Zenith Energy Regulatory News (ZEN)

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulation (EU) No. 596/2014 ("MAR"). Upon publication of this announcement via a regulatory information service ("RIS"), the inside information contained in this document is now considered to be in the public domain.

 August 13, 2018

ZENITH ENERGY LTD.

("Zenith" or the "Company")

Azerbaijan Operational Update

Zenith Energy Ltd. ("Zenith" or the "Company") (LSE: ZEN; TSX.V: ZEE), the dual listed international oil & gas production company operating the largest onshore oilfield in Azerbaijan, is pleased to provide an update on its operations in Azerbaijan.

Completion of Geological Studies

Zenith can confirm that it has completed two comprehensive geological studies to optimise the selection of potential drilling locations and workover opportunities across the Muradkhanli, Jafarli and Zardab oilfields.

Geological Study of the Muradkhanli and Jafarli oilfields

The geological study of the Muradkhanli and Jafarli oilfields has entailed the acquisition and revision of all existing well data. The integration of the old 2D seismic with the new 3D seismic, carried out by SOCAR in 2008 and 2011, has enabled a new, more detailed structural interpretation to be performed.

The primary achievement of the study has been the identification of a new, previously unexplored, Mesozoic carbonate prospect running across the two fields beginning from the south-western flank of the Muradkhanli oilfield. Three distinct structures have been highlighted at the level of the Upper Cretaceous, from West to East, whose structural highs are considered strong candidates for possible exploratory wells.

The study has also enabled the Company to better understand the challenges presented by its existing production reservoirs, specifically the causes of the high watercut in many of Zenith's production wells.

In addition, the study has also provided a modern re-evaluation of the Eocene age reservoir levels comprised of sandstones, marly limestones and volcanic facies. The revised interpretations have enabled Zenith to begin the selection of new drilling locations, as well as determining the choice of wells to be included in the Company's well workover programme in the Muradkhanli and Jafarli oilfields.

The primary workover opportunity in the Muradkhanli field has been determined to be the MOC-1 well and its sidetrack well MOC1-Z, drilled during the year 2000 by the Muradkhanli Operating Company ("MOC"). MOC-1 was the first onshore well to be drilled under a Production Sharing Agreement in Azerbaijan and is the only modern well in Zenith's 642.4 km2 field area. The geological study has concluded that the total depth of MOC-1Z, 4,615 metres, should be increased by approximately 100-150 metres to ascertain the fluid content of the Upper Cretaceous formation. In the eventuality that the presence of hydrocarbons in this formation is not confirmed, the study recommends that the re-perforation of the Eocene Zone, previously perforated by MOC between the depth of 4,447.5-4,483.5 metres, should be carried out. This section had shown strong oil presence, but limited production due to factors including the poor permeability of the formation and the potential damage caused by the heavy mud weight used during drilling operations.

The study was performed by a team of Italian geologists, comprised of Zenith's consultant geologist, Dr. Augusto Rossato (subsurface geologist), and Dr. Piero Casero (structural geologist). Both geologists have proven track-records of operational success during extensive careers with oil majors including Elf, Total, Eni, Enterprise, OMV, and Esso.

Geological Study of the Zardab oilfield

Zenith is pleased to announce that it has completed a second geological study to improve its understanding of the hydrocarbon production potential of the mostly undeveloped Zardab oilfield. This was considered a priority as the Company's independent Competent Person's Report, most recently updated on March 31, 2018, does not include an assessment of the recoverable reserves from the field.

The Zardab geological study includes an identification of the main producing target reservoirs, seal and source rocks, a comprehensive analysis of all well test results, digitalisation of all well logs, the creation of stratigraphic logs and structural logs, as well as several structural maps.

The study was performed by a team of American geologists led by Eldar Hasanov, a highly experienced geologist with many years of operational activity in onshore Azerbaijan, Kazakhstan, Russia, Middle East and United States.

The study has confirmed the Company's belief in the significant untapped potential of the Zardab field, enabling the identification of several high-value drilling and workover opportunities.

Specifically, it has drawn the following key conclusions:

1.) Comparative analysis of the time structure maps for the Zardab, Muradkhanli and Jafarli oilfields indicates that all three oilfields form part of a larger, unified system with faulted anticline, which suggests the possibility of a single oil-water contact for all three fields within the Upper Cretaceous/ Lower Eocene formations.

2.) Very few wells drilled in the Zardab field have penetrated the Upper Cretaceous formation. The majority of historical production from wells in the Zardab field has derived from the Maykop, Miocene and Chokrak formations of Oligocene-Miocene age.

3.) Several potential target intervals were identified during screening of structural and seismic data. Some of these were observed in both the Pliocene Productive Series, (main producer within Kura Valley), and within the Upper Miocene formation as sand bodies and clinoforms.

4.) The Maykop and Chokrak zones of the Oligocene/Miocene formations consist of interlaminations of sandstones, siltstones and shales, (the Maykop is a regional source rock), and could be considered as a main target for lateral drilling with hydraulic fracturing.

5.) The best well by production tested from Lower Eocene/Upper Cretaceous zones was obtained from well Z-3. This well was drilled to a total depth of 4,300 metres and recorded an initial production rate of 420 m3 tons/day (3550 bopd). Z-3 was drilled on a wedge of high amplitude reflector of Lower Eocene/Upper Cretaceous age in an isolated fault block.

6.) All other wells drilled in the Zardab field were drilled to target the Lower Eocene/Upper Cretaceous off high amplitude, which might explain poor production from these intervals. The time structure map of the top of the Upper Cretaceous formation indicates that most of these wells did not target the crest of the structure but were instead drilled on the flanks.

7.) The study suggests that the Upper Cretaceous/ Lower Eocene formation is a primary drilling target because Upper Cretaceous carbonates and volcanics are mostly fractured reservoirs within an erosional surface suggesting lengthy exposure and erosion. This resulted in increased porosity due to leaching and the formation of large voids and similar dissolution features. The seismic attribute maps and inversions would be critical for evaluation of the potential within this zone. An appraisal well drilled in the Zardab field will be situated in the area of stacked targets to evaluate all penetrated horizons. It will be a priority to acquire as much data as possible during the drilling and completion of the well to further understand the geology of the field. This will include: electronic monitoring of the drilling (Pason), high resolution mudlogging, full suite of wireline logging, and possible rotary coring amongst other items.

As announced on May 8, 2018, the Company's geological investigations also concentrated on a number of existing wells in the Zardab field, specifically wells Z-21, Z-28, Z-3, Z-14 and Z-4.

The objective of these targeted geological investigations has been to better ascertain the potential, and possible challenges, presented by workover and drilling activities in the aforementioned wells. The Company considers the study as particularly beneficial in light of the numerous discrepancies which had previously been identified between historical well data and the actual characteristics and condition of the wells today.

Line Pipe Replacement Programme

As part of Zenith's field rehabilitation programme, the Company has decided to replace 4,000 metres of line pipe across its field area in Azerbaijan by the close of 2018. Delivery of the first batch of line pipe is expected to take place within the next 14 days. The line pipe replacement programme will begin immediately upon delivery of the materials.

The installation of new line pipe is expected to yield the following benefits: minimising oil loss during transportation from the well to Zenith's field oil processing and storage facility; reducing restrictions to oil flow from active production wells, a lowering of line pipe pressure.

Oil Storage Tank Reconstruction Programme

As part of its ongoing field rehabilitation and infrastructure modernisation activities, the Company plans to begin the reconstruction of a 2000m3 oil storage tanks during the month of September. It is expected that further storage tanks will undergo reconstruction work later in the year.

Azerbaijan Oil Production Revenue 

The Company is pleased to announce that the Company's subsidiary in Azerbaijan generated revenue, gross of commissions and transportation expenses, of approximately US$490,000 for its oil production during the month of July 2018.

Update on BD-260 Drilling Rig

The Company has been advised by B Robotics W S.r.l., ("Robotics"), that the preparation of the BD-260 drilling rig, following the signing of a rental agreement announced on June 6, 2018, is progressing successfully. The Company will provide an update once Robotics confirms the finalisation of the preparatory work and shipping of the rig to Azerbaijan.

Work Programme

The Company is currently in the process of revising its work programme with its new operational management. Once this is defined, Zenith will provide shareholders with a clear summary regarding its operational strategy for the rest of the year 2018.

Electrical Submersible Pump Upgrade Programme (the "ESP Upgrade Programme")

The ESP Upgrade Programme has to date resulted in the installation of new electrical submersible pumps in 11 wells located across the Muradkhanli and Jafarli oilfields.

The benefits of the ESP Upgrade Programme include the following:

-New technology has enabled some of the 11 new electrical submersible pumps to be installed at a depth of approximately 2,500 meters. All of the previous electrical submersible pumps installed in Zenith's field had a maximum setting depth of approximately 1,500 meters.

-Significant reduction of the production decline rate, approximately 12% per annum, and minor production increase (57 bopd) across these 11 wells.

-Stabilisation of production achieved through the increased reliability offered by new ESP technology. Previous ESP technology often failed causing production downtime.

On May 18, 2018, Zenith had announced that it had planned to increase the number of new electrical pumps installed in the Muradkhanli and Jafarli oilfields to 12. However, the Company's field team has since pulled one of its newly installed electrical submersible pumps on account of poor performance that rendered the installation uneconomical.

The Company has identified a further 2 wells to be included in its ESP Upgrade Programme and will provide an update as appropriate. Any previous production objectives announced by the Company in relation to its ESP Upgrade Programme no longer reflect the outlook of Zenith's new operational management.

Equipment Upgrades

On January 25, 2018, the Company announced the signing of a purchase agreement for an A-100 truck-mounted workover rig (the "A-100") to be manufactured in Azerbaijan. The Company can confirm that construction of the A-100's mast and substructure has been completed. Following close discussions with the local manufacturer of the A-100, Zenith has decided to increase the A-100's engine capacity to 375hp in order to enhance its workover capabilities in deeper wells.

As previously announced, a number of other modifications had previously been requested and implemented. This further upgrade, amongst other benefits, will increase the maximum hook load capacity of the rig to 120 tons. The A-100 manufacturer has informed Zenith that it is currently awaiting delivery of the carrier to finalise construction of the rig. The Company will provide an update once the A-100 is delivered to its field locations.

Andrea Cattaneo, Chief Executive Officer, commented:

"Considerable progress has been made in many areas to ensure that we now return to the Zardab field with the full capability to achieve the results that have eluded us thus far. The geological work performed during recent months has significantly enriched our understanding of the field's geology, and further substantiated our confidence in the transformational potential of our Azerbaijan asset.

The arrival of new operational management in September, as well as some of the most powerful drilling equipment the field has seen in the last twenty years, means we shall be positioned to fully execute our work programme.

The months ahead are set to be hugely exciting for Zenith, and I hope shareholders will soon be fittingly rewarded for the loyalty and confidence they have shown in the project since the Company's listing on the London Stock Exchange."

For further information please contact:

Zenith Energy Ltd.

Andrea Cattaneo 

Chief Executive Officer 

E-mail: info@zenithenergy.ca

Tel: +1 (587) 315 9031

Vigo Communications - PR Adviser

Patrick d'Ancona

Chris McMahon 

Kate Rogucheva

Tel: +44 (0) 20 7830 9700

Daniel Stewart & Company Plc - (Joint Broker)

Robert Emmet- Corporate Broking

Nikhil Varghese- Corporate Finance 

Tel: + 44 (0) 207 776 6550

Optiva Securities - (Joint Broker)

Christian Dennis

Tel: + 44 (0) 203 137 1903

Allenby Capital Limited - (Financial Adviser)

Nick Harriss

Nick Athanas

Tel: + 44 (0) 203 328 5656

Notes to Editors: 

Zenith Energy Ltd. is an international oil and gas production company, dual listed on the TSX Venture Exchange and London Stock Exchange. 

The Company operates the largest onshore oilfield in Azerbaijan following the signing of a 25-year REDPSA, (Rehabilitation, Exploration, Development and Production Sharing Agreement), with SOCAR, State Oil Company of the Azerbaijan Republic, in 2016. 

The Company's primary focus is the development of its Azerbaijan operations by leveraging its technical expertise and financial resources to maximise low-cost oil production via a systematic field rehabilitation programme intended to achieve significantly increased revenue. Zenith also operates, or has working interests in, a number of natural gas production concessions in Italy. The Company's Italian operations produce natural gas, natural gas condensate and electricity.

Zenith's development strategy is to identify and rapidly seize value-accretive hydrocarbon production opportunities in the onshore oil & gas sector. The Company's Board of Directors and senior management team have the experience and technical expertise to develop the Company successfully.