About Us
Dear Shareholders and Interested Parties:
Thank you for your interest in our company. We are an independent exploration, development and production company that utilizes advanced technologies to systematically explore for and develop domestic and international oil and natural gas reserves. We focus our exploration and development activities in areas where we believe technology and the knowledge of our management can be used effectively to maximize our return on invested capital by reducing drilling risk and enhancing our ability to grow reserves and production volumes. Our exploration and development activities are currently concentrated in three core areas: the United States, Canada and Indonesia.
I'm acutely aware of the need to reward shareholders for their investments. You invest in GeoPetro to earn an attractive return. This past year was marked by significant progress for our company in many respects:
As previously announced, in 2005 we secured a commitment from Madisonville Gas Processing, LP ("MGP") to install and make operational additional treating facilities capable of treating 50 MMcf/d (million cubic feet per day) of natural gas, which combined with the capacity of the current in-service treating facilities will represent a total designed treating capacity of 68 MMcf/d of natural gas for the gas treatment plant servicing our Madisonville Project wells. In October 2007, MGP informed us that they had partially completed construction of the additional treating facilities. Subsequently in November 2007, MGP commenced phase-in of the additional treating capacity reaching a temporary peak inlet volume of 21 mmcf/d out of the total contracted 50 mmcf/d design capacity at such facilities. However, operations at the additional treating facilities were suspended by MGP in December 2007 in order to make the necessary modifications to effectively deal with the presence of diamondoids in the gas stream produced from the Rodessa Formation. A diamondoid is a rare, naturally occurring compound that can segregate out of the gas stream upon a decrease in temperature and pressure and as such, could cause operational problems for the nitrogen rejection portion of the additional treating facilities. MGP has obtained a detailed laboratory composition analysis of the diamondoids and is currently finalizing plans for modifications to the operating system. MGP indicates that removal of the diamondoids will require flowing the natural gas stream through a diesel contactor after the gas stream has had the hydrogen sulfide and carbon dioxide removed. Through this contactor process, the diesel will absorb the diamondoids from the gas stream prior to entry into the nitrogen removal tower. MGP expects to complete installation of the system modifications required in the new plant by the third quarter of 2008. In the meantime, the existing, in service portion of the plant continues to treat approximately 15 million cubic feet per day of inlet gas.
During 2007, our 12% owned subsidiary, C-G Bengara drilled a total of four wells on the Bengara II Production Sharing Contract ("PSC"), located in East Kalimantan, Indonesia. The technical information provided by drilling and testing results to date confirm the presence of an oil accumulation. However the data is not yet adequate to conclusively demonstrate the extent of the oil accumulation or that it has sufficient size of oil reserves to economically justify a full commercial development. Further technical information is required prior to commencing development.
Looking Forward
Looking forward, we believe we are well positioned for future growth:
Representatives of MGP have indicated that they expect operations to resume at the additional treating facilities, and treatment capacity of 68 MMcf/d of natural gas at the plant to be in place and operational by the third quarter of 2008. We believe the completion of the plant expansion will result in higher net gas production, increased revenue and improved operating results during 2008. In addition, later in 2008, we plan to commence the drilling of a Madisonville Field deep test well to a depth sufficient to test the Smackover formation, at an estimated depth of approximately 18,000 feet. We currently produce from the Rodessa zone at approximately 12,000 feet in the Madisonville Field. We believe there are as many as six prospective zones below the Rodessa zone, including the Sligo, Travis Peak, Cotton Valley Sand, Bossier, Cotton Valley Lime and Smackover formations.
In our Bengara II PSC, C-G Bengara has prepared a preliminary plan of development for the Seberaba discovery based upon drilling and testing results from the Seberaba-1 and 3 wells. Further testing is expected to be conducted in 2008. In addition to these well test results, C-G Bengara feels additional technical information is needed prior to finalizing the formal plan of development and submitting it for approval to the Indonesian oil and gas authorities. Approval of the formal plan of development would automatically invoke the final 20-year production period of the Bengara-II PSC through December 3, 2027. C-G Bengara has submitted the preliminary plan to the Indonesian authorities together with a request for additional time to implement the plan and thereby obtain the additional data needed to further appraise and prove up the Seberaba discovery prior to completing and submitting the formal plan of development. Approval is expected but not assured.
Elsewhere, in our Canadian Swan Hill and Alaskan (Cook Inlet) projects, operations are currently in the planning stages and we expect to announce further progress in these areas in the coming months.
The Swan Hills Project is located in the Central Alberta Basin, Alberta, Canada. The primary exploration objective is the Swan Hills Formation at approximately 9,000 feet. Secondary objectives will include the shallower Gilwood, Nordegg and Falher formations. We have reviewed 3-D seismic data over the prospect and plan to participate in the drilling of a test well in the third quarter of 2008. We have a 33% working interest in approximately 4,480 leased acres.
We own a 122,174 acre lease position onshore in Cook Inlet, Alaska which consists of two separate target areas that have been selected for exploration. These areas are called the Point MacKenzie and Trading Bay Blocks, respectively. We believe this acreage to be prospective for conventional and coal bed methane gas production. The first target we have selected for drilling is a conventional gas prospect called the Midnight Sun Prospect, an 11,500 acre structure identified from 2-D seismic. The proposed depth of the initial test well is 8,000 feet which will enable us to test the Tyonek and Hemlock formations, and allow us to evaluate secondary objectives in the shallower coal beds. This well is planned for drilling in the third quarter.
These forward looking statements are based on our current expectations, but our future performance involves risks and uncertainties that could cause actual results to differ materially, which risks are detailed in our filings with U.S. Securities and Exchange Commission, including under the caption "Risk Factors" contained in our Annual Report on Form 10-K, which is included herewith and also available at www.sec.gov.
Industry Outlook
A report issued on April 8, 2008 by the United States Energy Information Administration ("EIA") states that global oil markets remain fundamentally tight. West Texas Intermediate ("WTI") oil prices are projected to average $101 per barrel in 2008 and $92.50 per barrel in 2009. This report cites that several factors have contributed to the generally high crude oil prices, such as low world spare oil production capacity and rapid world oil demand growth. These factors will continue to affect markets in 2008 and 2009. Other factors are less certain, such as the magnitude, breadth, and duration of any global economic slowdown, and geopolitical instability in such places as Iraq and Venezuela. According to the report, the Henry Hub natural gas spot price averaged $7.17 per thousand cubic feet (Mcf) in 2007 and is projected to average $8.59 per Mcf in 2008 and $8.32 per Mcf in 2009. Higher natural gas prices this year and next reflect continued strong demand, high oil prices, and the need to replenish more stocks this year than last year.
Conclusion
On behalf of the Board of Directors and the employees of GeoPetro Resources Company, I would like to express my appreciation for your continued interest in the affairs of the Company. Thank you for your confidence and support.
Sincerely,
Stuart J. Doshi
Chairman of the Board, President and Chief Executive Officer