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Press release from CNW Group

Connacher Reports Year-End 2010 Reserves; Provides Brief Operational Update

Friday, February 18, 2011

Connacher Reports Year-End 2010 Reserves; Provides Brief Operational Update15:34 EST Friday, February 18, 2011CALGARY, Feb. 18 /CNW/ - Connacher Oil and Gas Limited (TSX: CLL) announced today that as at December 31, 2010, the ten percent present value ("10% PV") of its estimated pre-tax future net revenue of its proved and probable ("2P") bitumen, conventional crude oil and natural gas reserves, as evaluated by GLJ Petroleum Consultants Ltd. ("GLJ"), independent qualified reserves evaluators, surpassed $3.1 billion. This is an increase of nine percent over mid-year 2010 10% PV amounts and is 44 percent higher than the comparable 10% PV amounts at year-end 2009.The increase since mid-year 2010 primarily reflects the impact of a higher price deck for crude oil and bitumen used by GLJ in its December 31, 2010 Report ("Year-End 2010 Report"), modestly offset by higher operating cost assumptions, compared to GLJ's June 30, 2010 report ("Mid-Year 2010 Report"). The increase year over year reflects the impact of the success of the company's 2010 core hole program at Great Divide; the completion, commissioning and start-up of Algar, Connacher's second steam assisted gravity drainage ("SAGD") project during 2010; the submission of an EIA application for the Great Divide Expansion Project; and a higher price deck for crude oil and bitumen used by GLJ in its Year-End 2010 Report. GLJ's 10% PV estimate at December 31, 2010 was based on 2P bitumen reserves of 499.6 million barrels and 9.8 million boe of 2P conventional crude oil and natural gas reserves.  Total 2P reserves of 509.4 million boe at year-end 2010 was 31 percent higher than the company's comparable 2P reserves at year-end 2009.  Except for deduction of production volumes which occurred in the second half of 2010, there were no material differences between Connacher's year-end 2010 2P reserves and those estimated in the company's Mid-Year 2010 Report.  These results were as expected and met our targets for 2010. Year-end 2010 reserves do not include results from Connacher's 2011 oil sands core hole program or the results of conventional drilling undertaken after December 31, 2010. The information on Connacher's reserves, resources and associated present values is set forth in tables below, including comparisons of year-end 2010 results to mid-year 2010 results and to year-end 2009 results.The Year-End 2010 Report was prepared using assumptions and methodology guidelines outlined in the Canadian Oil and Gas Evaluation Handbook ("COGE Handbook") and in accordance with National Instrument 51-101 ("NI 51-101"). Comparisons provided herein with respect to Connacher's conventional and bitumen reserves, bitumen resources and for 10% PVs for December 31, 2010 are to estimates contained in reports, prepared by GLJ, with effective dates of December 31, 2009 ("Year-End 2009 Report") and June 30, 2010.Connacher owns a 100 percent working interest in approximately 98,000 net acres of oil sands leases, primarily located at its Great Divide project in northeastern Alberta, situated 80 kilometers southwest of Fort McMurray and a 50 percent working interest at Halfway Creek, Alberta. Numerous oil accumulations in the McMurray formation have been identified for continuing and future development on Connacher's properties. Connacher's first SAGD project at Great Divide, Pod One, has been producing bitumen since late 2007, with commercial production commencing March 1, 2008. Algar commenced producing bitumen in August 2010 and commerciality was achieved October 1, 2010.  Production from both projects since start up through December 31, 2010 has totaled approximately 7.7 million barrels of bitumen, of which 3.2 million barrels were produced in 2010 including 2.1 million barrels of bitumen in the second half of 2010. These amounts have been deducted from earlier estimates of proved reserves prior to the calculation of reserves and resources as at December 31, 2010.  Connacher's conventional reserve base remained fairly stable in 2010. Subsequent to year end, Connacher disposed of its Battrum properties located in southwestern Saskatchewan.  Estimates of conventional reserves in the Year-End 2010 Report include reserves from these properties.On a per share basis at December 31, 2010, the 10% PV of $3.1 billion for combined 2P reserves equates to approximately $6.94 per Connacher common share outstanding, before provision for the value of contingent resources and prospective resources, as estimated in the Year-End 2010 Report and before taking into account the value of the company's Great Falls, Montana refinery, its undeveloped acreage, the value of its investment in Petrolifera Petroleum Limited, and balance sheet adjustments.  Recognizing the value of Connacher's Best Estimate contingent bitumen resources would add a further $1.28 per share. There are presently approximately 447 million Connacher common shares outstanding. In this press release, unless otherwise stated, reserves refer to reserves of either bitumen or conventional crude oil, natural gas or natural gas liquids or barrels of oil equivalent ("boe") and resources refers to bitumen resources.  Future net revenue is calculated after the deduction of forecast royalties, operating expenses, estimated future capital expenditures and well abandonment costs, but before corporate overhead or other indirect costs, including interest and income taxes, from forecast revenue. The 10 percent pre-tax present value of future net revenue is also referred to as "present value" or "PV". Certain amounts cited herein have been rounded for presentation purposes. Outstanding financial hedges were not included in the evaluation.All references to barrel of oil equivalent ("boe") are calculated on the basis of 6 Mcf:1 bbl. Readers are cautioned that the conversion used in calculating barrels of oil equivalent is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.  Furthermore, boe may be misleading, particularly if used in isolation. Future net revenues disclosed herein do not represent fair market value. Also, estimations of reserves, resources and future net revenue discussed in this press release constitute forward looking information.  See "Forward Looking Information" below.The GLJ Year-End 2010 Report was prepared utilizing the GLJ January 1, 2011 price forecast, effective December 31, 2010.  Readers are referred to the notes to the Summary Tables included in this press release for details regarding the price forecast used by GLJ.  Earlier reports were prepared using the price forecasts then being applied by GLJ.Additional details regarding Connacher's projects and development opportunities at Great Divide can be accessed at www.connacheroil.com or www.sedar.com. Furthermore, additional information regarding Connacher's reserves and resources, including the company's interest in the resources and the risks and the level of uncertainty associated with the recovery of the resources, can be found in the company's annual information form ("AIF") dated March 19, 2010.  This AIF can be accessed at www.sedar.com. The company will be filing an updated AIF later this year and prior to March 31, 2011, once it has completed the audit of its financial and operating results for the year-ended December 31, 2010 and has released them to the public.  This is anticipated to occur on March 17, 2011.Operational Update:During the month of January 2011, pipeline restrictions on a number of crude oil delivery systems persisted, resulting in a continued widening of differentials between Western Canadian heavy crude oil prices and the West Texas Intermediate benchmark price ("WTI").  The impact of the pipeline restrictions, the ensuing back-up of crude oil, winter weather and problems at regional upgraders has reduced the industry's and Connacher's access to storage facilities, sales terminals, crude oil delivery trucks and sales pipelines. As a consequence of these events, Connacher restricted its bitumen production at Pod One during the month of January 2011 by approximately 15% of December year-end production levels.  This was accomplished by scaling back steam injection into certain wells.  Bitumen production at Algar was also temporarily scaled back during January 2011 to facilitate the planned installation of downhole pumps in three wells. Although many of the industry-wide external issues have continued in February 2011, Connacher has favorably positioned itself  to mitigate  the possible adverse production impact through arrangements to commence railing a portion of the company's diluted bitumen ("dilbit") to alternate and prospective new markets in the U.S.A.  It is anticipated the use of rail transportation will accomplish two marketing objectives for Connacher, namely that it will have the effect of eliminating downstream-related barriers to the overall production rampup at Great Divide and secondly, it will facilitate access to new sales markets that are less affected by the current differentials between Western Canadian heavy and light crude oil prices and the differential between WTI and Brent crude oil prices. In February 2011, Connacher resumed full steam injection at Pod One and bitumen production recently reached December 2010 levels. Bitumen production at Algar continues to ramp up following the installation of the three downhole pumps.  The company has also recently commenced steam injection in Algar's last (17th) well pair. Total Great Divide production currently exceeds 15,000 bbl/d.It should be noted that the company's refinery in Great Falls, Montana typically realizes higher margins in periods where there are wide differentials between Western Canadian heavy crude oil prices and WTI.The company is also pleased to report that its applications, first for the injection of "solvent with steam" into well pairs associated with one well pad at Algar and secondly, for the co-injection of methane with steam in the north pad of Pod One, were recently approved by relevant regulatory bodies.  The methane co-injection project at Pod One requires minimal capital and has already commenced, with an objective of achieving a reduction in steam:oil ratios (SORs) in the five existing wells on the north pad.The Algar "solvent with steam" injection pilot is a more significant project.  In addition to an anticipated reduction in SORs in the related wells, there is an expectation of a meaningful increase in the per well bitumen production rate and, over time, an increase in recoverable reserves.  This project is scheduled to commence in the third quarter of 2011. The requisite capital for this project, which follows extensive laboratory analysis and detailed simulation, was included in the company's previously-released capital budget for 2011. If successful, this project has the potential to deliver significant upside and the related technology could be applied not only in other wells at Algar but also on those to be drilled in conjunction with the proposed Great Divide Expansion Project, the EIA application for which is presently before regulators.As announced previously, on February 15, 2011 Connacher received $57.5 million, prior to normal closing adjustments, from the sale of its Battrum properties in Southwest Saskatchewan.  The company continues to advance the disposition of other non-core properties, including its mature natural gas producing assets in northeastern Alberta.  The funds from the sale of Battrum and from the prospective sale of other assets, if completed, will initially be added to Connacher's cash balances, thereby reducing net debt.Connacher Oil and Gas Limited is a Calgary-based crude oil, natural gas and bitumen exploration, development and production company.  Our principal assets are located in the oil sands at Great Divide, Alberta, where we operate two steam assisted gravity drainage ("SAGD") plants for the production of bitumen and sale of dilbit.  We also own conventional crude oil and natural gas production at Marten Creek, Latornell, Randall, Gilby and Three Hills, all in Alberta.   We own and operate a profitable 9,500 bbl/d heavy oil refinery at Great Falls, Montana and own approximately 19 percent of Petrolifera Petroleum Limited, a public crude oil and natural gas company active in South America.Forward Looking InformationThis press release contains forward looking information, including but not limited to estimated reserves and resources and future net revenues associated therewith, planned transportation of dilbit by railway to alternate and prospective new markets and the anticipated benefits therefrom, application of new technologies including the injection of solvent with steam and co-injection of methane with steam projects, and the proposed timing of the release of the company's 2010 audited financial and operating results and filing of its AIF.  The forward looking information is based on current expectations that involve a number of risks and uncertainties, which could cause actual results to differ materially from those anticipated. These risks include, but are not limited to risks associated with the oil and gas industry (e.g. operational risks in development, exploration and production delays or changes in plans with respect to exploration or development projects or capital expenditures; the uncertainty of reserve estimates; the uncertainty associated with geological interpretations; the uncertainty of estimates and projections in relation to production, costs and expenses and health, safety and environmental risks), the risk of commodity price and foreign exchange rate fluctuations, risks associated with the implementation of new technology, risks associated with obtaining, maintaining and the timing of receipt of regulatory approvals, permits, and licenses, uncertainties relating to access to capital markets and the risk of volatile global economic conditions. Additional risks and uncertainties are described in the company's Annual Information Form which is filed on SEDAR at www.sedar.com.  This press release includes information pertaining to the reserves, resources and the value of future net revenue of the Corporation as at December 31, 2010, June 30, 2010 and December 31, 2009 as evaluated by GLJ in its reports dated February 18, 2011, July 7, 2010 and February 12, 2010 (together the "GLJ Reports").  Statements relating to reserves and resources are deemed to be forward looking information, as they involve the implied assessment, based on certain estimates and assumptions, that the reserves and resources described exist in the quantities predicted or estimated, and can be profitably produced in the future.  The GLJ Reports are based on a number of assumptions relating to factors such as initial production rates, production decline rates, ultimate recovery of reserves, timing and amount of capital expenditures, marketability of production, future prices of bitumen, crude oil, natural gas liquids and natural gas, operating costs, anticipated reductions in SORs and operating costs as a result of installation of ESP's in certain wells to improve productivity, well abandonment and salvage values, royalties and other government levies that may be imposed during the producing life of the reserves.  Moreover, there is no assurance that the forecast price and cost assumptions contained in the GLJ Reports will be attained and variances could be material. In addition, the Year-End 2009 Report does not reflect production obtained during the 2010 year, and the Mid-Year 2010 Report does not reflect production obtained in the last half of 2010.  The reserves and resources estimates of Connacher's properties described herein are estimates only. The actual reserves and resources on Connacher's properties may be greater or less than those calculated.  The present value of estimated future net revenues referred to herein should not be construed as the current market value of estimated bitumen, crude oil, natural gas and natural gas liquids reserves attributable to Connacher's properties. In addition, the estimates and future net revenue for individual properties may not reflect the same confidence level as estimates of reserves and future net revenues for all properties, due to the effects of aggregation.Contingent resources disclosed herein were assigned in regions with lower core-hole drilling density than the reserve regions and are outside Connacher's current areas of application for development.  These resource estimates are not classified as reserves at this time, pending further reservoir delineation, project application, facility and reservoir design work, preparation of firm development plans and company approvals.  Contingent resources entail additional commercial risk than reserves.  Adjustments for commercial risks were not incorporated in the estimates of contingent resources set forth herein.  A range of Contingent Resource estimates (Low, Best and High) were prepared to reflect a range of technical uncertainty.  Low Estimate Contingent Resources were assigned to mapped regions of oil-in-place with at least 12 m of continuous bitumen pay along with a conservative estimate of recovery factor. Best Estimate Contingent Resources were assigned to mapped regions of oil-in-place of identified pods outside areas of application for development with at least 10 m of continuous bitumen pay along with a best estimate of recovery factor.  High Estimate Contingent Resources were assigned to mapped regions of oil-in-place of identified pods outside areas of application for development with at least 9 m of continuous bitumen pay along with a more optimistic estimate of recovery factor.  There is no certainty that it will be commercially viable to produce any portion of the Contingent Resources. Prospective resources disclosed herein were attributable to undiscovered pods in unexplored regions, utilizing average parameters from the pods discovered to date and the statistical success within the explored regions of the leases.  Prospective Resources entail additional commercial exploration risks than reserves and Contingent Resources.  A range of Prospective Resources estimates were prepared to reflect a range of technical uncertainty.  Best and High estimates of Prospective Resources were assigned using net pay thresholds of 10 m and 9 m, respectively.  No Low Estimate Prospective Resources were assigned, given the risk of not encountering an undiscovered pod of sufficient size to be considered commercial. The Prospective Resources estimates reflected herein have been risked for the chance of discovery but have not been risked for the chance of development and hence are considered partially risked estimates. Adjustments for commercial risks were not incorporated in the estimates of Prospective Resources set forth herein. If a discovery is made, there is no certainty that it will be developed.  If it is developed, there is no certainty as to the timing of such development. Due to the risks, uncertainties and assumptions inherent in forward looking information, prospective investors in the company's securities should not place undue reliance on forward looking information.  Forward looking information contained in this press release is made as of the date hereof and are subject to change.  The company assumes no obligation to revise or update forward looking information to reflect new circumstances, except as required by law.  Summary TablesEstimates of reserves, resources and future net revenue constitute forward looking information. See "Forward Looking Information" in the press release to which these summary tables are attached. Amounts are presented for working interest volumes which are the company's working interest (operating or non-operating) share before deducting royalties and without including any royalty interests of the company.A. Working Interest Volumes Connacher Oil and Gas Limited Bitumen Reserves and Resources    31/12/09  30/06/10  31/12/10  6 month  Yr End       (mbbl)     % change  % changeProved Reserves (1P) (1)    173,225  182,212  180,154  -1%  4%Proved and Probable Reserves (2P) (1)(2)    379,180  501,701  499,644  0%  32%Proved, Probable and Possible Reserves (3P) (1)(2)(3)   461,672  605,753  603,695  0%  31%Low Estimate Contingent Resources (4)(6)    148,408  215,868  223,443  4%  51%Best Estimate Contingent Resources (4)(7)    134,919  223,245  220,572  -1%  63%High Estimate Contingent Resources (4)(8)    188,766  319,821  408,908  28%  117%Best Estimate Prospective Resources (5)(7)    97,142  71,626  80,240  12%  -17%High Estimate Prospective Resources (5)(8)    236,786  195,477  287,337  47%  21%                  Connacher Oil and Gas Limited Conventional Canadian Reserves    LIGHT/MEDIUM OIL/NGL (mbbl)  NATURAL GAS (mmcf)    31/12/09  30/06/10  31/12/10  6 mo  12 mo  31/12/09  30/06/10  31/12/10  6 mo  12 mo             % change  % change           % change  % changeProved Reserves (1P)(1)         2,379    2,375       2,536  7%  7%     27,324    26,190    23,864  -9%  -13%Probable Reserves(2)            845       950         974  3%  15%    11,733  14,595    13,818  -5%  18%Proved + Probable Reserves (2P) (1) (2)         3,224    3,325     3,510  6%  9%    39,057  40,785  37,682  -8%  -4%                                A. Working Interest Volumes Connacher Oil and Gas Limited Combined Conventional and Bitumen Reserves(9)    31-Dec-09  30-Jun-10  31-Dec-10  6 mo  12 mo       (mboe)     % change  % change                 Proved Conventional(1)             6,934       6,741         6,513  -3%  -6%Proved Bitumen(1)         173,225  182,212     180,154  -1%  4%Total Proved (1P)(1)         180,159  188,953     186,667  -1%  4%Probable Conventional(2)             2,801      3,383        3,277  -3%  17%Probable Bitumen(2)         205,955        319,489  319,490  0%  55%Total Probable(2)         208,756     322,872    322,767  0%  55%Proved + Probable Conventional(1)(2)             9,735  10,124    9,790  -3%  1%Proved + Probable Bitumen(1)(2)         379,180     501,701  499,644  0%  32%Total Proved + Probable (2P)(1)(2)         388,915  511,825  509,434  0%  31%Total 3P Reserves(1)(2)(3)         471,406  615,876    613,486  0%  30%                 B. Present Value Connacher Oil and Gas Limited 10% Present Value of Future Net RevenueBased on Forecast Prices and Costs   Bitumen Reserves and Resources - Before Tax    31-Dec-09  30-Jun-10  31-Dec-10  6 mo  12 mo       ($MM)     % change  % change                 Proved Reserves (1P) (1)   1,369  1,345  1,397  4%  2%Proved and Probable Reserves (2P) (1)(2)   2,001  2,702  2,966  10%  48%Proved, Probable and Possible Reserves (3P) (1)(2)(3)   3,156  3,383  3,713  10%  18%Low Estimate Contingent Resources (4)(6)   176  587  780  33%  343%Best Estimate Contingent Resources (4)(7)   384  422  571  35%  49%High Estimate Contingent Resources (4)(8)   531  663  1,212  83%  128%Best Estimate Prospective Resources (5)(7)   236  129  217  68%  -8%High Estimate Prospective Resources (5)(8)   610  381  696  83%  14%                 Connacher Oil and Gas Limited 10% Present Value of Future Net RevenueBased on Forecast Prices and Costs  Combined Conventional and Bitumen Reserves - Before Tax(9)    31-Dec-09  30-Jun-10  31-Dec-10  6 mo  12 mo       ($MM)      % change  % change                 Proved Conventional(1)               122              109             99  -9%  -19%Proved Bitumen(1)            1,369         1,345     1,397  4%  2%Total Proved (1P)(1)            1,491        1,454     1,496  3%  0%Probable Conventional(2)                 33             40             36  -10%  9%Probable Bitumen(2)               632       1,357      1,569  16%  148%Total Probable(2)               665      1,397     1,605  15%  141%Proved + Probable Conventional(1)(2)               155              149        136  -9%  -12%Proved + Probable Bitumen(1)(2)            2,001     2,702    2,966  10%  48%Total Proved + Probable (2P)(1)(2)            2,156           2,851     3,102  9%  44%Total 3P Reserves(1)(2)(3)            3,311     3,532     3,849  9%  16%                 Notes: 1)Proved Reserves are those reserves that can be estimated with a high degree of certainty to be recoverable.  It is likely that the actual remaining quantities recovered will exceed the estimated proved reserves.2)Probable Reserves are those additional reserves that are less certain to be recovered than proved reserves.  It is equally likely that the actual remaining quantities recovered will be greater or less than the sum of the estimated proved plus probable reserves.3)Possible Reserves are those additional reserves that are less certain to be recovered than probable reserves.  It is unlikely that the actual remaining quantities recovered will exceed the sum of the estimated proved plus probable plus possible reserves.  There is a 10% probability that the quantities actually recovered will equal or exceed the sum of proved plus possible reserves.4)Contingent resources are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations using established technology or technology under development, but which are not currently considered to be commercially recoverable due to one or more contingencies.  These resource estimates are not currently classified as reserves, pending further reservoir delineation, project application, facility and reservoir design work, preparation of firm development plans and company approvals.  Contingent resources entail additional commercial risk than reserves and adjustments for commercial risks have not been incorporated in the summaries set forth herein.  There is no certainty that it will be commercially viable to produce any portion of the contingent resources.5)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.  The Prospective Resources estimates reflected herein have been risked for the chance of discovery but have not been risked for the chance of development and hence are considered partially risked estimates.  Prospective Resources entail additional commercial risk than reserves and adjustments for commercial risks have not been incorporated in the summaries set forth herein.  If a discovery is made, there is no certainty that it will be developed. If it is developed, there is no certainty as to the timing of such development.6)Low Estimate: this is considered to be a conservative estimate of the quantity that will actually be recovered.  It is likely that the actual remaining quantities recovered will exceed the low estimate.  If probabilistic methods are used, there should be at least a 90 percent probability that the quantities actually recovered will equal or exceed the low estimate.7)Best Estimate: this is considered to be the best estimate of the quantity that will actually be recovered.  It is equally likely that the actual remaining quantities recovered will exceed the best estimate.  If probabilistic methods are used, there should be at least a 50 percent probability that the quantities actually recovered will equal or exceed the best estimate.8)High Estimate: this is considered to be an optimistic estimate of the quantity that will actually be recovered.  It is unlikely that the actual remaining quantities recovered will exceed the high estimate.  If probabilistic methods are used, there should be at least a 10 percent probability that the quantities actually recovered will equal or exceed the best estimate.9)Does not include bitumen resources or undeveloped land value.10)Pricing assumptions in the Year-end 2009 Report and Year-end 2010 Report were as follows:                        Bitumen  WTI  Natural Gas    (wellhead) ($/bbl)  (US$/bbl)  (AECO) ($/mcf)    Year-end 2009  Year-end 2010  Year-end 2009  Year-end 2010  Year-end 2009  Year-end 2010                    2011   53.01  53.31  83.00  88.00  6.79  4.162012   54.36  54.41  86.00  89.00  6.89  4.742013   57.03  55.39  89.00  90.00  6.95  5.312014   60.77  58.50  92.00  92.00  7.05  5.772015   62.14  60.88  93.84  95.17  7.16  6.222016   63.53  62.57  95.72  97.55  7.42  6.532017   64.96  64.51  97.64  100.26  7.95  6.762018   66.41  66.27  99.59  102.74  8.52  6.902019   67.74  68.21  101.58  105.45  8.69  7.06Thereafter   +2%/yr  +2%/yr  +2%/yr  +2%/yr  +2%/yr  +2%/yrUS$/CDN$ exchange rates were 0.95 in the Year-End 2009 Report and 0.98 in the Year-End 2010 Report.11)    Tables may not add due to rounding.For further information: Richard A. Gusella President and Chief Executive OfficerORPeter D. Sametz Executive Vice President and Chief Operating OfficerORGrant D. Ukrainetz Vice President, Corporate DevelopmentPhone:  (403) 538-6201 inquiries@connacheroil.com     Fax:  (403) 538-6225 Website:  www.connacheroil.com