background history

This gives more confidence to the Caspian story


http://www.far.com.au/files/research/Petroleum%20Mag%20Article_Sept07.pdf

Excerpt from above link

Rigged up and ready to go
Far from the tropics, former African minerals
explorer Afminex is comfortable in its new
identity as Caspian Oil & Gas, and its new
home in the mountains of Central Asia’s
Kyrgyz Republic.
Known in the Soviet era as Kyrgyzstan, the
republic has a long history of oil production
and numerous oil seeps show how petrolific
it is. But following the collapse of the Soviet
Union, its petroleum sector fell into disarray
and production plummetted.
Today, the country produces just 1000
barrels of oil per day, only 5% of Soviet-era
production, and it relies on imports for the
vast bulk of its oil and gas needs. The nation’s
only refinery is working at just 20% of its
actual capacity.
Caspian saw an opportunity. Not only had
the Kyrgyz oil fields been neglected; they had
also been misunderstood.
“The understanding of geology hadn’t
advanced since Soviet times,� Caspian chief
operating officer Graeme Parsons said. “The
Soviets focused on vertical faults, which
meant they overlooked many potentially rich
plays. We believe there is a whole new subthrust
play with the potential for significant
reserves.�
Like Hardman, Caspian got in early and
grabbed prospective acreage in an
underappreciated backwater of the petroleum
world, in this case the Fergana Basin in the
south of the Kyrgyz Republic. The company
then worked up the data (in this case old
Soviet data) and brought in a much larger
company – Australia’s Santos – as a farm-in
partner and operator.
PETROLEUM I September 2007 53
Full speed ahead: the view from the bow of a vessel acquiring seismic for Otto
However, at 50-100 million barrels
Caspian’s largest potential targets are not on
the same scale as Hardman’s.
But Parsons points out Caspian has some
significant advantages over Hardman. The
junior’s Fergana Basin blocks are close to an
underused refinery and a hungry market, plus
it is operating onshore and has found ways to
keep drilling costs very low. It is also likely to
achieve near-term cashflow.
Frustrated by Central Asia’s severe rig
shortage, Caspian has bought its own rig and
at the time of going to press was rigging up in
preparation for a mid- September start to an
extensive drilling campaign.
“Our drilling manager Mike Newport –
who is a former country manager for Century
Drilling Australia and has also worked with
OD&E – is training a local crew made up of
ex- national oil company workers,� Parsons
said.
In addition, Caspian has retained all rights
to prospects shallower than 1000m in four of
nine licenses it farmed out to Santos. Santos
is earning 80% interest in all but the shallow
prospects on a staged basis for US$24 million
expenditure.
This portfolio of 100%-held modest but
low-risk shallow prospects can be developed
quickly and at low cost, using Caspian’s rig to
give near-term cashflow.
Parsons argues the lower risks and costs
associated with Caspian’s operations mean
the company has potential to be profitable in
the short-term and vault into a bigger league
in the medium term.
Hogan and Partners analyst Gary Lebas
found the Caspian story persuasive and
recommmended the stock as a Speculative
Buy last month.
The shallow strata were excluded from
the Santos farm-in because Caspian thought
they might be of much more interest to a
small company like itself rather than a big
player like Santos. Parsons, who understands
the story from both sides of the fence, said
Santos agreed.
Previously a geologist with Santos, Parsons
assessed the Fergana Basin acreage for the
company.
“I evaluated the shallow stuff for Santos
and recommended against taking it on,� he
said. “You’re looking at 30 to 50 barrels per
day wells a long way from Australia.
It’s not interesting to Santos, but it’s good
for Caspian because we can drill a lot of these
shallow wells at a low cost per well and the
cumulative outcome will be material for us.�
However, Santos will get a slice of any profit
from this acreage as it took a 16.9% stake in
Caspian at the time of the farm-in and is now
the junior explorer’s largest shareholder.
This act of faith in Kyrgyzstan has been
reinforced with Santos’ recent farm-in to
more Kyrgyz acreage held by Swiss company
DWM Petroleum. This additional investment
in the country is seen as a positive for
Caspian.
Santos has begun an extensive seismic
survey that will cover the Caspian and DWM
farm-in areas. In the Caspian acreage, its focus
is on shooting new seismic on high-graded
prospects and leads identified from
reprocessed Soviet data. Following evaluation
of this data, Santos is expected to make a
decision on whether to drill early in 2008.
If Santos does move into the final phase of
the farm-in, it is required to spend at least
$US15 million on drilling by the end of
February 2009.
Parsons points out many targets in the
Santos-operated deep acreage could be
drilled by Caspian’s 650hp rig and Caspian
would be very happy to make the rig available
if Santos wished.
But the junior explorer won’t be standing
still in the meantime.
“Once you’ve put a good drilling crew
together, you want to keep it busy,� Parson
said.
With that in mind, Caspian is beginning an
11-well program. It will drill four wells in the
Malisu III permit to earn 70% from KNG, the
Kyrgyz national oil company. These wells are
planned to delineate an extension of KNG’s
oilfield which has produced about 700,000bbl
of oil to date and has flat-line production
over the past 10 years.
Soviet drilling data supports the likelihood
of encountering oil in a number of the
proposed wells, according to Caspian.
The company will also drill additional wells
on the Ashvaz, East Mailisu and Charvak
licences, in each case drilling into shallow
targets lying above the Santos farm-in zone.
Each well is expected to take about two
weeks to drill.
And that is just the beginning, Parsons
said.
“We may look at using the rig to get farmins.
We’ve got a solid base in Bishkek [the
Kyrgyz capital] with geologists and
administrative staff and we are developing
good contacts, and we believe there a lot of
opportunities in the Kyrgyz Republic and in
Central Asia as a whole,� he said.
With a imminent cashflow likely, a free
carry in a high-impact exploration program,
and a 19% stake in Perseus Mining, worth
about $A25 million (a legacy of Caspian’s
former life as a miner), the Central Asian
explorer is bullish.
“We’ve put together an experienced team,
we’re developing operational capacities, we’re
in oil-prone areas, and we’re not putting our
eggs in one basket,� Parsons says.
“We’re keeping costs down as much as
possible and can look forward to some good
near-term production. And in the not-toodistant
future we will be tackling our blue-sky
deep prospects.�