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.

8 December2021

Zephyr Energy plc

("Zephyr" or the "Company")

Extensive State 16-2LN-CC production test successfully concluded;

Proven rate-constrained production high of 1,083 barrels of oil equivalent per day;

Simulation modelling indicates potential rates of 2,100 barrels of oil equivalent per day;

Highly successful appraisal suggests large hydrocarbon resource

Zephyr Energy plc (AIM: ZPHR) (OTCQB: ZPHRF), the Rocky Mountain oil and gas company focused on responsible resource development from carbon-neutral operations, is pleased to provide an update on the production testing of the State 16-2LN-CC well at its Paradox Basin project in Utah.

The Company is delighted to announce the completion of a safe and highly successful well test. After 23 days of production testing, the well has demonstrated the potential to drain a larger hydrocarbon resource and with stronger economics than initially forecast. Zephyr is now proceeding with plans to equip the well and facilitate the export and/or sale of hydrocarbons.

The State 16-2LN-CC well was the first in the Northern Paradox Basin to flow hydrocarbons from a horizontal well with a modern hydraulically stimulated completion design, and the Company's Board of Directors (the "Board") believes the results of the production test provide substantial justification for wider development of Zephyr's Paradox project.

Overview

·    During the test, the well averaged rate-constrained daily rates of 716 barrels of oil equivalent per day ("boepd"), with rate-constrained highs of 1,083 boepd achieved with limited pressure drawdown.

·    Initial simulation modelling suggests possible plateau rates of 2,100 boepd are possible when the well is fully equipped and no longer rate-constrained.

o  The test was rate-constrained to minimise flow assurance issues from salt deposition in the well bore. Future flow assurance issues are expected to be mitigated when the well's final completion equipment is installed.

·    Gas rates are substantially higher than expected, with modelling suggesting the well is capable of production plateau rates of     10 million square cubic feet of gas per day and 500 boepd of liquids.

·    Initial data from the production test suggests the State 16-2LN-CC has a single well potential Estimated Ultimate Recovery ("EUR") of 2.65 million barrels of oil equivalent ("mmboe"), significantly higher than the Company's   pre-drill estimates of up to 0.85 mmboe.

·    The test indicates a highly successful appraisal of a substantial new gas condensate resource and one which the Company forecasts will deliver strong single well economics. Using updated production forecasts and realised prices of US$3.00 per thousand cubic feet ("mcf") of gas and US$65 per barrel of oil ("boe"), the Company estimates that the well will pay out in under seven months and have a net present value at a ten per cent. discount rate (NPV-10) of US$12.5 million.

·    Zephyr is currently evaluating well equip and export options in order to put the well on full production as soon as practicable. The Company is also appraising a number of potential profitable solutions for selling the substantial volumes of natural gas expected to be produced from the well.  These solutions, detailed below, include the sale of gas into nearby existing infrastructure, as well as the potential to co-locate a cryptocurrency mining facility onsite in a similar manner to other nearby operators in the Paradox and Williston Basins.

·    The Board remains highly encouraged by the implications of the test results as related to the wider development of the Paradox project. Following the completion of the production testing, Zephyr has commissioned the independent reserve consulting firm Sproule Incorporated ("Sproule") to complete a Competent Persons Report ("CPR") to assess the Company's reserves across both the Cane Creek reservoir and the eight overlying reservoirs. The CPR is expected to be finalised over the next 60 days.

Colin Harrington, Zephyr's Chief Executive, said: "I am incredibly excited about the production test results announced today, and even more so about the significant implications for further drilling and potential full field development of our Paradox project. 

"The well test data, modelled production volumes and potential EURs exceed our pre-drill estimates and all indications point to the State 16-2LN-CC as a well which can generate significant Shareholder returns.

"Not only does this successful production test indicate the potential for a highly profitable single well, but we also believe the test will lead to a substantial reduction in development risk across our acreage while allowing for a future systematic development of the project - one with relatively predictable well distribution within both the Cane Creek reservoir as well as across the multiple overlying reservoirs.

"We are also excited to have several options to monetise the significant gas potential of the well. Given the potential scale of gas volumes, we have already entered into detailed conversations regarding selling produced gas into the nearby pre-existing gas infrastructure.  Alternatively, we've also been impressed with the return potential related to the co-location of a cryptocurrency mining facility on site with shared economics - and we've seen other forward-looking operators in the Paradox and Williston Basins benefit from such arrangements. We have therefore formed a first-class advisory board to help guide our deliberations in this area of considerable growth, and foresee a future in which both alternatives are weighed from a value perspective, potentially even in tandem.  We aim to have a path forward by the end of the first quarter 2022 and look forward to providing updates as progress is made and the well is equipped.

"In conclusion, we are delighted to be able to report that we appear to have a large and profitable first well on our Paradox asset - one which has far exceeded our expectations and which has validated the Board's decision to utilise hydraulic stimulation.  The Board believes that the results add considerable weight to the view that the Paradox asset has the potential to be a project of substantial scale and profitability, one which can be developed to maximise resource efficiency while minimising surface disruptions and offsetting Scope 1 emissions.  Our mission, as always, is to be responsible stewards of investors' capital while also being responsible stewards of the environment and I'm delighted that the results to date are a strong confirmation of that focus."

Further Detail

The successful completion of the State 16-2LN-CC well production test has served as a "proof of concept" for the wider potential development of Zephyr's Paradox asset base as a hydraulically stimulated resource play ("HSRP").

During the production test, the State 16-2LN-CC well demonstrated very high reservoir pressures and likely higher than expected reservoir permeabilities.  Should sufficient reservoir volume be connected, these conditions signify significant potential for additional highly productive wells in the Cane Creek reservoir across Zephyr's 25,000-acre White Sands Unit ("WSU").

The combination of favourable geologic conditions and excellent financial returns forecasted by the production test has now led Zephyr's team to accelerate planning for further drilling.   The team is currently integrating the well test results with reservoir and simulation models and field mapping.   To date, Zephyr has identified dozens of Cane Creek reservoir well targets within Zephyr's WSU acreage and in the Company's 12,613-acre position outside of the WSU in the wider Paradox Basin. Additional locations are being analysed and will be included in a future CPR.

Beyond the Cane Creek reservoir, the State 16-2 LN-CC well also provided a successful proof of concept well which can be applied to test the exploration potential from eight overlying zones that show similar petrophysical responses and have sampled moveable hydrocarbons from the side wall cores acquired in State 16-2 well.  Each of these overlying zones may have the potential for a similar number of wells as the Cane Creek reservoir but currently are less well understood with unknown reservoir pressures or hydrocarbon fluid type - they represent an exciting exploration opportunity that could add significantly to the Company's overall reservoir potential.

The Company has commissioned the independent reserve consulting firm Sproule Incorporated ("Sproule") to complete a CPR to assess the Company's reserves across the WSU and additional acreage in both the Cane Creek reservoir and the eight overlying reservoirs. The CPR is expected to be finalised over the next 60 days.

The State 16-2LN-CC well test data covered 23 days of production history which, although highly valuable, is still a limited period of time to fully evaluate this new play potential and the team continues to evaluate project risks such as any potential formation water production and upsides such as higher condensate yields over time. PVT (pressure-volume-time) properties of the fluid remain under evaluation and will be integrated to understand how liquid yield will vary over time as reservoir pressure is dropped.

To date, the liquid yield from the State 16-2LN-CC well is a high API condensate (approximately 60 API) with condensate yield of more than 50 barrels of condensate per million standard cubic feet ("mmscf") - a highly attractive light barrel which is sought after for blending with the heavy and waxy oil produced elsewhere in the state of Utah (particularly the oil from the nearby Uinta Basin).  Initial pricing indications received from potential end users are that State 16-2LN-CC liquids barrels will receive a premium over the West Texas Intermediate ("WTI") benchmark price at the refinery, although with transportation costs factored in, liquids volume pricing is expected to average the WTI price per barrel minus US$5 per barrel for transportation and marketing, which is better than expected pre-drill. It is expected that many future wells will have a higher liquid yield comparable to the offset Federal 28-11, a well sited less than one and a half miles from the State 16-2LN-CC well. 

During the production test, daily average rate-constrained rates from the production test were 716 boepd (3.6 mmscf per day ("mmscf/d") and liquids of 160 boepd), with rate-constrained high rates of 1,083 boepd (with peak liquid rates of 432 boepd and peak gas rates of 5 mmscf/d).  In addition to hydrocarbon rates, water rates during the test averaged 1,000 barrels of water per day with water rates declining at the end of the test as additional completion fluids were recovered, although to date it is unclear if a percentage of water volumes were comprised of formation water. The test was rate constrained, with limited pressure drawdown and maximum rates not fully tested, in order to avoid excess salt deposition in the well bore.  Future flow assurance issues are expected to be mitigated when the well's final completion equipment is installed. 

Gas Commercialisation Alternatives

Given the demonstrated and substantial reserve potential, Zephyr is assessing multiple options to commercialise the State 16-2LN-CC gas resource, including by tying into existing nearby gas export infrastructure. 

In addition, a growing number of U.S. upstream oil and gas operators (including an immediately adjacent Paradox Basin oil and gas operator) have chosen to co-locate and sell produced natural gas to cryptocurrency mining facilities in order to benefit from current demand for natural gas from which dedicated sources of power can be generated.

By way of illustration, from May to July of 2021 (following a crackdown on Chinese bitcoin producers), the U.S. has gone from hosting 18% of Bitcoin miners to hosting 35% of all Bitcoin mining operations.  Even prior to producing gas from the State 16-2LN-CC well, over the past year Zephyr was approached by multiple parties wishing to use future natural gas production to create power on site for use with power-intensive Bitcoin mining activities. Given the nationwide trend to limit gas flaring and reduce methane production, combined with a surge in crypto mining operations in the Western U.S., Zephyr has undertaken a detailed review of the potential to partner with a co-located mining facility. 

As part of the process to responsibly assess the viability of this market, Zephyr has established an advisory board of cryptocurrency operation, technology and regulatory specialists.  Members of the advisory board include:

·    Jacinda Brown:  CEO, CryptoKnight Energy, a company formed to bring value to stranded and undervalued natural gas resources by providing a viable alternative to pipelines and which can be scaled up or down in line with gas production.  Jacinda has 20 years' experience as a geologist, including significant experience in the Paradox Basin, and has spent the last four years pursuing the development and co-location of Rocky Mountain well-pad crypto-mine facilities.

·    Zachary Fallon:  Partner and Co-Founder of Ketsal PLLC, a financial technology legal and consulting firm.  Zach was formerly a Senior Special Counsel in the U.S. Securities and Exchange Commission's Division of Corporation Finance, and a staff attorney in the Office of the General Counsel.  Prior to joining the SEC Mr. Fallon practiced securities and corporate law in the London and San Francisco offices of Latham & Watkins LLP.

·    William Mapp: Noted author, technologist and cryptocurrency developer.  Will was the founder of BA Systems and Studio Codeworks, has worked for NASA, IBM and Lockheed Martin, and has architected software and systems that are running in more than 23 countries.

Initial indications suggest the State 16-2LN-CC production profile is ideally suited for the co-location of a cryptocurrency mining facility, and the Company is considering a near term test of a beta facility on site.  Long term, both traditional gas export and co-location uses appear as viable alternatives (either separately or in tandem) for commercialising the substantial gas resource, and Zephyr will carefully weigh the potential financial returns offered by both alternatives. 

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.