Message to Shareholders
Zargon Oil & Gas Ltd. has released financial and operating results for the first quarter of 2013 that highlighted continued progress in its drive to become a long term sustainable, dividend-paying energy producer. The quarter was highlighted by the sanctioning of the construction of our Little Bow Alkaline Surfactant Polymer ("ASP") tertiary oil recovery project in Southern Alberta.
Zargon's sustainability model implies balancing cash inflows and outflows, generating meaningful growth in cash flow per share, while continuing the shift toward oil and liquids over the next few years. Zargon believes that the Little Bow ASP tertiary oil recovery production will help improve sustainability, as it offers the best blend of low-decline, low-sustaining capital and high-netback and long-life assets available to the company.
The Company's intentions throughout the remainder of 2013 will be to:
-- Deliver the Little Bow ASP project on-time and on-budget, with first chemical injections to occur in January 2014;-- Deliver a consistent dividend of $0.06 per common share per month;-- Deliver a property divestiture program designed to high grade and concentrate the company's asset portfolio; and-- Maintain a strong balance sheet through substantial oil hedging programs while limiting drilling capital to high-graded projects offering the most attractive risk adjusted returns.
Little Bow Alkaline Surfactant Polymer ("ASP") Project
Zargon has made good progress with the Little Bow ASP project in 2013. This ASP project entails the injection of a dilute chemical solution into a partially depleted reservoir to recover incremental oil reserves. In its 2012 year end review, McDaniel and Associates Consultants Ltd. assigned 4.4 million barrels of probable undeveloped oil equivalent reserves to Zargon's working interest in phases 1 and 2 of the project.
Since the February 2013 sanctioning of the project, Zargon has advanced the project on many fronts: facility approvals from the Energy Resources Conservation Board ("ERCB") have been obtained; material and equipment procurement is proceeding; field pipeline replacements and upgrades have been constructed; and facility construction contracts and ASP chemical supply bids are being negotiated. Field construction is expected to commence in late May 2013, which will provide for first chemical injections in January 2014 and incremental oil production by the second quarter of 2014.
The total construction capital cost of phases 1 and 2 of the Little Bow ASP project continues to be approximately $60 million (as spent dollars). Of this total, $6.5 million of expenditures were incurred in 2012 and $5.0 million were spent in the first quarter of 2013. For the remainder of 2013, we plan on spending $37 million, an amount that includes $3 million of 2014 expenditures that have been advanced into 2013 to prepare for early production responses and the first ASP chemical deliveries. The estimated total phase 1 and 2 chemical cost for the 2014-2019 chemical injection period will be capitalized and remains at $66 million (as spent dollars). The project's final $12 million, for the implementation of phase 2, is scheduled for 2015.
Based on the current construction schedule, we forecast that the Little Bow ASP project will provide 250 barrels of oil per day of incremental production in 2014, which will be comprised of an initial production response in the 2014 second quarter and a 2014 year end rate of 500 barrels of oil per day. Without additional infill drilling, incremental production from phases 1 and 2 of the project are forecast to reach 1,600 barrels of oil per day by 2016. Using these rates with an estimated field oil price of $68 Cdn. per barrel, a 12 percent incremental tertiary royalty rate, and operating costs of $12 per barrel of incremental oil, the project is forecast to provide a field netback of approximately $50 per barrel of incremental oil production volumes.