Drilling Report

Published Tuesday 12th, May 2009.
Article Category: Announcements
SummaryExploration Program Update
Article Content
Andes Energia plc
(Andes or the Company)

Exploration Program Update
The Board of Andes (AIM: AEN), the Latin American energy group, announces an update on the exploration program adopted by the registered joint ventures Union Transitoria de Empresas (UTEs) for the license blocks held under the consortium agreement between Andes and Patagonia Oil & Gas S.A.. Andes holds a 20% royalty interest, a 20% carried interest and a 3% working interest in the licenses held by the consortium and the UTEs.

CONFLUENCIA BLOCK
Well Kil.ch.EB.x-1001

As announced on 10 November 2008, the first exploration well, Kil.ch.EB.x-1001, was drilled in the South East region of the Confluencia licence block to appraise the hydrocarbon bearing potential of the anticline structure called El Bloque, attributed to the Chubutuianos and Neocomian (Lower Cretaceous) cycles.

The primary objective of this exploration well was to investigate two levels of potential reservoirs: the continental clastic levels of the Lower Bajo Barreal formation and the upper Castillo formation (Chubutiano cycle); and the Basal Conglomerate of the Matasiete formation and the tidal and deltaic sediments of the Pozo Cerro Guadal formation (Neocomian cycle).

The exploration well, Kil.ch.EB.x-1001, was successfully drilled by San Antonio International, a subsidiary of Pride International Inc., in October 2008 and reached a final total depth of 6,573 feet and was cased with 5½ inch production casing. The well is located at approximately the same level as El Bloque 1 and probably lies at the edge of the closure area of the El Bloque structure. The drilling operations were completed within the planned time and within budget, with the following results:
traces of hydrocarbons were detected; and gas peaks were observed (3,000 to 5,000 units)

The petrophysical interpretation was not conclusive; the porosity interpretation was affected by the large caliper; the salinity of the water formation is 3.5 grams of salt per liter (Castillo Formation), which means that the resistivity differs very little from the oil resistivity, making it difficult to define a reliable water saturation; and an abundance of tuffaceous sedimentary rock with high resistivity was found from a depth of 1250 meters.

Further analysis and geochemical survey work will be conducted in 2009-2010, which will extend to the South West and West of the Kil.ch.EB.x-1001 well and will provide information to determine the shape of the structure. If the geochemical studies confirm the need to conduct 3D seismic work, this will be carried out regionally in 2010. The results of this work will also be used to target the location of further wells and define the completion works for the Kil.ch.EB.x-1001 well.

Well El Bloque 1

A previous well, referred to as El Bloque 1, was drilled in 1997 by YPF, 5km West of the Kil.ch.EB.x-1001 well and good quality reservoirs were found in the Castillo formation. The well yielded on tests, from the interval 1,343 meters to 1,345 meters, 320 barrels per day of water with 6% oil and, from the interval 1,238 meters to 1,240 meters, 240 barrels per day of water with 10% oil. El Bloque 1 had the best test results of the nine wells drilled in the Confluencia exploration area.

A petrophysical interpretation was commissioned with a local consultant group that has extensive experience of the area, EXE Energía S.A.. Although the formation water is of low salinity, similar to the Kil.ch.EB.x-100 well, new intervals were found that could be oil producing.

In order to convert El Bloque 1 into a viable production well, our consultant has recommended that hydraulic fracturing stimulation treatment be carried out. This is a technique successfully used in the San Jorge Basin to improve initial productivity.

In November 2008, the wellhead of El Bloque 1 was restored to evaluate the feasibility of mobilizing a work over unit. The cement plug was removed and the casing was extended. Further analysis will focus on re-testing perforated intervals and perforating or intervening new intervals in order to establish the well production capacity.

PAMPA SALAMANCA NORTE BLOCK

Carson Aerogravity, a division of Carson Helicopters, Inc (Carson), conducted an airborne geophysical survey between December 2007 and March 2008. The data was processed and evaluated by Carson in its operating centre in Perkasie, Pennsylvania, USA

Results of the report identified:

large magnitude soil gas anomalies; and a structural low that can be interpreted as Neocomian graben, with the possibility of an area of petroleum generation.

The shows of oil in wells Kinkelin 1001 and 1002 support this hypothesis. To confirm the existence of the graben detected by the airbone gravity a 2D seismic survey is planned (50 km) in 2010.

In conjuction with the aerogravity study, a regional soil gas geochemical survey was performed by Exploration Technologies, Inc., from Houston, Texas, with the following results: large magnitudes of soil gas anomalies were identified, suggesting a high potential for productive oil reservoirs. The very largest methane (18,309 parts per million) and ethane (1,457 parts per million) anomalies were found at a site that forms part of a cluster of anomalous sites that lie in the South of and extend outside the Pampa Salamanca block; the soil gas data is also distinctive in that it shows a change in composition from South to North, where an interesting cluster of oily sites occurs; and the magnitudes and compositional signatures shown by the soil gas anomalies could indicate the presence of full-spectrum hydrocarbon anomalies that are indicative of mature oil sources.

Pampa Salamanca Norte appears to have similar potential to the known productive area located South of the block and has to be considered as having excellent potential for the development of commercial reservoirs. Additional survey grids to further develop these leads will be identified.

Gathering data and petrophysical evaluation of the wells near areas of potential generation will be carried out during 2009.

BUEN PASTO BLOCK

In 1972 YPF drilled an exploration well, referred to as Meseta del Humo x1, located in the Buen Pasto Block in the North West flank of the San Jorge Basin. The well was drilled to a depth of 1,576 meters to investigate the Castillo, Matasiete and Pozo D129 formations in the structure named Meseta del Humo. A drill stem test was conducted in the Matasiete formation in an 8 meter interval from 720 meters to 728 meters, which recovered mud drilling fluid with traces of heavy oil.

In October 2008, the UTE technical team organized a swabbing operation for MH.es-1 well (Meseta del Humo), after finding abnormal pressure on the wellhead. As a result of this test 480 liters of crude oil were recovered and analyzed. The results showed rheological characteristics of viscous oil.

A further inspection was carried out in March 2009 and it was noted that the wellhead pressure had built up to 116 pounds per square inch, with oil found under the safety valve; evidence of reservoir response.

Taking into account these results and the petrophysical studies carried out, recompletion works are planned to define the well productivity potential.

Reinterpretation of available data has enabled us to delineate a potential area where the source rock could be oil generating. The structure of Meseta del Humo is close to a depocenter and confirms the existence of a petroleum system. This study together with the findings above mentioned, improves the likelihood of the prospectivity of the structure, pending further local geochemical survey, seismic reprocessing and well evaluation to better define the area and the associated resources.

MARKET SITUATION

The international economic turmoil and the fall in commodity prices, specifically oil, have had an important impact on oil companies and in particular exploration projects. The regulatory authorities in Argentina are considering the effects of the current difficult market conditions and whilst individual provinces may respond differently, management is confident that they will acknowledge the need to be flexible with regards to exploration license commitments in this time of uncertainty, to ensure exploration activities continue.

Towards the end of March, UTE representatives met with the Chubut government authority, Petrominera Chubut S.E., to discuss the possibility of reformulating the work programs under the Chubut exploration licenses, based on the information that has been obtained to date. At this meeting Petrominera was asked to consider the following: an extension of the exploration periods; acknowledgement that current work program commitments have been satisfied; and a reduction in future work program commitments.

The Board is waiting for a formal response to these requests and will update the market when this is received. Further meetings are also planned with the authorities where the company has interests.

The present economic environment and the outcome of these meetings have and will affect the exploration work programs planned for the rest of 2009 and 2010. We had previously indicated that the UTEs had anticipated drilling a second well in the San Bernardo block and two further wells in the San Jorge basin, subject to further interpretation and evaluation of exploration data. This drilling program has now been deferred and the planned exploration programs for 2009-2010 will now be oriented towards a cost-efficient approach based on a series of work overs (that explore the potential commerciality of the reservoirs in a more efficient manner than the drilling of new wells), geophysical studies, seismic reprocessing and 2D and 3D seismic acquisition with the aim, during 2009 and 2010, of further confirming the level of contingent resources and, subject to the result of this work, potentially defining proven reserves.

This work will allow us to advance the knowledge we have with minimum investment risk, whilst putting the Company in a position to be able to react to changes in market conditions and allow us to implement quickly any programs required to exploit production opportunities identified.

Juan Carlos Esteban, CEO of Andes oil and gas operations, stated, “We are pleased with the results of the exploration program undertaken and believe the exploration licences we hold offer us excellent potential oil and gas production opportunities”.

For further information please contact:
Andes Energia plc
Luis Alvarez Poli, CEO
Nigel Duxbury, FD
T: 020 7495 5326

Arbuthnot Securities
James Steel
Antonio Bossi
T: 020 7012 2000
Bishopsgate Communications
Nick Rome
Michael Kinirons
T: 020 7562 3350