First Quarter Highlights
- production declined 5% over Q4 FY2009 to 610 ("boe/d"), due to both a decision by Canoro to restrict natural gas production to maintain reservoir pressure in anticipation of the installation of gas reinjection in early 2010 and reduced demand for natural gas in the region;
- reduced production, partially offset by slightly higher commodity prices, consumed funds from operations of $0.9 million compared with $1.5 million funds used by operations in the prior quarter;
- exited the quarter with no debt and working capital of $5.0 million;
- Amguri condensate recovery and gas injection project on track for Q1 2010 commissioning with engineering and procurement 90% complete; and
- commenced site preparations for first well on Block AA-ONN-2003/2 (Canoro 15%).
Subsequent to Quarter Highlights
- closed limited-recourse funding of US$4.0 million for the purchase and installation of gas compression;
- completed primary volume of Amguri 3D Pre-Stack Depth Migration seismic re-processing with full re-interpretation of Amguri Block expected by year-end;
- in the wake of positive election results in India, the Company renewed its efforts to work with the various stakeholders to secure the necessary approvals to proceed with the Changpang project in Nagaland;
- initiated a feasibility study for a 50 megawatt to 100 megawatt gas-fired power plant in Amguri.
Canoro entered the first quarter of its fiscal 2010 year committed to solidifying its production base, financial position and organization in preparation for the next stage of the Company's growth. Canoro continues to navigate through very challenging times both for the Company and the industry as a whole. Capital markets have begun to be accessible for select oil and gas companies. Canoro succeeded in attracting a US$4.0 million follow-on investment in Amguri from a private equity fund which underscores both the quality of the asset and the confidence of the investors in the Company's ability to generate value from Amguri.
Over the past number of months, and in light of the performance to date, the Company's Board of Directors has supervised a fundamental overhaul of Canoro's senior management team, concluding with a change in leadership. There are going to be continued challenges and obstacles ahead, but the Company has the beginnings of a significant asset base in India, high value prospects and the technical and management expertise to explore and develop these opportunities.
The Company incurred a net loss during the Quarter of $2.2 million and utilized funds from operations of $0.9 million. During the Quarter and subsequent to Quarter-end, the Company continued to reduce general and administrative expenses and management believes that Canoro is now a leaner and more efficient organization going forward. The Company does not expect the full realization of G&A savings to be evident until the third quarter of 2009. The Company exited the Quarter with no debt and working capital of $5.0 million.
Subsequent to Quarter end, the Company strengthened its financial position by entering into an agreement with a private equity fund (the "Fund") whereby the Fund provided a follow-on limited recourse funding of $4.0 million for the purchase and installation of the gas compression units as part of development operations in the Amguri Field in Assam, India. The Fund will not earn a participating interest in the field, nor will it be responsible for future capital costs. The Fund will be entitled to receive payments based on Canoro's 60% share of gross revenue from the Amguri Field ranging from 8% before recovery of the original $4.0 million, declining to 4% thereafter.
Amguri (Canoro 60% working interest) production averaged 610 boe/d consisting of 2,629 thousand cubic feet ("mcf") per day of natural gas and 172 barrels ("bbl") per day of oil and condensate. Production decreased 33 percent from the comparative quarter in the prior year and decreased five percent from the previous quarter. The reduction in quarterly year-over-year production is due to both a decision by Canoro to restrict natural gas production to maintain reservoir pressure while the gas injection facility is being constructed, combined with a decreased demand for natural gas in the region primarily from the tea gardens resulting from monsoons arriving later than normal. Quarter-over-quarter, natural gas volumes were essentially flat and liquids production decreased approximately 18% as the Amguri A-5 oil well was shut-in. The well had been producing approximately 30 bpd of oil net to Canoro prior to being shut in due to water influx. Canoro is currently reviewing the reservoir and well characteristics to determine the feasibility and options for a water shut-off work over.
The pipeline for the Amguri A-14 well tie-in into the central process facility was completed at the end of May 2009. The well was put into production in early June at an initial rate of 1.0 mmcf/d (0.6 mmcf/d net to Canoro) dry gas on a 10/64" choke with a with a tubing head pressure of 2180 psig (shut in tubing head pressure was 2200 psig). The well is capable of been produced at 4.0 mmcf/d with minimal drawdown, however, was recently shut-in due to limited local demand for natural gas. Canoro has been approached by a number of industrial users of natural gas in the area with respect to entering into longer term fixed price and volume contracts. Natural gas prices in northeast India are significantly lower than the rest of the country. The Company intends to explore all of its options before committing to further gas sales contracts at what it believes are sub-market prices. In response to both depressed natural gas prices in the region and the Government of India's initiative to increase national power generation, Canoro has begun preliminary studies and analysis into the feasibility of building a 50-100 megawatt natural gas-fired power plant in Amguri. The Company believes that, given high demand for electricity in the area and throughout India, generating and selling electrical power may be an effective method over the long term to monetize Canoro's natural gas reserves at substantially higher prices than currently received, thereby decreasing the Company's reliance on regional gas markets.
The Company is pleased to report that the gas compression project continues to be on time and on budget. At the present time, the engineering and procurement components are over 90% complete. The gas recycling scheme required to maximize recovery of condensate also mitigates Canoro's exposure to low priced spot markets for natural gas by allowing the Company to extract condensate and re-inject gas into the reservoir. As the condensate is removed from the produced gas stream, the remaining lean gas will be re-injected into the reservoir to maximize reservoir pressure and recovery of condensate reserves.
Obtaining a complete and accurate geo-technical understanding of Amguri remains a top priority for the Company. The Pre-Stack Depth Migration ("PSDM") reprocessing of the primary volume of Amguri 3D seismic data is complete with preliminary results expected by the end of September. A secondary PSDM volume has been commissioned and a full re-interpretation of the Amguri Block is expected by the end of the year.
Due to adverse weather conditions and complications associated with lease construction during monsoon season, the spudding of the JRMC location on the AA-ONN-2003/2 Block (Canoro 15% working interest) has been delayed. Other locations, not as significantly impacted by these operational constraints, are being evaluated and prepared presently for the initial drilling program. Canoro is actively working with the Operator and the partners to address these operational and timing issues.