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Carnarvon Petroleum: Phoenix South-1 A Light Oil Discovery

Carnarvon Petroleum (ASX:CVN) has received confirmation from Apache Corporation (NYSE:APA) that oil sampled from Phoenix South-1 in the North West Shelf is exceptionally good quality light black oil with highly favourable mobilities.

The company is cash backed at about $0.10 per share following the agreement to sell the remaining interest in its onshore Thailand production assets.

Like Phoenix South-1, Roc-1 will be free carried by Apache and JX Nippon to a cap of US$70 million.

Carnarvon is fully funded to meet any additional costs for the well.

"The discovery of oil at Phoenix South has caused the Joint Venture to re-evaluate everything it previously assumed about this basin and that has added extra time and complexity to the work schedule," managing director Adrian Cook said.

"Further there are no obvious analogous oil plays to provide guidance on how to evaluate this basin.

"Consequently, Apache require more time to receive, consider and integrate all of the data before Carnarvon is able to provide oil in place estimates, recoverability factors and recoverable volumes.

"I expect we will be in a better position to provide a more comprehensive update sometime toward the end of the first quarter of 2015."

More work required for resource estimate

Apache is undertaking the technically complex and thorough process of assessing the well results on behalf of the joint venture.

The length of the evaluation period is due to the discovery of a new oil bearing hydrocarbon province when gas was anticipated as well as low porosity rock interspersed with intervals of potential high flow characteristics.

Discovering a new oil bearing hydrocarbon province means that any previous work is either redundant or requires re-evaluation.

Meanwhile, dealing with hydrocarbon-saturated, low-porosity rock means that extra effort needs to be taken to determine which intervals of the reservoir contribute to deliverability or only add volume.

A number of key laboratory tests are required to determine net pay and potential productive deliverability from this new type of reservoir. These include:

- Routine Core Analysis to measure for porosity, grain density, horizontal permeability, fluid saturation and a lithologic description (completed);
- Special Core Analysis to investigate two-phase flow properties determining relative permeability and capillary pressure. These have not commenced and results would not be available for months due to their nature;
- Pressure, Volume & Temperature Analysis of fluid properties has confirmed the oil at Phoenix South-1 is light black oil with an API of around 47 degrees. This is highly under-saturated, which will aid in high initial flow rates and makes it a good candidate for water injection to maintain pressure and increase oil recovery;
- Formation Micro-Imager to determine whether the reservois intersected are highly laminated reservoirs, which affects the determination of net pay; and
- Geomechanics to determine whether fracturing can aid in increasing the recovery of fluids from the well.

The data set remains incomplete, making it impossible for the company to provide specific information about the size of the discovery at this time.

Fully Funded

Carnarvon is fully funded for further activity in the North West Shelf in 2015.

Besides holding $48.5 million in cash as at the end of the September quarter, it has also reached an agreement to sell its remaining 20% interest in the Thailand oil production concessions to the Netherlands company Berlanga Group for US$58.2 million (A$68.5 million) in cash.

This is scheduled for completion on or before 16 February 2015.

Following this, the company is forecast to have more than A$100 million in cash, or about A$0.10 per share.

It also retains its US$32 million receivable as part of the Loyz transaction earlier this year.

Analysis

Apache Corporation continues to evaluate results from the Phoenix South-1 well on behalf of Carnarvon Petroleum and the other joint venture partners.

While no estimates on the size of the resource can be provided at this time, it has confirmed that the discovery is light oil with exceptionally good quality and high mobility.

The company is also fully funded with the recent agreement to sell its remaining Thailand production assets poised to increase its cash balance to over A$100 million.

This grants it respectable cash backing of about A$0.10 per share.

News flow ahead includes a more comprehensive update on Phoenix South-1 sometime toward the end of the first quarter of 2015; drilling of Roc-1 in the middle of 2015; and finding a partner for the Cerberus blocks in the offshore Carnarvon Basin, Western Australia.

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