Operations

Post-salt drilling programme  

Since January 2010 when the Group resumed its post-salt exploration campaign, it has drilled seven discoveries out of 18 exploration wells, a success rate of 39%.

To date, the Group has made a total of eight post-salt discoveries including the Zhana Makat, Borkyldakty, Uytas, Asanketken, East Kyzylzhar I, Sagiz West, Baichonas West and Eskene North fields, all of which are in various stages of testing, appraisal, development and production. Zhana Makat was discovered in 2006.

Since 31 March 2012, the Group has drilled a total of 11 wells, including five exploration wells that led to two discoveries and six successful appraisal and development wells.  

The Company has plans to continue appraising and developing its existing post-salt discoveries, drill its two remaining post-salt prospects, and finish drilling the pre-salt NUR-1 well on the Emba B prospect, with an option to drill the Kurzhem-1 well on the Emba A prospect in the event the NUR-1 well is successful.

The Company intends to drill between 30-40 post-salt wells during 2013, financed through a combination of cash flow from operations and proceeds from the Company’s US$90 million senior credit facility with SB Sberbank JSC. The Company’s shallow drilling campaign is primarily focused on drilling appraisal and development wells at Zhana Makat, Sagiz West and Uytas, with additional drilling at Baichonas West, Eskene North, Borkyldakty, East Kyzhylzhar I, and Uytas North.

The Company has two shallow drilling rigs under contract and is currently tendering for a third shallow drilling rig to conduct a 13-well appraisal programme in the Uytas Field.

Production 

Total production during the fiscal year ended 31 March 2013 averaged 3,346 barrels of oil per day (“bopd”), an increase of approximately 19% from average production of 2,807 bopd in the prior year. This increase was in line with the Company’s guidance that production would average between 3,200 and 3,600 during this period. For the current fiscal year ending 31 March 2014, it is expected that production will average between 4,500 and 6,000 bopd.

Kazakh regulations require each field to progress through incremental regulatory stages of appraisal and development, including the testing and appraisal phase (“Test Production”), trial production (“TPP”) and then full field development (“FFD”). Test Production may last between one and three years depending upon the complexity of the field, during which time the Group may produce each zone in a well for up to 90 days in order to gather information necessary to move onto TPP. TPP typically lasts two to three years, during which time the field may be fully appraised and wells can be produced continuously. The Group may only sell its production domestically during Test Production and TPP. Once the Group has enough information to prepare state reserves and a long-term full field development plan, it may apply for and obtain FFD status. FFD lasts for up to 25 years, during which time the Group may sell up to 80% of its production on the export market.  

The rate of production from fields on Test Production can be highly variable due to the uncertain stabilised production rates which are achievable from different productive zones in new exploration and appraisal wells, downtime incurred for pressure build-up tests, recompletions to move between zones and intentional variable production rates used during testing to gather data necessary to eventually apply to move a field to TPP status. 

In June 2011, Borkyldakty was granted TPP status and was able to commence continuing production operations. In September 2011, Asanketken started Test Production, followed by East Kyzylzhar I in November and Sagiz West in December. Uytas was brought back onto Test Production in January 2012, following preliminary tests in early 2011. Zhana Makat was transferred from TPP to FFD status in March 2012. The Group expects both Asanketken to move to TPP status and Borkyldakty to move to FFD status in the first half of 2013, while Sagiz West, Uytas and East Kyzylzhar I are not expected to proceed to TPP until 2014 after the Group drills more appraisal wells during 2013 to gather the additional information necessary to prepare an application for TPP. 

Reserves and Resources 

In the year ended 31 March 2012, the Group experienced substantial growth in reserves and contingent resources due to new discoveries during the year and further appraisal and analysis of existing discoveries. Given the early stage of development of the Group’s asset base, the majority of the growth is reflected in possible reserves and contingent resources, which the Group expects to convert into proved and probable (“2P”) reserves as the underlying fields are more fully appraised and developed. 

As at 31 March 2012, the Group’s competent person, Ryder Scott Company (“RSC”), estimated that the Group had 10.6 mmbo in 2P reserves with an after-tax net present value discounted at 10% (“PV10”) of US$215 million, an increase of 36% from 7.8 mmbo in 2P as at 31 March 2011 with a PV10 of US$176 million. RSC estimated that the Group’s  total proved, probable and possible (“3P”) reserves increased by 72% to 14.6 mmbo as at 31 March 2012, with a PV10 of US$285 million, from total 3P reserves in the prior year of 8.5 mmbo, with a PV10 of US$194 million. 

As at 31 March 2012, RSC estimated the Group’s oil-initially-in-place (“OIIP”) for the Sagiz West and Uytas fields, the Group’s two largest discoveries to date, of 101.3 mmbo and 64.9 mmbo, respectively, of which 79.8 mmbo and 27.2 mmbo were classified as in-place contingent resources. The Group has internally estimated an additional 126 mmbo in non-conventional resources at Uytas from the Cretaceous Albian reservoir which cannot be recovered using conventional primary production techniques. These resources were recognised by RSC in their report as being worthy of further evaluation but cannot be classified as contingent resources until they are demonstrated to be recoverable through a pilot production test. The Group did not have any reserves or resources booked for either field as of 31 March 2011. 

The Group reported total 2P reserves as at 30 September 2011 of 13.3 mmbo, as well as in-place contingent resources at Sagiz West of 61.3 mmbo. The 2P estimate included 4.8 mmbo in reserves based on the initial well drilled in the Sagiz West Field in September 2011. In December 2011, the Group drilled a second well in the Sagiz West Field, SAGW-2, that was non-productive and reduced the productive area of the eastern flank of the field from original estimates. The third well, SAGW-3, drilled in February 2012, was successful in confirming the discovery and supporting the Group’s view of the field’s overall size and structure. Given the results of SAGW-2 and the greater complexity of the field, however, the estimate for 2P reserves for Sagiz West was adjusted downward as of 31 March 2012 by 2.2 mmbo, while in-place contingent resources for the field increased by 18.5 mmbo. Other changes in the estimate of 2P between the periods relate primarily to production and the revision of reserve estimates based on well performance and estimated recovery factors. 

^{A table showing the Group’s reserves and resources as calculated by RSC for the years ended 31 March 2012 and 31 March} 

^{2011, and the interim period ended 30 September 2011 is presented below:}

Zhana Makat Field

The Zhana Makat Field, discovered in September 2006, continues to perform well, with average daily production of approximately 2,200 bopd from a combination of Jurassic, Neocomian, and Triassic reservoirs. The field commenced commercial production under TPP in August 2007, with cumulative sales of 3.6 mmbo generating US$211 million in total revenue through 31 March 2012. Zhana Makat was approved for FFD status in March 2012, allowing the Group to continue to develop and produce the field for up to 25 years, as well as giving it a right to sell up to 80% of its crude oil production on the export market under the terms of the Licence. The Group drilled five exploration, appraisal and development wells in the field in fiscal year 2012, including two Triassic wells in the southern end of the field that were subject to 90-day Test Production constraints given the exploratory nature of the wells. The Group expects to return the Triassic wells to production under the field’s FFD permit in 2013 upon receipt of the necessary regulatory approvals. In February 2013 the Group also embarked on a programme of further development drilling at Zhana Makat and as of May had completed four wells successfully.

Borkyldakty Field

The Borkyldakty Field was discovered in Block E in February 2010, with the BOR-1 well encountering five productive Triassic reservoirs in a small four-way anticlinal structure. In June 2011, the Group received regulatory approval of Borkyldakty’s TPP, allowing the Group to place the field on continuous production and drill further exploration and appraisal wells, if necessary, in order to gather additional data needed to proceed to FFD status.  In July 2011, the Group successfully drilled and completed the BOR-3 appraisal well, encountering 28 metres of net oil pay over five Triassic sandstone reservoirs and has one additional drilling location planned in 2013. The Ministry of Oil & Gas of Kazakhstan has approved the general terms to convert the Borkyldakty Field to FFD, subject to review and final approval by several other regulatory agencies. The FFD status will allow the Company to sell 80% of its oil production on the export market under the terms of the Licence and Borkyldakty will be the Company’s second discovery to transition to FFD status. Final regulatory approval for FFD is expected before 30 June 2013.

Uytas Field  

The Uytas Field, a shallow, four-way anticline with productive Cretaceous and Jurassic reservoirs, was discovered in Block A in October 2010. Drilled to a depth of 827 metres, the UTS-1 discovery well potentially makes Uytas the Group’s largest post-salt discovery to date. Uytas is a unique field given its shallow depth, with productive Cretaceous reservoirs above 160 metres and Jurassic reservoirs between 300 and 400 metres. 

Interpretation of 3D seismic data acquired in late 2011 revealed a structure larger than previously identified which enabled the Group’s estimate of OIIP to increase to 184 mmbo, including 58 mmbo in conventional Cretaceous Aptian (“Aptian”) and Jurassic reservoirs and 126 mmbo in shallower, non-conventional Cretaceous Albian ("Albian") reservoirs. RSC estimates are in line with this assessment, estimating OIIP of 65 mmbo for the conventional Aptian and Jurassic reservoirs as of 31 March 2012, of which 27 mmbo are classified as contingent resources in-place. The Group has internally estimated an additional 126 mmbo in non-conventional resources at Uytas from the Albian reservoir which cannot be recovered using conventional primary production techniques. These resources were recognised by RSC in their report as being worthy of further evaluation but cannot be classified as contingent resources until they are shown to be recoverable through a pilot production test. 

The Group anticipates up to 200 shallow vertical wells will eventually be drilled in the field to develop its conventional reserves, over a period of several years. Based on testing and core analysis, the Group is also planning an enhanced oil recovery pilot project using steam injection to determine the commerciality of the Albian reservoirs. 

The OIIP estimates from RSC provide external confirmation of the significant size of the field. Further appraisal drilling and more production history from existing and future wells is expected to lead to much higher recoverable reserves and a higher assumed recovery factor for the field by RSC. The Group expects Uytas to move into TPP during 2014 after the Group has completed the Phase One appraisal drilling programme and the pilot project to evaluate the non-conventional Albian reservoirs. The Company is currently tendering for a third shallow drilling rig to conduct a 13-well appraisal programme for the Uytas Field. These wells, which will vary in depth between 200 and 550 metres, will appraise a significant portion of the 27.2 mmbo of conventional in-place contingent resource potential in the field and assist in preparation of a full-scale development plan.

Asanketken Field  

The Asanketken Field was discovered in March 2011 with the ASK-1 well encountering 24 metres of net oil pay at depths from 1,230 to 1,302 metres in the Jurassic formation in a three-way faulted trap. The ASK-2 well confirmed the Jurassic discovery at the end of 2011, while the field’s deeper Triassic objective was found to be non-productive. The Group drilled two additional Jurassic appraisal wells in the field during the quarter ended 30 June 2012, both of which are currently on Test Production. 

The Asanketken Field is estimated by RSC to have in-place reserves of approximately eight mmbo, with reservoirs of excellent quality from which the Group expects ultimate recovery factors of approximately 35% to 40%. 

The approval of the Appraisal Extension is the single remaining requirement for the Company to convert the Asanketken Field to trial production (TPP) status and resume continuous production from all four wells in the field in order to gather the required technical data to progress Asanketken to full field development status during 2014.  The Company has already received a gas flaring permit for the field and expects to resume production during May 2013 with a combined productive capacity in excess of 2,000 bopd from the Asanketken wells.

No additional drilling is expected in the field prior to reaching FFD status. The expected rapid progress of Asanketken through the regulatory approval process is a result of the uncomplicated nature of the field and as it has already been fully appraised by the current producing wells.

East Kyzylzhar I Field  

The East Kyzylzhar I Field, a three-way faulted closure located in Block E, was discovered in August 2011, with the KZIE-1 exploration well encountering 17 metres of net oil pay in two Jurassic sandstone reservoirs at depths ranging from 987 to 1,251 metres. The KZIE-2 appraisal well was drilled later in 2011, confirming the discovery.  The Group placed both wells on Test Production with very high initial production rates, but water cut increased rapidly in both wells. Further testing of these wells is planned after obtaining a two-year appraisal extension of the Company’s Licence, to determine if the water cut has been caused by a mechanical problem in the wells, as is indicated by the electric logs and other pressure data currently available.  If the water production problem can be resolved, the field will move on to TPP during 2013 and the Group plans to acquire additional 3D seismic and drill additional development wells over the next several years. If not, then the field may be abandoned. The decrease in RSC 2P reserves from 30 September 2011 for the Field reflects the uncertainty of the source of the water production seen in the first two wells. 

Sagiz West Field 

The SAGW-1 exploration well made the initial discovery of the Sagiz West Field in Block E in September 2011, reaching a depth of 1,406 metres with electric logs indicating 27 metres of net pay, including 21 metres of oil and 6 metres of gas pay, over a 114 metre interval in the Triassic formation at measured depths between 1,177 and 1,291 metres. Reservoir quality is very good with porosities ranging from 18% to 25%. The unsuccessful SAGW-2 appraisal well did not encounter producible hydrocarbons, limiting the eastern flank of the field. However, the SAGW-3 appraisal well confirmed the initial discovery and the Group’s view of the large potential size and scope of the field. 

As of 31 March 2012, RSC estimated 2P reserves for Sagiz West of 2.6 mmbo and contingent resources in-place of approximately 79.8 mmbo. The 2P estimate was adjusted downward by RSC from 30 September 2011 due to the results of SAGW-2 and the greater complexity of the field, but their higher estimate of contingent resources supports the Group’s view that Sagiz West has potential ultimate recoverable reserves of between 15 and 20 mmbo. The Group expects ultimate recovery factors for the field to range from 20% to 30%. 

Following the acquisition and analysis of 3D seismic for the Sagiz West field the Group is planning to drill a fourth appraisal well, SAGW-4. Preliminary mapping of recently acquired high-fold 3D seismic data has confirmed the location of SAGW-4, four km south of the SAGW-3 well, as prospective. If successful, the new well will substantially extend the known productive area of the field.  The results of the SAGW-4 well, together with the new seismic data, will be crucial in evaluating a significant portion of the 79.8 mmbo of in-place contingent resources in the field, as well as assisting the Company in the design of the future appraisal and development plan for the field.

The Group is planning to drill additional wells in Sagiz West during 2013, to appraise the field and gather enough information to design and build the field facilities required to handle the associated gas production expected when Sagiz West enters TPP. Due to the need for further appraisal drilling, and the amount of time needed to design and construct the production facilities required for TPP, the estimated start of TPP has been moved out into 2014. The Sagiz West Field is currently shut-in pending drilling additional wells that will be placed on Test Production before moving these and existing wells onto TPP. 

Both the SAGW-1 and SAGW-3 wells have additional zones which will ultimately be tested, including lower porosity oil reservoirs in both wells that may respond well to hydraulic fracturing and a possible gas cap in SAGW-1. Further testing is expected to demonstrate additional value both from increased oil production and potential gas sales, but will not yield significant production in the near term and is currently being planned for during the appraisal drilling programme in 2013.

Baichonas West

On 3 September 2012, the BCHW-1 exploration well in the Baichonas West Prospect reached a depth of 1,430 metres with electric logs indicated 13 metres of net pay over a 20 metre interval in the Jurassic Formation at measured depths between 1,179 and 1,190 metres.

On 22 October 2012, the Group announced that the BCHW-1 well at the Baichonas West prospect had begun testing in a Triassic reservoir from depths between 1,184 and 1,190 metres, flowing at a stable rate of 450 barrels of 48 degree API gravity oil per day (“bopd”) with no water. This zone was initially reported as Jurassic, but is now believed to be Triassic pending final age determination. The results of this test, combined with revised mapping of the structure, indicate that Baichonas West is a commercial discovery with oil in place of approximately 16 mmbo and expected recovery factors between 20% and 40%.

On 1 May 2013, the Company spudded the BCHW-2 well, the first appraisal well in the Baichonas West Field. The BCHW-2 well will be drilled with a ZJ-30 rig from the drilling contractor, Zhanros Drilling LLP, to a depth of approximately 1,400 metres.

Eskene North

On 31 December 2012, the Group announced that the ESKN-1 exploration well in the Eskene North prospect had reached a depth of 1,507 metres with electric logs indicating 20 metres of net pay over an 90 metre gross interval in the Triassic Formation at measured depths between 1,272 and 1,362 metres. Reservoir quality is fair with porosities ranging from 15% to 20%. 

Pre-salt potential

On 4 November 2011, the Group began drilling the NUR-1 well on the Emba B prospect in Block E. The well had a target depth of 7,250 metres and targeted reservoirs with unrisked mean resource potential of 467 million barrels of oil equivalent with a 29% geological chance of success. 

On 5 April 2012, the NUR-1 well reached the top of the Kungurian salt at a depth of 5,718 metres. However, upon drilling into the salt a high pressure transition was encountered resulting in the drilling tools becoming stuck. After side-tracking the well and setting casing at 5,681 metres, the Group drilled ahead. Progress was slow as the Group drilled alongside the stuck drilling tools. After clearing the old wellbore, the well reached the Kungurian salt on 19 June 2012. Due to encountering anomalously high pressures beyond the scope of the original well design, the drill pipe again become stuck at 5,722 metres, despite using the higher density mud specified for penetrating this section. The Group was unable to free the stuck drill string and decided to suspend drilling operations and release the drilling rig in July given the need to obtain additional capital to complete the well. The Group has incurred a total cost of approximately US$39 million on NUR-1 and estimates it will require between US$12 and 20 million in additional capital in order to finish drilling the well to its target depth at a later date.

Based on a review conducted by the Group’s in-house technical team and external consultants with expertise in drilling high pressure, pre-salt wells, the Group believes it is technically feasible to complete the drilling of NUR-1 with certain modifications to the existing drilling programme to address the higher than expected pressures encountered in the salt.

The Group is awaiting the final ratification of the  two-year appraisal extension of the Blocks A&E Licence which will allow completion of the drilling of NUR-1 well on the Emba B prospect, with an option to drill the Kurzhem-1 well on the Emba A prospect in the event the NUR-1 well is successful. The Group is continuing to work with external experts to establish how best to deal with this pressure on a resumption of drilling and how, in cooperation with the authorities, to best redesign the well so as to successfully drill through the Kungurian salt layer. Given that the well has been successfully drilled down to the current depth, a broader range of rigs fit the criteria required and would be available. Any pre-salt drilling operations are subject to the Company obtaining additional financing.

Debt restructuring

On 27 November 2012, the Company announced its intention to implement a refinancing and comprehensive restructuring of its outstanding debt facilities comprising the refinancing of its Macquarie Credit Facility and the restructuring of its Bonds, (together, the “Restructuring”).

The Restructuring was conditional on Bondholder and shareholder approval, with Bondholder and shareholder meetings called for 20 December 2012 which both approved the Restructuring.

The key terms of the Credit Facility Restructuring were as follows:

• The Company entered into a new senior secured US$90 million credit line agreement with Sberbank.
• Up to US$60 million were available to draw down from the Sberbank Facility by the end of December 2012, conditional, among other things, upon the approval of the Company’s shareholders and Bondholders.
• Up to a further US$30 million were available to draw down from the Sberbank Facility (“Tranche 2”) as soon as certain conditions precedent were met, including the registering of security and obtaining requisite government regulatory approvals. These conditions have now been satisfied.
• The Sberbank Facility bears interest at 11% and matures in November 2017 with quarterly amortisation beginning in March 2014.
• The Company’s existing Macquarie Credit Facility was cancelled, with Macquarie receiving US$47 million plus all accrued but unpaid interest in December 2012 and a further US$3 million in March 2013 from the proceeds of Tranche 2, in full settlement of all monies owed by the Company.

Proceeds from the Sberbank Facility of US$50 million were used to pay down the principal amount outstanding under the Macquarie Credit Facility on 27 December 2012 and, following the receipt of the government approvals and registration of the security, on 28 March 2013.

As a result of the 2012 Restructuring, a total of 709 million Ordinary Shares were issued to Bondholders, which represents approximately 39% of the Company’s currently issued share capital.

On 28 March 2013, the Company paid approximately US$3.4 million to certain bondholders of the Company’s US$85.6 million 6.75% convertible bonds who tendered their bonds for cash under the terms of the Restructuring.

The remaining funds available under the terms of the Sberbank Facility will be used to partially fund the Company’s ongoing shallow drilling programme and related expenses.