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.

29 October 2021

Zephyr Energy plc

("Zephyr" or the "Company")

Approval granted for the formation of a new Federal Unit

Zephyr Energy plc (AIM: ZPHR) (OTCQB: ZPHRF), the Rocky Mountain oil and gas company focused on responsible resource development from carbon-neutral operations, provides an update related to the land position on its flagship project in the Paradox Basin, Utah (the "Paradox project"), where the Company is currently production testing the State 16-2LN-CC well.

Zephyr is pleased to announce that following its recent activity on the State 16-2LN-CC well, the United States Bureau of Land Management (the "BLM") has approved the formation of a new 25,000-acre Federal Unit to be operated by Zephyr. The new unit, named the White Sands Federal Unit (the "WSU"), incorporates all the Company's existing leases covered by its historic 3D seismic survey, including the lease on which the State 16-2LN-CC well is situated. 

The WSU approval, effective 1 October 2021, is a key milestone in the Company's ongoing development of the Paradox project. By consolidating over twenty separate leases into one overarching land agreement, Zephyr can focus on an optimal long-term development plan for the project as a whole, rather than maintaining its lease position in an ad-hoc fashion.

The BLM defines a Federal Unit as follows:

"A unit agreement is for oil and gas exploration, development and production for separately owned leases and interests within a set boundary. The entire unit area is operated as a single entity, without regard to lease boundaries, and allows for the maximum recovery of production from the reservoir. Costs are reduced because the reservoir can be produced by utilising the most efficient spacing pattern, separate tank batteries are not necessary, and there is no requirement to drill unnecessary offset wells. The objective of unitisation is to provide for the unified development and operation of an entire geologic prospect or producing reservoir so that exploration, drilling, and production can proceed in the most efficient and economical manner by one operator."

As part of the WSU agreement, the State 16-2LN-CC well was designated as a commitment well (a "Unit obligation well").  Now that the State 16-2LN-CC has been completed and is currently undergoing production testing, the Unit obligation well requirement of the WSU agreement has been fully satisfied. As a result, the entire contiguous 25,000-acre land position around the State 16-2LN-CC will now be held for a minimum of an additional 36 months without any lease expiry. 

Furthermore, if the State 16-2 LN CC well is determined to be capable of delivering paying quantities of hydrocarbons, or if a second well is drilled on the WSU acreage within the next twelve months, the WSU will be extended beyond the initial 36-month extension currently approved by the BLM.

Next steps

With the WSU approved and operational, the Company will continue its detailed planning for the next phases of development of the Paradox project - both on the WSU acreage (which consolidates the majority of the Company's historical footprint in the Basin) and on the acreage recently acquired in the Utah School and Institutional Trust Lands Administration ("SITLA") auction in July 2021. 

While the Company's future drilling plans will, to some degree, be informed by the performance of the State 16-2LN-CC well, it is currently planning for the following future operations on the Paradox project:

1.    A second well targeting the Cane Creek reservoir in the WSU in 2022

2.    A development well on a recently acquired lease located in the historically prolific Cane Creek Field (south of the WSU) in 2022

3.    An exploration/appraisal well targeting the WSU's shallow Paradox Formation in 2022/2023

It is currently proposed that this activity will be funded from cashflows from the Company's non-operated portfolio and/or from revenues generated by the State 16-2LN-CC well.  Further details on each of these three planned wells are set out below.

The Company is also planning to immediately commission an updated Competent Person's Report ("CPR") on its entire asset portfolio, both operated and non-operated assets, once the production testing on the State 16-2LN-CC well has been completed in the coming weeks.

Colin Harrington, Zephyr's Chief Executive said: "I am absolutely delighted that Zephyr has gained approval for this new Federal Unit - the White Sands Unit - named after the former U.S. missile testing range on which a large portion of our lease acreage is located.

"This approval is a direct result of the successful operations completed on the State 16-2LN-CC well to date, and means that we now have a strong framework from which to hold our lease acreage for the medium and/or long-term.  I'd like to thank the BLM and SITLA for working closely with our team over many months to form this Unit - it's a major step to enable the future development of the Paradox project in a systematic, commercial and responsible fashion.

"Over the past twelve months, the work conducted by Zephyr's technical team and our third-party partners has significantly enhanced our understanding of the Paradox geology. Going forward, we will seek to utilise this knowledge, combined with cash flow generated from both our operated and non-operated production assets, to deliver additional wells located on our existing leases. If we identify further attractive and accretive acquisition opportunities that fit our stringent acquisition criteria, we'll of course pursue those deals in parallel.

"As always, we'll endeavour to generate additional Shareholder value whilst being responsible stewards of investors' capital and responsible stewards of the environment."

Contacts:

Background to the three proposed wells

1.    White Sands Unit - second well targeting the Cane Creek reservoir:  The planned follow-up well to the State 16-2 LN CC forms an additional component of the delineation/development of the WSU's Cane Creek reservoir. Once well testing on the State 16-2LN CC well is completed, the Company will provide more detailed development plans for this well. Given the Company's detailed reservoir database and increased understanding of the geology underlying the WSU, Zephyr's board believes that additional drilling in the Cane Creek reservoir is already warranted in order to more fully delineate this reservoir.

2.    Cane Creek Field development well:  The Company acquired a further 12,260 acres across the northern Paradox Basin in July 2021.   Approximately 5,000 of these acres surround the currently producing Cane Creek Field, with 640 of those acres located 2 miles from an existing production well in an area with existing field 3D seismic.  Zephyr believes that this is an ideal location for development via hydraulic stimulation like the State 16-2LN CC well, with a near term goal to deliver commercial levels of production. Demonstration of this completion type could open up to 13 further well locations on Zephyr's Cane Creek Field acreage. 

3.    White Sands Unit - shallow reservoir exploration/appraisal well:  With a proven successful completion technique at State 16-2 LN-CC, the Company anticipates testing the shallow reservoirs above the Cane Creek in the WSU.  Initial analysis of twenty reservoirs overlying the Cane Creek suggests that all twenty reservoirs are likely to be hydrocarbon filled to some degree, based on the State 16-2 well sidewall core data and petrophysical analysis of several offset wells.  Of the twenty overlying reservoirs, the Company has high-graded eight reservoirs which have adequate thickness for potential future development.  Data gathered during the drilling of State 16-2LN-CC well provided the first step in determining the viability of these reservoirs, and the Company believes that successful testing of the selected target would provide further confirmation of the potential for several of these additional reservoir zones.