San Leon Regulatory News (SLE)

23 January 2014

Lewino-1G2: Successful Vertical Frac Leads To Horizontal Well

San Leon Energy Plc ("San Leon" or "the Company"), the AIM listed company focused on oil and gas exploration in Europe and North Africa, announces the successful completion of flow testing in the Ordovician shales in the Lewino-1G2 well on its 221,000 acre (894 km2) Gdansk W Concession in Poland's northern Baltic Basin. The Company has achieved all of its goals in the Lewino testing programme including extensive data gathering of crucial information required to understand the recipe for a successful frac and commercial flow in the Ordovician shales. Based upon these results San Leon plans to spud its first horizontal well and multi-stage frac at Lewino in the near future.

Highlights

· Sustained gas production rate of 45,000-60,000 standard cubic feet per day (scf/d) after 6 weeks of well clean-up, despite the well not yet being fully cleaned of frac fluid.

· Using the data acquired SIGMA3 Engineering (previously known as Apex) estimates a potential rate of 200,000-400,000 scf/d, based upon full clean-up of frac fluid. A commercial decision was taken to stop cleaning up the well (at a cost of $55,000 per day due to coiled tubing and nitrogen lift), as all necessary data has been acquired for planning a long offset horizontal well with a full multi-staged frac programme. Based upon the well performace it is estimated that several more months' flow is likely to be needed for full clean up.

· Condensate yield of around 20 barrels per mmscf improves overall economic potential of the play.

· Based on the results, a long horizontal well with multi-staged frac will now be drilled and tested as soon as possible - subject to permitting, rig availability and planning with technical partners.

· Flow rates are believed to have been achieved relying only on the highly successful frac 3 in the upper Ordovician, leaving considerable upside for future stimulation of the entire Ordovician.

· One of the key learnings of the vertical frac programme was that it is likely the entire Ordovician interval can be stimulated with a properly-planned frac design. This will be targeted with each frac in the upcoming horizontal well and will be invaluable in future commercial production in our concessions.

· In the US, horizontal wells typically yield 7-30 times the production rate and recovery of vertical wells in the same formation, especially after optimisation and learning.

· Further strengthened strategic relationship with United Oilfield Services (UOS) as both companies work together to pioneer shale gas in Poland.

Executive Chairman, Oisin Fanning, commented:"This is the most encouraging vertical shale well test in Poland to date. We have moved a long way towards "cracking the code" towards commercial production from our unconventional plays. This has been achieved in conjunction with our technical partners, and is the result of the successful iteration of the frac design to the point where we can now see the production potential of our extensive shale gas acreage in Poland's Baltic Basin. These learnings will be put to good use in the planned multi-staged fracced horizontal well in the Lewino area, where we believe we shall be able to stimulate the entire vertical extent of the Ordovician interval with each frac, and prove commercial flow rates."

Dennis McKee, UOS CEO and President, commented:

"The recovery of gas so early in the flowback of frac fluid is highly unusual and very positive. It suggests to me that the formation really wants to flow gas. In the upcoming horizontal well we can use the success from the frac design from the upper Ordovician to target the whole of the Ordovician, as I think that the lower Ordovician only flowed back during the early stages and then closed up. This lower formation layer may well have been the source of the very early gas, and our knowledge of what works from frac 3 should enable us to keep it open in future wells. I look forward to the horizontal with great anticipation as it stands a strong chance of proving up this play."

Lewino-1G2 Results

Previously Reported Frac Operations

Frac 1 was performed in July 2013 in the lower Ordovician, and achieved very low proppant concentration.

Frac 2 was performed in November 2013 and was a re-frac of the lower Ordovician pay section, using ceramic proppant, different frac fluid chemistry, and a different frac programme. More proppant was emplaced than during frac 1, but still at significantly lower concentration than planned. Frac fluid chemistry issues appeared to have been resolved.

Frac 3 was a further iteration of the frac programme based on the results of fracs 1 and 2, this time targetting the upper Ordovician pay section - a secondary target, chosen as the lower Ordovician primary target was already fracced and re-fracced. This time the frac proceeded as per plan, emplacing far higher proppant concentrations into the formation with relative ease.

Flowback and Rate Measurement

Flowback of frac fluid through the 7" casing began on 13th November 2013, and quickly achieved continuously flared gas. On 21st November 2013 the well was shut in to allow the 2-3/8" completion tubing to be run into the hole, at which point 30% of the frac fluid from the November fracs had been recovered.

The well was reopened to flow on 4th December, now through the 2-3/8" completion tubing, and again with continuously flared gas. By 9th December 2013 37% of the frac fluid from the November fracs had been recovered and coiled tubing was run into the hole to assist with further clean up using nitrogen lift. Due to the significant dilution effect of the nitrogen lift on the formation gas, as expected it was not possible to flare during the early days of nitrogen lift. However on 20th December the flare re-lit intermittently and within a day was flaring again continuously, despite the nitrogen dilution effect. This coincided with a steady decrease in gas mixture density (formation gas plus nitrogen from coiled tubing lift) observed at surface, indicating an increase in formation gas rate as the well cleaned up.

Regular technical discussions were held with United Oilfield Services (UOS) and SIGMA3 Engineering (SIGMA3) in Denver to track and analyse the clean up and performance of the well. Considering the high daily cost of coiled tubing lift with nitrogen, the decision was taken that sufficient data had been acquired to enable post-clean up well performance to be predicted. As such, the coiled tubing was removed from the well on 16th January 2014 and a downhole shut-in tool and pressure gauges were run into the well to perform a pressure build up test over the coming weeks. This data will help refine our interpretation of the well and also frac design on future wells.

The typical formation gas rate achieved at the time the clean up was stopped was around 45,000-60,000 scf/d - a highly encouraging rate, particularly given that the well was still in the process of cleaning up, and also that it had flowed for 6 weeks (and so had time to undergo the steepest part of its natural decline curve). The hydrocarbon gas rate was calculated using surface rate measurement at various nitrogen lifting rates, detailed gas sample analysis and gas density.

In addition to the gas flow, 20 bbl of condensate per mmscf gas was observed. This would be expected to add around 20% additional revenue to future gas sales. The gas itself is "rich" and has very low CO2 and N2, and no measurable H2S.

Results Interpretation

Based upon frac and flowback data SIGMA3 calculates the likely achievable rate of the fully cleaned-up well is in the range 200,000-400,000 scf/d. This models the well with the fracs as they have been performed; with no additional optimisation of design. The well would have been expected to clean up given additional time, as occurs on the vast majority of comparable shale fracs. The 200,000-400,000 scf/d figure is also based solely on the upper Ordovician flowing.

Further, SIGMA3, San Leon and UOS are in agreement that the current production most likely comes almost entirely from the upper Ordovician only. The upper Ordovician was the secondary target for the well and was fracced with frac 3 only because the lower Ordovician already had a frac and re-frac within it (albeit with very low proppant concentrations). Indeed the upper Ordovician was only a contingent target during frac planning. Modelling indicated that the lower Ordovician had insufficient proppant concentration for its fracs to stay open once the well was significantly drawn down - something which all technical parties believe can be addressed in the planned horizontal well programme.

The lower Ordovician net pay has higher effective porosity and gas saturation than the upper Ordovician, although slightly lower net pay thickness. Therefore if the technical interpretation of flow from only the upper Ordovician is correct, then the per-frac potential for the Lewino Ordovician formation is materially higher than measured and inferred from the flowback data and SIGMA3's post-clean up extrapolation. Direct downhole flow measurements were not possible due to the presence of coiled tubing in the well.

Next Steps

Following the highly-encouraging testing results from the Lewino-1G2 vertical well, San Leon is preparing to drill a 1,500 metre horizontal well with a multi-staged frac programme. Successful developments of shale in Poland will likely use wells of this design. Long horizontal multi-fracced wells have a number of advantages over vertical wells in terms, not only of higher production rates and recovery, but also of their physical ability to clean up after fraccing, and for that clean up to be performed in a far more economical manner.

The existing well pad and a pre-prepared drilling cellar will be utilised, reducing cost and time. San Leon already has good-quality 2D seismic across the Lewino area. Some seismic lines were deliberately acquired in the most likely direction for horizontal drilling based upon regional stress directions, meaning that the well will have seismic data coverage across its entire length. Limited faulting with relatively minor offsets is expected, and the trajectory has a very slight upward dip from heel to toe. Subject to operational feasibility, the existing Lewino-1G2 wellbore will be used as a downhole listening post for microseismic data acquisition during the multiple fracs in the horizontal well.

The final frac on Lewino-1G2 provided a step-change insight into the frac design which works in this play. Proppant was emplaced very easily, without any material increase in treatment pressure. This was in-line with the final frac design and provides scope for further modification and optimisation in future fracs. This gives us confidence that fracs can be designed in the horizontal well to cover the whole of the Ordovician net pay interval, and be kept open with high proppant concentrations. Design work continues, but it is likely that the horizontal well will be landed towards the top of the lower Ordovician, providing frac initiation in the optimal zone, while also accessing the upper Ordovician.

In the US, horizontal wells typically yield 7-30 times the production rate and recovery of vertical wells in the same formation, especially after optimisation and learning over time. It is also generally accepted that production rate and recovery of wells drilled later in the development learning curve significantly outperform early wells, suggesting further material upside.

The Company is delighted to continue to work with UOS, with whom it has an existing agreement and relationship enabling flexibility over payment (to include Company shares, at its option). San Leon is also in active discussions with various industry players regarding a potential joint venture.

Summary of Lewino-1G2 Vertical Well Achievements

· Rapid first gas on flowback of final frac campaign.

· Continuous production of high-quality "rich" gas.

· Rate of 45,000-60,000 scf/d, plus around 20 bbl/mmscf condensate. SIGMA3 has calculated a current estimated rate of 200,000-400,000 scf/d with the well fully clean-up of frac fluid.

· First known application of ceramic proppant in Poland.

· Breakthrough in frac design and understanding between fracs 1 and 3.

· Ease of emplacement of proppant in frac 3 gives confidence in the ability to optimise fracs even further in the upcoming horizontal.

· Knowledge of expected significant increase in gas rate per frac when targetting both upper and lower Ordovician with each frac in the horizontal. This is based upon the interpretation that the lower Ordovician, the primary target, was inadequately stimulated by fracs 1 and 2 (prior to the breakthrough in Lewino frac design).

· Temperature log from frac 1 gave an understanding of frac height growth, which is now an input to future frac designs.

· Trial microseismic on frac 1 suggests applicability in the upcoming horizontal.

· Oil-wetting tendency of produced fines seen in frac 1 has been overcome with frac fluid chemistry changes.

Further Information

Enquiries:

A short paper, including some further technical information and diagrams, is available on the San Leon website at www.sanleonenergy.com. Additionally, a video relating to the announcement is available at: https://www.youtube.com/watch?v=VxXZ3L40CJk

Qualified personJoel Price, who has reviewed this update, has 20 years' experience in the oil & gas industry and is a member of the Society of Petroleum Engineers. He holds a BA in Natural Sciences from Cambridge University, an MEng from Heriot-Watt University, and an MBA from Durham University. Joel is Chief Operating Officer for San Leon Energy and is based in San Leon's London office.