SOCAR signs PSA for enhanced oil recovery project

Jun. 3, 1998 SOCAR, the State Oil Company of the Azerbaijan Republic has officially signed an agreement in principal with Union Texas Qobustan Ltd, which will serve as the operator, and Commonwealth Oil and Gas for a production sharing agreement (PSA) for an onshore enhanced oil recovery project, known as the Southwest Qobustan venture.
Union Texas and Commonwealth will each hold a 40 % interest in the joint venture with SOCAR retaining a 20 % interest.
Union Texas and Commonwealth expect to enhance production through exploitation and exploration work on 3 blocks on the Southwest Qobustan area located within a 50-mile radius of Baku in south-eastern Azerbaijan.

Union Texas plans to focus its initial activities on re-development of the existing fields on the three blocks, which comprise a total of 143,000 acres. The Union Texas-operated venture expects to develop oil from structures on the blocks that have previously been tested but are not currently on production.
In addition, existing seismic data indicate considerable upside exploration potential from other structures on the Southwest Qobustan contract area.
The Union Texas venture plans to significantly boost daily production from the 3 blocks within 5 years by reworking existing wells and drilling development wells. Well workovers, a development drilling program and first production are expected to begin in late 1999.

The PSA includes a minimum 3-year work program that requires drilling 7 wells and rehabilitating 7 existing wells, which is estimated to cost less than $ 20 million gross. However, Union Texas expects ultimate capital expenditures to be considerably higher over time as the project demonstrates success. Initial reserve bookings are not anticipated until the work program is well underway.
Final approval of the PSA by Azerbaijan's parliament is expected during the second half of 1998 or in early 1999.

The three blocks in the Southwest Qobustan venture are known as the Central, Coastal and Northern blocks. Fields on the Central and Coastal blocks were discovered during 1949 - 1995. The Northern block fields were discovered during 1959 - 1960.
Currently, only the Coastal block is onstream, producing less than 200 bpd.
The quality of crude oil at the three blocks ranges from 26 - 57 API gravity. The average crude oil gravity is expected to be 30 - 35 API. Oil from the blocks is considered to be sweet and is very low in corrosive chemical compounds.
The terms of the PSA provide for a sliding scale for the contractor profit oil share, beginning at 50 % and declining to 10 % and also include provisions for cost recovery. The sliding scale is anticipated to yield an average 40 % contractor share of profit over the 25-year life of the project.
The PSA is renewable after its initial 25-year term.

The joint venture with Commonwealth and SOCAR represents Union Texas' second enhanced oil recovery project in Azerbaijan.
In mid-April 1998, Union Texas Lok Batan Ltd entered into an agreement with BMB Oil, Inc. to acquire 75 % of BMB's interest in a PSA with SOCAR that covers the 225,000-acre West Apsheron oil and gas concession located near the project area with Commonwealth and SOCAR.
Union Texas also serves as operator of the West Apsheron venture.

Union Texas Petroleum Holdings, Inc. explores for and produces oil and gas primarily in the U.K. North Sea, Indonesia, Venezuela, Pakistan, Alaska and other strategic areas. The company has petrochemical operations in Louisiana.
On May 4, 1998, ARCO and Union Texas Petroleum signed a definitive Agreement and Plan of Merger.

Commonwealth Oil and Gas Company Limited is a subsidiary of Canadian A&B Geoscience Corporation. A&B Geoscience Corporation is a fully integrated marine seismic contractor specialising in shallow water, high resolution, 3-D and 2-D data acquisition.
A&B has been managing seismic projects on a world wide basis for over ten years. A&B has been actively involved in Azerbaijan since 1994 when, with the support of SOCAR, A&B completed thefirst commercial 2-D towed streamer marine seismic survey in the Caspian Sea by a Western company.