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Quarterly Updates

2016 Third Quarter Update

OVERVIEW

ShaMaran Petroleum Corp. is an oil development and exploration company with a 20.1% direct interest in the Atrush Block production sharing contract (“PSC”) relating to a property located in the Kurdistan Region of Iraq (“Kurdistan”). Atrush is currently in the pre-production stage of the first phase of the development program (“Phase 1”). Phase 1 of field development consists of installing and commissioning production facilities with 30,000 barrels of oil per day (“bopd”) capacity and the drilling and completion of five production wells to supply the production facility. The oil discovery on the Atrush petroleum property is continuously being appraised.

ShaMaran is a Canadian oil and gas company listed on the TSX Venture Exchange and the NASDAQ OMX First North Exchange (Stockholm) under the symbol "SNM".

HIGHLIGHTS

Atrush Contract

  • On November 7, 2016 the Assignment, Novation and Fourth Amendment Agreement to the PSC (the “4th PSC Amendment”) and Atrush Facilitation Agreement were concluded between TAQA Atrush B.V. (“TAQA” and the Operator of the Atrush Block), General Exploration Partners. Inc. (“GEP” and a wholly owned subsidiary of ShaMaran), Marathon Oil KDV (“MOKDV”)(together, the “Non-Government Contractors”) and the Kurdistan Regional Government (“KRG”) resulting in participating interests in the Atrush Block PSC of TAQA at 39.9%, the KRG at 25%, GEP at 20.1% and MOKDV at 15%.
  • The above agreements include the terms for repayment to the Non-Government Contractors for costs which they have agreed to pay for on behalf of the KRG, including those relating to the Feeder Pipeline.

Production Facility, Export Pipeline and Wells

  • Construction of the 30,000 bopd Atrush Phase 1 Production Facility (“Production Facility”) is complete and commissioning is in progress.
  • The Atrush-2 (“AT-2”) and Atrush-4 (“AT-4”) wells were successfully completed in the second and third quarters of this year. All four wells intended for production are now completed, connected to the Production Facility and ready for start-up.
  • Work on the pipeline being constructed between the Production Facility and the block boundary (the “Spur Pipeline”) is substantially complete. Construction of the pump station and the intermediate pigging and pressure reduction station (“IPPR”) is nearing completion and is expected to be finalised by the end of this year.

Work has now commenced on the final 35km section of pipeline which will run from the Atrush Block boundary to the tie-in point on the main export pipeline (the “Feeder Pipeline”) and is subject to the terms of an Engineering, Procurement and Construction (“EPC”) contract between TAQA and KAR Company (“KAR”) which became effective on November 7, 2016. The length and complexity of the commercial discussions associated with the EPC contract, the 4th PSC Amendment, and the Atrush Facilitation Agreement have brought the commencement of the Atrush Feeder Pipeline closer to the winter season which means there is an increased risk to the schedule. While completion in the first quarter of 2017 is still the target and a possibility, it is probable that first production from Atrush will be further delayed to the second quarter of 2017.

Corporate

  • As a result of the increased risk of delay in the schedule the Company estimates that it will require approximately $20 million of additional funding which the Company expects will be made available by increasing GEP’s Super Senior Bond through facilities provided for in GEP’s April 2016 financing arrangement.
  • The Company completed a financing arrangement in early May 2016 (the “Financing Arrangement”) with holders of the $140.6 million bonds (the “Senior Bonds”) of GEP, a wholly owned subsidiary of ShaMaran. The Financing Arrangement provides the Company with additional liquidity in 2016 of approximately $33 million based on the issuance of $17 million ($16.2 million proceeds net of transaction costs) of additional super senior bonds (“Super Senior Bonds”) and provides terms for the Company to pay bond coupon interest in kind by issuing additional bonds, including approximately $17.9 million of 2016 coupon interest. Also under the Financing Arrangement the Company issued 218,863,000 common shares at a deemed price of CAD 0.105 per share to holders of the Senior Bonds who elected to convert Senior Bonds into ShaMaran common shares which represented $18 million of Senior Bonds at face value. PIK Bonds of $8.1 million and $1.0 million were issued under the Senior Bonds and Super Senior Bonds agreements, respectively, to satisfy coupon interest  for the six months ended November 13, 2016.
  • On February 15, 2016 the Company reported updates to estimated reserves and contingent resources for the Atrush block as of December 31, 2015. Total oil in place is estimated at 1.5 to 2.8 billion barrels, with Total Field Proven plus Probable (“2P”) Reserves on a property gross basis increasing from 61.5 million barrels (“MMbbl”) to 85.1 MMbbl, an increase of 38 percent. Total Field Unrisked Best Estimate Discovered Recoverable Resources (“2P + 2C”) on a property gross basis increased from 372 million barrels oil equivalent (MMboe) to 389 MMboe.

    1. This estimate of remaining recoverable resources (unrisked) includes contingent resources that have not been adjusted for risk based on the chance of development. It is not an estimate of volumes that may be recovered.
    2. Boe may be misleading, particularly if used in isolation. A boe conversion ratio of 6 million cubic feet (“Mcf”) per one barrel is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

OPERATIONS

ShaMaran, through its wholly owned subsidiary, GEP, holds a 20.1% direct interest in the Atrush Block PSC. TAQA, a subsidiary of Abu Dhabi National Energy Company PJSC, is the Operator of the Atrush Block with a 39.9% direct interest, the KRG holds a 25% direct interest and MOKDV holds a 15% direct interest. TAQA, GEP, the KRG and MOKDV together are “the Contractors” to the PSC.

The Atrush Block PSC relates to a petroleum property located in Kurdistan in the northern extension of the Zagros Folded Belt and adjacent to several major oil discoveries. 

The Atrush field was discovered in 2011 and a Phase 1 development plan was approved in October 2013, which consists of installing and commissioning production facilities with 30,000 bopd capacity and the drilling and completion of production wells to supply the Production Facility. To date four Phase 1 production wells have been drilled, tested and completed, and a further two appraisal wells have been drilled and tested with the objective of further delineating the field towards the east. Good reservoir communication has been proven between the east and the west part of the field.

Ownership and Principal PSC Terms

In August 2010 the Company acquired a 33.5% shareholding in GEP which then held an 80% working interest in the Atrush Block PSC, with the remaining 20% third party interest (“TPI”) being held by the KRG. In October 2010 MOKDV was assigned the 20% TPI in the PSC. On December 31, 2012 GEP sold a 53.2% direct interest in the Atrush Block to TAQA, who also assumed from GEP the Operatorship of the Block, and repurchased the entire 66.5% shareholding which Aspect Energy International LLC (“Aspect”) held in GEP, leaving the Company with a 100% shareholding interest in GEP and, at that time, a 26.8% direct interest in the PSC.

On November 7, 2016 the Assignment, Novation and Fourth Amendment Agreement to the PSC (the 4th PSC Amendment”) and Atrush Facilitation Agreement were concluded between TAQA, GEP, MOKDV (together, the “Non-Government Contractors”) and the KRG. 

The 4th PSC Amendment and Atrush Facilitation Agreement include the following principal terms:

  • The KRG acquires a 25% interest in the PSC effective November 7, 2012, the date of declaration of commerciality (“DOC date”). As a consequence the respective participating interests in the Atrush PSC are TAQA at 39.9%, the KRG at 25%, GEP at 20.1% and MOKDV at 15%;
  • The Non-Government Contractors will fund the cost of constructing the Feeder Pipeline which will be novated to the KRG following the commencement of oil exports from Atrush;
  • All Atrush petroleum costs from the DOC date through the commencement of oil exports from Atrush will be paid by the Non-Government Contractors and the majority of the KRG’s share of these costs will be repaid through an accelerated PSC cost recovery arrangement from the sale of future oil production from Atrush; and
  • Feeder Pipeline costs and the balance of the Atrush petroleum costs incurred by the Non-Government Contractors on behalf of the KRG that are not covered by the accelerated PSC cost recovery arrangement will be repaid by the KRG within 2 years from the commencement of oil exports from Atrush.

Fiscal terms under the PSC include a 10% royalty and a variable profit split based on a percentage share to the KRG. GEP has the right to recover costs using up to 40% of the available oil (produced oil less royalty oil) and 55% of the produced gas. The Contractor Group is entitled to cost recovery in respect of all costs and expenditures incurred for exploration, development, production and decommissioning operations, as well as certain other allowable direct and indirect costs.

The portion of profit oil available to the Contractors is based on a sliding scale from 32% to 16% depending on the “R-Factor”, which is a ratio of cumulative revenues to cumulative costs. When the ratio is below one, the Contractor Group is entitled to 32% of profit oil, with a reducing scale to 16% when the ratio is greater than 2.75. In respect of gas, the sliding scale is from 40% to 22%.

Current Operations
Production Facility and Pipeline

30,000 bopd Atrush Phase 1 Production Facility: Construction and commissioning of the Production Facility is complete and commissioning is in progress.

Atrush Spur Pipeline: The Atrush Spur Pipeline project includes the IPPR and a 6 kilometre 10 inch section from the Production Facilities crossing the Chiya Khere Mountain to the IPPR, followed by a 2 kilometer 12 inch section to the Atrush block boundary. The pipeline is substantially complete. The construction of the pump station and the IPPR is nearing completion and is expected to be finalised by the end of this year.

Atrush Feeder Pipeline: The Feeder Pipeline consists of a 18 kilometer 12 inch pipeline to the location of a future blending station followed by a 17 kilometer 36 inch pipeline to the tie-in point on the main export pipeline at Kurdistan Crude Pipeline pumping station #2 (“KCP2”). Work on the Feeder Pipeline has now commenced and, while completion in the first quarter of 2017 is still the target and a possibility, the upcoming onset of wet winter weather has the potential to create further delays in construction and as such there is a probability that completion will be deferred into the second quarter of 2017.

Development Wells

The completion for both the AT-4 and the AT-2 well were installed and successfully tested in second and third quarter of this year.  All four wells intended for production are now completed, connected to the Production Facility and ready for start-up.
A further development well, Chiya Khere-7 (“CK-7”), and the Chiya Khere-9 (“CK-9”) water disposal well, are planned for 2017.

ATRUSH OUTLOOK

Production Facility

The construction of the 30,000 bopd Atrush Phase 1 Production Facility is complete. Commissioning is in progress and is expected to be complete in advance of the Feeder Pipeline.

Engineering and design of water injection facilities has commenced and will continue in 2017.

Oil Export Pipeline

TAQA, as operator of the Atrush PSC, is responsible for the construction of the Spur Pipeline to the block boundary. The construction of the Spur Pipeline is substantially complete. Construction of the pump station and the IPPR is nearing completion and is expected to be finalised by the end of this year.

Work has commenced on the Feeder Pipeline which will ultimately be owned by the KRG. The complexity of commercial and legal discussions has led to delays in the start of construction of the Feeder Pipeline. Completion is targeted for the first quarter of 2017 but due to onset of winter conditions it is probable that it will slip to the second quarter of 2017. Production start is planned to begin after the Feeder Pipeline is commissioned.

Wells

AT-2, the final of four initial producing wells all equipped with electric submersible pumps, was completed in the third quarter of this year. The four initial producing wells are all connected to the Production Facility and now ready for start up.

Plans in 2017 are to drill and test CK-7, an appraisal and development well located in the central area of the Atrush Block, and CK-9, a dedicated water disposal well.

New Ventures

As part of its normal business the Company continues to evaluate new opportunities.


2016 Second Quarter Update

2016 First Quarter Update

2015 Fourth Quarter Update

2015 Third Quarter Update

2015 Second Quarter Update

2015 First Quarter Update

2014 Annual Update

2014 Third Quarter Update

2014 Second Quarter Update

2014 First Quarter Update

2013 Annual Update

2013 Third Quarter Update

2013 Second Quarter Update

2013 First Quarter Update

2012 Annual Update

2012 Third Quarter Update

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2012 First Quarter Update

2011 Annual Update

2011 Third Quarter Update

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2009 Annual Update

2009 Third Quarter Update