Prior to publication, the information contained within this announcement was deemed by the Company to constitute inside information as stipulated under the UK Market Abuse Regulation. With the publication of this announcement, this information is now considered to be in the public domain.

2 September 2021

Zephyr Energy plc

(the "Company" or "Zephyr")

Positive results from the State 16-2LN-CC diagnostic fracture injection test;

well to be completed using hydraulic stimulation; and

update on timing and next steps

Zephyr Energy plc (AIM: ZPHR) (OTCQB: ZPHRF), the Rocky Mountain oil and gas company focused on responsible resource development and carbon-neutral operations, is pleased to provide an update on its flagship project in the Paradox Basin, Utah, U.S.

The Company recently drilled the State 16-2LN-CC well to a Total Depth ("TD") of 14,370 feet ("ft"), at which point a full suite of wireline logs was run and production casing was set.  During drilling operations, the Cane Creek reservoir target indicated hydrocarbon charge across the entirety of its 4,555 ft horizontal lateral portion, as well as across multiple overlying reservoirs.  Wireline data also suggested that a high percentage of the lateral well (approximately 85 per cent) has the potential to be tested for production. 

Based on the positive geological data received, the excellent positioning of the lateral portion of the well within the Cane Creek reservoir and the potential to utilise the State 16-2LN-CC completion as a "proof of concept" for wider development of the Paradox asset base via hydraulic stimulation, the Company recently opted to conduct a wellbore diagnostic fracture injection test ("DFIT").  During the DFIT, a 3 ft interval at the toe of the lateral was perforated and hydraulically stimulated.

The Company is pleased to report that the analysis of DFIT has been completed, and that the test provided strong evidence of the potential to successfully develop the Cane Creek reservoir as a hydraulically stimulated resource play (a "HSRP"). 

Highlights from the DFIT

·    High formation pressure: After perforation of the State 16-2LN-CC wellbore and stimulation of the reservoir, pressure measurements from the wellbore suggested high formation pressure - a strong positive indicator of reservoir drive.

·    Permeability: DFIT results also suggested evidence of matrix permeability consistent with other prolific resource plays.   

·    Hydrocarbon flow:  During the DFIT operation, there was demonstrable evidence of hydrocarbons flowing into the well after stimulation.

·    Geomechanical interpretations: Further rock mechanical data (including lithostatic gradient, effective stress and fracture propagation data) has been interpreted and has provided valuable insight to assist with completion design.

·    HSRP completion method selected: Based on the positive results from the DFIT in conjunction with the recent log and core data acquired, Zephyr has now elected to complete the State 16-2LN-CC by way of hydraulic stimulation.  The well will serve as the initial "proof of concept" for wider potential development of the Paradox asset base via HSRP, although natural fracture completions may also be utilized where optimal.

Final State 16-2LN-CC well completion design work is currently underway.  Despite increasing challenges posed by industry supply chain constraints and volatile weather across the western U.S., the Company has secured equipment and a completion crew which will be on-site during the second week of October.  From that point, completion operations are expected to take less than a week and production testing will commence immediately thereafter, with initial flow tests and results expected by the end of October.

Colin Harrington, Zephyr's Chief Executive, said: "I'm thrilled with the continued progress from the well site.  The results of the DFIT, combined with the significant amount of data previously gathered from the well, all indicate that the State 16-2LN-CC has the potential to be an excellent "proof of concept" location for an HSRP test. 

"This marks tremendous progress, and the Board's subsequent decision to move forward with an HSRP completion is a clear indication of the significant value which we believe may exist through that development route.

"The next step - a successful HSRP test - would result in a substantial reduction in development risk across our acreage, as well as allow for a wider systematic development with predictable well distribution.  Production results from the first well, expected to be available in late October, will be the first test of the viability of this strategy - but given what we've learned to date, I feel confident that we'll continue to hone drilling and completion techniques on this acreage well into the future.

"Indeed, we now believe that our acreage holds multiple opportunities within both the Cane Creek and the shallower clastic reservoirs to support the drilling of additional wells to delineate the acreage. This first completion will add further data to help us understand the reservoirs and our ability to optimise well length, well spacing and completion design.

"I'd like to conclude by noting that in pursuing the HSRP development route, Zephyr's goal is to maximise resource efficiency and project economics while minimising environmental and surface disruption.   Zephyr's core mission is to be responsible stewards of our investors' capital while also being responsible stewards of the environment, and a tangible demonstration of that commitment is our pledge to offset one hundred per cent. of our Scope 1 carbon emissions by the end of September. With any future development, we will continue to strive to mitigate the environmental impact by reducing surface footprint, minimising disturbance and offsetting our emissions.

"We look forward to keeping shareholders informed as completion operations commence and production data is received."

Background

On June 30, 2021, Zephyr released an internally-generated Updated Resource Estimation, in which the Company detailed its work to analyse and interpret the extensive geological data obtained during the State 16-2 drilling programme - data from both the project's primary target, the Cane Creek reservoir (the "Cane Creek") and from multiple potential stacked reservoirs overlying the Cane Creek (the "overlying reservoirs").

In addition to the work carried out by the Company, Zephyr engaged the third-party consultant Premier Oilfield Group ("Premier") to assist the Company in determining the viability of additional methods for the development of the Paradox project. A U.S. Department of Energy-backed project team, led by the University of Utah's Energy & Geoscience Institute, also contributed data and analysis as part of their evaluation of the State 16-2 well data related to ongoing Paradox Basin research.

As part of this analysis, Zephyr released the following internally generated estimates regarding development of the Paradox leasehold by way of HSRP:

Internal Zephyr Assessment: HSRP Case #1 - hydraulic stimulation of the Cane Creek reservoir only

Background:  In Q2 2021, Zephyr hired Premier to assess the Company's primary Cane Creek reservoir related to its potential for a HSRP development. This process modelled a modern stimulation and its impact on the Cane Creek reservoir, and concluded that if a continuous hydrocarbon play exists, there is good evidence that hydraulically stimulated wells have potential to deliver commercial well rates and volumes.  This estimate is preliminary and highly dependent upon the continued observations of ubiquitous low water saturations, reservoir over-pressure and a yet to be proven, successful hydraulic stimulation operation. 

This HSRP alternative delivers the following preliminary estimates:

·    up to 30 well locations

·    A range of risked net recoverable contingent resources of up to 18 million barrels of oil equivalent ("mmboe").

Internal Zephyr Assessment: HSRP Case #2:  hydraulic stimulation of the overlying reservoirs

Background:  The C1, C2, C4, C7, C8, C9, C10/11 and C18/19 overlying reservoirs have been high-graded by Zephyr as potential exploration zones with an estimated P50 total of 1 billion barrels of oil equivalent ("boe") HCIIP in place across the ZPHR acreage.  Scaling of Premier's models indicates an opportunity to target this in place resource via HSRP development. Should the conditions for the HSRP be proven to be favourable, it could result in the potential for up to 200 well locations across the shallow reservoirs with a net contingent resource potential of up to 125mmboe. This estimate is highly dependent upon developing a better understanding of each zone's reservoir pressure, fluid phase, geomechanical properties, permeability and a successful proof of concept production well. The assessment can be summarised as:

·    up to 200 well locations

·    Range of risked net recoverable contingent resources (overlying reservoirs only): up to 125mmboe

·    Range of total risked net recoverable contingent resources for the HSRP:  up to 143mmboe

Glossary of Terms

Contingent Resources: A discovered accumulation where project activities are under evaluation and where justification as a commercial development is unknown based on available information. 

Hydrocarbon Initially In Place (HCIIP) - Quantity of hydrocarbon that is estimated, as of a given date, to be contained in known accumulations before production. HCIIP may be subdivided into commercial, sub-commercial, and the portion remaining in the reservoir as unrecoverable.

About Premier Oilfield Group

Premier was formed in May 2016 under the private equity sponsorship of CSL Capital Management. Headquartered in the U.S., Premier is a global leader in the aggregation, generation and application of rock and fluid data, utilising it to better understand, explore and develop earth resources. It is founded on the belief that the data-driven energy industry is here, and generating and sharing relevant data from rock and fluid samples is the key to more effective and efficient resource development. Premier has assembled world-class experts, laboratories and platforms to produce data, make it readily accessible and help its clients apply the data effectively. https://pofg.com/about/

Contacts:

Dr Gregor Maxwell, BSc Hons. Geology and Petroleum Geology, PhD, Technical Adviser to the Board of Zephyr Energy plc, who meets the criteria of a qualified person under the AIM Note for Mining and Oil & Gas Companies - June 2009, has reviewed and approved the technical information contained within this announcement.

Estimates of resources and reserves contained within this announcement have been prepared according to the standards of the Society of Petroleum Engineers.  All estimates are internally generated and subject to third party review and verification.