Frontera Resources Corporation Reports 2006 Interim Results and Provides Operations Update
Frontera Resources Corporation Reports 2006 Interim Results and Provides Operations Update HOUSTON, TEXAS, USA, September 14, 2006 ? Frontera Resources Corporation (London Stock Exchange, AIM Market ? Symbol: FRR), an international oil and gas company pursuing exploration, development and production opportunities in the Greater Black Sea Region, today announced its results for the six-month period ended June 30, 2006 and provided an update on its operations.
Taribani Field Unit
- Began a planned three-well drilling program to re-enter existing wells in the Taribani Field where recoverable reserves are believed to be approximately 140 million barrels.
- Horizontal drilling and testing completed at the first well, the Dino #2, validated several important elements of Frontera’s field model regarding commercial viability.
- Objective reservoirs were found to be highly pressured and fractured, as well as thicker, higher in porosity and more numerous than originally estimated.
- Extended production testing yielded good quality 38 degree API oil, while challenged with sediment obstruction.
- Completion program for wells to be redesigned to overcome sediment challenge.
- Further drilling postponed pending successful completion program redesign.
- Company remains confident that challenges can be overcome with a return to operations later this year or early next year.
- Processed, interpreted and integrated new seismic data acquired in 2005 into our existing mapping of the field. This data revealed a larger structure than previously thought and identified a new prospect
lead to the southwest of the Taribani Field.
Basin Edge Play Unit
- Advanced key studies related to the 350 kilometers of new 2D seismic data over the Basin Edge Play Unit’s “B” and “C” prospects where unrisked recoverable reserves are estimated to be in excess of
1 billion barrels.
- Successfully completed acquisition of a new 80-square kilometer, 3-D seismic survey over the Basin Edge Play Unit’s “C” prospect to further define a large, independent four-way structural closure of pproximately 55 square kilometers.
- Completed acquisition and began interpretation of approximately 170 kilometers of 2-D seismic data over the Basin Edge Play Unit’s “B” prospect.
- Advanced an environmentally important multi-year hydro-geologic study designed to assess ground water quality in the vicinity of Basin Edge Play Unit prior to commencement of drilling operations in
Mizraani Field Area Exploration Unit
- Completed interpretation of 105 kilometers of 2-D seismic data acquired in 2005 to further delineate mapped prospects beneath the Mirzaani Field.
- Interpretation revealed a larger than originally mapped structure with potential reserves believed to be in excess of 50 million barrels.
- Confirmed and further delineated a second prospect called the Mirzaani South Prospect.
- Selected a drilling location for the Mirzaani Deep Prospect in 2007.
Mirzaani Field Area Production Unit
- Profitable production continued.
- Options to increase productivity of the field are being evaluated. If successful, could lead to development of large undeveloped portions of the field and two other undeveloped nearby fields.
Block 12 Area-Wide Field/Prospect Inventory Development
- Continued development and prioritization of extensive inventory of prospects within Block 12, consisting of 19 identified prospects and leads and five undeveloped fields.
- Balance sheet remains strong to carry out planned drilling programs at Taribani Field Unit and Basin Edge Play Unit.
- Reported a net loss of $5.0 million, or $0.09 per share on a fully diluted basis, for the period ending June 30, 2006.
- Net loss includes $1.6 million non-cash charge related to expensing of stock options.
- Commenced initiative to seek and evaluate new venture growth opportunities throughout the Greater Black Sea Region.
- Announced and pursuing enforcement of an award of $1.2 million plus interest against the State Oil Company of the Azerbaijan Republic (SOCAR).
Steve C. Nicandros, Chairman and Chief Executive Officer, commented:
“The results achieved from operations within each of our business units this year have continued to encourage us and confirm our assumptions regarding these individual areas of prospectivity within Block 12. The information we have obtained has brought Frontera closer to its goal of establishing commercial production from the four business units that represent only a portion of the company’s very large portfolio of opportunities in Block 12. We remain confident that our technically prudent and steady approach will place Frontera Resources in an ever-stronger position to tap the significant value that we have identified in Block 12 and the Greater Black Sea Region.”
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 has operated in Georgia since 1997 where it holds a 100 per cent 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. For more information, please see www.fronteraresources.com.
This release contains certain forward-looking statements, including, without limitation, expectations, beliefs, plans and objectives regarding the potential transactions, potential drilling schedule and ventures discussed in this release, as well as reserves and future production. Among the important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are future exploration and development results, availability and performance of needed equipment and personnel, the final results of the processing of seismic data, fluctuations in oil and gas prices, weather conditions, general economic conditions and the political situation in Georgia and neighboring countries. 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.
The common shares of Frontera have not been registered under the U.S. Securities Act of 1933. Transfer of these securities is prohibited, except in accordance with the provisions of Regulation S, pursuant to registration under the U.S. Securities Act, or pursuant to an available exemption from registration. Hedging transactions involving these securities may not be conducted unless in compliance with the U.S. Securities Act.
Neither this document nor any attachment hereto shall constitute an offer to sell or the solicitation of an offer to buy the Company’s securities in any jurisdiction in which such offer is unlawful, including the United States.
The reserve information herein was determined by the independent consulting firm of Netherland, Sewell & Associates in accordance with the petroleum resource definitions adopted by the Society of Petroleum Engineers (SPE), World Petroleum Council (WPC) and the American Association of Petroleum
Geologists (AAPG) in 2000.
Frontera Resources Corporation
Vice President Investor Relations and Corporate Communications
Citigate Dewe Rogerson (+44 207 638 9571)
Analyst enquiries: Nina Soon
Media enquiries: Martin Jackson/George Cazenove
Chairman and Chief Executive Officer’s Statement
The following statement was made to Frontera’s shareholders in a letter dated September 14, 2006 from Steve C. Nicandros, Chairman and Chief Executive Officer. A full copy of this letter can be downloaded
from Frontera’s website at www.fronteraresources.com:
Dear Fellow Shareholder:
As we approach the end of the third quarter of 2006, I am writing to update you on our company’s progress, as well as to provide you with our mid-year financial results for the period ending June 30, 2006. For your convenience, you can also access a copy of this letter together with our interim financial report on our website at: www.fronteraresources.com.
During the first half of 2006 and since my last letter to you of June 26th, I am happy to report that Frontera continued to make progress on its various exploration and development initiatives. The results achieved from operations within each of our business units this year have continued to encourage us and confirm our assumptions regarding these individual areas of prospectivity within Block 12. At the Taribani Field Unit drilling operations achieved a measure of success, while also revealing new production engineering challenges. Even though we continue to be confident that these challenges can be successfully addressed, they have caused us to temporarily slow down the pace of our drilling while we develop solutions for implementation in
future drilling at this large undeveloped oil field. At the Basin Edge Play Unit, a new 80 square kilometer 3D seismic survey successfully revealed more confirming detail of a very substantial oil prospect for which drilling preparations are currently underway. These results, together with progress from our investments at the Mirzaani Field Area Exploration and Production Units, have brought us closer to our goal of establishing commercial production from the four business units that represent only a portion of our very large portfolio of opportunities in Block 12.
You will note from the attached interim financial results for this year that we continue to pursue our work in four business units within Block 12 with a strong balance sheet. In addition, we continue to work on the balance of this 5,060-square kilometer license area in eastern Georgia in order to advance prospecting on our extensive remaining inventory of five undeveloped fields and nineteen prospects and leads. From this inventory, future business units will emerge to capture the additional reserve potential that we have identified throughout our massive license area, an area that is equal in size to some 250 blocks in the U.S. Gulf of Mexico or approximately 25 standard blocks in the U.K. North Sea.
Finally, amidst a strong oil price environment, we have commenced a new ventures initiative to broaden and grow our company’s exposure to opportunities in an area that we refer to as the Greater Black Sea Region. This area, anchored by our current position in Georgia, has been strategically highlighted as an area of focus to pursue opportunities in oil and gas basins that build on Frontera’s extensive technical experience in the Kura Basin where our current work in Georgia has been focused and where we had a significant effort in the country of Azerbaijan in past years.
We believe this historical work in the Kura Basin provides us with a unique advantage in identifying and understanding technically similar and meaningful opportunities that will build on our success in Georgia and allow us to grow our company throughout this area in the years ahead. Hand in hand with this initiative, we are investigating ways to further strengthen our balance sheet in a manner that is intended to be accretive in value to our shareholders in order to accelerate our work throughout Block 12 as well as to pursue new ventures.
A detailed update of our progress in each of our business units within Block 12 in Georgia follows below, together with a summary of our interim financial results for 2006.
TARIBANI FIELD UNIT
Drilling Operations: In February 2006, Frontera began a three-well drilling program to reenter existing wells in the Taribani Field to determine whether sustainable commercial production could be established from undeveloped oil bearing horizons. Frontera believes targeted horizons can be effectively developed and produced with the use of conventional horizontal drilling, completion and associated production engineering techniques the company has tailored specifically for the Taribani Field. Our plan was to collect extensive data and production testing results from the three-well program that would collectively provide Frontera with the necessary technical data to determine whether the Taribani Field can be commercially developed.
In April 2006, horizontal drilling operations were completed at the first well, the Dino #2. This well was designed to evaluate multiple horizons within the field, with a primary objective of a final horizontal completion into Zone 15 at a total vertical depth of approximately 2,700 meters. Once the horizontal portion of the well was completed, an extended testing program commenced on the Dino #2, which continued through the end of August.
To date, information obtained from the Dino #2 well has validated several important elements of Frontera’s field model regarding commercial viability of the Taribani Field. Specifically, data has confirmed: (1) Frontera’s ability to drill a horizontal well successfully into the over-pressured reservoirs that exist within the field; (2) the presence of fractures in Zones 9, 14 and 15; (3) that the orientation of reservoir fracture systems can be successfully encountered via horizontal drilling methods; (4) matrix porosities in Zones 9, 14 and 15 are higher than originally projected in the company’s third party reservoir engineering assessments, thereby verifying a larger hydrocarbon storage capability for the target reservoirs; and, (5) objective reservoirs were
thicker and more numerous than originally estimated.
Because of a better than expected reservoir section that was encountered at Zone 14, we completed and tested both Zones 14 and 15 together. During the testing program, bottom-hole pressure was observed to be approximately 6,800 psi, thereby confirming excellent reservoir energy. Conservative drawdown parameters were employed in order to avoid artificial stimulation of sediment influx from reservoir formations into the well bore. When testing with drawdowns from 300 psi to 800 psi, the well initially flowed approximately 80 bbls per day of light, 38 degree API oil with minor amounts of associated gas on a 4/64th inch choke.
We were encouraged by these results because our reservoir models indicated that the well was capable of higher flow rates as we increased drawdown rates. This, coupled with the frequent oil and gas flows that we experienced during horizontal drilling operations while utilizing heavy 17+ pound per gallon mud weights, provided important confirmation of certain assumptions in our reservoir engineering models. However, despite this encouragement, the extended production testing program proved to be challenged with sediment obstruction in the well bore that interrupted sustainable production from the well and, therefore, required frequent cleaning.
Over the course of the extended testing program, sediment obstruction was observed to be a new challenge that we currently attribute to our well-completion procedures and design that we believe can be solved. Pending completion of ongoing engineering analysis, we believe that we have experienced a situation whereby we have not been able to successfully clean the well prior to commencing testing operations. Heavy drilling mud, residual cuttings from the drilling process and formation sediment has remained in the horizontal portion of the well, thereby impeding flow rates and acting as an obstacle to production. To this end, we are now designing a solution for the Dino #2 well and a new well-completion design for our future wells to overcome these occurrences as we evolve our understanding of how to successfully complete and sustain production from Zone 14/15 reservoirs.
Upon finishing drilling operations at the Dino #2 well, drilling commenced at Well #23 on May 30th with an objective of a Zone 9 horizontal completion. Prior to drilling, core samples and logs were taken from Zone 9 at the nearby Dino #2 location for the sole purpose of confirming properties for this target reservoir. These cores and logs revealed fractured, oil saturated sandstones in excess of 20 meters in thickness. Two attempts were made to sidetrack from the existing well. However, due to the poor integrity of the thirty nine year old well bore, the casing collapsed during sidetrack operations. As a result, we temporarily suspended operations at the Well #23 location due to the risk of further failure associated with continued attempts to utilize the old well. Instead, we will drill a new well from this location to reach the same Zone 9 objectives. Drilling will recommence once long lead time materials that were not on hand for a new well can be procured and delivered.
In light of the challenges observed during the extended testing program at the Dino #2 well, we postponed the third well, the Niko #1 reentry/sidetrack, in order to allow adequate time to fully incorporate the evolving new completion design changes in this well, as well as at Well #23.
Seismic Operations: During 2005, the company successfully acquired 60 kilometers of 2D seismic over the south-western portion of the Taribani Field. The southwest area of the field is situated approximately 900 feet updip from the area of the field where our current drilling operations are currently underway. During the first half of 2006, this new seismic data was processed, interpreted and integrated into our existing mapping of the field. This data revealed a larger structure than previously thought and identified a new prospect lead to the southwest of the Taribani Field.
Overall, we remain encouraged by the data gathered from our operations to date and we are committed to integrating our learning in a smart manner. We are attempting to solve the engineering challenges as quickly as possible so that we might return to down-hole operations as early as the fourth quarter of this year or, depending on the redesign solution we choose, early next year.
Despite the delay we are experiencing in our work program, it is important to keep in perspective the size of the value objective that we are moving closer to achieving in this large oil field. To this end, since our inception of work at the Taribani Field, we have expended approximately $0.50 per barrel in “finding cost” in order to prove commerciality of the approximately 140 million barrels of oil that we believe to be recoverable. Considering that the industry spends an average of approximately $9.00 per barrel to find a commercial field of this size, our historical spending to address the challenges in the Taribani Field has been comparatively low. As a result, we remain confident that the issues related to developing this field can be resolved and further investment is warranted to achieve commerciality.
BASIN EDGE PLAY UNIT
In June, Frontera successfully completed acquisition of a new 80 square kilometer 3-D seismic survey over the Basin Edge Play Unit’s “C” prospect. Processing and interpretation of this new seismic survey has revealed a large independent four-way structural closure of approximately 55 square kilometers in size and is currently being integrated with our existing database for this sizeable prospect in order to select drilling locations this fall. Drilling of the first well at the “C” prospect is expected to commence during the first half of 2007.
During the first half of 2006, Frontera also completed acquisition of approximately 170 kilometers of 2D seismic data over a second large prospect within the Basin Edge Play Unit, known as the “B” prospect. Interpretation of this data is currently underway.
Finally, as we prepare to commence drilling operations, we continued to advance an environmentally important multi-year hydro-geologic study that is designed to assess ground water quality in the vicinity of the Basin Edge Play Unit, as well as the region in general. The goals of the study are to: (1) Conduct a baseline ground water quality environmental assessment of 130 water wells and natural springs in the eastern portion of Block 12 ahead of commencing planned drilling operations next year (we will continue to monitor these wells in the future); (2) Determine direction of ground water flow in the region; (3) Determine ground water chemistry and map the location of any pre-existing pollution in the ground water system; (4) Provide water for local use and for the planned drilling operations; and, (5) Determine the reservoir drive mechanism for prospects associated with the Basin Edge Play Unit. The project began in 2005 and is being conducted with the support of project team members from Penn State University in the U.S. and the Georgian Geologic Institute of Tbilisi.
Frontera’s objectives within the Basin Edge Play Unit remain focused on commercially accessing the unrisked resource potential that is estimated to be in excess of one billion barrels of oil for the “B” and “C” prospects by the independent consulting firm of Netherland, Sewell and Associates. These hold Jurassic, Cretaceous and Tertiary age reservoir objectives.
MIRZAANI FIELD AREA EXPLORATION UNIT
In 2005, approximately 105 kilometers of 2D seismic were acquired over identified prospects that are situated below discovered fields within the Mirzaani Field Area Exploration Unit. Processing and interpretation of this new data was completed earlier this year and further evolved our mapping of one of these prospects in greater detail, the Mirzaani Deep Prospect. This evolution revealed a larger prospect than previously mapped such that Frontera now believes unrisked recoverable reserves may be in excess of 50 million barrels of oil.
The Mirzaani Deep Prospect sits below the existing Mirzaani Field that is currently on production from shallower reservoirs. Frontera’s new interpretation indicates that the same “hanging wall” fault that sets up the shallow field also creates the deep prospect and is a part of the same petroleum system. New mapping has revealed a better defined prospect with more independent closure than originally hypothesized. The primary objectives for this prospect lie within the marine section of the Upper Miocene age interval at a depth of approximately 2,500 meters. Well planning and design is targeting not only these primary deep objectives, but will also evaluate the shallow Pliocene age interval.
Our interpretation of the new seismic data acquired to the south of the Mirzaani Field also confirmed a previously identified feature called the Mirzaani South Prospect. This structure is in the “foot wall” of the same fault that sets up the Mirzaani Deep Prospect and the shallower Mirzaani Field. The main objectives for this prospect are fluvial sandstones associated with the Pliocene interval, a potential look-alike to the currently producing Mirzaani Field. The Mirzaani South Prospect will remain in our inventory for future drilling.
A drilling location has been selected to test the Mirzaani Deep Prospect in 2007. Other similar prospects are believed to be on trend with the Mirzaani Deep Prospect and remain the focus of ongoing geological and geophysical work within this business unit.
MIRZAANI FIELD AREA PRODUCTION UNIT
During the first half of 2006, operations within the Mirzaani Field Area Production Unit continued to yield an average daily production rate of approximately 90 barrels per day of oil from wells that range from 800 to 1,500 meters in depth. This production comes from one of three fields within this business unit. While this volume is not significant in terms of our long-term strategy, Frontera operates this field at a profit and expertise gained from the operations will be valuable when we develop and produce future fields in Block 12.
As a result of studying the shallow Pliocene age reservoirs that transcend the Mirzaani Field Area Production Unit, the Mirzaani Field is currently under consideration for pressure maintenance and enhanced oil recovery to see if it is possible to increase production from this low-reservoir-energy field. With success in implementing such a program, Frontera has identified large undeveloped portions of this field and the two other undeveloped fields within this unit that will be candidates for future development drilling.
BLOCK 12 AREA-WIDE FIELD/PROSPECT INVENTORY DEVELOPMENT UNIT
In addition to our work at the four business units already described, we continued to develop and prioritize our extensive inventory of prospects and leads throughout Block 12. Today, in addition to our primary areas of focus, our block inventory consists of 19 identified prospects and leads and five undeveloped fields. From this area outside of our existing business units
new opportunities will emerge from our inventory and future business units will be formed with the potential to capture additional reserves from within Block 12. We hope that our ongoing technical studies and data gathering throughout this area will allow us to create a “conveyor belt” of highly prospective drilling opportunities for many years to come.
Financial Review. For the six months ending June 30, 2006, we incurred a net loss of $5.0 million, or $.09 per share on a fully-diluted basis. This loss compares to a net loss of $2.8 million, or $0.08 per share for the first six months of 2005. The increase in the net loss reported is due primarily to higher operating expenses and lower other income in the first half of 2006. Below is a comparison of the six month periods ending June 30 for 2005 and 2006.
Revenues from crude oil sales during the first six months of 2006 were $0.8 million, an increase of $0.4 million from $0.4 million during the same period last year. The increase in revenues was primarily attributable to higher oil prices realized this year.
Operating expenses were $6.6 million during the first six months of 2006, an increase of $1.4 million from $5.2 million in 2005. Both periods include one-time charges that caused general and administrative expenses to be higher than normal. In 2006, we incurred a $1.6 million noncash charge related to the expensing of stock options in accordance with provisions of SFAS 123R. Last year, expenses included non-recurring costs related to Frontera’s IPO and arbitration proceedings with SOCAR. Excluding these charges in both periods, general and administrative expenses increased by $0.7 million this year owing to additional costs associated with being a public company and the ramp-up of our drilling and seismic operations work programs in Georgia.
Other income of $0.8 million during the first six months of 2006 decreased $1.3 million from $2.1 million in 2005. The decrease was largely attributable to a $2.9 million gain in 2005 from retiring a portion of the long-term debt at a discount. Partially offsetting this gain was an increase of $0.5 million in interest income in 2006 from investing cash balances and the reduction in interest expense of $1.1 million as a result of a significant portion of the long-term debt being repaid in 2005.
Looking forward, we have a strong balance sheet with $38 million in cash and marketable securities with only $3.5 million in long-term debt. In addition, we had 13,500 barrels of oil in storage, worth approximately $0.75 million, at June 30. While the cash balances should be sufficient to carry out our drilling programs for the Taribani Field and Basin Edge Play Units in 2007, we are investigating ways to raise additional funds to accelerate work in our other operating units and pursue new ventures outside of Block 12. We will keep you informed on any developments in the coming months.
SOCAR Arbitration. In January 2006, we announced that our wholly owned subsidiary, Frontera Resources Azerbaijan Corporation, was awarded $1.2 million plus interest from 2000 until payment is made in connection with its binding arbitration case with SOCAR, the State Oil Company of the Azerbaijan Republic. The arbitration was held in Sweden and is binding on the parties under the rules of UNCITRAL, the United Nations Commission on International Trade Law.
As you will recall, Frontera initiated the arbitration against SOCAR in October 2003 related to claims resulting from SOCAR’s halting of exports from the onshore Kursangi & Karabagli oilfields in the Azerbaijan Republic during the fourth quarter of 2000.
The arbitral panel found that the halting of exports of crude oil from the Kursangi & Karabagli oil fields in the Azerbaijan Republic was in violation of the Agreement on Rehabilitation, Exploration, Development and Production Sharing between SOCAR, Frontera, Delta/Hess and SOCAR Oil Affiliate (the “PSA”). The arbitration panel rejected all other claims and counterclaims between the parties and the arbitration therefore resolves all claims between Frontera and SOCAR with respect to the PSA.
In February 2006, Frontera Azerbaijan filed an action in the United States District Court, Southern District of New York seeking to enforce the tribunal’s award in the United States. Contemporaneously, SOCAR filed a challenge to the award with the Swedish Court of Appeals. Frontera Azerbaijan does not believe there is any basis for a challenge by SOCAR and will continue to pursue enforcement of the Swedish tribunal’s award.
Shareholder Meetings. On January 16, 2006, the company held an annual meeting of shareholders in Houston, Texas. At that meeting, the company re-elected Steve C. Nicandros, Andrew J. Szescila and Luis E. Giusti as Class II directors to hold office until the 2008 annual meeting. In recognition of its shareholders outside the United States who were unable to travel to Houston in January, the company held a second meeting of shareholders in London, England on June 8, 2006. At this meeting, the company provided shareholders an overview of its results for the 12-months ending December 31, 2005 and an update of the company’s operations. No new material price-sensitive information was presented at this meeting. Beginning in 2007, the company intends to hold its annual meeting of shareholders in May.
Please do not hesitate to contact us should you have any questions about our interim financial report or the details of our progress to date. In the meantime, please know that all of us at Frontera remain confident in the belief that our technically prudent and steady approach to our work programs will place Frontera Resources in an ever-stronger position to tap the significant value creation that we have identified in Block 12 and the Greater Black Sea Region. Thank you for your continued confidence and support.
Steve C. Nicandros
Chairman and Chief Executive Officer
Frontera Resources Corporation