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Press release from CNW Group

CONNACHER OIL AND GAS PROVIDES OPERATIONAL UPDATE; CONVENTIONAL RESOURCE PLAYS PROGRESSING FAVOURABLY

Tuesday, July 05, 2011

CONNACHER OIL AND GAS PROVIDES OPERATIONAL UPDATE; CONVENTIONAL RESOURCE PLAYS PROGRESSING FAVOURABLY17:00 EDT Tuesday, July 05, 2011CALGARY, July 5, 2011 /CNW/ - Connacher Oil and Gas Limited (CLL - TSX) today announced the considerable continuing progress of its two light gravity crude oil resource plays in central Alberta and a doubling of its exposure to a multi-zone liquids-rich natural gas resource play at Latornell in the Deep Basin of northwestern Alberta.At Twining, a third Pekisko well has been placed onstream, at attractive albeit temporary facility-restricted rates.  Three additional wells have been licensed on this play, with one rig dedicated to a continuous drilling program during the balance of 2011.With the licensing of our first horizontal well at Penhold, Alberta, we have now identified the Lower Cretaceous Viking Formation as our second central Alberta resource play.  New facilities, infrastructure, reserves and production have also been acquired at Penhold, complementing our 100 percent working interest in approximately 40 sections (25,600 acres) of primarily Crown rights in the region.  A rig has been contracted to drill at least two Viking horizontal wells by year end 2011.Today, Connacher also acquired approximately 476,000 boe of proved and probable reserves (as estimated at 31/12/2010 by GLJ Petroleum Consultants Ltd., before deduction of minor production volumes during 2011) at Latornell (Townships 63-64, Ranges 1-2, W6M), Alberta.  We also expanded our land base in this area by an additional 9.25 sections or 5,920 net acres. The assets were acquired from a private company which had joint ventured with Connacher on a portion of lands already held in the region.  With the completion of the transaction, Connacher now owns and operates a 100 percent working interest in 38 sections (24,320 acres) in this Deep Basin resource play, including Duvernay rights under 28 sections or 17,920 acres.  The area has multi-zone liquids-rich natural gas potential from the Dunvegan to the Duvernay, including the Wilrich, with possible Nordegg crude oil potential also recognized. Numerous undrilled vertical and horizontal drilling opportunities have been identified.At Twining, in the general Three Hills region of central Alberta, Connacher owns 38 sections along the Pekisko Fairway.  We recently commenced production from the third of three wells drilled earlier in the year, located to provide us with an initial range of information on the play.  Completion of the 6-23-31-25 W4M well had been delayed by extremely wet weather and similar surface conditions, which precluded access to the well location.   It has now been onstream and on pump at restricted rates since June 19, 2011; the well has produced at peak rates to date of 300 boe/d and peak crude oil rates to date of 250 bbl/d during this period of temporary facility-constrained production.  Average daily production during this period has been 132 bbl/d of crude oil and 161 boe/d (82 percent crude oil) with an average water cut of 54 percent.   Production on July 2, 2011 was increasing at 150 bbl/d of crude oil and 175 boe/d of crude oil and oil equivalent natural gas, with the water cut slightly below 50 percent.  This water cut is consistent with that occurring at our 13-24-31-25 W4M well, thus meeting our expectations and matching our estimated production type curve.  The 13-24 well has been onstream since February 2011 and has produced close to 20,000 boe during that time.  Our second well at Twining experienced high water cuts which we attribute to an offsetting area water injection and now mostly produces natural gas with continuing high water cuts.To commence Phase II of our drilling program at Twining, we recently licensed three new horizontal Pekisko wells, including 1-23; 2-23 and 1-24, all in Township 31, Range 25 W4M.  We have a dedicated drilling rig that will continue to drill these and further follow up locations through the first quarter of 2012.  We have begun an application to construct a new battery in this region so we can remove any facility constraints and manage all of our anticipated and growing production (currently 360 boe/d) in the region.  Front-end engineering design work is well underway for the battery and related infrastructure, which would be constructed in 2012.  This remains an attractive region with multi-zone potential and normally affords year-round access, buoyed by excellent relationships we have established with the surface owners in the area.The Penhold area is south of Red Deer approximately forty miles northwest of Twining and is located adjacent to the Queen Elizabeth II Highway, which runs between Calgary and Edmonton.  We have just licensed our first Viking multi-frac horizontal location at 16-13-36-5 W5M and expect to commence drilling imminently upon rig arrival, with our primary objective being light gravity 40 degree API Viking crude oil.  Connacher believes we have the potential for approximately 80 locations on our 100 percent working interest lands, covering approximately 40 sections (approximately 25,600 acres) of Crown and freehold rights in the region.  A second location is expected to be licensed in the next several days.   In conjunction with our establishment of an extensive land base in the region on this resource play, Connacher also recently completed the purchase of a 7.5 mmcf/d natural gas plant in the area, together with related gathering lines and related infrastructure, which will facilitate early production optimization upon identification of any new light gravity crude oil with associated solution natural gas.  Our current production at Penhold is approximately 270 boe/d, including 46 boe/d of crude oil and natural gas liquids.  As with Twining, this is a year-round access area with multi-zone potential.  There are at least three other operators pursuing Viking crude oil opportunities with horizontal multifrac drilling and completion programs in the region.As a result of these recent acquisitions and drilling activity, all of Connacher's conventional production regions, including Gilby in central Alberta, have an established production base and also identifiable light gravity crude oil or liquids-rich natural gas resource potential.  All of the above activities, including the asset purchases, planned drilling at Twining and at Penhold and engineering preparations for permanent facilities at Twining have been provided for or will be accommodated within Connacher's 2011 capital budget, as presented in May 2011.  Our conventional production, after adjustments for asset sales earlier in the year, has now surpassed 1,000 boe/d and has grown by 325 boe/d during the past eight weeks, primarily due to our drilling success at Twining.At Great Divide, production during May 2011 averaged 14,587 bbl of bitumen per onstream day.  Connacher conducted a turnaround at Algar during early May 2011 and as a consequence lost approximately 7.8 days of Algar production for the month.  Only 0.54 days were lost at Pod One during the month, reflecting streamlined operations.  Pod One averaged 7,381 bbl of bitumen per onstream day, while Algar averaged 7,206 bbl of bitumen per onstream day.  Total production at Great Divide for May 2011 was 12,646 bbl per calendar day, with recorded levels of 7,252 bbl/d at Pod One and 5,393 bbl/d at Algar, reflecting the impact of the aforementioned turnaround.  We anticipate initiating our steam-assisted gravity drainage ("SAGD") plus solvent pilot program at Algar during the third quarter of 2011, as we continue to focus on production optimization at our oil sands projects.The Halfway Creek sales process announced in June 2011 is continuing, with bids anticipated later this month.  There has been a considerable expression of interest in this asset.  We are also finalizing aspects of our process to secure a joint venture arrangement for the accelerated development of our proposed expansion at Algar, for which we anticipate receiving regulatory approval sometime later in 2011.We anticipate a busy second half of 2011 with drilling at Twining and Penhold, planning for 2012 facility expansion on continued success at Twining and advancing our joint venture discussions as part of our process to secure the funding of our proposed Algar expansion at Great Divide.  We also anticipate farmout discussions to encourage near term deep drilling activity at Latornell.Our refinery in Montana experienced favourable margins and reasonably strong product demand in April and May of this year and with improved weather conditions, paving activity in Southern Alberta and in Montana should be active and buoyant, contributing strong net margins to our overall results.We anticipate releasing our first half 2011 comparative financial and operating results on August 11, 2011.  These results will reflect the adverse impact on net income of certain costs associated with refinancing our long term debt in May 2011.  The refinancing streamlined Connacher's balance sheet, substantially reduced interest costs while extending the remaining term of our indebtedness, without any principal repayment requirement, to 2018 and 2019.Connacher Oil and Gas Limited is a Calgary-based company whose primary assets are two SAGD bitumen production projects, called Pod One and Algar, which are a core part of the company's Great Divide assets in the Athabasca oil sands region of Alberta.  Further expansion of the company's bitumen production is contemplated from the continuing rampup of production at Algar, from the application of optimization programs and the introduction of innovative new recovery methods at both projects, including SAGD plus solvent at Algar in 2011.  The company is expanding its involvement in light gravity crude oil resource plays at Twining and Penhold in central Alberta and has also consolidated its position in an extensive land position prospective for liquids rich natural gas resource accumulations at Latornell in the Deep Basin, Alberta.  Connacher also owns and operates a 9,500 bbl/d heavy oil refinery in Great Falls, Montana, U. S. A.Forward Looking Information: This press release contains forward looking information including but not limited to expectations regarding future development and exploration activities, timing to initiate construction of a new battery at Twining, potential for drilling locations at Penhold and the licensing of additional locations at Penhold, the anticipated impact of the acquisition of the natural gas plant at Penhold on early production optimization, expected timing of initiating a SAGD plus solvent pilot program at Algar, the anticipated timing of receiving bids pursuant to the Halfway Creek sales process, possible joint venture and farmout arrangements, timing or receipt of regulatory approval of the proposed expansion at Algar, the potential of Connacher's conventional resource plays, the impact of costs associated with refinancing the Corporation's long term debt on the Corporation's financial results for the first half 2011 and future financial results from the Corporation's refinery.Forward looking information is based on management's expectations regarding future growth, results of operations, production, future commodity prices and foreign exchange rates, future capital and other expenditures (including the amount, nature and sources of funding thereof), plans for and results of drilling activity, environmental matters, business prospects and opportunities and future economic conditions. Forward looking information involves significant known and unknown risks and uncertainties, which could cause actual results to differ materially from those anticipated. These risks include, but are not limited to: the 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 and resource estimates, the uncertainty of geological interpretations, the uncertainty of estimates and projections relating 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 impact of general economic conditions, risks and uncertainties associated with securing and maintaining the necessary regulatory approvals to proceed with the operation and continued expansion of the Great Divide oil sands project and risks associated with the sale of the Halfway Creek properties. In this press release, per barrel of oil equivalent (boe) amounts have been calculated using a conversion rate of six thousand cubic feet of natural gas to one barrel of crude oil (6:1). The conversion is based on an energy equivalency conversion method primarily applicable to the burner tip and does not represent a value equivalency at the wellhead. Boes may be misleading, particularly if used in isolation.In addition, reported average or instantaneous production levels may not be reflective of sustainable production rates and future production rates may differ materially from the production rates reflected in this press release due to, among other factors, difficulties or interruptions encountered during production. Additional risks and uncertainties affecting Connacher and its business and affairs are described in further detail in Connacher's Annual Information Form for the year ended December 31, 2010, which is available at www.sedar.com. Although Connacher believes that the expectations in such forward looking information are reasonable, there can be no assurance that such expectations shall prove to be correct. The forward looking information included in this press release is expressly qualified in its entirety by this cautionary statement. The forward looking information included herein is made as of the date of this press release and Connacher assumes no obligation to update or revise any forward looking information to reflect new events or circumstances, except as required by law. For further information: Richard A. Gusella Chairman and Chief Executive Officer OR Peter D. Sametz President and Chief Operating Officer OR Grant D. Ukrainetz Vice President, Corporate Development Phone:  (403) 538-6201     Fax:  (403) 538-6225 inquiries@connacheroil.com       Website:  connacheroil.com www.connacheroil.com