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Italy: licences in detail

Offshore – Farmout Concluded and Acreage Position Enhanced West Sicily Thrust Belt – G.R17.NP, G.R18.NP, G.R19.NP, G.R20.NP, G.R21.NP, G.R22.NP, d21G.R-.NP, d25G.R-.NP and d26G.R-.NP (5,982 km²)

Having over the last few years indicated our belief in the potential of this acreage containing an extension of the thrust belt play productive onshore Italy, it was extremely pleasing to announce in December 2008 the farmout to Shell Italia of these licences. The licences contain an extension of the thrust belt that extends from the Southern Apennines, where Shell Italia holds an interest in the Val d’Agri oil complex of fields, through Sicily and the Gagliano gas condensate field into the offshore west of Sicily, Northern has unaudited mean unrisked Prospective Resources for all the prospects in the six licences of 1.9 million barrels recoverable from the limited 2D seismic data coverage. The area under licence is equivalent to about 20 North Sea blocks and increases to 27 North Sea blocks when the applications are included. Work will now concentrate on upgrading the acreage through further seismic work ahead of a drilling decision.

Under the terms of the farmout agreement Shell Italia will earn 55% in G.R17.NP, G.R18. NP and G.R19.NP; and 70% in G.R20.NP, G.R21.NP and G.R22.NP. Shell Italia paid 100% of the back-costs on these licences of €1.9 million and will reimburse all the costs of the 2008/9 reprocessing and the 2009 2D seismic programme that has been recently acquired. Thereafter Shell Italia has the option to acquire two 3D seismic surveys plus drill and test the first well on the licences, a programme that Northern will be carried on for its share up to the point of earn in that may exceed €100 million. Northern will remain the operator until the drilling stage when Shell Italia have the option to operate the well.

Efforts are now concentrated on improving the interpretation and mapping of the identified structures through a programme of reprocessing of all the previously acquired seismic data, including seismic acquired by Northern in 2006 and the recently acquired 2D seismic infill programme of 2,463km which was successfully completed by the Bergen Oilfield Services vessel ‘BOS Angler’ in March 2009. A decision to proceed with 3D seismic surveys will be made in the summer 2009 after receipt and interpretation of the new seismic data.

The expected prospective section of interest in these licences can be compared to the onshore oil and gas fields and the existence of a petroleum system is supported by a seabed coring programme previously undertaken by Eni. There is an expectation that high quality Lower Tertiary and Cretaceous reservoirs will be the primary targets with Cretaceous sequences containing the primary source rock.

The preliminary award d21G.R-.NP (Northern 100%) close to the Nilde field and the Narciso and Nara discoveries has undrilled prospects but is still awaiting Ministerial approval following the environmental submission. Two additional applications (Northern 100%) have been made adjacent to the existing Licences; d26G.R-.NP contains a mapped extension of a prospect mapped in G.R17.NP and in d25G.R-.NP further identified prospects are interpreted.

F.R39.NP, F.R40.NP, d60F.R-.NP, d61F.R-.NP and d149D.R-.NP (3,681 km²)

The licences and preliminary awards contain two oil fields and multiple exploration prospects. In the last year further work has identified additional gas prospectivity. These regional data coupled with information on the Falco discovery has improved Northern’s understanding of the Lower Tertiary and potential trapping mechanisms.

The Giove discovery made by Enterprise Oil Plc (“Enterprise”) in 1998 and the Rovesti oil discovery made by Eni in 1978 have both been the subject of two independent petroleum engineering and geological reports by Blackwatch Petroleum Services Limited (“Blackwatch”). This resulted in the allocation of Probable Recoverable Reserves of 33.56 million barrels to Rovesti and 19.67 million barrels to Giove. The economic evaluation carried out in 2007 was based on a subsea development and a new build FPSO. By using a $60 per barrel price for Brent crude oil the 53.23 million barrels of oil reserves are valued at US $410 million with a 10% per annum real terms discount rate. This is before consideration of financing options or FPSO leasing, the main capital expenditure item.

The Giove field contains heavy 15° API oil at shallow depths with a reservoir in Lower Tertiary carbonates deposited in a shallow water shelf environment. The Rovesti field contains a mid gravity 28° API oil in an equivalent aged Tertiary reservoir and Cretaceous carbonates. However these sequences occur at greater depth than Giove and are interpreted to have been deposited in a deep water, basinal environment similar to the reservoirs in the Aquila field. Developed by Eni Aquila is currently suspended and is awaiting the arrival of a new FPSO to redevelop the field. Northern is seeking partners to assist with the development of these fields and the large exploration prospect inventory mapped in the acreage.

A series of exploration prospects for oil have been identified up dip from the Rovesti and Aquila fields as closures against the shelf edge, originally mapped by Enterprise. These prospects are significant in size and potential when compared to the existing fields. A third report by Blackwatch evaluates three of these prospects, namely Bacco, Bacco East and Pegaso and three others prospects to contain a mean of 2.29 billion barrels of oil in place increasing to a potential of 6.03 billion barrels with a 10% probability of success for each prospect. On trend to these prospects in d149F.R-.NP is an additional prospect named Teti, previously mapped by Enterprise. In addition a further oil prospect, Giunone is mapped on the shelf in a similar setting to Giove, again previously recognised by Enterprise. The prospect inventory for the preliminarily awarded licences d60FR.NP, d61FR.NP and d149DR.NP will be subject to further technical evaluation following the proposed purchase of additional 2D seismic coverage from Eni. This will occur once licence award has occurred and will form part of the committed work programme to government.

Additional prospects mapped by Northern in d60F.R-.NP may be oil or gas condensate prone as the depth to target is deeper and the acreage is closer to where the source rock is modelled from data located in Albania to have generated gas. Additional encouragement has come from the results of mapping the Tertiary sequences in more detail to evaluate the potential for gas as proved by the Falco discovery. A series of gas prospects have been identified along the shelf margin which if comprise the equivalent reservoir sequences to Falco could have the potential for individual prospects with tcf reserve potential. More analysis needs to be undertaken to evaluate the likely reservoir development but we believe this further demonstrates the high potential of this acreage.

The analysis of the acreage continues to improve the perception of prospective value. It is a core area for the Company, equivalent to approximately 17 North Sea blocks with the five previously drilled discoveries confirming the play fairway. This is an exceptional exploration track record for an area of this size and gives a strong indication that further success can be expected from the drill bit when exploration starts on this large portfolio that Northern has built. Northern will look to introduce a partner that will have a primary focus on exploration given the large Prospective Resource potential while also considering separate arrangements with other partners for the development of the fields which in comparison would be modest reserves and immaterial to some companies.

Licence C.R146.NP and d351CR.-NP (720 km²)

The potential of these licences that lie on trend with the Liassic carbonate platform edge that extends from the Vega oil field to the north-west has recently been substantially enhanced by seismic reprocessing of the 550km 2D seismic programme acquired by Northern in 2006.

The identification of a major prospect has been made possible as a result of being able for the first time to clearly map below volcanic sequences that occur above the primary target. These volcanic sequences have in the past limited the seismic imaging of deeper sequences and also impact on time to depth conversion uncertainty. The well Spigola Mare-1 drilled by Elf in the 1980’s has been confirmed by Northern to have been located outside of closure and therefore suboptimally located. The well encountered a better Liassic reservoir sequence than the Vega field and tested minor quantities of gas and had oil shows. The ‘Vesta’ prospect has been mapped as a prominent carbonate bank, the overlying Jurassic seal sequences onlap what is interpreted to be a major build up on the margin of the carbonate shelf and is located adjacent to the proven shale source facies of the Liassic and Triassic. Deeper prospectivity exists in the Triassic beneath Vesta in the equivalent reservoir sequence productive in the onshore fields in southwest Sicily.

The revised mapping of the prospect and utilising reservoir parameters from the well and the Vega oil field gives a mean oil in place of 2.8 billion barrels and a Prospective Resource potential of over 600 million barrels recoverable for the Liassic and 2.2 billion barrels and a Prospective Resource of 480 million barrels for the Triassic. Recognising the prospect may extend outside of the licence an application d351CR.-NP was made in January 2008 to ensure the entire prospect would be encompassed under Licence, the revised mapping has indicated the prospect extends into this preliminary award. Northern will present the revised work to potential farminees with the expectation that a well will be drilled in 2010. Indications of interest have been expressed by a number of companies who recognise that a prospect with a billion barrel potential is rare in Europe.

Licence C.R147.NP (637 km²)

The seismic data acquired by Northern in 2006 over the licence identified some significant prospects on trend with prolific oil fields in Tunisian waters that are geologically equivalent to those mapped. An additional infill 602km 2D seismic grid was acquired in March 2009 to enhance the prospects for drilling. The Tunisian fields have Lower Tertiary reservoirs which are at shallow depths and produce light oil at high rates of production. The single production well on the Oudna field, operated by Lundin Petroleum, commenced production in 2006 at over 25,000 bopd into an FPSO. The Cretaceous has proven gas condensate in the Abiod formation in the nearby Douga discovery in Tunisian waters.

Three primary structural and two primary stratigraphic prospects are mapped with the largest prospect ‘Arcturus’ located in only 100 metre water depth. The mean Prospective Resource for the Tertiary formation reservoirs in this prospect is close to 350 million barrels, with an upside of over 600 million barrels, the Cretaceous secondary target has mean Prospective Resource of close to 300 million barrels and an upside of over 500 million barrels. Compared to the fields in Tunisia this potential is enormous but the structure mapped is a magnitude larger and warrants an expectation of a significant resource.

Companies that prefer the attractions of North African geology and the success that can come with exploring this region should find this opportunity attractive; the geology is North African and part of the same petroleum system but the Italian fiscal terms under which any discovery would be developed are significantly more favourable. Northern expects that these prospects will be recognised by potential farminees as offering the opportunity to explore African geology under European terms with the benefits that brings.

d59F.R-.NP, d63F.R-.NP and d64F.R-.NP (2,202 km²)

Northern is waiting on the award of the d59F.R-.NP licence having submitted the environmental report and made minor adjustments to the application area based on requests from the authorities. In October 2008 two further applications to the north and south of the preliminary awarded licence were made recognising the potential of this area to trap large gas accumulations.

Previous exploration in d59F.R-.NP by Eni resulted in three gas discoveries adjacent to the 1.5 Tcf Luna gas field and the smaller Lavinia, Linda and Hera-Lacinia gas fields in water depths between 200 and 1000 metres. The discoveries had to be relinquished at the end of the exploration period of the licence held by Eni as no development plan was submitted before expiry, Northern applied for the acreage immediately thereafter. A good quality 3D seismic survey was acquired by Eni and has indications of amplitude versus offset (AVO) anomalies suggesting the presence of gasbearing sands not evaluated by previous drilling. These in addition to the existing discoveries will be evaluated once the licence is awarded and the 3D seismic data can be purchased from Eni as part of the work programme on the licence.

Adding the two further applications has fulfilled the Company strategy of building a large acreage position in core areas where prospectivity is perceived to be significant and economics will be favourable to exploit resources. This acreage has already had firm expressions of interest from potential farminees and will be the subject of a farmout to progress the drilling phase of appraisal and exploration.

d347C.R-.NP (391 km²)

The primary play that has proven to be successful for Eni in the adjacent acreage is for thin but stacked gas charged Pliocene sands in the foredeep ahead of the Gela Nappe. Following on from the Panda discovery in 2002 two further recent discoveries Cassioppea and Argo have been made on trend. In addition to the potential for this play an objective in the northern part of this preliminary awarded licence would be prospects that lie on trend with the Palma-1 discovery (43° API oil) in the Inici reservoir formation. Evaluation will commence upon award of the acreage and the purchase of previously acquired 2D seismic data.

Licence E.R51.NP (724 km²)

The disappointing result of the onshore Arrone-1 well drilled by Ascent Resources plc in 2006 has downgraded the potential of the offshore play. Given the substantial opportunities elsewhere in Northern’s Italian portfolio, the decision was made in 2009 to relinquish the licence.

Onshore – Po & Marche Basins – Farmout Concluded

The eastern Po Basin and Marche Basin have been developed as gas provinces with some fields containing more than a tcf in reserves. The established infrastructure and gas pipeline network provides easy access to the deregulated gas and power markets which gives the opportunity to sell gas into a market that has a high demand for energy being in the industrial heartland of Italy. By holding acreage within a proven and prolific play fairway, the mitigation of key geological risks is made significantly easier when mapping potential drilling candidates from the existing 2D seismic data.

In October 2008 Northern announced a farmout deal for three of the licences, Savio, Longastrino and Cerasa to Avobone, an Italian subsidiary of the Indofin Group. Under the terms of the farmout agreements, Avobone will earn 20% in each licence through payment of back costs to Northern and a promote on the first well in each licence. In Savio and Longastrino, Avobone will pay 40% (i.e. a 20% promote) of the well costs and 30% in Cerasa.

The western Po Basin has a large oil prospect interpreted as a thrust anticline in an unexplored structural setting that may be analogous to the structural traps that contain the fields of the Val d’Agri oil complex in the Southern Apennines.

Eastern Region – Savio, Longastrino, Cerasa, Punta Marina and La Sacca, (1,063 km²)

Interpretation of the seismic data purchased from Eni on the Savio and Longastrino licences has demonstrated that the licences contain multiple gas prospects that are located along a trend of existing gas fields developed and produced predominantly by Eni. The reservoirs are Pliocene sandstones charged by biogenic gas. These reservoirs have the capacity to produce at high volumes making even small accumulations economically viable.

The Savio-1X well was completed to a total depth of 4,000 metres in May 2009 as the first well in the Savio licence. The well encountered thicker than expected sandstone formations but the gas contained in them was not sufficient to warrant testing. A disappointment of course, but the mapped potential of the prospects onshore in the Po Basin licences compare well with the size of gas prospects being drilled in the North Sea under harsher economic criteria and therefore considered attractive as has been demonstrated by the farmout to Avobone.

Within the Longastrino licence seismic amplitude anomalies with an AVO response indicate that part of the Agosta field discovered by Eni in 2002 may extend into the licence and this potential will be the target of the first well. In addition the Mantello-1 well drilled in 1956 encountered a thin gas sand, the appraisal wells at the time did not target the thicker developed sandstones on the flank of the structure now recognised on the 2D seismic data. In the south of the licence a prospect ‘La Tosca’ previously recognised by Eni now has the benefit of 3D seismic coverage received as courtesy data from a large 3D acquired over the adjacent Alfonsine gas field that is being converted to gas storage. This seismic data is being interpreted to confirm the potential of this prospect.

The undeveloped Roncitelli gas discovery in the Cerasa licence has gas in the Lower Pliocene and beneath in the Upper Miocene is a prospect that has an associated seismic amplitude and flat spot, potentially indicating a gas to water transition. The deeper prospect is interpreted as containing 73 Bcf GIIP and will be the target for the first well on the licence. The licence within the Marche basin also contains the now depleted Fano, Marotta and San Costanzo gas fields which may offer potential for gas storage projects.

Environmental reports submitted for the preliminary awards Punta Marina and La Sacca are under review by the authorities. Following full award of the licences a limited seismic purchase is expected over prospects identified through evaluation of the existing 2D seismic data. The licences may contain similar gas plays to gas fields productive in adjacent licences.

Western Region – Cascina Alberto and Nibbia (715 km²)

A large oil prospect was recognised by the previous licence holders Eni and Enterprise Oil as having the potential to contain 300 million barrels recoverable together with two other leads in south facing Alpine thrust structures. The prospect was not drilled in the initial six year term of the licence following the acquisition of Enterprise by Shell. Northern applied for the acreage following relinquishment. An environmental submission has been made for the Cascina Alberto preliminary award and further evaluation will commence on award of the licence.

The Nibbia licence has the potential for gas trapped in Miocene reservoirs. The play was tested in the adjacent Vercelli Licence by BG Group Plc with the Robbio-1 exploration well in 2006. To fully evaluate the potential of this play would require an extensive 3D seismic survey as acquired for the location of the Robbio well. Although the Miocene is shallower in the Nibbia licence no prospects been identified from an evaluation of 2D seismic data. A very deep, Triassic exploration target with potential for gas was evaluated on 2D seismic data however the trap was interpreted to be situated in the Vercelli licence and therefore not of interest to Northern. The licence was relinquished in 2009.

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