FRONTERA RESOURCES CORPORATION
Houston, Texas, U.S.A. – 31 January 2012
FRONTERA ANNOUNCES OPERATIONS UPDATE AND ENTRY INTO SEDA-BACKED LOAN AGREEMENT IN SUPPORT OF ONGOING WORK PROGRAMS
Frontera Resources Corporation (London Stock Exchange, AIM Market, FRR), the oil and gas exploration and production company with assets in the country of Georgia, today announces an update of operations across its Block 12 portfolio, as well as the entry into a Stand-by Equity Drawdown Agreement (“SEDA”)-Backed Loan Agreement (the “Loan Agreement”) with YA Global Master SPV Ltd.
- Mtsare Khevi Field operations focused on accelerating gas exploitation.
- New drilling at Mtsare Khevi Field encounters potentially large extension of the field’s oil resources.
- Gas sales expected in Q2 of this year, following the construction of gas sales infrastructure.
- Taribani Field study completed, with plans underway to commence the re-entry, sidetrack and completion of the Niko #1 well in Q3 of this year, subject to availability of capital.
- Mirzaani Field study work underway prior to completion of #5 well.
- Continued access to capital secured via the Loan Agreement enhances the Company’s availability of capital for investment.
- Currently producing approximately 220 barrels of oil per day (bopd), with a further 300 barrels equivalent (boepd) of shut-in gas awaiting infrastructure.
Mtsare Khevi Field
Drilling Expansion of Mtsare Khevi Field Continues
Following completion of testing operations associated with the Mtsare Khevi #32 well in November, development and appraisal drilling has continued with the Mtsare Khevi #41, #35 and #33 wells. All three wells completed drilling operations to total depths of approximately 400 meters and are currently undergoing various stages of evaluation and production testing operations. The objective is to continue to delineate/produce oil and gas reservoirs associated with Zones I, II and III within the southeastern and northwestern portion of the Mtsare Khevi Field.
Wells #41 and #35 perforated 10 and 12 meters, respectively, of oil bearing sands. Well #41 produces 16° API oil while well #35 contains 11° API oil. Of note, well #35 discovered what is believed to be a potentially large extension of the field’s oil reserves in the NW area. As both of these wells encountered a heavier oil quality, selection of appropriate production engineering design is underway to maximize production from these and future wells related to this potentially large new resource. Well #33, situated approximately one kilometer northwest of the #32 gas discovery, is currently being evaluated and is expected to provide further confirmation of gas and oil resources in this undrilled portion of the field. Once operations are completed at the #33 well over the next few weeks, drilling will move to the #36 location in order to extend field delineation to the northwest.
Gas Sales Expected to Commence in April 2012
In parallel, plans for installation of gas sales infrastructure continues to progress. Engineering design work has been completed and procurement will shortly commence for the construction of gas gathering facilities and an approximate eight kilometer pipeline connecting Frontera’s currently shut-in gas reserves to a local sales point. This work, for which capital is available, is currently projected to be completed in April 2012 to commence gas sales.
Current oil production from the Mtsare Khevi Field is approximately 75bbls per day of oil, with wells #41 and #35 being brought into production. In addition, shut-in daily gas production that awaits installation of sales infrastructure currently stands at approximately 57,000 cubic meters per day (2 million cubic feet per day). With current continuous drilling plans, gas production is expected to increase as this year progresses.
Mstare Khevi Field Resources Estimates
The Mtsare Khevi Field, which Frontera operates with 100% interest, is located in the western portion of the Shallow Fields Production Unit. In their July 2010 report for the Company, the independent engineering firm of Netherland, Sewell & Associates (“NSA”) places a “Best Estimate” for gross original gas-in-place for the Mtsare Khevi Field of 2.6 billion cubic feet, with a “low”-to-“high” range of 2.1–3.1 billion cubic feet; and a “Best Estimate” for associated gross contingent and unrisked prospective resources of 1.5 billion cubic feet, with “low”-to-“high” range of 1.2-1.9 billion cubic feet. Frontera’s internal estimates are higher and reflect additional resource potential along the northwest trend of the field’s fault block which the Company believes have now been confirmed by well #32. NSA will be asked to this year evaluate Frontera’s assessments for this area once additional appraisal drilling has been completed during the current campaign.
For oil, NSA places a “Best Estimate” for gross original oil-in-place for the Mtsare Khevi Field of 14.9 million barrels, with a “low”-to-“high” range of 11.3–19.7 million barrels; and a “Best Estimate” for associated recoverable gross contingent and unrisked prospective oil resources of 2.1 million barrels, with a “low”-to-“high” range of 1.4-3.2 million barrels. Frontera’s internal estimates are higher as a result of recent drilling operations and NSA will be asked to evaluate these estimates once additional appraisal drilling has been completed.
Completion of Frac Design Study at Taribani Field Points to Niko #1 Well Re-entry for Significant Oil Production Increase from the Field
During the fourth quarter of 2011, a study was completed with Schlumberger that analyzed the long term reservoir performance of the Dino #2 and T-#45 wells that today produce approximately 35 bopd by natural flow. These wells were originally completed by Schlumberger with first-generation fracs in the field. These results, along with analysis of frac completions from the nearby Mirzaani Field, have yielded new frac designs for implementation in well re-entries and new drilling operations.
Plans are currently underway to commence operations at the field, subject to funding being available from operating cash flow and external sources of finance, with the re-entry, sidetrack and frac-completion of the Niko #1 well later this year as part of a new campaign of development drilling to target reservoir Zones 9, 14, 15 and 19 within the field. When Frontera originally drilled the Niko #1 well, it flowed at a peak rate of 960 bopd and produced 5,345 barrels during its forty day production test. However, production was suspended as a result of sediment flow from behind the casing due to a poor cement job and a failed packer. Today, reservoir performance modelling by Frontera from this planned sidetrack and re-completion operation predicts a “most-likely” case of approximately 1,000 bbls per day.
Taribani Field Resources Estimates
Taribani Field is a very large oil accumulation with 788 million barrels OOIP independently assessed by NSA (2005) for Zones 9, 14, 15 and 19. NSA assigns a 15% recovery factor giving “Technical Possible Reserves” of 118 million barrels for the field. An additional 36 million barrels are assessed as un-risked Prospective Resources in five deeper zones in the field.
Study Work at the Mirzaani Field in Preparation for New Drilling Operations
At the beginning of the fourth quarter of last year, new operations commenced at the Mirzaani Field with the re-entry of the #1 and #5 wells. In addition, well #2 was evaluated for re-entry operations and a plan was designed to access unperforated reservoir intervals in the well. All of these wells established the presence of large undeveloped areas of the field and were targeted for re-entry operations in order to perforate additional key reservoir sections that were penetrated by each well, as well as obtain new production data. In November, results of this work were incorporated into a comprehensive reservoir engineering study conducted by Schlumberger, designed to identify optimized frac-completions for producing the field’s undeveloped reservoirs. The study is expected to be completed prior to the end of the first quarter.
Schlumberger’s study is re-evaluating results from the three wells which discovered significant northwest (up-dip) and southeast (down-dip) extensions to the field. Analysis of results from the Mirzaani #1, #2 and #5 wells is focused on optimizing frac completion designs, which are expected to significantly increase production rates and enhance the economic value of the field. Pending completion of the current study, the Mirzaani #5 well will be completed ahead of plans for new drilling in the undeveloped, up-dip northwest area of the Mirzaani Field.
Mirzaani Field Resources Estimates
The Mirzaani Field, which Frontera operates with 100% interest, is located in the eastern portion of the Shallow Fields Production Unit amidst a complex of several existing oil fields and currently delivers approximately 90 barrels of oil per day (b/d) from the older and historically developed portion of the field and surrounding areas. Discovered in 1932, the Mirzaani Field has historically produced oil from a small developed portion of the field but contains extensive undeveloped and underdeveloped areas. After acquiring approximately 100 kilometers of new 2D seismic data as part of an effort to re-map and identify new potential associated with the field, Frontera drilled the Mirzaani #1, #2 and #5 discovery and appraisal wells, which were the first wells to be drilled in the field since the Soviet-era.
NSA have assigned a “Best Estimate” for gross original oil-in-place for the Mirzaani Field and Mirzaani Northwest Extension of 541.7 million barrels, with a “low”-to-“high” range of 343.8–857.3 million barrels; and a “Best Estimate” for remaining recoverable gross contingent and unrisked prospective oil resources of 43.8 million barrels, with a “low”-to-“high” range of 20.5–86.1 million barrels. This assessment is consistent with Frontera’s internal estimates.
SEDA-backed Loan Agreement
Frontera has entered into a loan agreement (the “Loan Agreement”) with YA Global Master SPV Ltd, an investment fund managed by Yorkville Advisors LLC (“Yorkville”) which has the potential to provide up to US$3.1 million in cash to the Company in support of ongoing work programs. Frontera believes this is a prudent means to access additional capital for our operations based on our agreements with Yorkville.
Under the terms of the Loan Agreement, Frontera can receive up to US$3,100,000 which shall be advanced in two installments. The first installment of US$1,100,000 (less implementation costs and an implementation fee of US$75,000) (the “Initial Advance”) will be advanced as soon as practicable, with the second installment of US$2,000,000 (less implementation costs and an implementation fee of US$150,000) (the “Further Advance”) being advanced on or about 8 June 2012, subject to the group having achieved certain milestones in its oil and gas production during the period 1 October 2011 to 31 May 2012 and the Company being in a position to give certain warranties and confirmations to Yorkville at that time. In the event that the Further Advance is not available, Frontera will adjust its development plans as appropriate.
Repayments of a portion of the principal, plus interest, of both the Initial Advance and Further Advance (if made) are to be made by the Company every 30 days (commencing 30 days after the date upon which the respective advance is provided to the Company). In any event, both advances are to be repaid in full, with interest, within 360 days of the date upon which each was advanced to the Company.
Under the Loan Agreement, Yorkville has the option to convert such amount as may be outstanding under the Loan Agreement from time to time into ordinary shares of US$0.00004 each in the capital of the Company (“Ordinary Shares”), at a price which is the greater of 4 pence and 200 percent of the average of the volume weighted average price for each of the five trading days prior to the date upon which the relevant advance was provided to the Company.
In respect of the Initial Advance Yorkville has been granted warrants (exercisable within 2 years) to subscribe for 15,000,000 Ordinary Shares at a price of 1.8 pence each. Subject to and upon the Further Advance being provided, Yorkville will be granted additional warrants (also exercisable within 2 years), with the number of warrants being determined in accordance with the Loan Agreement (up to a maximum number of 15,000,000), exercisable at a price per Ordinary Share which is equal to 125 percent of the average of the daily volume weighted average price for the three trading days immediately prior to (and excluding) the date upon which such warrants are granted.
As security for the repayment of the advances, the Company is required to deliver SEDA advance notices, which Yorkville may process in certain circumstances, including a default in making repayments under the Loan Agreement.
The Loan Agreement contains customary events of default and warranties, indemnities and undertakings given by the Company in favour of Yorkville.
The Company and Yorkville have also agreed to an amendment to the SEDA (which was entered into by the Company and Yorkville on 28 June 2011), pursuant to which, amongst other amendments, Yorkville may now be required to subscribe for a minimum of £250,000 (which at today’s conversion rate is approximately US$392,500) of Ordinary Shares upon any given advance request being made by the Company under the SEDA.
Steve C. Nicandros, Chairman and Chief Executive Officer, commented:
“As a result of our good progress from operations during the fourth quarter of last year, Frontera is well positioned to increase production levels, with a clear focus on achieving corporate profitability. Our success at the Mtsare Khevi Field and focus on achieving first gas sales in April will take priority in our near term efforts, followed by planned initiatives to increase revenues from the Taribani and Mirzaani fields this year. Simultaneously, we continue to progress efforts to attract a strategic partner for our Shale Gas Play Unit and Basin Edge Play Unit. With this in mind, I look forward to reporting our continued progress in the weeks and months to come.”
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
+44 (0) 20 7220 0500
Old Park Lane Capital Plc
Michael Parnes / Luca Tenuta
+44 (0)20 7493 8188
Cornhill Capital Limited
Nick Bealer / Stefan Olivier
+44 (0)20 7710 9610
Tim Thompson / Helen Chan
+44 (0)20 7466 5000
Notes to Editors:
About Frontera Resources Corporation
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 currently operates in the country of Georgia where it holds a 100 percent working interest in a production sharing agreement with the government of Georgia. This gives Frontera the exclusive right to explore for, develop and produce oil and gas from a 5,060 square kilometer area in eastern Georgia known as Block 12. Frontera Resources Corporation shares are traded on the London Stock Exchange, AIM Market – Symbol: FRR. For more information, please visit www.fronteraresources.com.
2. Information on Resource Estimates: The contingent and prospective resources estimates contained in this announcement were determined by the independent consulting firm of Netherland, Sewell & Associates (NSA) 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). The full report, dated July 1, 2010, is available at www.fronteraresources.com. Gerard Bono, Frontera’s Vice President and Chief Reservoir Engineer, who is a member of the SPE, is the qualified person who reviewed and approved the statements in this announcement.
3. This release may contain certain forward-looking statements, including, without limitation, expectations, beliefs, plans and objectives regarding the transactions, work programs and other matters discussed in this release. Exploration for oil is a speculative business that involves a high degree of risk. Among the important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are: risks inherent in oil and gas production operations; availability and performance of needed equipment and personnel; the Company’s ability to raise capital to fund its 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 Frontera’s financial reports, which are available at www.fronteraresources.com. There is no assurance that Frontera’s expectations will be realized, and actual results may differ materially from those expressed in the forward-looking statements.