acquisition of 2,400 kilometres of 2D seismic, the drilling and testing of 11 to 12 exploration and appraisal wells, additional casing and tubing inventory and expenditures for front end engineering and design ("FEED") for the early production system.
The ultimate extent of operations and expenditures will depend on several factors, including seismic and well results, regulatory approvals and partner funding.
Contact Us
Verenex Energy Inc.
Suite 600, 1015 - 4th Street S.W.
Calgary, Alberta, Canada T2R 1J4
Telephone: +1 (403) 536-8000
Facsimile: +1 (403) 536-8130
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