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Colombia: Canacol Energy acquires VIM 5 and VIM 19 E&P Contracts and Clarinete gas discovery in the Lower Magdalena Valley

19 Dec 2014

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Canacol Energy subsidiary CNE Oil and Gas has acquired 100% interest in the VIM 5 and VIM 19 Exploration and Production ('E&P') contracts from OGX Petroleo E Gas. The National Agency of Hydrocarbons of Colombia (ANH) has formally approved the transfer of title and operatorship of the E&P contracts to CNE Oil & Gas S.A. Both contracts are located adjacent to the Corporation's 100% operated Esperanza and VIM 21 gas contracts in the Lower Magdalena Basin of Colombia. The ten prospects and leads identified within the VIM 5 and 19 contracts contain a significant volume of prospective resource (note tabulated volumes by prospect below) assuming all prospects are drilled according to a July 2014 NI-51-101 compliant report from Gaffney Cline and Associates ("GCA"). In addition, the Clarinete 1 exploration well drilled on the VIM 5 contract in November 2014 encountered 149 feet ("ft") of potential gas pay in the primary Cienaga de Oro sandstone ("CDO") reservoir, the same reservoir that the Corporation produces from at its Nelson and Palmer gas fields on the adjacent Esperanza contract. The gross unrisked pre drill best estimate for the Clarinete prospect as per the GCA prospective resource report is 540 billion cubic feet (bcf) of gas. Production testing of the Clarinete 1 well is planned to commence in mid January 2015. The Corporation shall formally assign reserves to the Clarinete discovery following completion of the production test.

Charle Gamba, President and CEO of the Corporation, commented, 'The acquisition of these two contracts adds significant gas resource to our core gas position in Colombia. Clarinete also adds a very large gas discovery to our inventory of gas discoveries which we will be developing and putting onto production in 2015, where via executed sales contracts we plan to increase production from current levels of approximately 20 mmscfpd to 83 mmscfpd by the end of 2015 through 5 year contracts with pricing up to US$ 8.00 / Mbtu not tied to global oil prices. The Corporation is currently negotiating new long term gas sales contracts for the Clarinete discovery."

This strategic acquisition 1) adds 638,000 gross acres to Canacol's gas position in the Lower Magdalena Basin, 2) adds a significant volume of prospective gas resource to Canacol's exploration portfolio (note tabulated volumes by prospect below), 3) includes the recently drilled Clarinete 1 gas discovery which will be tested in mid January 2015 that contains a pre drill best estimate of 540 bcf of gross prospective resource, 4) adds 10 additional drill ready gas prospects to Corporations existing 7 drill ready gas prospects identified on the Esperanza and VIM 21 contracts, and 5) any new discoveries on VIM 5 and VIM 19, including the Clarinete discovery, can be tied into the Corporation existing operated infrastructure at Jobo on the Esperanza block.

VIM 5 and 19 Farm-in Terms and Joint Venture Partner

The total consideration payable to OGX in respect of the sale of 100% of its working interest in the VIM 5 and 19 contracts consist of the following: (i) a cash payment of US$29.5 million, and (ii) a royalty interest of 3% on net revenue generated by the sale of hydrocarbons derived from the drilling of any exploration wells on such blocks. Pursuant to prior agreements among the Corporation and a joint venture partner, the Corporation will be reimbursed for 25% of the consideration payable to OGX as well as 50% of the costs of drilling 2 exploration wells on the blocks. Subject to completing such earn in commitments and any required regulatory approvals, the Corporation will retain a 75% interest in the blocks and its partner will hold 25%.

Clarinete 1 Exploration Well Results

The Clarinete 1 exploration well was spud on October 8, 2014, and reached a total depth of 8,068 feet measured depth ("ft md") on November 7, 2014. The primary objective of the well were sandstones of the Tertiary aged Cienaga de Oro ("CDO") sandstone, the main producing reservoir at the Nelson and Palmer fields in the adjacent Esperanza contract where Canacol has a 100% operated working interest. Clarinete 1 encountered the top of the CDO reservoir on prognosis at 5,926 feet subsea with excellent dry gas shows encountered while drilling throughout the CDO all the way to basement. The Clarinete 1 encountered 149 feet of potential gas pay with average porosity of 26% within the CDO sandstone reservoir based upon an evaluation of the open hole logs. The Corporation plans to commence production testing operations on the Clarinete 1 well in mid January 2015 and will provide an update on the results when they are available.

Independent Evaluation by Gaffney, Cline & Associates ('GCA')

The Corporation engaged Gaffney, Cline & Associates ("GCA") to prepare an independent Prospective Resources evaluation of the VIM-5 and VIM-19 exploration contracts in the Lower Magdalena Basin, Colombia effective June 14, 2014. The report was prepared in accordance with National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities ("NI 51-101") and uses the resources and reserves definitions, standards and procedures set forth in the Canadian Oil and Gas Evaluation Handbook ("COGEH").

GCA has provided low, best, high and mean estimates* of gross unrisked prospective resources for the following 10 prospects on the VIM 5 contract and 1 prospect on the VIM 19 contract.

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Source: Canacol Energy

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