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Canacol, ExxonMobil eye Magdalena shale oil play

A unit of Canacol Energy Ltd., Calgary, and ExxonMobil Exploration Colombia Ltd. will pursue oil in conventional and unconventional targets in the Cretaceous La Luna and Rosablanca source rock formations in the Middle Magdalena basin of Colombia.

Canacol’s Carrao Energy Sucursal Colombia, which holds three adjacent contracts totaling 126,000 net acres, entered into a farmout agreement with ExxonMobil on the VMM 2 contract area. The formations are analogous to the Eagle Ford shale in Texas, Canacol said.

Canacol chose to retain its 100% interest in the adjacent Santa Isabel E&P contract in order to capture all of the upside on the block should the play prove commercial on the adjacent VMM 2 and VMM 3 blocks.

ExxonMobil will carry the cost of drilling and testing as many as three wells into the proven oil source rocks. The first two wells will be vertical while the third, if ExxonMobil elects to proceed, may be a horizontal, multistage fractured well. It is anticipated that prospective intervals of the La Luna and Rosablanca will be cored and logged in the first well and stimulated and flow-tested in the second well.

ExxonMobil will pay 100% of the cost of the three wells to a cap of $15 million for each of the first two wells and $17.5 million for the third well should it be a horizontal lateral well exceeding 4,000 ft in lateral length and $ 15 million should it be another vertical well.

ExxonMobil will also pay Canacol $2.2 million upon execution of the farmout for back-costs related to the acquisition of 3D seismic on the block in 2011. The total potential investment on the block is $50 million. ExxonMobil will earn 50% of Canacol’s 40% interest in the contract. Vetra Energia SL, Bogota, will remain operator of VMM 2 during the exploration period and expects to spud the first well in late 2012.

The formal assignment of working interests as contemplated by the transaction, including Canacol's 20% interest, remain subject to the approval of Colombia’s Agencia Nacional de Hidrocarburos.

Canacol has 20% interest in 7,561 net acre VMM 2 and 16,622 net acre VMM 3 and 100% interest in the 101,542 net acre Santa Isabel block.

One of the world’s most productive source rocks, the La Luna is the primary source rock in Venezuela’s Maracaibo basin, which contains over 250 billion bbl of recoverable oil, Canacol noted. Historical vertical wells in nearby Totumal and Buturama fields have tested at as much as 900 b/d of light oil, natural, from La Luna fractured shales.

In the last year, Canacol said, this unconventional play type has received considerable attention from world-class, international resource play operators and is an area of emphasis in the upcoming 2012 Colombia bid round. According to the ANH, 30% of the 109 new E&P contracts planned for the 2012 round have exposure to some form of unconventional resource potential.

Ecopetrol is targeting more than 25,000 b/d of production from the Middle Magdalena unconventional shale fairway by 2015.

Land values in the Middle Magdalena basin that feature prospective unconventional resources have risen sevenfold to more than $700/acre in less than a year, Canacol said.

Shell-Colombia in January 2012 acquired 100% participating interest in the VMM 3 E&P contract. Shell-Colombia has assumed $50 million in work commitments that consist of all costs for seismic acquisition and drilling three exploratory wells. Effective 2014, Canacol has the option to exercise a 20% participating interest in the VMM 3 E&P contract for no additional cost.

Canacol’s zero-cost option to exercise a 20% participating interest in the VMM 3 contract allows it to not only retain a significant interest in VMM 3’s deep Cretaceous potential but also benefit from having a world-class operator such as Shell-Colombia exploring the area. Canacol also aims to capture valuable data from Shell-Colombia’s activities to derisk San Isabel exploration and development.

Canacol plans to drill one exploratory well in the second half of 2012. Should the Cretaceous shale exploratory wells in the adjacent VMM 2 and VMM 3 prove successful, Canacol will have retained important exposure and upside to the play on its 100% owned contract.

Consulting engineers have estimated undiscovered oil in place on San Isabel at mean values of 879 million bbl in Upper La Luna, 915 million bbl in La Luna, and 792 million bbl in Rosa Blanca, Canacol said. The estimates for VMM 2 net to Canacol’s 20% interest are Upper La Luna 274 million bbl, La Luna 230 million bbl, and Rosa Blanca 61 million bbl.


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