Petro Matad reports setbacks from Davsan Tolgoi in Mongolia

Mongolia-focused Petro Matad Ltd (LON:MATD) disappointed this morning with a double-dose of bad news from its exploration efforts on the Block XX oil field.

In separate statements, the company announced that the Davsan Tolgoi-1 well test was unsuccessful and that the oil shows from DT-9, which prompted an upbeat statement last week, stemmed only from a small, isolated reservoir that did not merit testing.

The primary cause of the problems encountered during testing DT-1 is currently believed to be the poorly controlled application of high-density cement during casing operations in July 2010.

The first test interval from 1,111-1,123 metres was swabbed and indicated a production rate of 107 barrels of fluid per day, 80 percent of which was water.  In light of the cement job complications the results are being evaluated for possible contribution by non-reservoir sources for the recovered water.

The second test interval from 1,090-1,104 metrs was swabbed with an indicated production of less than 1 barrel of fluid per day, with a 10 percent oil cut.

The third test interval from 1,072-1,080 metres tested the zone with the best combination of sample shows, porosity, and calculated hydrocarbon saturations at the top of the Tsagaantsav Formation.  The test was swabbed and had an indicated production of 1,300 barrels of fluid per day with a trace of oil.  

The produced water was significantly fresher than that produced from the lower intervals and rates of fluid production were inconsistent with realistic permeabilities for the third test interval.  These results reveal that the water was not from the intended test interval and that the test was unsuccessful.

Given the relatively low cost of drilling new wells and the possibility that damage to DT-1 may prove to be irreparable, Petro Matad has decided to locate the next well, DT-11,  approximately 220 metres from DT-1.  DT-11 will be tested as soon as drilling has been completed.  This location has the advantage that a successful test would contribute towards establishing a reserve in the DT-1 and DT-2 reservoir.

The company's technical team is evaluating the mechanical and geologic conditions responsible for the results of the test.  

The company has decided not to carry out further operations on DT-1 while data analysis is being completed and options are considered.  No remediation, stimulation, or pumping operations will be undertaken until the engineering and geologic evaluation is completed.
 
Petro Matad chief executive Doug McGay said: "The failure of the DT-1 test, due to mechanical issues is considered to be a relatively minor setback in our overall progress at Davsan Tolgoi.  The inexpensive well costs, in both monetary and time terms, mean that alternative actions can be taken quickly and the possible loss of the initial investment in the DT-1 well's drilling and testing is the only setback when viewing the larger picture of our company's and its programme's progress.  Our analysis to date indicates that this is a mechanical issue.”

At DT-9, the company has completed the testing programe, with only water being produced from the most promising interval of the well.

The water produced is approximately five times fresher than that normally observed in the Tsagaantsav Formation, and it is believed that this phenomenon led to the incorrect estimation of net pay from the pre-test wireline logs which were announced by Petro Matad last week, on August 22. 

The DT-9 well reached its total depth of 1,766 metres in mid-August. The well encountered live oil shows at the top of the Lower Tsagaantsav and wireline logs identified a principal calculated pay zone between 1,639 and 1,651 metres depth that was accompanied by oil stain in samples and slightly elevated gas readings.

At that time, high apparent hydrocarbon saturations were calculated from the DT-9 wireline logs using a reservoir water salinity of 8,550 parts per million nayrium chloride (NaCl) equivalent.  This salinity is consistent with Tsagaantsav waters that were recovered from initial testing of DT-1 and is also within the 4,700 - 14,000 ppm range of wireline log salinities for the Davsan Tolgoi area.

The actual formation waters recovered from DT-9 were approximately 1,700 ppm NaCl equivalent.  This unprecedented fresh water occurrence in the local Tsagaantsav reservoir is currently considered to be the likely cause of the error in the original estimate of net pay from the pre-test wireline logs. 

Geological and 3D seismic reviews confirm that DT-9 well was drilled on a small fold closure that was superimposed on a larger hanging wall fault trap that is isolated from other Shoroo Prospect drilling targets and from the other DT well series drilled to date. The live oil shows from 1,597-1,601 metres in DT-9 indicates that the fold closure at the top of the Lower Tsagaantsav objective formed a small but effective trap. However, the reservoir quality of this interval did not merit testing.

CEO McGay said: "While very disappointing, DT-9 was in both a separate structure and a different reservoir than previously drilled locations on Davsan Tolgoi.  Thus the test failure is not seen as an adverse judgement on the overall Davsan Tolgoi complex.

"The inaccurate results of the petrophysical calculations of the net pay zone as originally announced are regrettable but understandable, given the factor of the presence of unprecedented fresh water," he added.

Petro Matad is exploring the Shoroo prospect further. DT-10 has been spudded, andf the well will target Lower Tsagaantsav objective but within a separate structural closure. The well will be drilled 4.3 kilometres south of DT-9.