Alvopetro Energy Ltd. ("Alvopetro") announces the results of the Caburé Unit redetermination process wherein the appointed independent expert ("the Expert") has found in favour of Alvopetro's final proposal, increasing Alvopetro's working interest to 56.2%.
Highlights
Alvopetro's working interest in the Caburé Unit has been increased from 49.1% to 56.2%.
The redetermined working interest is to become effective on June 1, 2024 (the "Effective Date").
Incorporating the increased working interest, Alvopetro's share of proved plus probable reserves ("2P") (effective December 31, 2023) in the Caburé Unit increases to 4.6 MMboe from 3.7 MMboe, a 25.4% increase.
Alvopetro's total company 2P reserves (effective December 31, 2023) increases to 9.6 MMboe from 8.7 MMboe, a 10.8% increase.
Following the Effective Date, Alvopetro's entitlement to natural gas production from the Unit will increase to 13.9 MMcfpd (before additional NGL volumes), compared to average 2023 natural gas production from the Unit of 11.7 MMcfpd per day.
Alvopetro retains our right to nominate for additional gas volumes in excess of our entitlement when those volumes are available at the Unit.
Upon the Effective Date, Alvopetro will be pursuing our right to assume Unit operatorship.
Background
As previously disclosed, Alvopetro's Caburé natural gas discovery extends across two blocks owned by Alvopetro (Block 197 and 198) and two adjacent blocks owned by a third party (Blocks 211 and 212). Under Brazilian legislation, petroleum accumulations straddling two or more licensed blocks must undergo unitization (pooling) in order to promote efficient and fair exploration and development. In April 2018, Alvopetro and the adjacent resource owner finalized the terms of the Unit Operating Agreement ("UOA"), the unit development plan and all related agreements, with Alvopetro's initial working interest share of the unitized area (the "Unit") being 49.1% and Alvopetro's 50.9% partner being named initial operator. Under the terms of the UOA, the working interest split is subject to redeterminations. The first redetermination was to occur 18 months after Alvopetro commenced production allocations but the parties agreed to defer the redetermination to include data up to October 31, 2023.
Under the provisions of the UOA, the parties agreed that the redetermination would be evaluated by the Expert. Pursuant to the provisions of the UOA, where an Expert is engaged, the Expert's determination shall be made using what is commonly referred to as the "pendulum" method of dispute resolution. Under this method, the Expert is not required or permitted to provide their own interpretation but is required to select the single Final Proposal (between the two partner's respective Final Proposals), which, in the Expert's opinion, provides the most technically justified result of the application of the relevant information and data and material provided to the Expert consistent with the UOA and all related agreements.
Basis of Redetermination
The UOA and related agreements require that any redetermination of working interest to each party shall be based on the estimated ultimate recovery of all natural gas, natural gas liquids and crude oil that are projected to be recovered from the Unit commencing from first production ("Unit Recoverable Volumes") on a best estimate basis. For purposes of the redetermination, each party presented their proposal as to Unit Recoverable Volumes for this purpose and the proposed redetermined working interest to each party following the redetermination. Unit Recoverable Volumes are not determined in accordance with the standards contained in the Canadian Oil and Gas Evaluation Handbook (the "COGE Handbook") or the standards of National Instrument 51-101 ("NI 51-101") and Alvopetro's remaining share of such Unit Recoverable Volumes will not agree to reserves as disclosed by Alvopetro for purposes of NI 51-101.
Expert Decision
Up until December 31, 2023, Alvopetro had received 470.9 million m3 (16.6 Bcf) of natural gas deliveries from the Unit. Based on the above redetermined interest, Alvopetro's remaining entitlement to Unit Recoverable Volumes effective December 31, 2023 is 1,047.5 million m3 (37.0 Bcf or 6,165 Mboe).
Alvopetro's remaining entitlement to Unit Recoverable Volumes pursuant to this redetermination decision is 6,165 Mboe (effective December 31, 2023) which contrasts with our previously disclosed Caburé Unit reserves as of December 31, 2023 announced on February 26, 2024 (based on Alvopetro's original 49.1% interest) as reflected in the table below. The reserves and resources data below (the "Original December 31, 2023 Reserves") is based on an independent reserves and resources assessment and evaluation prepared by GLJ Ltd. ("GLJ") dated February 26, 2024 with an effective date of December 31, 2023 (the "GLJ Reserves and Resources Report").
Alvopetro's remaining entitlement to Unit Recoverable Volumes of 6.2 MMboe as of December 31, 2023 exceeds Alvopetro's December 31, 2023 Pro-forma Caburé 1P and 2P Reserves of approximately 2.7 MMboe and 4.6 MMboe, respectively but is relatively consistent with Pro-forma 3P reserves of approximately 6.0 MMboe. Unit Recoverable Volumes were not prepared nor determined in accordance with the COGE Handbook or NI 51-101 and Alvopetro's remaining entitlement to such volumes as of December 31, 2023 is higher than the December 31, 2023 Pro-forma Reserves assigned at the new redetermined working interest. Such differences arise due to differing levels of certainty associated with the various classes of reserves but also arise due to differing assumptions utilized in the determination of Unit Recoverable Volumes most notably with respect to the extent and estimated ultimate recovery of the reservoirs. Alvopetro's ultimate entitlement to natural gas volumes over the life of the field will be based on the results of future development and overall reservoir performance.
Effective Date
Pursuant to the provisions of the UOA and related agreements, the redetermined working interest is expected to become effective on June 1, 2024.
Impact on Future Entitlements to Natural Gas Production
Under the terms of the Gas Balancing Agreement between Alvopetro and the Third-Party Partner, each party is entitled to their working interest share of natural gas produced from the Unit (the "Lifting Entitlement") plus any natural gas not nominated by the other party. The Lifting Entitlement is updated based on the redetermined working interests and as a result, the share of natural gas production which Alvopetro may nominate from the Unit is expected to increase. Once the redetermined working interest is effective, Alvopetro's Lifting Entitlement from the Caburé Unit will be increased to approximately 393 e3m3/d (13.9 MMcfpd or 2,315 boepd) before natural gas liquids (condensate) production compared to Alvopetro average natural gas sales from the Caburé natural gas field in 2023 of 332 e3m3/d (11.7MMcfpd or 1,957 boepd). Alvopetro's ability to sell the incremental natural gas production following the increase in our Lifting Entitlement will be dependent on demand from Bahiagas, our offtaker.
Operatorship
Once the redetermined working interest becomes effective Alvopetro has the right, as defined in the UOA, to assume operatorship of the Unit.
