2010 Annual Results and Operations Update
Frontera Resources Corporation (London Stock Exchange, AIM Market – Symbol: FRR; OTC Market, U.S.A. – Symbol: FRTE), an independent oil and gas exploration and production company (“Frontera” or the “Company”), today announced its audited final results for the year ended 31 December 2010 and provided an update of operations within its Block 12 license area in the country of Georgia.
2010 Final Results
• Results for the year ended 31 December 2010 reflect a net loss of $63.9 million, or $0.48 per share on a fully-diluted basis. This loss compares to a net loss of $28.5 million, or $0.31 per share for the fiscal year 2009. The increase in the net loss reported is due to a $44.6 million impairment charge related to compliance with exploration and production ceiling test requirements.
• Revenues from crude oil sales for 2010 totaled $8.3 million, compared to $4.1 million during the same period in 2009. The increase was attributable to increases in sales volume in the 2010 period, as well as an increase in the price of Brent oil.
Recent Operational Developments
• Mirzaani Field: Completed cleanout operations on multi-zone frac at the Mirzaani #5 well. Currently awaiting a packer to finalize completion of the well. Based on results from the Mirzaani #5 well, 10 new well locations have been identified and are planned for continued field development.
• Mtsare Khevi Field: Operations currently ongoing to systematically upgrade plunger lift pumps to progressing cavity pumps to increase oil production from the field’s Zone I interval. Plans to initiate gas sales including infrastructure design and construction have been finalized. Twenty new well locations have been identified and are planned for continued oil and gas exploitation.
• Taribani Field Unit: Based on analysis of historical production results from the Dino#2 and T-#45 wells, 10 new well locations have been identified and are planned for ongoing exploitation at the Taribani Field
• Basin Edge Play Unit: Completed new interpretations of reprocessed geophysical data related to the ‘A’, ‘B’ and ‘C’ prospects and advanced efforts to seek a strategic partner for continued exploration operations in this significant asset.
• Shale Gas Play Unit: Advanced study of significant potential oil and gas prospectivity related to the Maykop shales. Identified and designed work program for next phase of technical analysis.
Shallow Fields Production Unit
The Shallow Fields Production Unit is located in the central portion of Block 12 and represents what the Company believes to be an extensive trend of low-cost, low-risk oil and gas resources. The unit contains a number of known oil fields–Mirzaani, Mtsare Khevi, Nazarlebi, and Patara Shiraki–representing undeveloped or under-developed fields that have additional associated exploitation potential. The unit also contains an inventory of “look-alike” exploration prospects–the Kakabeti, Lambalo, Mkralihevi, Mlashiskhevi-Oleskhevi and Tsitsmatiani prospects–each of which contains Soviet-era wells that had hydrocarbon shows while drilling but were never placed on production or adequately appraised. Reservoir objectives are the well-known, regional clastic reservoirs of Pliocene and Miocene age, situated at depths from 10 meters to 1,500 meters.
Field operations have been focused on maintaining oil production from the numerous low-productivity wells in the historically developed portion of the Mirzaani Field, which has produced 7 million barrels of oil since 1932, and is currently producing 70 to 90 barrels of oil per day from a total of 119 wells. Meanwhile, the Company continues to evaluate results from its recent drilling operations, which discovered significant northwest (up-dip) and southeast (down-dip) extensions to the field. Ongoing analysis of results from the Mirzaani #1, #2 and #5 wells confirms the attractiveness of frac completions, which are expected to maximize production rates and enhance the economic value of the field.
A successful multi-zone frac completion of the Mirzaani #5 well was conducted by Schlumberger in 2010, targeting the Pliocene (Shiraki Formation) reservoir Zones 13 and 16/17, at depths of 897-909 and 1,057-1,075 meters. Production testing of these co-mingled zones initially yielded oil at more than 100 barrels of oil per day, although increasing water production, probably from the deepest horizon, began to impair oil production and the well was temporarily suspended. A “bridge plug” will be installed to isolate the lower water zone which should allow production to resume. Based on results observed to date, 10 new well locations have been identified for exploitation of the undeveloped, up-dip northwest area of the Mirzaani field.
The Mirzaani Field is now recognised to be a large accumulation with over 500 million barrels “original oil in place” (OOIP) (gross best estimate numbers) independently assessed by Netherland Sewell & Associates (“NSA”) in 2010. Primary recovery factors are, however, quite low in the mainly low pressure reservoirs (around 10%), and NSA have assigned 17.9 million barrels as Best Estimate gross Contingent Resources for the main part of the field, with an additional 25.9 million barrels as the Best Estimate gross Prospective Resources (un-risked) in the northwest field extension area, which appears to be significantly higher pressure. The Company holds a 100% working interest in the field.
Mtsare Khevi Field
The Mtsare Khevi Field is located in the western portion of Block 12, with multiple Upper Pliocene sandstone reservoirs of the Akchagil formation situated at depths between 200 and 1,100 meters. A large number of shallow wells were drilled following field discovery in the 1960’s, although there was very little production. Five wells were known to be on production during 1989 to 1994, but there has never been a coherent development plan for the field and total production is reported to be less than 30,000 barrels. Some gas is present in the field, mainly on the crest although there is no clearly defined gas cap.
Since 2008, the Company has been implementing a re-development plan designed to bring the field back to significant production levels. A well workover program was followed by a total of 18 new wells drilled into the Akchagil reservoir, and frac completions have been used to improve well deliverability. A program to install Progressive Cavity pumps in the field, replacing the traditional sucker rod pumps, was completed in March 2011 and early results show a reduction in downtime and operating costs. Current production is around 90 barrels of oil per day from a total of 14 wells. Twenty new well locations have been identified, targeting both oil and gas reservoirs and providing for some pressure support through three proposed water injection wells. A previously disclosed infrastructure project designed to initiate gas sales from shut in wells within the field is now on track for implementation.
The NSA (2010) independent assessment identifies approximately 15 million barrels of OOIP and 2.6 billion cubic feet of original gas in place (OGIP) in the field (gross Best Estimate numbers). Primary oil recovery is again quite low, although gas recovery of about 60% is anticipated; NSA accordingly assigns 1.4 million barrels and 0.516 billion cubic feet as Best Estimate gross Contingent Resources, with an additional 0.7 million barrels and 1.017 billion cubic feet as the Best Estimate gross Prospective Resources (un-risked) in the northwest part of the field which is thought to be prospective mainly for gas.
These assessments are generally consistent with the Company’s internal estimates for the Akchagil formation, although the Company’s estimates reflect additional resource potential along the northwest trend of the fault block, which NSA was not asked to evaluate.
Taribani Field Unit
The Taribani Field is a large, under-developed oil field covering an area of approximately 80 square kilometers on the southern side of Block 12, with up to 12 productive horizons situated in Pliocene and Miocene age reservoirs at depths between 2,200 and 3,500 meters. The field, which has been known since the 1930s, has been penetrated by 41 wells drilled during the Soviet era, but production has been very poor due to inadequate drilling and completion practices. Around 550,000 barrels have been produced from the field to date; current production is 38 barrels of oil per day from 5 wells.
The Company has acquired a significant seismic database over the field, including 2D and 3D data, and has drilled three new wells in the field as the initial steps in its re-development of this asset. The Dino #2 and T #45 wells were originally completed with first-generation fracs in the field, and these results along with analysis of more recent frac results from the nearby Mirzaani Field, have resulted in the re-design of future frac completions for the Taribani Field. Ten new well locations have been identified for the next campaign of development drilling, along with the re-entry and recompletion of the three Frontera-drilled wells, targeting reservoir Zones 9, 14 and 15.
Taribani is known to be a very large oil accumulation with around 788 million barrels OOIP independently assessed by NSA (2005) for Zones 9, 14, 15 and 19. Recoveries are expected to be somewhat higher in these deeper reservoirs and NSA assigns a 15% recovery factor giving “Technical Possible Reserves” of 118 million barrels for the field, contingent upon declaration of commerciality and approval of a development plan, among other factors. An additional 36 million barrels are assessed as un-risked Prospective Resources in five deeper zones in the field.
Basin Edge Play Unit
Ongoing analysis has continued associated with a recent remapping project relating to the Basin Edge “A”, “B” and “C” prospects. Of note, relating to this analysis, new well locations have been identified for the continued future appraisal and exploration of these prospects. Additionally, an effort is underway to seek a strategic partner for the continuation of exploration efforts.
The Basin Edge Play Unit is located along the northern border of Block 12 and represents what the Company believes is one of the newest and potentially most prolific exploration plays in the Upper Kura Basin, with very large potential structures in Cretaceous carbonate reservoirs. In 2005, NSA estimated total unrisked prospective resource potential to be in excess of 680 million barrels within the primary Cretaceous and secondary Miocene (Sarmatian) reservoir targets of two major prospects in the play (“B” and “C”).
Shale Gas Play Unit
Since the completion of a study last year that resulted in the identification of significant liquids and gas prospectivity associated with the Maykop shales within Block 12, work has continued to advance this opportunity. Work to date has resulted in the identification of a prospective area encompassing approximately 2,000 square kilometers where potentially significant quantities of natural gas and liquids could be exploited from the regionally present Oligocene-Lower Miocene age Maykop shales and Mesozoic age Liassic shales. Potentially similar to extensive natural gas shale plays in North America and Europe, study work to further define the play’s prospectivity continues. The Company’s internal estimates indicate over 1 trillion cubic feet of recoverable gas reserves and up to 500 million barrels of oil potential associated with the play. The next phase of planned work includes an independent assessment of these internal prospectivity estimates.
Year Ending 31 December, 2010
For the year ending 31 December, 2010, Frontera incurred a net loss of $63.9 million, or $0.48 per share on a fully-diluted basis. This loss compares to a net loss of $28.5 million, or $0.31 per share for the fiscal year 2009. The increase in the net loss reported is due to a $44.6 million impairment charge due to compliance with exploration and production ceiling test requirements.
Revenues from crude oil sales for 2010 were $8.3 million, compared to $4.1 million during the same period in 2009. The increase was attributable to increases in sales volume in the 2010 period, as well as an increase in the price of Brent oil.
Operating expenses were $61.1 million in 2010, an increase of $39.0 million from $22.1 million in 2009, primarily due to an impairment provision attributable to the 2010 ceiling test write-down with no like adjustment in the 2009 period. Field operating costs increased $0.9 million in 2010, mainly due to higher oil production levels. General and administrative expenses decreased $5.0 million to $9.9 million for 2010 from $14.9 million in 2009. The decrease was generally due to a series of cost cutting measures instituted in 2010, primarily related to headcount reductions in Georgia and Houston.
Total other expenses increased to $11.0 million in 2010 from $10.6 million in 2009. The $0.4 million increase is primarily attributable to a $3.0 million increase in interest expense, partially offset by a $0.9 million increase in derivative income and a $1.9 million increase in “other”, mainly attributable to a gain on the extinguishment of debt in 2010.
The Company’s consolidated financial statements for the fiscal year ending 31 December 2010 contained an explanatory paragraph regarding the Company’s ability to continue as a going concern in its report of independent auditors. The Company’s ability to continue as a going concern is discussed in more detail in Note 2 to the financial statements. Additional disclosure and financial information about the Company, including the audited financial statements of the Company as of 31 December 2010, can be found at www.fronteraresources.com.
Corporate Transactions Announcement
The Company has today also announced a series of transactions designed to significantly reposition the Company to facilitate the execution of its business plan, including the redomicile of the Company to the Cayman Islands, the conversion of a significant portion of Frontera’s convertible debt securities and management debt for shares, and an equity placing of new shares to raise approximately £6.8 million (US$11 million) before expenses (the “Proposals”). Full details of the Proposals are contained in a separate Frontera announcement made simultaneously with this announcement and also available on the Company’s website at www.fronteraresources.com.
Frontera Resources Corporation
Vice President, Investor Relations and Corporate Communications
Strand Hanson Limited
James Harris/Andrew Emmott/Paul Cocker/Liam Buswell
+44 (0)20 7409 3494
Arbuthnot Securities Limited
Richard Johnson/Adam Lloyd
+44 (0)20 7012 2000
Old Park Lane Capital Plc
Michael Parnes/Luca Tenuta
+44 (0)20 7493 8188
Tim Thompson/Ben Romney
+44 (0)20 7466 5000
Notes to editors:
1. Frontera Resources Corporation is an independent Houston, Texas, U.S.A.-based international oil and gas exploration and production company whose strategy is to identify opportunities and operate in emerging markets around the world. Frontera Resources Corporation shares are traded on the London Stock Exchange, AIM Market – Symbol: FRR and via the Over-the-Counter Market, U.S.A. – OTC Symbol: FRTE. For more information, please visit www.fronteraresources.com.
2. Information on Resource Estimates: The contingent and prospective resources estimates in this announcement for Mirzaani and Mtsare Khevi Fields were determined by the independent consulting firm of Netherland, Sewell & Associates (NSA) in 2010 in accordance with the definitions and guidelines set forth in the 2007 Petroleum Resources Management System (PRMS) adopted by the Society of Petroleum Engineers (SPE). Contingent resources are those quantities of petroleum which are estimated, as of a given date, to be potentially recoverable from known accumulations but for which the applied project(s) are not yet considered mature enough for commercial development due to one or more contingencies. Contingent resources estimates in this announcement for Mirzaani Field are contingent solely upon demonstration of the economic viability of the project and an approved development program. If this issue is resolved, some portion of the contingent resources may be reclassified as reserves. Prospective resources are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from undiscovered accumulations by application of future development projects. The reserve estimates in this announcement for Taribani Field and the prospective resources estimates for the Basin Edge Play Unit were determined by NSA in 2005. The full reports of NSA are available atwww.fronteraresources.com.
3. This release may contain certain forward-looking statements, including, without limitation, expectations, beliefs, plans and objectives regarding the potential drilling and construction schedule, well results, debt restructuring and financing transactions and other matters discussed in this release, as well as reserves, future drilling, development and production. Exploration for oil is a speculative business that involves a high degree of risk. A number of factors could cause developments to differ materially from those expressed or implied by the forward-looking statements including, without limitation, risks inherent in oil and gas production operations; availability and performance of needed equipment and personnel; the Company’s ability to raise further capital to fund exploration and development programs; seismic data; evaluation of logs, cores and other data from wells drilled; inherent uncertainty in estimation of oil and gas resources; fluctuations in oil and gas prices; weather conditions; general economic conditions; the political situation in Georgia and relations with neighboring countries; and other factors listed in the Company’s financial reports, which are available at www.fronteraresources.com. There is no assurance that the Company’s expectations will be realized, and actual results may differ materially from those expressed in the forward-looking statements.