WesternZagros Announces First Quarter 2014 Operational and Financial Results

CALGARY, ALBERTA -- (Marketwired - May 21, 2014) - WesternZagros Resources Ltd. (TSX VENTURE:WZR) ("WesternZagros" or "the Company") announced today its operating and financial results for the first quarter ended March 31, 2014, and additional key highlights and activities to date. A summary of the activities, the financial statements the accompanying Management Discussion and Analysis ("MD&A") are available at www.westernzagros.com and on SEDAR at www.sedar.com.

Commenting on the first quarter results and subsequent events, WesternZagros's Chief Executive Officer Simon Hatfield said:

"There have been several key operational accomplishments and corporate initiatives this year that continue to steadily advance the development of our substantial oil and gas discoveries in Kurdistan. The most significant of these is that the interpretation of the integrated 3D seismic data that we acquired last year over the Kurdamir discovery and the Baram structure indicates that it is likely that the oil leg in the Oligocene reservoir at Kurdamir contains significantly more resources than our currently audited contingent resource estimates. This is also supported by the successful results of the approximately one and half month extended well test of the lowest perforated interval in our Kurdamir-2 well. This test produced approximately 90,000 barrels of oil, a significant amount of gas and, most significantly, no formation water. This confirms that any oil-water contact ("OWC") is significantly deeper than the tested interval."

"This evidence, together with the new high quality 3D seismic interpretation, provides compelling support that the OWC may be as deep as that encountered at Baram-1. Should this prove to be the case, the oil leg in the Oligocene reservoir at Kurdamir would increase from the 241 metres used for our last contingent resource estimate to an eye-popping 837 metres, a 250% increase. The Company has long recognized that Kurdamir has significant undiscovered potential in the Oligocene reservoir down the flank of the structure from the audited contingent resources as we carry over 1 billion barrels of gross prospective oil resources (mean estimate), however, these recent findings increase the chance of success for these resources considerably. If proven, this has the potential to convert an estimated 950 million barrels of prospective oil resources to contingent resources. We also anticipate the results of two additional wells that are underway to test the extension of the Kurdamir Oligocene oil leg onto adjacent blocks. These are Talisman's Topkhana-2 well and KNOC's Massoyi-1 well, being drilled to the west on Talisman's Topkhana Block and to the north on KNOC's Sengaw South Block. The Company anticipates that the results from these wells are likely to support our assertion that the Kurdamir oil discovery and its extension onto adjacent blocks will prove to be a multi-billion barrel light oil field."

"On our Garmian Block, the KRG has accepted our declaration of commerciality for the Sarqala oilfield and we are near to submitting our first field development plan to the KRG for their approval with a view to commencing production as soon as possible. Preliminary open hole flow tests on the Hasira-1 well have confirmed light oil in both the Oligocene and Jeribe reservoirs although mechanical difficulties have prevented comprehensive testing in the open hole and both sections have now been cased for future testing. The light oil that flowed is similar in quality to previous production from our neighboring Sarqala-1 well. A more comprehensive Hasira-1 cased hole production test program is planned once the current drilling rig has moved off the location and the more cost effective workover rig is available, following the workover of Sarqala-1. The current workover of Sarqala-1 is part of the Garmian Development Plan, which contemplates initial Sarqala production of about 10,000 barrels of oil per day this year, increasing up to 25,000 to 35,000 barrels of oil per day during the second phase of development," Hatfield said.

WesternZagros is evaluating a range of funding options available to the Company while it progresses these development plans. In connection therewith, the Board of Directors has established a Special Committee to review all financing and strategic alternatives available to the Company with a view to enhancing shareholder value. In addition, the Company has retained Citigroup Global Markets Inc. ("Citi") to act as its financial advisor. One of the alternatives that the Special Committee is exploring is a possible corporate transaction and is in discussions with certain parties to determine whether such a transaction would deliver additional value to shareholders. Notwithstanding this, the Special Committee continues to consider all available alternatives for enhancing shareholder value, which may include, but are not limited to, a potential sale of the Company, a merger or other business combination, the sale of some or all of the assets of the Company in one or more transactions, the completion of a rights offering or other equity or debt financing or any combination of these alternatives. The review process is ongoing and WesternZagros does not intend to disclose developments with respect to the review process until the Board of Directors has approved a specific transaction, action plan or otherwise determines that disclosure is necessary or appropriate.


Operations Summary

WesternZagros's assets comprise two contract areas, the Garmian and Kurdamir blocks, with significant oil and gas discoveries on both. These blocks are on trend with the super-giant Kirkuk oil field and adjacent to a number of prolific oil and gas discoveries.


Operated Joint Venture: Garmian Block

- The Company declared the commerciality of the Sarqala Discovery on December 23, 2013, and design work is underway on future development plans for the oil resources in the Sarqala area.

- As part of the Sarqala development plan, a workover commenced in March 2014 on the Sarqala-1 well to increase the production capability above the current capacity of 5,000 barrels of oil per day ("bbl/d") up to 10,000 bbl/d. Upon approval of the development plan, the Company anticipates commencing oil sales into the domestic market or into the export market via the new Kurdistan Region-Turkey pipeline

- The Hasira-1 well has reached a total depth of 4,181 metres, drilling through both the Jeribe and Oligocene reservoirs. Logging and initial open hole tests conducted in both reservoirs have confirmed light oil in both the Jeribe and Oligocene reservoirs. The open hole test completed in the Oligocene reservoir flowed oil to surface during an initial clean up flow, however the test was prematurely terminated after six hours due to formation debris plugging the tubing. Estimated rates from the cleanup flow period were 3,000 barrels per day of fluid, with up to 40 percent oil cut, the balance being drilling fluids. The oil flowed to surface was consistent with the oil produced from Sarqala-1, approximate 40 degree API and no indications of H2S. Currently the Company is casing the Oligocene reservoir section, and then will suspend the well for future testing of both the Oligocene and Jeribe reservoirs utilizing the more cost-effective workover rig which will be moved to Hasira-1 once it has completed the workover of Sarqala-1.


Non-Operated Joint Venture: Kurdamir Block

- WesternZagros updated its contingent and prospective resource estimates for the Oligocene reservoir in the Kurdamir structure based on new information obtained from the drilling of the Kurdamir-3 well and the interpretation of 3D seismic data. The revised resources assessment has been audited by the Company's independent reserves evaluator, Sproule International Limited, as of February 10, 2014, resulting in a revised mean estimate of gross unrisked contingent resources ("Mean Contingent Resources") of 750 MMBOE, an increase of five percent from those previously recognized. On an oil basis, the Mean Contingent Resources are now 386 million barrels of oil ("MMbbl"). The combined Mean Contingent Resources estimates for the Oligocene and Eocene reservoirs in the Kurdamir Block are now 976 MMBOE or 541 MMbbl on an oil basis. The revised mean estimate of gross unrisked prospective resources ("Mean Prospective Resources") for the Oligocene reservoir at Kurdamir is now 1,084 MMbbl of oil, effectively unchanged from a previous estimate of 1,076 MMbbl of oil.

- Subsequent to updating the contingent and prospective resources, the Company has conducted the following work to better understand the Kurdamir discovery and prepare for future development activities and for further delineation of the prospective resources:

-- A 44-day extended well test ("EWT") from the drill stem test ("DST") 6 interval at the Kurdamir-2 well (deepest test conducted in base of Oligocene at -1,966 to -1,986 metres sub-sea ("mSS") was completed on May 2). Cumulative oil production was approximately 90,000 barrels and during this time no formation water was produced. The Company views this information as support that the current contingent resource estimates, which limit lowest known oil to a depth in the range between -2,049 and -2081 mSS, represents a conservative view. During testing, the oil flow rate was restricted to limit the volume of gas flared as per the requirements of the KRG.

-- Analyzed the Kurdamir-3 log and test data and concluded that the formation water encountered in Kurdamir-3 was most likely from a deeper interval. Based upon the oil tested at the DST 1 interval and oil pay calculated on wireline logs, the lowest known oil would extend significantly deeper, i.e. down to the deepest point drilled to date in the Oligocene reservoir at -2228 mSS. Extending the lowest known oil to that depth has the potential to convert approximately 350 million barrels of the current prospective oil resources to contingent oil resources.

-- In addition, the Company has continued to interpret the integrated 3D seismic data acquired over Baram and Kurdamir in 2013 and determine the implications to its understanding of the Kurdamir discovery. This work has recently identified that while the Kurdamir Thrust Fault exists between Baram and Kurdamir, the 3D seismic data clearly shows that the Oligocene reservoir interval remains juxtaposed and, as such, is unlikely to represent a pressure barrier between Kurdamir and Baram. In this case, the oil-water contact tested in Baram at -2,676 mSS is likely to represent a common oil-water contact for the whole Topkhana-Kurdamir structure. This is a very significant observation, as the implication is that it extends the known oil leg another 600 metres than that used in the current audited contingent resource estimate. If this common oil-water contact can be proven, this has the potential to convert an additional approximately 600 MMbbl of the current prospective oil resources to contingent oil resources. This is in addition to the additional 350 MMbbl of prospective oil resources discussed in the previous paragraph, i.e. on a combined basis this would allow the conversion of approximately 1 billion barrels of prospective oil resources to contingent resources.

-- Please refer to the following map and schematic diagram for further information based on the recent analysis and interpretation:

To view the first image associated with this release, please visit the following link: http://media3.marketwire.com/docs/947163_map1.jpg

To view the second image associated with this release, please visit the following link: http://media3.marketwire.com/docs/947163_map2.jpg

- Work has continued during the first quarter to identify possible future drilling locations on the Kurdamir block, utilizing the 3D seismic to identify locations within the current contingent resources for a horizontal development well to target the Oligocene reservoir estimated to have the best fracture development for well deliverability and to identify locations that could also convert further prospective resources to contingent resources by confirming lowest known oil deeper than the currently recognized range of -2,049 to -2,081 mSS.

- The Company continues to monitor the progress and results from wells that are drilling on neighboring blocks but still on the Kurdamir/Tophkana structure. The Tophkana-2 well currently being drilled by Talisman on its neighboring block is targeting the Oligocene reservoir, which reached total depth at the end of April, and is now commencing testing operations. The Massoyi-1 well currently being drilled by KNOC on its neighboring block to the north is targeting the Oligocene and Eocene reservoirs and is anticipated to be testing in the second half of 2014.


Financial

- As at March 31, 2014, WesternZagros had $70.0 million in working capital, excluding the $5.3 million non-current portion of the deposit held in trust pertaining to the drilling contract.
Subsequent to March 31, 2014, the Company completed the assignment of its two drilling rigs and recovered $10 million of the deposit held in trust in relation to the first of two rigs which were assigned. Refer to the "Outlook" section for further discussion.

- WesternZagros's share of exploration and evaluation ("E&E") expenditures during the first quarter of 2014 included 50 percent of Garmian Block costs and 60 percent of Kurdamir Block costs. WesternZagros's share for these activities and other capitalized costs was $26.0 million, comprised of $12.3 million of drilling-related costs on the Garmian Block and $13.7 million in other appraisal and development planning costs. The Company's portion of drilling-related costs included $6.4 million for Hasira-1 and $5.9 million for Baram-1. Appraisal and development costs included $2.9 million for the Kurdamir-2 EWT, $1.4 million for the Sarqala workover, $4.5 million for initial long lead costs and other site preparation costs, $0.6 million for development planning and $4.3 million for local office and other PSC-related costs for both blocks.


Outlook

In 2014, WesternZagros will focus on the completion of appraisal activities and on the advancement of development plans on the Garmian and Kurdamir blocks.

On the Kurdamir Block, the Company is working with Talisman, the operator, to advance the submission of a declaration of commerciality prior to the end of the second quarter 2014, with the development plan anticipated to be submitted during the third quarter of 2014.

Remaining activities during 2014 will include completion of the interpretation of the 3D seismic program over the Kurdamir structure and securing a site and long lead materials for a future horizontal well. The Company is focused on applying the same phased development approach that is being utilized on the Garmian Block with early production initially achieved using available production equipment. Subsequent phases will focus on the construction of centralized production facilities and the drilling of development wells targeting initial total production levels of 25,000 to 35,000 bbl/d of oil. Additional phases will be completed as further development wells are drilled targeting the approximately 1 billion BOE of gross unrisked contingent resources (mean estimate) and to further delineate the 1.6 billion BOE of gross unrisked prospective resources (mean estimate).

With the declaration of commerciality on the Garmian Block, the Company is progressing towards bringing production on from its Sarqala Discovery and anticipates that this will happen subsequent to the submission of the development plan due in June 2014.

The Company and Gazprom Neft are advancing a development plan and have established a dedicated team to complete this work by the submission deadline of June 21, 2014. Current facilities at Sarqala can support production levels of at least 10,000 bbl/d, and a workover of the Sarqala-1 well has commenced with the objective of increasing the production capacity up to 10,000 bbl/d. These facilities may also be expanded to handle any additional volumes of crude oil that Hasira-1 may provide once testing is completed at that well. The second phase of development on the Sarqala field is expected to focus on development wells and the construction of centralized production facilities that could support total production of up to 25,000 to 35,000 bbl/d of oil. Additional development phases for the Sarqala field may be added beyond this as future wells appraise the estimated 463 MMBOE of gross unrisked prospective resources (mean estimate) in determining the ultimate extent of the reservoir. Work is continuing on opportunities to utilize the associated natural gas from any future crude oil production to minimize the flaring.

Subsequent to March 31, 2014, WesternZagros concluded an assignment agreement with Gazprom Neft and the rig contractor to temporarily assign two of its contracted drilling rigs elsewhere for the remainder of 2014. Under this arrangement, the rigs will return to the Company's Garmian Block for development drilling on the Sarqala Discovery in early 2015 once the development plan is approved and additional development locations are prepared. This will minimize expenditures in the near term during the preparation of the development plan and its approval by the KRG. Under the development terms of the Garmian Block contract, WesternZagros's operatorship is expected to transfer to Gazprom Neft by December 31, 2014.

The Company's portion of planned expenditures related to Garmian and Kurdamir Block activities for the remainder of 2014 include $9 million for Hasira-1 and other exploration-related costs, $5 million for the Sarqala-1 workover, $3 million for the Kurdamir-2 EWT activities, $13 million for Garmian and Kurdamir development planning, $19 million for supervision, local office costs and other Garmian and Kurdamir PSC-related costs and $11 million for other corporate costs.


Liquidity and Capital Resources

As at March 31, 2014, WesternZagros had $70.0 million in working capital, which is sufficient for funding the completion of its exploration and appraisal activities on the Garmian and Kurdamir Blocks. WesternZagros invests its cash and cash equivalents and short-term investments with major Canadian financial institutions with investment grade credit ratings and in Government of Canada instruments in accordance with an Investment Policy approved by the Board of Directors. The other income generated during the interim period ended March 31, 2014, was comprised entirely of interest earned on cash and cash equivalent balances and short-term investments.

WesternZagros and its co-venturers on the Garmian and Kurdamir blocks are currently preparing staged development plans with early production systems to supply both oil and natural gas to either the domestic or export markets. With the submission of the development plan on the Garmian Block, which is anticipated by the end of the second quarter of 2014, WesternZagros will be requesting to commence the production and sale of crude oil from Sarqala-1.

Further funding will be required by WesternZagros as it advances the development of its properties. In connection therewith, the Board of Directors has established a Special Committee to review all financing and strategic alternatives available to the Company and has retained Citi to act as the Company's financial advisor. The Special Committee continues to evaluate all available alternatives for enhancing shareholder value, which may include, but are not limited to, a potential sale of the Company, a merger or other business combination, the sale of some or all of the assets of the Company in one or more transactions, the completion of a rights offering or other equity or debt financing or any combination of these alternatives. The review process is ongoing and a definitive schedule to complete it has not been set.

In determining which course of action to pursue, the Company will monitor and assess all relevant factors, including the following:

- The Special Committee's review and evaluation of the financing and strategic alternatives;
- The timing of submission and approval for development plans;
- The expected timing and scope of development activities;
- The ability to export or to sell into the domestic markets oil and natural gas in accordance with the economic terms of the PSCs;
- The ability to generate cash flow from early production;
- The current conditions in the financial markets, including the potential for further market instability;
- The ability to access debt, and the costs thereof, for development activities in Kurdistan; and
- The timing for repayment of outstanding debt.


About WesternZagros Resources Ltd.

WesternZagros is an international natural resources company focused on acquiring properties and exploring for, developing and producing crude oil and natural gas in Iraq. WesternZagros, through its wholly-owned subsidiaries, holds a 40 percent working interest in two Production Sharing Contracts with the Kurdistan Regional Government in the Kurdistan Region of Iraq. WesternZagros's shares trade in Canada on the TSX Venture Exchange under the symbol "WZR".


This news release contains certain forward-looking statements relating to, but not limited to, operational information, future appraisal and development plans and the timing associated therewith, future production capability and capacity of wells and facilities, estimated commitments under the Company's Production Sharing Contract for the Kurdamir area ("Kurdamir PSC") and Production Sharing Contract for the Garmian area ("Garmian PSC"), and planned expenditures. Forward-looking information typically contains statements with words such as "anticipate", "estimate", "expect", "potential", "could", or similar words suggesting future outcomes. The Company cautions readers and prospective investors in the Company's securities to not place undue reliance on forward-looking information as, by its nature, it is based on current expectations regarding future events that involve a number of assumptions, inherent risks and uncertainties, which could cause actual results to differ materially from those anticipated by WesternZagros. Readers are also cautioned that disclosed test rates and results are not necessarily indicative of long-term performance or of ultimate recovery.

Forward looking information is not based on historical facts but rather on management's current expectations as well as assumptions made by, and information currently available to management, concerning, among other things, outcomes of future well operations, plans for and results of extended well tests and drilling activity, future capital and other expenditures (including the amount, nature and sources of funding thereof), future economic conditions, future currency and exchange rates, continued political stability, timely receipt of any necessary government or regulatory approvals, the successful resolution of disputes, the Company's continued ability to employ qualified staff and to obtain equipment in a timely and cost efficient manner, the participation of the Company's co-venturers in joint activities, and the ability to sell production and the prices to be received in connection therewith. In addition, budgets are based upon WesternZagros's current appraisal and development plans and anticipated costs, both of which are subject to change based on, among other things, the actual outcomes of well operations and the installation and commissioning of facilities, unexpected delays, availability of future financing and changes in market conditions. Although the Company believes the expectations and assumptions reflected in such forward-looking information are reasonable, they may prove to be incorrect. Forward-looking information involves significant known and unknown risks and uncertainties. A number of factors could cause actual results to differ materially from those anticipated by WesternZagros including, but not limited to, risks associated with the oil and gas industry (e.g. operational risks in exploration and production; inherent uncertainties in interpreting geological data; changes in plans with respect to capital expenditures; interruptions in operations together with any associated insurance proceedings; the uncertainty of estimates and projections in relation to costs and expenses and health, safety and environmental risks), the risk of commodity price and foreign exchange rate fluctuations, the uncertainty associated with any dispute resolution proceedings, the uncertainty associated with negotiating with foreign governments and risk associated with international activity, including the lack of federal petroleum legislation and ongoing political disputes in Iraq in particular.

In addition, statements relating to "resources" contained herein are deemed to be forward-looking statements, as they involve the implied assessment, based on certain estimates and assumptions that the resources described can be economically produced in the future. Terms related to resource classifications referred to herein are based on the definitions and guidelines in the Canadian Oil and Gas Evaluation Handbook which are as follows. "Prospective resources" are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from undiscovered accumulations by application of future development projects. Prospective resources have both an associated chance of discovery (geological chance of success) and a chance of development (economic, regulatory, market, facility, corporate commitment or political risks). The chance of commerciality is the product of these two risk components. The estimates referred to herein have not been risked for either the chance of discovery or the chance of development. There is no certainty that any portion of the prospective resources will be discovered. If a discovery is made, there is no certainty that it will be developed or, if it is developed, there is no certainty as to the timing of such development or that it will be commercially viable to produce any portion of the prospective resources. "Contingent resources" are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations using established technology or technology under development, but which are not currently considered to be commercially recoverable due to one or more contingencies. Contingent resources have an associated chance of development (economic, regulatory, market and facility, corporate commitment or political risks).

The estimates referred to herein have not been risked for the chance of development. There is no certainty that the contingent resources will be developed and, if developed, there is no certainty as to the timing of such development or that it will be commercially viable to produce any portion of the contingent resources. All resource estimates presented are gross volumes for the indicated reservoirs, without any adjustment for the Company's working interest or encumbrances. A barrel of oil equivalent ("BOE") is determined by converting a volume of natural gas to barrels using the ratio of 6 million cubic feet ("Mcf") to one barrel. BOEs may be misleading, particularly if used in isolation. A BOE conversion ratio of 6 Mcf:1 BOE is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Given that the value ratio based on the current price of oil as compared to natural gas is significantly different from the energy equivalency of 6:1, utilizing a conversion on a 6:1 basis may be misleading as an indication of value. The Company's Statement of Oil and Gas Information contained in its Annual Information Form dated March 13, 2014 ("AIF"), filed on SEDAR at www.sedar.com contains additional detail with respect to the resource assessments and includes the significant risks and uncertainties associated with the estimates and the recovery and development of the resources, and, in respect of contingent resources, the specific contingencies that prevent the classification of the resources as reserves. In addition, combined mean estimates of resources that are presented in this MD&A are an arithmetic sum of the mean estimates for individual reservoirs and each such individual mean estimate is the average from the probabilistic assessment that was completed for the reservoir. Readers should refer to the AIF for a detailed breakdown of the high (P10), low (P90) and best (P50) estimates for each of the individual reservoir assessments as audited by the Company's independent reserves evaluator.

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WESTERNZAGROS RESOURCES WAS RECOGNIZED AS A TSX VENTURE 50® COMPANY IN 2012 AND 2013. TSX VENTURE 50 IS A TRADE-MARK OF TSX INC. AND IS USED UNDER LICENSE.

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Contact

WesternZagros Resources Ltd.
Greg Stevenson, Chief Financial Officer
(403) 693-7007

WesternZagros Resources Ltd.
Tony Kraljic, VP Business Development
(403) 693-7011

WesternZagros Resources Ltd.
Lisa Harriman, Manager of Investor Relations
(403) 693-7017
investorrelations@westernzagros.com
www.westernzagros.com

John Kiely / Brett Jacobs / James McFarlane
Smithfield Group
+44 (0) 20 7360 4900