AMGURI – CANORO’S CORE ASSET

Background

On November 27, 2003, the State of Assam granted the petroleum mining lease to the owners of the Amguri Production Sharing Contract (PSC). An amendment to the Amguri PSC recognizing Canoro as a 60% owner and operator of the Amguri PSC was executed in September 2004. Canoro physically took over operations of the Amguri field in November 2004. With the transfer of operations came one producing natural gas well, Amguri 8A. During the year ended March 31, 2006, this well produced natural gas at a rate of 430 thousand standard cubic feet per day (“mcf/d”).

In April 2005, Canoro began its work program for reentering the three suspended wells to re-establish production and test new potential hydrocarbon bearing zones. Work over operations were completed on the first well, Amguri 1. Canoro completed the testing of three potential hydrocarbon zones in this well and temporarily suspended the well as a potential gas producer. The well tested natural gas at rates exceeding 1 mmcf/d. In September, Canoro re-entered Amguri 5 and tested the original producing zone at gross oil rates of 588 barrels per day (“bbl/d”) of 44° API oil and 0.8 mmcf/d of natural gas. Amguri 6 was re-entered and tested next, with gross oil rates of 405 bbl/d of 56° API oil and 2.6 mmcf/d of natural gas. In light of the success of reentries at Amguri 5 and 6, Canoro re-entered Amguri 2 and did not encounter any hydrocarbons. This well has now been converted into a water disposal well.

In July 2007, Canoro announced that the Amguri 10B well encountered a 32 meter thick gas-condensate reservoir at a depth of 2,882 meters to 2,914 meters in the Barail formation. This interval is also approximately 26 meters higher and 12 meters thicker than the same sands in the producing Amguri 6 well. The well tested in two intervals with the lower 13 meter interval being tested first. This interval flowed at a clean-up test rate of 375 bbl/d of 50° API condensate and 1.1 mmcf/d of natural gas through a 12/64 inch choke and tubing head pressure of 2,200 psi with less than 5% BS&W.

In early August 2007, Canoro began drilling operations at the Amguri 11 appraisal location on the Amguri development block. Later that month, Canoro announced that it drilled Amguri 11 through the Barail to a depth of 3327 meters. The well discovered two new reservoirs and the main sand (totaling 65 meters of net pay), and flowed at a total of 1,190 bbl/d of condensate and 12 mmcf/d of natural gas, or 3,190 barrels of oil equivalent per day (“boe/d”).

Key Features of the Amguri PSC
The Company’s interests in the Amguri field are governed by a production sharing contract between the Government of India (“GOI”), Canoro (60%) and its partner, Assam Company Limited (40%). The Amguri PSC contains a number of key provisions in that:

1. It enables the Amguri partners to recover all exploration, development and production costs and expenses incurred (collectively, the “Investment”) in a field or block from the petroleum produced from that field;
2. It establishes formulas for sharing the petroleum produced over and above the amount required for Investment recovery (the “Profit Petroleum”). In the Amguri Field, the GOI is entitled to a 10% net profits interest in the Profit Petroleum once the Company and its partner have recovered 100% of its investment in the block from cash flows from the block. The GOI’s net profits interest increases to a maximum of 35% once 300% of the Investment has been recovered;
3. It grants the Amguri partners the right to market natural gas to third parties at market determined prices;
4. The partners are required to sell crude oil produced to the GOI at international prices;
5. It provides a term of 25 years with provision for the GOI to grant extensions for oil and gas production for such terms as mutually agreed between the parties considering the balance of recoverable reserves;
6. It provides that at the end of the contract life, all of the wells, facilities, and infrastructure equipment associated with a particular block or field be returned to the GOI;
7. A 10% royalty assumed by the natural gas purchaser, payable to the GOI on natural gas production;
8. A combination of royalty and cess payments of 1,455 Indian rupees (“Rs”) per metric tonne of oil (approximately $3.88 per barrel of condensate using an exchange rate of Rs 50 = US$1 as at March 31, 2009) is payable on crude oil production; and
9. It provides that the GOI has the right to terminate the Amguri PSC on 90 days notice upon the occurrence of certain events, including certain breaches of the Amguri PSC by the Amguri partners.

Operational Review

Amguri Production

Amguri (Canoro 60% working interest) production for the Quarter averaged 576 boe/d consisting of 2,579 thousand cubic feet (“mcf”) per day of natural gas and 129 barrels per day (“bbl/d”) of condensate. Production decreased 12% from the comparative quarter in the prior year but increased 12% from the previous quarter. As was the case in Q2 F2010, the reduction in quarterly year-over-year production is due to both a curtailment of condensate volumes to maintain reservoir pressure while the gas injection facility is being constructed, combined with a decreased seasonal demand for natural gas in the region. Quarter-over-quarter, natural gas volumes increased by 12% as seasonal demand increased slightly. Liquids production increased approximately 13% commensurate with the increase in natural gas production.

Subsequent to the end of the Quarter, the Company commissioned the new condensate processing and storage facility at the Moran pipeline terminal. The facility was completed on schedule and under budget. The facility will eliminate third-party processing and storage charges of approximately $4.00/bbl.

Amguri 11 Well-Work-over 

During the Quarter, the Company entered the final preparations for the work-over and dual re-completion of the most productive well in the Amguri field, A-11. Because of its physical proximity to A-11, the A-10B well was shut in during the work-over. A-11 was worked over subsequent to the end of the Quarter to recomplete the existing productive zone, the Main Barail and open up a new zone, the Mid-Barail. Once the condensate recovery and gas re-injection facility is commissioned, the Company intends to produce from the new zone, the Mid-Barail, and inject a portion of produced gas stripped of condensate back into the Main Barail zone to maintain reservoir pressure and maximize condensate recovery. 

The Amguri-11 well work-over was a critical step in the condensate recovery and gas reinjection project providing the necessary re-injection capability into the Main Barail reservoir. The Company successfully removed a bridge plug that had isolated a lower portion of the Main Barail. The well has been cleaned up and testing is ongoing. The re-completion necessary to ultimately re-inject gas has now been successfully put in place. The work-over was completed on 23^rd February 2010 and clean-up and testing commenced. The adjacent A-10B well was also successfully brought back into production after the work-over.

As at the date hereof, A-11 production testing is ongoing and is estimated to be completed in approximately 10 days. The new zone, the Mid-Barail, was tested at three rates (gross 100%), 2.2 mmcf/d, 3.7 mmcf/d and 4.9 mmcf/d on a short-term basis. Currently, the Company is undertaking an extended production test at 3.7 mmcf/d at a flowing tubing head pressure of 2600 psi through a 8mm choke representing a 10% pressure drawdown. At this rate, the well is producing 887 boe/d (gross 100%), being 270 bbl/d of condensate, being a rich gas condensate ratio of approximately 73 bbl/mmcf, as well as 42 bbl/d of water which may include a portion of completion fluids. Whilst there are no clear signs of pressure depletion at this stage, down-hole pressure gauges remain in place and the data is required for a complete analysis of the test. Given the presence of underlying water, the extended rate test is necessary to assess stabilized production levels and determine the potential sustainable production rates from the well.  The successful work-over and dual re-completion of Amguri-11 is a critical milestone on the condensate recovery gas re-injection project.

Amguri Field

Natural Gas Marketing

As was the case in the previous quarter, the Company continued to shut in the A-14 Tipam gas well a result of the continued curtailments in natural gas sales during the Quarter.  Whilst there is competition for longer term gas supply in Assam, through both sales to the state capital Guwahati and power generation, the Company needed to secure increased gas sales volumes in the short term.  During the Quarter, Canoro agreed to principal terms of a gas sales contract to a large public sector company in Assam. The contract provides for sales of 200,000 SCM/d until 31 March 2011 with provisions for extension and is subject to approval by the Government of India and the Company’s joint venture partner.

During the Quarter, the Company participated in a task force commissioned by the state government of Assam to assess the supply and demand for natural gas in Assam, with the specific objective of identifying potential sources of long term gas supply to the state capital Guwahati. The task force submitted an initial report to the state government in January which is now under review. The Company continues to explore all of its options before committing to long term gas sales contracts at what it believes are sub-market prices. Both the Central and state governments in India continue to have a policy emphasis on increasing reliable and environmentally friendly power generation capacity. Given the potential for Amguri to supply a gas-fired power plant, Canoro continued to work towards defining the scope and feasibility of a staged 30-100 megawatt plant at Amguri. The Company continues to receive a number of indications of interest in participation in the equity and debt portion of the project, as well as turnkey supply of equipment, engineering, procurement, construction, commissioning and operations management.

Amguri Condensate Recovery / Gas Re-injection Project

In December, the Company evaluated bid tenders and awarded a contract condensate recovery and gas re-injection plant. The contractor mobilized in February and site preparation is ongoing. Major equipment for the Amguri condensate recovery and gas re-injection project arrived by the end of the Quarter at the port in Kolkata and was delivered to the site by February 2010. Delays occurred in mobilizing the contractor and pressure vessel fabrication which have added approximately six to eight weeks to the schedule, extending the estimated on-stream date to early calendar Q3 2010.

The gas recycling scheme required to maximize recovery of condensate also ensures that optimal condensate volumes can be produced with or without a local gas market as lean gas is re-injected into the reservoir to maximize reservoir pressure and recovery of condensate. Further processing of the natural gas stream has the potential to yield significant quantities of liquid petroleum gas (“LPG”), specifically a mix of butane and propane, for sale to the local markets. Assam is a net importer of these products which are used for cooking gas and industrial applications. Based on preliminary feasibility studies, the LPG plant would add approximately 180 bbl/d to 240 bbl/d, to the Company’s working interest liquids production depending on the ultimate raw gas production volumes.

Amguri PSDM Seismic Re-interpretation

By the end of the Quarter, the Company had substantially completed an extensive structural re-interpretation of the Amguri Block. Early in 2009, Canoro commissioned the data processing of a Pre-Stack Depth Migration (PSDM) volume of the Amguri 3D survey in order to obtain a better quality geologic model of the block.  The data were first re-processed to a Pre-Stack Time Migration stage, resulting in higher quality gathers which in turn were the feedstock to the PSDM process.  A PSDM product was developed using one of two principal methodologies, the global tomographic approach. After considerable involvement in the iterative process of obtaining and quality inspecting, Canoro took delivery of the global tomographic PSDM volume in August.  Concerned with the technical shortcomings of the global tomographic approach to the Amguri subsurface environment becoming evident, a second volume was commissioned in July using a layer-cake approach with a different contractor.   As a result, Canoro is in receipt of two PSDM volumes, built using two different methodologies, which permits the confirmation of structural features between the two PSDM volumes.  Variations do exist between the resultant velocity models created to produce the respective PSDM volumes. As PSDM processing is a highly iterative and interpretive process, having two PSDM volumes with their respective resultant interpretations, the Company expects that it will result in a more reliable geologic model. 

Structural interpretations have been completed on both PSDM volumes with interpreter confidence preferring the layer-cake methodology. Potential drilling candidates have been identified.  The Company has recently calculated the reserve potential associated with each of these drilling candidates along with economics for each opportunity.  In parallel, the Company has moved beyond a purely structural interpretation of the PSDM data by investigating various aspects of reservoir characterization with the objective of further quantifying potential drilling locations and mitigate drilling risk further.  The Company has investigated amplitude anomalies and reflector coherence in an effort to delineate the position of various faults as a means to assess compartmentalization.  In December, Canoro commissioned the creation of a post-stack seismic inversion volume of the Amguri 3D PSDM data to investigate reservoir lithology and continuity.  Interpretation of the seismic inversion volume is expected to be completed by April 2010.  This reservoir characterization work may influence potential drilling candidates which have been identified to date. Preliminary work suggests that the existing “Location H” (location AMAA) and the accumulation discovered at A-13B remain prospective and are top drilling candidates. Upon completion of this work, agreement with its joint venture partner and approval of the government, the Company could be in a position to proceed with a drilling program late in calendar 2010.

Once the final bottom hole coordinates for the proposed drilling locations are selected, agreed upon by partners and approved by regulators, the Company plans to embark upon another cycle of drilling activity in 2010/11 that will be reflected in an updated Plan of Development document to be submitted to industry regulators by Q3 2010.