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Press release from CNW Group

Connacher Oil and Gas Initiates SAGD+? Project At Great Divide Oil Sands Algar Pad 203

Monday, July 18, 2011

Connacher Oil and Gas Initiates SAGD+? Project At Great Divide Oil Sands Algar Pad 20309:00 EDT Monday, July 18, 2011CALGARY, July 18, 2011 /CNW/ - Connacher Oil and Gas Limited (CLL-TSX) announced today that it has initiated the injection of solvent with steam on wells 203-2 and 203-3 on Algar Pad 203, two of seven horizontal steam-assisted gravity drainage ("SAGD") well pairs on one of three wellpads at the company's bbl/d Algar bitumen production operation at Great Divide in Alberta's oil sands. Initial target solvent injection rates were achieved within approximately three hours of startup on July 16, 2011.This pilot project is designed to measure the increase in bitumen production due to the downhole reduction of bitumen viscosity, through the interaction of the solvent and bitumen at the steam oil interface and the amount of solvent recovered after it is injected.  Connacher anticipates there will be a measurable improvement in individual well and overall steam:oil ratios ("SORs") as a consequence of the solvent injection. In turn, this is anticipated to be further improved as a result of anticipated increases in individual well productivity and overall Algar production levels.  If the field trial project proves to be as successful as Connacher's initial laboratory and simulation results, solvent injection may be expanded to all seven wells on Pad 203 by year end 2011.  Further applications to the two other Algar well pads and possibly also to Pod One would then be under consideration for 2012.Connacher is excited about the potential of SAGD+™.  It represents another technical innovation being applied to bitumen recovery initiatives at our Great Divide oil sands operations in northeastern Alberta.  Our oil sands projects are the company's most significant assets, including 180 million barrels of proved ("1P") reserves and over 500 million barrels of proved and probable ("2P") reserves, as estimated by GLJ Petroleum Consultants Ltd. ("GLJ"), independent petroleum consultants, in their report dated February 18, 2011 and effective December 31, 2010.  Connacher has already built and operates two SAGD projects at Great Divide, namely Pod One and Algar. We have already produced approximately 10 million barrels of bitumen.  Backed by our proved, probable and possible ("3P") reserves totalling 604 million barrels, including 104 million barrels of possible reserves, GLJ estimated we have the prospect of sequentially developing over 70,000 bbl/d of productive capacity from these Great Divide reserves.   Access to this excellent pipeline of development opportunities has a high level of immediacy, as we have already submitted an application to regulators to secure authorization to expand our productive capacity at Algar by 24,000 bbl/d.  We expect this application will secure approval before year end 2011.  In addition, the company also owned 221 million barrels of best estimate contingent resources and 80 million barrels of best estimate prospective resources as at year end 2010 (as again estimated by GLJ) and anticipates its winter 2011 core hole drilling and 3D seismic programs at Great Divide and at Thornbury, situated southwest of Great Divide, could contribute to new contingent resource recognition when the company completes its year end 2011 reserve report.  This, in turn, could further enhance future growth possibilities if these resources are upgraded over time to reserve status. Development of this productive potential may also be accelerated upon completion of a joint venture later in 2011, as there are few similar near-term production opportunities from defined 2P reserves available to third parties in the oil sands, as most joint ventures have emphasized early stage resource opportunities.Development of growing, reliable bitumen production at Great Divide is the foundation of Connacher's five point strategy leading to value recognition.  We believe our SAGD+™ project will accelerate the realization of this goal.  We have already completed the streamlining of our balance sheet with our successful refinancing of our long-term debt.  This transaction lowered our cost of capital and with no financial maintenance covenants and no principal repayments until maturities in 2018 and 2019, our funds from operations, supplemented by third party funds through farm outs and joint ventures, will be available to fund growth activities in the oil sands and in our prospective conventional resource plays at Twining and Penhold, both in central Alberta.  Our asset rationalization program is also well-advanced and we continue to high-grade our asset base and monetize non-cash generating assets to maintain a high level of liquidity.  We are committed to the strategy we have enunciated, with a view to completing component parts in a systematic and effective manner.  In this regard, we are well advanced and remain optimistic about our outlook, despite challenging market conditions for heavy oil, exacerbated by the large Brent/WTI differential, the prevailing heavy oil differential, the strong Canadian dollar, general cost pressures in the oil business arising from strong demand for services, especially in the unconventional resource space and the usual challenges of producing bitumen.Weather permitting and upon the arrival of our contracted drilling rigs, we will be spudding our first new wells at Twining and Penhold, likely during the week of July 18, 2011.  Field operations in central Alberta have been curtailed and affected by extremely wet weather conditions since breakup, as has been reported by all operators.  Our production from Twining has also been temporarily constrained by the capacity of available facilities.  Nevertheless, we are producing over 1,000 boe/d of conventional production, well above levels following the successful sale of our properties at Battrum, Saskatchewan and Marten/Randall, Alberta.Connacher is a Calgary-based bitumen, crude oil and natural gas production and sales company whose primary assets are two SAGD bitumen production projects, Pod One and Algar.  These are a core part of the company's Great Divide assets in the oil sands of Alberta.  Further expansion of the company's bitumen production is contemplated from the continuing rampup at Algar, the potential impact of its SAGD+™ project and subsequent broader application at Algar well pad 203 and other technical innovations being applied or considered by Connacher.  We are expanding our light gravity crude oil resource plays at Twining and Penhold in central Alberta and hold a substantial acreage position, which we recently consolidated, at Latornell, Alberta, a region in the Deep Basin prospective for multi-zone liquids rich natural gas, including zones form the Dunvegan Formation to the Duvernay Formation.  We also own and operate a profitable 9,500 bbl/d heavy oil refinery at Great Falls, Montana, U. S. A.Forward Looking Information: This press release contains forward looking information including but not limited to expectations regarding the anticipated impact of solvent injection on future SORs and production levels, future well productivity and overall production levels, reserves and resources estimates, future applications of solvent injection at additional well pads and additional future innovations, future development and exploration activities, 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 and the ability to fund future growth activities and, future application of innovations.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 condition and 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.  Statements relating to "reserves" and "resources" are deemed to be forward looking statements, 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.  Certain information and assumptions relating to the reserves and resources reported herein are set forth in Connacher's annual information form for the year ended December 31, 2010 ("AIF") which is available at www.sedar.com.  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. In addition, reference should be made to Connacher's AIF for additional information pertaining to Connacher's resources, including the risks and level of uncertainty associated with the recovery thereof.  Contingent resources means 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 were not considered to be commercially recoverable due to one or more contingencies. 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. Additional information relating to the estimate of contingent resources included in this press release is included in the AIF.  Best Estimate Contingent Resources were assigned to mapped regions of oil-in-place of identified accumulations outside areas of application for development with at least 10 m of continuous bitumen pay along with a best estimate recovery factor. There is no certainty that it will be commercially viable to produce any portion of the Contingent Resources.Prospective Resources means 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.  Prospective resources disclosed herein were assigned in unexplored regions of Connacher's acreage.  Prospective resources entail commercial risk not applicable to reserves.  The prospective resource estimate set forth herein has been risked for the chance of discovery but not for the chance of development and hence are considered partially risked estimates.  There is no certainty that any portion of the prospective resources will be discovered.  If a discovery is made, there is no certainty that it will be commercially viable to produce any portion of the prospective resources.  Additional information relating to the estimate of prospective resources included in this press release is included in the AIF. "Best Estimate" 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 be greater or less than the best estimate.  If probabilistic methods are used, there should be at least a 50 percent probability that the quantity actually recovered will equal or exceed the best estimate.Possible reserves are those additional reserves that are less certain to be recovered than probable reserves. There is a 10% probability that the quantities actually recovered will equal or exceed the sum of proved plus probable plus possible reserves.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.Design capacity is not necessarily indicative of the stabilized production levels that may ultimately be achieved at the Connacher's SAGD facilities.  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 AIF. 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   inquiries@connacheroil.com     www.connacheroil.com Fax:  (403) 538-6225 Website:  connacheroil.com