Operational Plans and Capital Budget
TAG's capital budget for fiscal year 2015 is CDN$60 million; funded entirely by forecasted cash flow and working capital on hand. The capital budget spend will focus on three key components: low-risk shallow development drilling, high-impact deep and offshore drilling in the Taranaki Basin, and the fractured source rock prospects on the East Coast.
TAG's goal for the 2015 fiscal year capital program is to create shareholder value from three core areas:
Unlock the major undiscovered resource potential by confirming unconventional commerciality from the fractured source rocks of the East Coast Basin;
Grow baseline reserves, production, and cashflow in Taranaki via low-risk shallow development drilling; and
Pursue high-impact exploration on deep Kapuni Formation and Offshore prospects in Taranaki.
Cash Flow & Production Guidance
TAG's premium pricing for its oil (Brent benchmark), combined with low operating costs, allows for a higher cash flow from production operations than what is often achieved by North American producers. TAG estimates cash flow from operations of approximately $40 million, with production averaging approximately 2,000 barrels of oil equivalent per day (BOE/D) net to TAG for fiscal year 2015 with oil contributing 80% to daily production estimates. This guidance is based on TAG's shallow development wells and existing production: additional success on the Company's current and ongoing exploration programs could have significant impact on this guidance.
TAG's current average daily production is approximately 2,000 BOE/D per day (1,800 BOE/D net to TAG) with 75% of the production being oil. It is expected that current production levels can be maintained within a 15% window of the present production during the year, based on established decline rates and the Company's intended 2015 shallow Taranaki development drilling program. At the present time, TAG has identified more than 50 shallow, low risk development drilling locations on the Company's Taranaki acreage, which is a five year inventory based on the current pace of drilling.
This guidance assumes initial production rates of 150 bbls of oil + 50 BOE/D of gas in seven new shallow Taranaki wells to be drilled. This guidance also estimates commodity prices of US$106.00 per bbl based on Brent pricing and US$5.40 per mmcf for natural gas. An exchange rate of CDN$1.10 to US$1.00 and CDN$0.935 to NZ$1.00 is also assumed.
Taranaki Deep Drilling Program
ALTTAG has several deep, high-impact onshore drilling opportunities targeting the Kapuni Formation, which is where most large fields have been discovered in Taranaki. Most recently TAG successfully drilled and cased the Cardiff-3 well to total depth of 4,853m. The well intercepted 230 meters of potential oil-and-gas bearing sands in numerous zones within the Kapuni Formation. The deepest of three zones identified for further completion, the K3E zone, was perforated and hydraulically fractured. The following parameters were independently interpreted from that fracture stimulation:
The reservoir pressure is 10,400psi;
The reservoir contains hydrocarbon gas with low (7%) CO2;
The reservoir pressure and induced perforation pressure was suitable to give a 3,000psi drawdown;
Original permeability was 0.17mD to 1.2mD; and
The K3E zone produced gas, oil and condensate with no formation water, but not at the commercial rates expected, given the above parameters.
Independent experts and further analysis has concluded that either the fracture stimulation was affected by a poor cement bond over the interval, or skin damage must exist in the near wellbore area, restricting flow. As a result, TAG is now planning to move uphole and initiate testing on the second of the three identified potential zones, where there is a competent cement bond in place, while incorporating the results of the K3E zone to the overall completion strategy for the well.
East Coast Basin Fractured Source Rock "Tight Oil" Prospect
ALTAs announced recently, the Gisborne District Council has granted TAG consent to drill the Waitangi Valley-1 well (TAG 100%), located in Petroleum Exploration Permit 38348 in the East Coast Basin, New Zealand. Earthwork activities are already underway to build an access road and drilling pad, with construction expected to be fully complete and drilling rig mobilized to the site by the end of June 2014. Waitangi Valley-1 will be drilled to a total depth of 3,600 meters, with the well targeting the naturally fractured Waipawa Black Shale and Whangai source rock Formations.
Data obtained from the Company's first East Coast well, Ngapaeruru-1, located approximately 250 km south of Waitangi Valley-1, provided excellent quality data with many of the unconventional tight reservoir technical thresholds being met in that first well. Future wells will incorporate that data, with a goal of proving "sweet spots" within the basin where source rock production may prove commercial. Independent undiscovered resource potential assessments estimate on a mid-range (P50) basis approximately 14 billion barrels of undiscovered oil initially-in-place within less than 20% of the Company's permitted lands1.
1 The resource estimates were prepared by Sproule International Limited with an effective date of July 31, 2013, and by AJM Petroleum Consultants with an effective date of September 1, 2008. Each is a qualified reserves evaluator in accordance with NI 51-101 and the Canadian Oil and Gas Evaluation Handbook.
Offshore Kaheru Prospect
ALTPlanning and preparations are now underway to drill the shallow-water Kaheru-1 well (TAG-40%) to a total depth of 4,400 meters. The Kaheru Prospect is a large well defined Miocene-age four way dip closure, situated in a discovery trend that is referred to as the "last pearl" in a string of discoveries. On May 31, 2011 Sproule International Limited, a qualified reserves evaluator in accordance with NI 51-101 and the Canadian Oil and Gas Evaluation Handbook estimated the Kaheru Prospect to have potential cumulative undiscovered petroleum initially-in-place, net to TAG, of over 17.4 million barrels of oil on a mid-range (P50) basis.
Shallow Development, Step-out and Exploration Drilling Update
In 2015 fiscal year, TAG will drill six development wells within the Cheal and Greater Cheal area. Four of these wells will be drilled with a 100% interest; one well drilled will be at a 70% interest in the new Cheal-E site acreage, and one well has already been drilled at Southern Cross at a 50% interest.
The Cheal area development and step out drilling continues to achieve excellent results. The successful Cheal-E1 step out well, which was placed on production in November 2013, made the Cheal-E area (TAG-70%) TAG's newest producing oil site, and this success substantially extends the oil saturated area of the 100% TAG held Cheal field. To date the Cheal-E site has produced approximately 90,000 bbls of oil with current stabilized production of approximately 650 bbls/d of oil (455 bbls/d net) plus solution gas from three wells.
Separately, in a 50-50 joint venture with East West Petroleum, TAG drilled a total of four shallow exploration wells and one exploration side-track well within the Cheal South and Southern Cross areas. The Cheal-G1 well is currently planned for production testing as a potential new discovery; the other three exploration wells are being plugged and abandoned. The total cost to drill these wells was approximately $11.6 million with TAG contributing $3.3 million after the initial carry amount of $5 million from East West Petroleum.
Additionally, after re-evaluation of TAG's (100%) Sidewinder acreage where the Company discovered and produces gas from a shallow zone, the next round of exploration wells will focus on the oil potential identified in the Sidewinder acreage. In this regard, TAG will drill two exploration wells in the Sidewinder-B site targeting 3D seismically defined anomalies, which are interpreted to be oil-prone prospects. With 100%-owned TAG production facilities in place, further successful Sidewinder wells can be quickly commercialized.
A Message from TAG Oil Ltd. CEO, Garth Johnson
"The past few years have had a learning curve for TAG's management, since our discoveries in Taranaki. We have now compiled a significant body of geotechnical, production and financial data that enables us to more accurately establish future guidance. Cash flow from operations will ensure TAG remains financially strong throughout the coming year and will fully fund the execution of a disciplined capital spending program. We will remain risk focused, with low-risk development drilling accompanied by higher risk, high-reward, deep, offshore and unconventional drilling opportunities. I have of the utmost confidence in our forward program and I look forward to sharing news on our progress as the program unfolds."
About TAG Oil Ltd
TAG Oil Ltd. (tagoil.com) is a Canadian-based production and exploration company with operations focused exclusively in New Zealand. With 100% ownership over all its core assets, including extensive oil and gas production infrastructure, TAG is enjoying significant organic value creation through exploration success and ongoing development and appraisal drilling of several light oil and gas discoveries. As New Zealand's leading explorer, TAG actively drills high-impact conventional and unconventional exploration prospects identified in the Taranaki Basin, East Coast Basin and Canterbury Basin that covers 2.8 million net acres of land, prospective for major discovery in New Zealand.
Best Estimate is considered to be the best estimate of the in-place volumes that will actually be present. It is equally likely that the actual in-place volumes will be greater or less than the best estimate. If probabilistic methods are used, there should be at least a 50 percent probability (P50) that the in-place volumes will equal or exceed the best estimate.
Undiscovered Resources and BOEs:
TAG Oil has adopted the standard of six thousand cubic feet of gas to equal one barrel of oil when converting natural gas to "BOEs." BOEs may be misleading, particularly if used in isolation. A BOE conversion ratio of 6Mcf: 1 Bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.
Undiscovered Oil Petroleum Initially-In-Place (equivalent to undiscovered resources) is that quantity of petroleum that is estimated, on a given date, to be contained in accumulations yet to be discovered. The recoverable portion of undiscovered petroleum initially in place is referred to as "prospective resources," the remainder as "unrecoverable."Prospective resources are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from undiscovered accumulations by application of future development projects. Prospective resources have both an associated chance of discovery and a chance of development. There is no certainty that any portion of the resources will be discovered. If discovered, there is no certainty that it will be commercially viable to produce any portion of the resources.
Exploration for hydrocarbons is a speculative venture necessarily involving substantial risk. TAG's future success in exploiting and increasing its current reserve base will depend on its ability to develop its current properties and on its ability to discover and acquire properties or prospects that are capable of commercial production. However, there is no assurance that TAG's future exploration and development efforts will result in the discovery or development of additional commercial accumulations of oil and natural gas. In addition, even if further hydrocarbons are discovered, the costs of extracting and delivering the hydrocarbons to market and variations in the market price may render uneconomic any discovered deposit. Geological conditions are variable and unpredictable. Even if production is commenced from a well, the quantity of hydrocarbons produced inevitably will decline over time, and production may be adversely affected or may have to be terminated altogether if TAG encounters unforeseen geological conditions. TAG is subject to uncertainties related to the proximity of any reserves that it may discover to pipelines and processing facilities. It expects that its operational costs will increase proportionally to the remoteness of, and any restrictions on access to, the properties on which any such reserves may be found. Adverse climatic conditions at such properties may also hinder TAG's ability to carry on exploration or production activities continuously throughout any given year.
The significant positive factors that are relevant to the resource estimate are:
Proven production in close proximity;
Proven commercial quality reservoirs in close proximity; and
Oil and gas shows while drilling wells nearby.
The significant negative factors that are relevant to the resource estimate are:
Tectonically complex geology could compromise seal potential; and
Seismic attribute mapping in the two, deep, liquids'-rich gas plays can be indicative but not certain in identifying proven resource.
Certain information in the Information Materials may constitute "analogous information" as defined in NI 51-101, including, but not limited to, information relating to the areas in geographical proximity to the lands held by TAG. Such information is derived from a variety of publicly available information from government sources, regulatory agencies, public databases or other industry participants (as at the date stated therein) that TAG believes are predominantly independent in nature. TAG believes this information is relevant as it helps to define the reservoir characteristics in which TAG may hold an interest. TAG is unable to confirm that the analogous information was prepared by a qualified reserves evaluator or auditor or in accordance with the Canadian Oil and Gas Evaluation Handbook. Such information is not an estimate of the reserves or resources attributable to lands held or to be held by TAG and there is no certainty that the reservoir data and economics information for the lands held by TAG will be similar to the information presented therein. The reader is cautioned that the data relied upon by TAG may be in error and/or may not be analogous to TAG's land holdings.
Cautionary Note Regarding Forward-Looking Statements:
Statements contained in this news release that are not historical facts are forward-looking statements that involve various risks and uncertainty affecting the business of TAG. Such statements can be generally, but not always, identified by words such as "expects","plans","anticipates","intends","estimates","forecasts","schedules","prepares","potential" and similar expressions, or that events or conditions "will","would","may","could" or "should" occur. All estimates and statements that describe the Company's objectives, goals, production rates, test rates, hydraulic fracture operations, optimization, infrastructure capacity, timing of operations, work-over results, and or future plans with respect to the drilling in the Taranaki and East Coast Basins are forward-looking statements under applicable securities laws and necessarily involve risks and uncertainties including, without limitation: risks associated with oil and gas exploration, development, exploitation and production, geological risks, marketing and transportation, availability of adequate funding, volatility of commodity prices, environmental risks, competition from other producers, and changes in the regulatory and taxation environment. Actual results may vary materially from the information provided in this release, and there is no representation by TAG Oil that the actual results realized in the future would be the same in whole or in part as those presented herein.
Other factors that could cause actual results to differ from those contained in the forward-looking statements are also set forth in filings that TAG and its independent evaluator have made, including TAG's most recently filed reports in Canada under NI 51-101, which can be found under TAG's SEDAR profile at sedar.com/.
TAG undertakes no obligation, except as otherwise required by law, to update these forward-looking statements in the event that management's beliefs, estimates or opinions, or other factors change.