NORIO

Middle Eocene Exploration Potential

In 2000, CanArgo acquired the Norio (Block XI^C) and North Kumisi Production Sharing Agreement (Norio PSA) through its subsidiary CanArgo Norio Limited (CanArgo Norio) in which CanArgo currently holds a 100% interest. CanArgo believes that the Norio PSA area is extremely prospective, lying as it does at the intersection of two thrust belts, and just to the north of the large Samgori, Patardzeuli and Ninotsminda Field complex which has produced approximately 200 million barrels of oil to date. The licence is large, covering an area of some 265,122 acres (1,061 Km²) and has only been subject to limited exploration in the past. The Norio PSA area represents a continuation of the same proven petroleum system within the basin to the northwest. Indeed, oil was first discovered on the licence in 1939, and two small shallow oil accumulations have been operated almost continually since the 1940's by the Georgian State Oil Company, however, these fields are now almost depleted.

The geology of the Norio area contains all the key elements for oil and gas generation, migration and trapping. The primary target is the Middle Eocene fractured volcanogenic sandstones. This is the most prolific reservoir so far discovered in the Kura Basin in Georgia accounting for the majority of the oil production from the Samgori, Patardzeuli and Ninotsminda Fields. Other important reservoirs in the area include Upper Eocene and Oligocene turbidites in the Palaeogene and 'Sarmatian' (Upper Miocene) sandstones in overriding thrust sheets, and following CanArgo's recent success to the east at Manavi, the Cretaceous carbonates. The principal oil source rock in the basin is believed to be Maikopian (Oligocene–Lower Miocene age) and Upper Eocene mudstones. Top seals to the reservoirs are abundant within the basin as thick deposits of Upper Eocene and Maikopian mudstones abound, faulting as a result of the intense structural deformation of the area provides another sealing as well as trapping mechanism.

The average thickness of the Middle Eocene reservoir in the Samgori area is of the order of 2,200 feet (670 metres), but it does thicken in a north–westward direction over the Norio PSA area towards the source area for the sediments, as evidenced by the 2,674 feet (815 metres) thick sequence in the prolific Lisi 1 hot water well to the west of Tbilisi. This well is reported to have sustained flow rates in excess of 40,000 barrels per day thus demonstrating the potential productivity of this reservoir.



The poor quality of the seismic data acquired during Soviet times meant the area was never effectively explored especially at deeper levels and beneath the complex thrust sheets. In 2000, CanArgo acquired around 190 km of 2D seismic data over the Norio block. The quality of the new data is good and its interpretation led to the identification of a number of large un–drilled prospects in the target Upper and Middle Eocene sequences. The larger of these, the Norio–Martkopi prospect, is potentially larger than the Samgori–Ninotsminda complex. Further leads have been identified at the margins of the seismic grid, which have yet to be properly defined and as such will require the acquisition of further seismic data.



Norio–Martkopi Prospect

The Norio–Martkopi Prospect is located in the eastern part of Georgia approximately 9 miles (15 km) northeast of Tbilisi and 6 miles (10 km) to the north of Georgia's largest oil field discovered to date, the Samgori–Patardzeuli Field. The structure lies wholly within Block XI^C of the Norio PSA. The Norio–Martkopi structure is represented on seismic data as a large compressional feature at Middle Eocene level. The structure maps out as an east–west trending anticline in the sub–thrust with an area of closure in the region of 28,000 acres. This is overlain by another compressional structure at Oligocene level within the thrust zone itself. The Oligocene closure is somewhat smaller, but still of considerable size at 16,000 acres. These structures, as mapped, have the potential to contain very significant volumes of recoverable of oil and gas reserves.



MK 72 Exploration Well

The MK72 exploration well was located to test both target horizons in the Norio–Martkopi structure. The primary objective of the well was the Middle Eocene with the shallower Oligocene sequence providing a secondary objective. The MK72 well reached a total depth of 16,076 feet (4,900 metres) in the Middle Eocene reservoir in December 2005 having encountered very good oil and gas shows. Gas levels up to 21% were recorded at surface, as well as light oil in the mud and hydrocarbon fluorescence in the cuttings samples. Before the well could be drilled to the planned depth and tested, the bottom hole assembly (BHA) became stuck due to hole collapse. As the well was already being drilled in a small diameter hole due to earlier sidetracking, the lower zone in the well was abandoned without testing. CanArgo, nevertheless, is very encouraged by the data obtained from the Middle Eocene, and believe that the reservoir has exhibited both permeability, due to the heavy loss of drilling fluids on entering the Middle Eocene, and the presence of movable light oil.



With the well plugged back, a comprehensive testing program on the oil bearing Oligocene sandstones (secondary objective) commenced in March 2006 when a total of 322 feet (98 meters) of net sands were perforated over the interval 12,096 feet (3,687 meters) to 13,622 feet (4,152 meters). These sands had good oil shows whilst drilling, with oil to surface and with hydrocarbons being interpreted on the electric logs which also indicated a substantial thickness of net pay sands. Following an extensive testing program, the well sustained flow on a small choke size with low average gross fluid rates of approximately 13 barrels per day consisting of light 48.6° API oil, gas and water.

Following detailed analyses of the drilling and testing data, it is believed that the flow obtained from the Oligocene is limited to a thinner, less permeable, interval whilst the better quality reservoir remains isolated due to potential reservoir damage caused by the invasive fluid damage of the drilling mud. The lower zones in the well, which would have been in communication with the Oligocene interval through the well bore, were drilled with a 1.9 to 2.2 Specific Gravity (SG) mud due to anticipated reservoir pressures while the results from the testing program indicate that the mid interval reservoir pressure for the Oligocene whilst still over pressured, is lower at 1.7 SG equivalent. As a result of possible mud damage, the perforations may have not penetrated deep enough beyond the damaged zone to allow proper communication between the more permeable formations and the well bore.



The potential to hydraulically fracture the reservoir in order to get beyond the near well bore damage is limited due to a lack of a cement bond behind the casing and the large interval which has been perforated. Consequently, the only effective option remaining to properly test the Oligocene interval is to sidetrack the well or to drill a new well. The latter, of course, would enable a potential test of both the Oligocene and Middle Eocene intervals both of which are considered to have significantly reduced geological risk as a result of drilling the MK72 well.

CanArgo plans, subject to financing being available from internal resources or through a farm out arrangement, to drill an appraisal well to fully evaluate these attractive discoveries in the Norio–Martkopi structure within the Norio PSA area. Based on the information obtained from drilling the MK72 well, the new well will be engineered so as to enter the Middle Eocene reservoir with a sufficiently large hole size so as to properly evaluate the reservoir and flow test the well.