Colombia gas discovery update from Canacol Energy

Canacol Energy Ltd has announced that Clarinete 1, the first exploration well drilled in its recently acquired VIM 5 exploration and production contract, has tested at a final gross rate of 24.7 million ft3/d (4333 boe/d) of dry gas with no water from the Upper Cienaga de Oro reservoir in the second of two production tests over two separate reservoir intervals. As previously reported, the Lower CDO tested at a final gross rate of 20.6 million ft3/d (3606 boe/d) of dry gas with no water. The combined gross deliverability of the Clarinete 1 well from both intervals is approximately 45.3 million ft3/d (7947 boe/d). Canacol, through its wholly owned subsidiary CNE Oil & Gas S.A.S., holds a 100% operated interest in the VIM 5 E&P contract. Pursuant to an existing agreement, and subject to approval from the Agencia Nacional de Hidrocarburos, an industry joint venture partner has the ability to earn up to 25% of the corporation's 100% interest in exchange for fulfilling certain financial commitments.

Benchmark against falling oil prices

Both gas sales from Esperanza (currently sold based on the Guajira price index of US$5.08/million mbtu or US$28.96/boe) and tariff oil from Ecuador (US$38.54/bbl), together comprising approximately 42% of production in 1Q15, are completely insensitive to world oil prices, offering the corporation a significant degree of protection from the current effects of falling benchmark oil prices.

Clarinete 1

The Clarinete 1 exploration well was spud on October 8, 2014, and reached a total depth of 8068 ft measured depth (ft md) on 7 November 2014. The primary objective of the well were sandstones of the Tertiary aged CDO sandstone, the main producing reservoir at the Nelson and Palmer fields in the adjacent Esperanza contract where Canacol has a 100% operated working interest. The Clarinete 1 encountered 149 ft of gas pay with average porosity of 26% within the CDO sandstone reservoir based upon an evaluation of the open hole logs. The upper part of the CDO sandstone reservoir was perforated in various intervals between 6409 - 6568 ft measured depth. This interval achieved a final rate of 24.7 million ft3/d (4333 boe/d) using a 42/64 in. choke with a tubing head pressure of 2274 pounds per square inch with no water, at the end of a 16 hr flow period. The corporation is preparing to lay a flowline to tie the Clarinete 1 well into its operated gas processing facility at the Jobo station. The corporation is also negotiating a new take or pay sales contract with a domestic Colombian purchaser and will announce details concerning the contract in the near future.

The Clarinete 1 discovery

As per the previously disclosed independent evaluation of the prospective resources associated with the Clarinete prospect by Gaffney Cline and Associates, the pre drill best estimate of unrisked gross prospective gas resource associated with the Clarinete discovery is approximately 540 billion ft3. The corporation has engaged its reserves auditors to prepare a reserve and contingent resource report for the Clarinete discovery following the completion of the testing programme.

Three new gas sales contracts

As previously announced, the Canacol Energy in 2014 executed three new gas sales contracts for a combined 65 million ft3/d (11 052 boe/d) which is expected to take the company’s current daily gas production of approximately 20 million ft3/d (3509 boe/d) to 83 million ft3/d (14 561 boe/d) in late calendar 2015. The new contracts each have a five year term, with pricing of US$ 5.40/million mbtu (US$30.78/boe) escalated at 2% per year for two of the contracts totalling 35 million ft3/d, and US$8.00/million mbtu (US$ 45.60/boe) escalated at approximately 3% per year for the third contract of 30 million ft3/d. Canacol currently sells approximately 18 million ft3/d (3158 boe/d) of gas from the Nelson Field to a local ferronickel producer under a 10 year contract that expires in 2021. That contract, unlike the new contracts, is linked to the Guajira price index, which changed effective 29 October 2014 from US$3.97/million mbtu (US$22.63/boe) to US$5.08/million mbtu (US$28.96/boe). As recently announced, the corporation has executed a new 15 year take or pay gas sales contract to provide 35 million ft3/d to a third party commencing in the last quarter of calendar 2016 at a price of US$ 6.25/million mbtu (US$ 35.63/boe) escalated at 2 % per year throughout the life of the contract. This pricing reflects the income from both the raw gas sales and the sale of the final LNG product.

The total gross productive capacity of Canacol's existing gas wells at its Nelson (Nelson 2, 3, 4 and 5), Palmer (Palmer 1) and Clarinete (Clarinete 1) gas fields is approximately 120 million ft3/d, more than sufficient to satisfy the 83 million ft3/d required to fulfil its contractual sales obligations in late calendar 2015. The Corporation is planning to double the capacity of its operated Jobo gas processing facility from the current level of 50 million ft3/d to 100 million ft3/d by midyear calendar 2015 at a cost of approximately US$ 3 million.

Adapted from press release by Cecilia Rehn

Published on 11/02/2015

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