Extrem Energy

Extrem Energy A.S. (Turkey)

Extrem Energy is an exploration and production joint venture with Merty Energy of Turkey. The JV’s aim is to create a new medium-sized oil and gas exploration and production business, initially focused on Turkey where Merty Energy has particular experience and expertise. Extrem Energy has a portfolio of licence interests including the high potential prospect at Candarli Bay in south-west Turkey. Xtract owns 34% of the issued share capital of Extrem Energy.

On 31 August 2008, the Company completed a definitive agreement with Merty Energy, Petroleum Exploration, Education and Services Inc (’Merty’) of Turkey regarding an investment in a new exploration and production joint venture. Xtract and Merty, together, aim to create medium-sized oil and gas exploration and production business initially focused on Turkey, where Merty has particular expertise and experience.

Under the terms of the agreement, the parties created a Turkish company, Extrem Energy A.S. (“Extrem”) in which Xtract and Merty initially held 20% and 80% interests respectively. Xtract invested US$5.0 million to fund Extrem’s initial work programme and Merty applied for the transfer of a portfolio of seven licence interests into Extrem.

The licences transferred to the new company include 100% interests in offshore licences at Candarli Bay and in the Sea of Marmara and onshore licences at Edirne and Siraseki plus an 80% interest in an onshore licence at Alasehir. The other 20% of the Alasehir licence is owned by Turkish company, Petrako Petrol Gas and Industrial Co. The intention of the partners is that the lower risk onshore developments at Alasehir and at Edirne will provide early oil and gas revenues to enable the company to develop the offshore licences, including the very exciting prospect at Candarli Bay.

The first well drilled by Extrem, known after as Sarikiz-2 was drilled in the Alasehir licence area. The Alasehir Basin is a tertiary clastic basin located in the XVII-Izmir District of South-West Turkey, in an industrial area. The basin has a sedimentary succession of 3,000-4,500m in thickness created by large rifting faults and has a geothermal gradient that causes early maturation of hot shales. The reservoir is lower-middle Miocene clastics, which are also thought to provide the source. Effective seals are provided by bounding faults and clay zones within the formation.

The well was spudded on 31 October 2008 and drilling was completed to the target depth of 1,843m at 1630hrs on 07 December 2008. Wire line logging and pressure testing indicated a producible and commercial oil discovery. Following completion of the logging procedures, 23 levels of sandstone were assessed to have producible oil. Of these, 12 levels with a combined reservoir thickness of 75m were selected for subsequent production testing. The total reservoir thickness encountered greatly exceeded the pre-drill estimate of 10m.

The Sarikiz-2 production test began on 15 May 2009 and was completed on 30 July 2009. It took much longer than originally expected due to various technical complexities that were encountered, but it was ultimately successful. The well was shut in as a production well with commercial production expected to commence in the final quarter of 2009 following construction of the necessary surface facilities. Production performance from the initial wells will be analysed to determine the optimal well configuration to drain the structures over a reasonable field life of 20-25 years. Formal field development plans and reserve categorisation will be finalised once commercial production has been established.

In addition to developments at Alasehir, Extrem completed technical work on its other on-shore licence areas during the year with a view to identifying future drilling targets. The results from seismic and GORE geochemical surveys over the Siraseki licence area near the Syrian border gave rise to a new prospect called Menekselik. The sandstone structure is a fault bounded anticline with an estimated area of 11.2 square km and an expected pay thickness of 30m.

At Edirne in the Thrace basin of western Turkey, a programme of seismic acquisition was completed on 9 August 2009. The acquisition of GORE geochemical data was completed on 19 September 2009. The seismic and geochemical data will be analysed together to identify drilling targets in this well-established gas-bearing zone. If successful, these targets will be drill-ready by early 2010. The area is close to existing downstream infrastructure, so production can be established quickly in the event of success.

In summary, Extrem has developed an impressive portfolio of near term production potential and highly prospective drill-ready targets. The rate of growth of Extrem will be governed to a large extent by the speed at which production can be brought on and at which reserves are confirmed by independent experts.