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CALIFORNIA AS AN EXPLORATION NICHE
The US Geological Survey estimates a mean of 393 million barrels of undiscovered oil, 1.7 trillion cubic feet of undiscovered natural gas, and 86 million barrels of natural gas liquids in the San Joaquin Basin Province. Studies show that California is under-explored, particularly for targets between 11,000 and 15,000 feet, which are depths that are considered modest in Texas, Louisiana, and Oklahoma. These facts, combined with California’s extensive and under-utilized infrastructure, access to large acreage positions and expertise, and a known political and regulatory environment, spell opportunity.
Statesman’s focus is on geologically proven plays within highly prolific trends, as well as on stratigraphic traps adjacent to oil and gas production from multiple reservoirs, also within the San Joaquin and Sacramento Basins.
SALINAS MULTI-LEASE FARMIN
The objectives of the Salinas Multi-Lease Farmin are to target prospects in the 10 to 20 million barrel recoverable range. Over twenty leads in the San Joaquin Basin have been vetted pursuant to the Farmin and the most prospective ones are being matured for drilling starting in 2010.
Salinas Energy Ltd. Statesman established a strategic partnership with Salinas in 2006. Salinas is listed on the Australian Stock Exchange, trading under the ticker symbol SAE. Since 2005, Salinas’ objective has been to create sufficient value in its oil and gas portfolio to rank as a mid-cap Australian oil and gas company. Its initial focus was on oil prolific basins in Southern California where it established itself as a producer and qualified operator by redeveloping several heavy oil fields in the Salinas Valley. Salinas’ exploration focus has been on areas adjacent to existing production, targeting large structural and stratigraphic traps.
Comprehensive Evaluation of Southern San Joaquin Basin. Pursuant to the Farmin, Salinas undertook a geological and geophysical study that covered 1000 square miles in the San Joaquin Basin, included building a digital database of 8,700 miles of 2D seismic, and incorporated over 410 sq. miles of 3D seismic and over 42,000 wells. The work was undertaken by an international group of technicians who invested well over 5,000 hours of study, at a cost to Statesman of US$750,000.
The parties’ rigorous technical approach has matured existing prospects and identified new ones which required further leasing in the Basin. These prospects are characterized by moderate to good porosity, low to good permeability, contain medium to light oils (26º API – 40º API), and are mainly at depths between 8,000 and 13,000 feet.
The parties believe the results of the study will provide a competitive edge in defining drillable targets with mitigated risks, in oil-prone areas adjacent to large producing fields in the prolific southern San Joaquin Basin.
Prospects under the Farmin. Expected to be drilled first is the Osso Bucco Prospect, followed by drilling of the Merlot Prospect.
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Osso Bucco Prospect. The Osso Bucco Prospect is situated beneath the abandoned portion of the Paloma Field (which has produced 60 million barrels of oil and 400 Bcf of gas). Osso Bucco, covering approximately 2,800 acres, has been mapped on 3D seismic as a potential extension of a Steven’s sandstone that is still producing in the southeast of the Paloma Field. The primary target of this prospect is at 11,350 feet. In addition, the exploration well will test several other, shallower, prospective oil and gas horizons.
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Merlot Prospect. The Merlot Prospect lies within leases that cover approximately 4,100 acres on the Tejon platform, on the southern margin of the San Joaquin Basin. The leases have mainly been acquired from the Tejon Ranch Company, one of the largest landholding and mineral (petroleum) rights owners in California. The acreage is surrounded by a number of small to large sized oil and gas fields.
The Merlot Prospect is a footwall structure (set up by closure in a downthrown setting against a prominent thrust fault) with numerous, stacked sandstone targets at 11,000 to 13,000 feet. The primary reservoir within the prospect is the Vedder Formation in an updip position from a 1962 well that tested oil (40° API) and gas from that zone.
Business Terms under the Farmin. Statesman recently negotiated a reduction in its participating interest from 25% to 15% in the Salinas Farmin. Subject to payment of 22.5% of the drilling costs through casing point for up to four wells, Statesman will earn a 15% working interest (which typically equates to an 16.875% net revenue interest) in all drilled leases.
SOUTH BUENA VISTA PROSPECT
Statesman Resources has a working interest that ranges from 11.875% to 22.8125% over an area of mutual interest consisting of approximately 8,000 acres in the southern San Joaquin Basin.
Statesman earned its interest in the Prospect by participating in the drilling of the initial test well, North Yowlumne No.1-26, to its total depth of 13,025 feet. Light oil, 32-36 degrees API, was recovered from the No. 1-26 well, but damage to its well-bore and the hydrocarbon-bearing formations during drilling and testing prohibited the operator from completing the well as a producer.
Thereafter, the South Buena Vista Prospect was re-mapped with the benefit of a substantially improved local and regional database of well and seismic control. The North Yowlumne No. 2-26 exploration well encountered the reservoir section up dip where thicker sands are present, and during testing recovered oil.
Recognizing the risk-averse market at the end of 2008 and most of 2009, Statesman has decided to postpone participating in further exploration drilling in the South Buena Vista Prospect until 2010 and possibly later.
Play Concept. The wells of the South Buena Vista Prospect are targeting Miocene Stevens Sands, which have produced to date over 1.8 billion barrels of oil in the San Joaquin Basin. In general, one can observe that wherever an anticlinal axis is overlain by a known Stevens Sand channel, the sand has been found to be productive. A significant number of Stevens reservoirs can be cited as working examples of this play type, the nearest being the immediately adjacent Yowlumne Field. The Yowlumne Field has produced over 110 million barrels of oil and 95 billion cubic feet of gas since it was discovered by Texaco in 1974.
This same play concept has also been proven in the Landslide Field, which lies about 2 miles to the south of the Yowlumne Field, in the same submarine fan system. The Landslide Field was discovered by the Nahabedian Exploration Group (“NEG”), operator and one of Statesman’s working-interest partners in the South Buena Vista Prospect. This play concept also works, among others, in the San Emidio Nose Field about 10 miles to the southeast and the Buena Vista Field located 20 miles to the northwest, each of which is situated in a different Stevens submarine fan system.
Business Terms. Statesman entered into the South Buena Vista Farmin with NEG at the end of 2005. During 2006 and 2007 the Company earned its working interest and participated in the drilling of two exploration test wells (North Yowlumne No. 1-26 and No. 2-26). In 2007 Statesman purchased 25% of Ivanhoe Energy’s interest in the South Buena Vista Prospect. As a result, Statesman increased its working interest from 12.5% to 22.8125% in most leases in the approximately 8,000-acre Area of Mutual Interest. Its net revenue interest will now range from 8.9% to 17% throughout the Prospect.
Pursuant to its operating agreement with NEG, Statesman has the right to elect to participate in all future drilling operations on a well-by-well basis and thus pay its proportionate share of drilling expenses. Statesman also has the right to not participate in which case its proportionate share of expenses will be paid by the other, participating working-interest owners who will then have the right to recover 300% of the associated drilling expenses from any production revenues. Once such cost recovery is achieved, Statesman will receive its proportionate share of all production revenues. Under either election, Statesman retains its earned working interest that equals 22.8215% in most of the South Buena Vista Prospect leases.
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