PELICAN XIII & MIDIA XV
In late 2006 Sterling completed an arrangement with Talisman Energy Ltd. to acquire its 80% interest in the Black Sea blocks X111 Pelican and XV Midia. As a result Sterling increased its interest from 20% to 100% and operates the blocks.
The blocks cover 1.1 million acres and are comprised of the Pelican Block XIII to the north and the Midia Block XV to the south. These blocks contain several mapped prospects as well as the Doina and Ana gas discoveries in the southern Midia block.
Following its corporate strategy, Sterling farmed out 35% of its interest in both blocks to Petro Ventures and Gas Plus reducing its interest to 65%.
In late December 2007 Sterling drilled the Ana-1 (formerly Doina Sister) well and encountered gas. The well tested at stabilized rates up to 19.2 MMscf/d from perforations over a 29 meter interval. As with the discovery well on the neighbouring Doina well, the test results do not reflect the full production for a development well due to the limitations of the testing equipment. The well is now suspended for possible future re-entry.
During August 2008 Sterling completed the open-hole logging of the Doina-4 well after having reached a target depth of 1,250 metres approximately 17 days after the well was spudded. Initial results confirmed the northerly extension of the gas bearing Doina Main Sand reservoir, some 1.6 kilometres north of the previously drilled Doina wells. In addition, prospective gas bearing intervals were noted both above and below the main reservoir body.
The Doina Main Sand reservoir was encountered some 3 metres higher than anticipated, and had a significant gas show on drilling. Subsequent electric wireline logging has confirmed a reservoir section similar to previous Doina wells with excellent sand intermingled with more silty intervals. The top of the Doina Main Sand section was at 1,094 metres true vertical depth subsea (tvdss) with the base of the gas bearing reservoir picked at 1,125 metres tvdss, which is consistent with the gas water contact noted in the previous Doina wells. This interval contained an estimated gross 12 metres of high quality reservoir with porosities in excess of 30%, again similar to previous wells. Given the equivalent reservoir was tested in the Doina-2 well at 17.5 MMscf/d, and calculations for this well indicate similar productivity potential, the well has been suspended for possible re-entry as part of any future development program.
During September of 2008 Sterling announced the successful completion of the Ana-2 appraisal well, in the Romanian Black Sea. Ana-2 was drilled as a follow up appraisal well following the Ana-1 discovery well, which was drilled and tested in January 2008.
The Ana-2 well encountered gas within the Doina Main Sand Formation at 1,121 metres tvdss, some 10 metres shallower than originally mapped. The well has been extensively evaluated with electric logs, MDT pressure tests and a collection of wireline gas samples. These results confirm the presence of a 39 metre gas column with a net pay of 23 metres in high quality reservoir sands with porosity of up to 32% and good permeability. The pressure data also confirms a gas water contact consistent with the earlier Ana-1 well. The reservoir sands encountered in the Ana-2 well are equivalent to, or slightly better, than those encountered in Ana-1. The original Ana-1 well tested gas, at rates up to 20 MMscf/d under conditions restricted by equipment. Under unrestricted conditions, a final completed rate in excess of 30 MMscf/d per well is anticipated.
The Ana-2 well also encountered a 5 meter gas bearing reservoir in a shallower horizon at 766 metres tvdss. This shallower horizon was also present in the Ana-1 well and will be further evaluated, in order to determine its feasibility as a new reservoir.
The well reached a total depth of 1,600 metres on September 10th, 2008 and was located approximately 750 metres north west of the original Ana-1 seabed location. Following the successful acquisition of the logging suite, the well has been suspended. Ana-2 was directionally drilled from a seabed template, which provides re-entry capability for both of the Ana wells for future production.
Sterling and the National Agency for Mineral Resources (NAMR) signed an agreement in 2007 to modify the existing Exploration and Production Sharing Agreement (EPSA) to a tax royalty concession agreement. In November of 2008 the Government of Romania ratified this agreement and changes for the 11th Amendment to the EPSA for Blocks XIII Pelican and XV Midia located in the Romanian Black Sea.
This Amendment converts the original EPSA to conform to Romania's tax and royalty structure as contained in other recent petroleum agreements. The agreement transfers greater control and decision-making to the operator, and reduces direct day-to-day Government involvement, without compromising the requirement for ongoing compliance with both Romanian and European legislation.
In addition to the Doina and Ana discoveries, the Doina trend also contains several other mapped prospects with amplitude anomalies indicative of possible gas. The Midia and Pelican blocks also have other exploration targets, including the large Midia SE prospect, which is located to the south and east of the Doina trend. In late 2008, Sterling shot 3,000 kilometres of new seismic data across the Doina trend and Midia SE to progress all of these to drillable status.
In early December 2008, Sterling signed a Heads of Agreement with Melrose Resources plc ("Melrose") relating to the Pelican XIII and Midia XV Blocks. In exchange for a cash consideration and a carry on future expenditures, Melrose will acquire a 32.5% working interest in the Pelican XIII and Midia XV Blocks.
On February 3, 2009 resolution of the Maritime Boundary Dispute between Romania and the Ukraine was announced by the International Court of Justice ("ICJ") in the Hague with approximately 80% of the disputed territory awarded to Romania. Concurrent to the announcement media reports in Romania surfaced questioning the validity and extent of certain concessions granted to Sterling by the Romanian government. On February 5, 2009 Sterling issued a Statement of Facts outlining Sterling's history of operations in Romania and confirming the validity of the concessions in place.
During the remainder of calendar year 2009 subsequent political events delayed the approval of the transfer of the offshore licenses to Melrose, Petro Ventures and Gas Plus. However the transfer of the onshore license to TransAtlantic was approved and drilling was commenced late in 2009. On November 1, 2010 Sterling announced cessation of the Farm-in Agreement with Melrose, concurrently withdrawing the 32.5% assignment request made on May 22, 2009 with the National Agency for Mineral Resources (NAMR) for Melrose on Sterling's Pelican and Midia Blocks, offshore Romania.
The inability to obtain assignment approval impeded progress on the Ana and Doina discoveries, as well as further exploration and appraisal activities on the Blocks. Following the cessation of the agreement with Melrose, Sterling then moved forward proactively with offshore activities with its other intended assignees, PetroVentures Europe BV and Gas Plus International BV. During 2011, subject to regulatory approval, it was Sterling's intention to drill a well at Eugenia in the oil prone Pelican Block and a well at Ioana in the gas prone Midia Block.
Sterling, Petro Ventures and Gas Plus subsequently continued the dialogue with the Romanian government. While the government acknowledges the importance of this project to their country's domestic gas industry, they are still hampered by internal political issues. In late April of 2011 Sterling declared Force Majeure on its Midia and Pelican Blocks in the Black Sea after the Company had been unable to undertake Petroleum operations for reasons outside of its control.
In early 2011, after extensive and lengthy efforts, the Company finally obtained from the relevant Governmental authorities the environmental and drilling permits necessary for operations on the Midia and Pelican Blocks. The National Agency of Mineral Resources ("NAMR") had given approval to a 2011 work program based on which Sterling is obligated to undertake certain offshore activities which include the drilling of 2 offshore wells, acquiring 1,050 linear kilometers of 2D seismic and undertaking investigations and studies to bring the Ana and Doina discoveries forward for development.
However, in July 2009 the Romanian Parliament passed a law requiring construction permits for certain offshore activities. Sterling had sought clarification of this requirement from relevant authorities, as the activities contemplated under the 2011 work program clearly appear to have aspects that required a construction permit. It is Sterling's view that, after having received responses from certain relevant governmental authorities, that the authorities are were unable or unwilling to provide construction permits for offshore oil and gas activities.
The effect of this situation, which the Company views as political in nature, was to render it impossible for the Company to undertake Petroleum Operations. Sterling thus issued a notice to NAMR, stating that the total lack of clarity on the applicable procedure and authority for issuance of construction permits constituted an event of Force Majeure under the Concession Agreement.
Under the terms of the Concession Agreement NAMR must have within 15 days of this notification, either agreed with the invocation of Force Majeure, the effect of which would be to extend the duration of the Concession Agreement, or reject the Company's invocation putting the two parties into a dispute resolution procedure which could ultimately be decided in international arbitration. As NAMR did not respond to the invocation of Force Majeure within the 15 day timeframe, Force Majeure is now in effect.
On May 2, 2011 Sterling filed a Notice of Default with NAMR as a result of NAMR's failure to grant license assignments to Sterling's farm-in partners Petro Ventures Europe BV and Gas Plus International BV (the "Partners") for a 20 percent and 15 percent license holding respectively on its Midia and Pelican Blocks in the Black Sea.
On January 24, 2011 Sterling and the Partners, at the request of NAMR, submitted new applications, supported by required documentation, to request assignments for the Partners into the Concession Agreement. Pursuant to the Concession Agreement NAMR has the sole authority to grant such assignment requests, and the obligation to not unreasonably withhold or delay its consent to such applications and to treat such applications within a maximum of 90 days. These applications followed and superseded Sterling's previous attempts to obtain assignments for its partners beginning in April of 2009, when Sterling's initial assignment applications were submitted. In the event that NAMR and Sterling are unable to resolve the situation then this would put the two parties into a dispute resolution procedure which could ultimately be decided in international arbitration.
On June 20, 2011 Sterling filed a Notice of Dispute with the Government of Romania under the treaty for the Promotion and Reciprocal Protection of Investments between Romania and Canada (the "Treaty"). In the Treaty, Romania undertook obligations with respect to the protection of investments of Canadian investors in Romania. The Notice of Dispute allows for a six month period of negotiations in which to resolve the issues amicably. If Sterling is unable to obtain satisfactory resolution on all the issues within this period, the Company can then submit the matter to arbitration, if it so desires. Under the arbitration process, Sterling would claim monetary damages that reflect the entire and significant ultimate value of our offshore assets.
Sterling was subsequently pleased to announce on October 11, 2011 that the Romanian government had rescinded the Construction Permit Law in relation to offshore requirements, the impediment upon which the Company had declared force majeure on April 28, 2011. This action removed a major obstacle to offshore work in the Romanian Black Sea; however it did not address all of the issues raised in the Notice of Dispute filed on June 20, 2011. The Company therefore continued to negotiate with the authorities (1) in an effort to secure the approval to assign equity to intended partners, and (2) to receive an extension to license periods for the time last since the onset of the blockages impeding the progress of exploration and development activities.
In response to statements made on October 27, 2011 by the Ministry of the Economy, Trade and Business Environment (MECMA) in Bucharest the Company was pleased to announce that it had reached agreement with the Government of Romania on a package of issues to resolve the notice of dispute filed on June 20 2011. At a meeting with Minister Ariton of MECMA and the President of the National Agency of Mineral Resources (NAMR) agreement was reached to grant assignments to Sterling’s designated partners, PetroVentures Europe (20%) and Gas Plus International (15%). In addition, the Government confirmed that all of Sterling’s offshore licenses will now initially run to May 2014 with two further extension periods, each of three years in duration available under the terms of the Concession Agreement originally signed in August 2007.
Formal documentation to reflect these changes was received on November 18, 2011 from the Romanian National Agency for Mineral Resources (NAMR). Sterling is pleased that resolution of these issues has now occurred with the Company now able to fulfill its obligations, preserve its rights and ultimately achieve success for the Company and the people of Romania. We are hopeful that we can advance our plans to undertake further exploration on the prospective Midia and Pelican blocks and bring Ana and Doina to production within three years. This will bring significant benefits to Romania in terms of greater energy self-sufficiency, the likely award of construction and oil service contracts to local companies, and encouraging a wide range of companies to explore offshore Romania.
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