NINOTSMINDA

Field Description

CanArgo, through its wholly owned subsidiary Ninotsminda Oil Company Limited (NOC), owns 100% of the contractor's share in the Ninotsminda, Manavi and West Rustavi Production Sharing Contract (PSC). The main producing field in this PSC area is the Ninotsminda Oil Field which was initially developed in 1979 by the Georgian State Oil Company. Cumulative production from the field to date is approximately 11.5 million barrels of oil and 11.7 billion cubic feet (331 MMCM) of natural gas of which approximately 5 million barrels of oil and 8.4 billion cubic feet (239 MMCM) of gas have been produced since CanArgo began its involvement with the field in 1996.

The Ninotsminda Field covers an area of approximately 2,500 acres and is located 40 Km east of the Georgian capital city, Tbilisi. Ninotsminda is the easternmost element of an elongate anticline which includes the Samgori and Patardzeuli Fields and is separated from the Patardzeuli Field to the west by a saddle and a NW-SE trending cross fault. The field has a maximum structural relief of around 2,493 feet (760 metres). The main reservoir horizon is the Middle Eocene which consists of well-bedded deep marine sedimentary rocks eroded from volcanoes. Such rocks typically have low matrix porosity but well developed sub-vertical fractures can provide secondary porosity and permeability of up to 100-500 mD. The reservoir which in the field area is up to 1,640 feet (500 metres) thick is at a depth of 8,530 feet (2,600 metres) below surface to 9,843 feet (3,000 metres) below surface. Production from the field is facilitated by a strong water drive. The oil accumulation has a gas cap which together form a maximum hydrocarbon column of 1,060 feet (323 metres), with the gas-oil contact at 4,839 feet (1,475 metres) True Vertical Depth Sub Sea ("TVDSS") and the oil-water contact at 5,413 feet (1,650 metres) TVDSS. The oil itself is a high quality light sweet crude: 41°API, with just 0.24% sulphur, 4.9% paraffin and 8.7% tar and asphaltene.



Production & Development

Early Operations

NOC began an immediate rehabilitation of the Ninotsminda Field in 1996 which included repairing and adding perforations to existing wells, acquiring additional seismic data and a limited drilling program. The first new vertical well (named N96) was completed in October 1997 and a second well (N98) was completed in October 1998 which was sidetracked as a horizontal producer in 2000. The N98 horizontal well had produced approximately 470,000 barrels of oil to the end of June 2007.

Horizontal Drilling

As a result of this development work, subsequent drilling and the completion of a dynamic reservoir model, it was suggested that a higher level of production could be achieved from the Middle Eocene reservoir from horizontal wells drilled in a preferred orientation so as to intersect the main fracture sets. During 2003, three horizontal sidetrack wells were completed with a total of 3,720 feet (1,134 metres) of horizontal section having been drilled through the reservoir using CanArgo's own rigs, equipment and conventional drilling techniques. Although individual wells tested at rates of over 2,000 barrels of oil per day (bopd) when completed, the wells were put on production at lower rates in accordance with the recommendations of independent petroleum engineering specialists in order to maintain production. However, it has not been possible to maintain production at these levels due to water incursion resulting from, what is believed to be coning of water up the fractures, caused to an extent by, reservoir damage caused by conventional drilling techniques. However, due to alternative UBCTD equipment not being available in the short to medium term due to a high demand for oil field equipment and services in general, the Company decided to continue with its horizontal development and production program and drill at least two additional sidetrack wells with its own equipment.



Despite the fact that initial production results from the horizontal wells indicated significant improvement, compared to production from offsetting vertical wells, production was not sustainable at the same high levels due to, what is believed, being drilled overbalanced with a water-based mud that has resulted in highly overbalanced pressures and mud invasion into what is already a low permeability reservoir. In an attempt to address this issue, it was decided to employ under balanced drilling ("UBD"), as well as drilling with coiled tubing ("CT") as these technologies have been combined successfully in the international oil industry to drill undamaged horizontal sections for improved production and exploitation of both oil and gas reservoirs.

In June 2004, CanArgo signed a contract with WEUS Holding Inc., a subsidiary of Weatherford International Ltd ("Weatherford"), for the supply of Under Balanced Coiled Tubing Drilling ("UBCTD") services to the Ninotsminda Field in Georgia. At least five under balanced horizontal sidetracks were planned starting with the N22H well which is located in the east part of the Field where the reservoir is tighter but it is believed to be relatively un-drained. The well was prepared by CanArgo Georgia, a wholly owned operating subsidiary company, which involved sidetracking from the existing well-bore at 8,661 feet (2,640 metres) down to 9,193 feet (2,802 metres) and setting a 4½ inch liner. Weatherford commenced operations in December 2004, however technical problems with the Weatherford equipment caused a number of delays which resulted in the UBD not being completed until late February, 2005 and then only with a much shorter than planned section being drilled. The well did not achieve its objective, despite flowing gas at reported high rates through the gas cap section.

Subsequent operations by Weatherford on both N100H2 (an eastern sidetrack to the well where NOC earlier successfully drilled a conventional horizontal side track to the west) and N49H wells also proved unsuccessful, with Weatherford failing to drill any horizontal section in these wells. Progress was hampered by multiple failures of the downhole motors, other equipment malfunctions and the loss of bottom hole assemblies in the wells. As a result, of the failure of Weatherford to successfully complete any horizontal sidetrack development wells on the Ninotsminda Field using UBCTD technology, Weatherford demobilized its equipment and left Georgia in July 2005.

Despite this lack of success, which is attributed mainly to multiple equipment failures, it is still believe that under-balanced technology is an appropriate technology for the development of this type of reservoir. However, due to alternative UBCTD equipment not being available in the short to medium term due to a high demand for oil field equipment and services in general, we decided to continue with our horizontal development and production program and drill at least two additional sidetrack wells with our own equipment.

In October 2005, the N100H2 well was successfully sidetracked by CanArgo Georgia having drilled a horizontal section of 1,667 feet (508 metres). The well tested at a rate of up to 13.07 million cubic feet (370 MCM) of gas per day plus 301 barrels of condensate per day. The well is currently choked back while access to the gas market is secured; this involves the construction of an extension to the domestic gas grid by the State which is progressing slowly.



The most recent horizontal sidetrack well to be drilled on the field was the N97H well which was completed in March 2006. It targeted oil volumes un-drained from previous offset area wells and was put on production test following the installation of a slotted liner over a 1,509 feet (460 metres) interval furthest from the heel of the well. The well produced initially with a high water cut, approximately 70%, and an oil rate which peaked at 385 barrels of oil per day (bopd) before declining. Subsequent pressure surveys run with downhole gauges suggested that the N97H well was in communication with the offset N4H well. The most likely assumed scenario was then some of the fracture sets encountered at the end of the N97H well were drained by the N4H well and were hence water filled. Once a very high permeability connection is established with the aquifer, water will flow in preference to any oil filled fractures or matrix of lower permeability.

On the basis of the test data and due to the fact that the N97H well is approximately 36 feet (11 metres) structurally higher than the N4H well which is still producing oil, it was decided to attempt to conduct remedial water isolation. The slotted liner deployed in the horizontal section limited mechanical options for shutting off the toe end of the horizontal section. Previous experience in the field has shown that pulling a liner once set has a very low chance of success due to formation collapse around the liner. Also, a traditional cement isolation was considered to have a low chance of success in a horizontal section, so a coiled tubing deployed chemical shut-off was opted for. Water isolation operations were carried out, but subsequent production testing showed that the treatment was not successful or that water was being produced from a larger area of the horizontal section. The current plan is to set a cement retainer in the solid liner section of the N97H well in order to isolate and abandon the slotted liner part, then perforate the liner through the build-up and heel section of the well and turn it into a potential gas producer. This operation will be subject to having proper access to the gas market and a suitable gas off take agreement in place.

Eastern Ninotsminda

Production and development to date at the Ninotsminda Field has focused on the western 2/3rds of the field. The eastern most wells drilled on the field are the N98 horizontal well and the N52 well which is an inclined well towards the southeast, both of these wells have proven the oil-water contact to be at a deeper level than in the western part of the field. N52, which is a Soviet era well, has never produced from the reservoir due to a complex fish being left in the hole with the well subsequently abandoned. N98H, on the other hand, was the first horizontal completion and while not oriented in an optimal direction so as to best encounter the sub vertical fractures, the well has produced in excess of 470,000 barrels of oil and continues to produce at the same steady rate of approximately 200 bopd with less than 1% water cut.

The eastern part of the field has not been exploited because most of the area falls within an environmental protection zone where drilling is prohibited. CanArgo has plans to develop this area by drilling a highly deviated well from the vicinity of the N98H surface location into the eastern part of the field and completing the well with up to two horizontal sections in the reservoir interval.

In an attempt to increase production at the field in 2007, workover operations were undertaken on the N52 well using the smaller of CanArgo’s rigs to extract a complex fish (approximately 9,300 feet (2,843 metres) comprising drill pipe, tubing and a milling assembly) from the well and add perforations to the reservoir interval. N52, which is a Soviet era well, has never produced from the reservoir due to the fish with the well subsequently being abandoned. The fishing operation was further complicated due to the inclined nature of the well which has a number of severe dog legs and the potential for the tubing to have deformed when dropped. Although the operation was always considered to present a considerable technical challenge, approximately 7,155 feet (2,181 metres) of 2 7/8” and 2 3/8” tubing was recovered from the well, but before the job could be successfully completed, the pulling capacity of the rig was reached. Consideration will be given to moving a larger rig to the site once it has completed current operations.

Shallower Reservoirs

Apart from the Middle Eocene sequence on the Ninotsminda Field there are a number of other reservoirs which contain oil. These intervals have not yet been fully evaluated which may only be achieved by further seismic evaluation, and the employment of modern drilling techniques such as radial drilling so as to get past near well bore reservoir damage caused by unsuitable drilling fluids used in Soviet times.



Reserves

The following table summarizes net hydrocarbon reserves for the Ninotsminda Field. This information is derived from a report dated as of January 1, 2008 prepared by Oilfield Production Consultants (OPC), independent petroleum consultants headquartered in London, England. This report is available for inspection at our principal executive offices during regular business hours. The reserve information in the table below has also been filed with the Oslo Stock Exchange.