WesternZagros Announces First Quarter 2013 Operational and Financial Results

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CALGARY, ALBERTA--(Marketwired - May 23, 2013) -

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WesternZagros Resources Ltd. (TSX VENTURE:WZR) ("WesternZagros" or "the Company") announced today its operating and financial results for the first quarter ended March 31, 2013, and additional key highlights and activities to date. A summary of the activities, the financial statements the accompanying Management Discussion and Analysis ("MD&A") are available at www.westernzagros.com and on SEDAR at www.sedar.com.

Commenting on the first quarter results and subsequent events, WesternZagros's Chief Executive Officer, Simon Hatfield said,

"Our twin goals of increasing proven resources and production potential are our main focus and the first quarter provided a solid start to the year. So far in 2013 we have spud an appraisal well on one of our major discoveries and have spud the first well of a planned three-well shallow drilling program, we are preparing to spud two more exploration wells, and we have acquired a significant amount of both 2D and 3D seismic data. We remain very optimistic that the strength of our business model, the proven expertise of our personnel and the evolved efficiency of our drilling program will help us to achieve significant increases in our proven resource estimates from our aggressive multi-rig drilling program in the remainder of 2013, while also continuing our excellent track record in regards to health, safety, environment and security practices."

Highlights

Health Safety and Environment ("HSE")

  • As at May 21, 2013, WesternZagros achieved a total of over 3.4 million man hours performed safely and 939 days without any Lost Time Incidents.

Resource Estimates

  • The total combined mean estimate of gross unrisked contingent resources of the Kurdamir structure increased to 545 million barrels of oil in the Oligocene and Eocene reservoirs (audited by independent reserve evaluator, Sproule International Limited).
  • On the Kurdamir and Garmian Blocks, the total combined mean estimate of gross unrisked contingent resources is now 974 million barrels of oil equivalent and the total mean estimate of gross unrisked prospective resources is now 4.7 billion barrels of oil equivalent.

Operations - Kurdamir Block

  • The Kurdamir-3 appraisal well was spudded on the giant oil discovery of the Kurdamir structure on February 22. Kurdamir-3 will evaluate the Oligocene reservoir. Casing is currently being set in the seal above the Oligocene reservoir at depth of approximately 2,400 metres, before drilling continues to a planned total depth of 2,800 metres. Testing is anticipated to be completed in the third quarter.
  • We have acquired approximately 20 percent of the data for the 3D seismic survey which covers the Kurdamir structure and extends onto the neighbouring Topkhana Block. This survey commenced in January 2013 and completion of the data acquisition phase is anticipated early in the third quarter. Following the completion of the Kurdamir/Tophkana seismic survey, the crew will be mobilized to conduct the North Garmian 3D seismic acquisition survey.

Planning and Development

  • Design work is beginning on appraisal and future potential development plans for the existing WesternZagros oil discoveries in the Sarqala area. A preliminary engineering design of the Sarqala-1 first phase central processing facility with 20,000 barrel-per-day capacity is underway.
  • In order to begin development planning on the Kurdamir Block, the joint venture has created a sub-committee and Talisman, as operator, has staffed a dedicated team to commence this work following the recent oil discoveries in the Kurdamir-2 well.
  • The Company and its joint venture partners continue discussions with the KRG to advance plans for the utilization of natural gas from both the Garmian and Kurdamir Blocks. Gas conservation studies are ongoing for pipeline routing, gas re-injection options to maximize oil recovery, and options for temporary and permanent power generation.

Operations - Garmian Block

  • The Mil Qasim Upper Bakhtiari-1 was spudded on May 19, 2013. This is the first well of a planned three-well drilling program that will explore the shallow Upper Bakhtiari formation in the southern part of the Garmian Block.
  • A 2,000 horsepower rig has been mobilized from North America and is currently being set-up at the Hasira-1 location. Hasira-1 has an anticipated spud date in early June 2013 and will appraise the extent of the oil leg previously encountered in the Jeribe reservoir at Sarqala-1 and also explore the deeper Oligocene reservoir potential beneath the Jeribe.
  • The acquisition phase of the 2D seismic survey over the Chwar prospect and the 3D seismic survey over the Sarqala and Mil Qasim oil discoveries and the Zardi Complex prospect was completed on April 8, 2013, on time and on budget. Processing and interpretation of the obtained data is currently underway.
  • On the Baram prospect, the data from the Kurdamir-2 well resulted in an increase of the total mean estimate of gross unrisked prospective resources by over 300 percent to 423 million barrels of oil. The Company now interprets that the Baram prospect has the potential to contain an extension of the Kurdamir oil leg into the Garmian Block.
  • If successful and the extension is confirmed, the Baram-1 exploration well could be the Company's highest impact well in 2013, with the potential to add gross unrisked mean contingent resources of 200 to 300 million barrels of oil equivalent (MMBOE) in the Garmian Block and 500 to 600 MMBOE in the Kurdamir Block. A second 2,000 horsepower drilling rig will be deployed shortly from North America for transport to the Baram-1 location with an anticipated spud date in the third quarter 2013.
  • The Company is also beginning to prepare for future exploration wells, with the Qulijan-1 well site prepared and long leads beginning to be ordered.

Financing

  • During the first quarter of 2013, the Company completed a non-brokered private placement of 51 million common shares with Crest Energy International LLC ("Crest") of Houston, USA, at Cdn$1.25 per common share for gross proceeds of $62.4 million. This represented an approximate 25 percent premium to the March 8, 2013, closing share price. Crest obtained the right under the associated investment agreement to appoint an additional nominee to the WesternZagros Board of Directors and has elected John Howland to that position. Eric Stoerr, an officer of Crest, has been a member of the Company's Board of Directors since August 2012.
  • In conjunction with the private placement, WesternZagros also entered into a loan agreement with Crest and received US$57.5 million, which is secured by 10 percent of the issued share capital of WesternZagros Limited, a wholly-owned subsidiary of the Company that is the contracting party to the Garmian and Kurdamir Production Sharing Contracts (PSCs). The loan accrues interest at a fixed rate of six percent per annum, compounded monthly. The principal and accrued interest is repayable by September 30, 2014, subject to certain prepayment terms.
  • Subsequent to March 31, 2013, the Company completed a further marketed private placement of 11,431,422 common shares with Crest and Jasmine Capital (a wholly-owned subsidiary of Richard Chandler Corporation) at Cdn$1.25 per common share for gross proceeds of $14.1 million. The net proceeds of $13.5 million were then used to repay accrued interest of $0.2 million and repay $13.3 million of the principal amount of the loan from Crest. As a result of these transactions, the remaining principal amount of the Crest loan was reduced to $44.2 million as at April 4, 2013.
  • Upon closing of the further private placement in April 2013, Crest held approximately 19.8 percent and Jasmine Capital held approximately 15.1 percent of the issued and outstanding common shares of the Company.
  • During the first quarter of 2013, the Company executed a two-year drilling contract for two rigs, for which the Company deposited into trust its share of a required deposit in the amount of $20 million. The total deposit in trust is $40 million of which Gazprom Neft has funded their 50 percent share of the total deposit that was due.
  • As at March 31, 2013, WesternZagros had $152.2 million in working capital, excluding the $20 million deposit in trust pertaining to the drilling contract. The Company is fully funded for its planned activities in 2013.

Corporate

  • The Company is pursuing admittance to the Standard Listing segment of the Official List of the London Stock Exchange ("LSE") in order to provide access to an alternate market with a strong understanding of the Middle East and, particularly, Kurdistan focused companies.
  • On February 1, 2013, Mr. William Jack was appointed to the position of General Manager Kurdistan with responsibility for government liaison and in-country administration following the retirement of Mr. Ian McIntosh.

Outlook

In accordance with the Kurdamir and Garmian PSCs, the end of the exploration periods are September 1, 2014 and December 31, 2014, respectively, after which the development periods begin. On the Kurdamir Block, the Company's focus will be on continued appraisal drilling to delineate the existing 943 MMBOE of Gross Mean Contingent Resources and an estimated 1.6 billion BOE of Gross Mean Prospective Resources. On the Garmian Block, the Company's focus will be on exploration drilling to delineate the following estimated Gross Mean Prospective Resources: 527 MMBOE on the Baram prospect, 463 MMBOE on the Sarqala Discovery and 143 MMBOE on the Mil Qasim Upper Bakhtiari Discovery. In addition, WesternZagros's work program on the Garmian Block over the next two years will be on exploration activities to rank, prioritize and drill the highest ranked additional prospects prior to the end of the exploration period. This ranking will be based on the results of the North and South Garmian Seismic Programs (2D and 3D), the 2013 drilling results from the Company's planned wells on the Garmian and Kurdamir Blocks and also other Operator's wells on neighbouring blocks. Possible prospects for future exploration drilling in 2014 include Qulijan, Chwar, Bawanoor, Alyan, Zardi Complex, Tilako and the Upper Fars Fault Trap play.

Kurdamir Block

The Company continues to work with the operator, Talisman, to appraise the giant oil discovery in the Oligocene reservoir of the Kurdamir discovery. This includes a 3D seismic program over the Kurdamir structure with acquisition that commenced in January 2013, drilling and testing the Kurdamir-3 well that was spudded on February 22, 2013, targeting an estimated 150-250 MMBOE of Gross Mean Prospective Resources, and an extended well test which is anticipated to start in the second half of 2013, subject to the approval of the KRG. Appraisal activities for the deeper Eocene and Cretaceous reservoirs will be deferred until additional insight is obtained on optimal drilling locations. The Company anticipates that the results of the 3D seismic survey currently underway over the Kurdamir structure will assist in this process.

Planned expenditures for the remainder of 2013 include approximately $25 million for the Kurdamir-3 vertical appraisal well (spudded February 22, 2013), $8 million for the Kurdamir seismic program which commenced in the first quarter of 2013 and $6 million for Kurdamir office costs and other Kurdamir Block activities. Contingent projects during 2013 may also include $9 million for a potential Kurdamir-3 sidetrack, if required, and, subject to KRG approval, $7 million related to commencement of extended well test production at the Kurdamir-2 well.

Garmian Block

Sarqala-1 Extended Well Test ("EWT")

WesternZagros expects to recommence the EWT at Sarqala upon KRG approval to gain additional information in order to appraise the discovery for future development. Upon receipt of KRG approval, and the procurement of suitable rig and tubular equipment, the Company plans to complete a workover of the Sarqala-1 well in the second half of 2013 in order to allow future EWT production capability to increase beyond the current 5,000 barrels per day. Long lead items have been ordered for this workover. Engineering work is also underway for permanent facilities to increase EWT production capability at Sarqala including gas conservation measures. In particular, preliminary engineering design of the Sarqala first phase permanent facilities with 20,000 bbl/d capacity is underway in readiness to request engineering procurement and construction tenders at the appropriate time. Work is continuing on opportunities to utilize the associated natural gas from any future crude oil production to minimize the flaring of natural gas.

Hasira-1 Exploration and Appraisal Well

The Hasira-1 exploration and appraisal well rig set up is nearing completion with an anticipated spud date in early June, 2013 to appraise the extent of the oil leg previously encountered in the Jeribe reservoir, targeting 25-50 MMBOE of Gross Mean Prospective Resources, at the Sarqala-1 well and also to explore the deeper Oligocene reservoir, targeting a further 25-50 MMBOE of Gross Mean Prospective Resources. Significant oil shows were encountered in the Oligocene interval at Sarqala-1 but the Company was unable to evaluate them at that time due to wellbore conditions. Hasira-1 is expected to take approximately seven months to drill to a planned total depth of 4,100 metres.

Baram-1 Exploration Well

The Baram-1 well is planned to spud in the third quarter of 2013, in order to explore a potential extension of the oil leg in the Oligocene reservoir of the Kurdamir discovery into the Garmian Block. If successful and the extension is confirmed, this well could add 200-300 MMBOE of Gross Mean Contingent Resources in the Garmian Block and possibly also confirm an additional 500-600 MMBOE of Gross Mean Contingent Resources on the Kurdamir Block. WesternZagros expects the well to take approximately five months to reach the planned total depth of 3,800 metres. A drilling rig will be deployed shortly from North America for transport to the Baram-1 location with an anticipated spud date in the third quarter 2013.

The completion of either Baram-1 or Hasira-1 in 2013 would fulfill the Company's obligations under the second exploration sub-period of the Garmian PSC, prior to any extension of such sub-period.

Upper Bakhtiari Three-Well Drilling Program

Upper Bakhtiari-1 was spudded on May 19, 2013. This is the first well that will explore the potential of the shallow (500 to 700 metres depth) Upper Bakhtiari formation in the southern part of the Garmian Block through a low cost, three well drilling program, targeting 29 MMBOE of Gross Mean Prospective Resources. If successful, the wells could be quickly tied into the existing Sarqala facilities for EWT production, subject to KRG approval.

Garmian Seismic Programs

WesternZagros has completed the acquisition phase of a 3D seismic appraisal survey over the Sarqala, Mil Qasim and adjacent Zardi Complex structures as well as the 2D seismic survey at Chwar which is located 22 kilometres west-northwest of Sarqala to elevate this low risk, Jeribe oil opportunity to drill ready status. The Chwar prospect will be ranked against the other prospects on the Garmian Block. The Company will utilize the 3D information to optimize the number and placement of future appraisal and development well, improve its understanding of fracturing within these structures and further evaluate the Bakhtiari, Upper Fars, Jeribe, Oligocene, Eocene and Cretaceous reservoirs on the southern portion of the Block. The Company also plans to conduct a 3D seismic program in the second half of 2013 over the northern portion of the Block targeting the Baram and Qulijan structures utilizing the seismic crew from the Kurdamir/Tophkana program. The 3D data over Baram will assist in determining whether Baram is an extension of the existing Kurdamir Oligocene discovery or a separate structure.

Planned expenditures for the remainder of 2013 include $27 million for the Hasira-1 well, $26 million for the Baram-1 well (expected to be spudded in the third quarter), $4 million for the Sarqala EWT facilities, $2 million for the first of three wells of the Mil Qasim Upper Bakhtiari program, $2 million for the remainder of the Garmian South seismic program, $5 million for the planned North Garmian 3D seismic program and $8 million for G&A and other costs. Contingent projects during 2013 may also include $4 million for anticipated Sarqala-1 work over and recompletion costs, subject to KRG approval, and $4 million for up to two additional wells at the Mil Qasim Upper Bakhtiari program, subject to successful results.

This news release contains certain forward‐looking information relating, but not limited, to operational information, future drilling and testing plans, seismic programs and the timing and costs associated therewith. Forward-looking information typically contains statements with words such as "anticipate", "plan", "estimate", "expect", "potential", "could", or similar words suggesting future outcomes. The Company cautions readers not to place undue reliance on forward‐looking information as by its nature, it is based on current expectations regarding future events that involve a number of assumptions, inherent risks and uncertainties, which could cause actual results to differ materially from those anticipated by WesternZagros. In addition, the forward‐looking information is made as of the date hereof, and the Company assumes no obligation to update or revise such to reflect new events or circumstances, except as required by law.

Forward‐looking information is not based on historical facts but rather on management's current expectations and assumptions regarding, among other things, plans for and results of drilling activity and testing programs, future capital and other expenditures (including the amount, nature and sources of funding thereof), continued political stability, and timely receipt of any necessary government or regulatory approvals. Although the Company believes the expectations and assumptions reflected in such forward‐looking information are reasonable, they may prove to be incorrect. Forward‐looking information involves significant known and unknown risks and uncertainties. A number of factors could cause actual results to differ materially from those anticipated by WesternZagros including, but not limited to, risks associated with the oil and gas industry (e.g. operational risks in exploration; inherent uncertainties in interpreting geological data; changes in plans with respect to exploration or capital expenditures; interruptions in operations together with any associated insurance proceedings; the uncertainty of estimates and projections in relation to costs and expenses and health, safety and environmental risks), the risk of commodity price and foreign exchange rate fluctuations, the uncertainty associated with negotiating with foreign governments and risk associated with international activity. For further information on WesternZagros and the risks associated with its business, please see the Company's Annual Information Form dated March 22, 2013, which is available on SEDAR at www.sedar.com.

In addition, statements relating to "resources" contained herein are deemed to be forward-looking statements, as they involve the implied assessment, based on certain estimates and assumptions that the resources described can be economically produced in the future. Terms related to resource classifications referred to herein are based on the definitions and guidelines in the Canadian Oil and Gas Evaluation Handbook which are as follows. "Prospective resources" are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from undiscovered accumulations by application of future development projects. Prospective resources have both an associated chance of discovery (geological chance of success) and a chance of development (economic, regulatory, market, facility, corporate commitment or political risks). The chance of commerciality is the product of these two risk components. The estimates referred to herein have not been risked for either the chance of discovery or the chance of development. There is no certainty that any portion of the prospective resources will be discovered. If a discovery is made, there is no certainty that it will be developed or, if it is developed, there is no certainty as to the timing of such development or that it will be commercially viable to produce any portion of the prospective resources. "Contingent resources" are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations using established technology or technology under development, but which are not currently considered to be commercially recoverable due to one or more contingencies. Contingent resources have an associated chance of development (economic, regulatory, market and facility, corporate commitment or political risks). The estimates referred to herein have not been risked for the chance of development. There is no certainty that the contingent resources will be developed and, if developed, there is no certainty as to the timing of such development or that it will be commercially viable to produce any portion of the contingent resources. All resource estimates presented are gross volumes for the indicated reservoirs, without any adjustment for the Company's working interest or encumbrances. A barrel of oil equivalent (BOE) is determined by converting a volume of natural gas to barrels using the ratio of 6 million cubic feet (Mcf) to one barrel. BOEs may be misleading, particularly if used in isolation. A BOE conversion ratio of 6 Mcf:1 BOE is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Given that the value ratio based on the current price of oil as compared to natural gas is significantly different from the energy equivalency of 6:1, utilizing a conversion on a 6:1 basis may be misleading as an indication of value. The Company's Statement of Oil and Gas Information contained in its Annual Information Form dated March 22, 2013 ("AIF") filed on SEDAR at www.sedar.com contains additional detail with respect to the resource assessments and includes the significant risks and uncertainties associated with the estimates and the recovery and development of the resources, and, in respect of contingent resources, the specific contingencies which prevent the classification of the resources as reserves. In addition, combined mean estimates of resources which are presented in this MD&A are an arithmetic sum of the mean estimates for individual reservoirs and each such individual mean estimate is the average from the probabilistic assessment that was completed for the reservoir. Readers should refer to the AIF for a detailed breakdown of the high (P10), low (P90) and best (P50) estimates for each of the individual reservoir assessments.

WESTERNZAGROS RESOURCES WAS RECOGNIZED AS A TSX VENTURE 50® COMPANY IN 2012 AND 2013. TSX VENTURE 50 IS A TRADE-MARK OF TSX INC. AND IS USED UNDER LICENSE.

Contact:
WesternZagros Resources Ltd.
Greg Stevenson
Chief Financial Officer
(403) 693-7007

WesternZagros Resources Ltd.
Tony Kraljic
VP Business Development
(403) 693-7011

WesternZagros Resources Ltd.
Lisa Harriman
Manager of Investor Relations
(403) 693-7017
investorrelations@westernzagros.com
www.westernzagros.com

Smithfield Group
John Kiely
+44 (0) 20 7360 4900
jkiely@smithfieldgroup.com

Smithfield Group
Brett Jacobs
+44 (0) 20 7360 4900
bjacobs@smithfieldgroup.com

Smithfield Group
James McFarlane
+44 (0) 20 7360 4900
jmcfarlane@smithfieldgroup.com

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