Map source: KeyFacts Energy

Highlights:

• Contract awarded for supply of long lead inventory items required for drilling operations
• January cash calls received - cash on hand of ~$16.5 million to fund operations
• Cuban work visas received for expatriate project management staff
• Construction of first well pad mostly complete
• Drilling contract amended to provide additional flexibility to manage possible future COVID related travel and operating restrictions. Contract to be awarded shortly.
• Block 9 drilling program is for the drilling of two exploration wells testingfour separate targetswith a total Prospective Resource of 236 million barrels of oil(Best Estimate)
• First well (Alameda-1) now expected to commence drilling in mid-2021 and take about 75 days. Three targets with a combined Prospective Resource of 143 million barrels of oil (Best Estimate)1 to be tested, each of which have previously recovered hydrocarbons and the best of which has an independently assessed 32% chance of success.
• Second well (Zapato-1) to immediately follow Alameda-1 and take about 55 days. Single target near to the shallower Motembo oil field (which has historically produced a high-quality light oil) with a Prospective Resource of 95 million barrels of oil (Best Estimate)

Melbana has a significant (30%) interest in this opportunity and is carried for 85% of thecosts of this drilling program

Melbana Energy today provides an update on progress made towards the drilling of its two high impact exploration wells onshore Cuba in its Block 9 contract area ("Block 9 PSC").

Melbana has a 30% interest in the 236 million barrels of Prospective Resource (Best Estimate) being tested in this drilling program projected to start mid-year.

Inventory for Drilling Operations

Contracts have been signed for the manufacture and supply of the steel pipe required to drill both wells in this campaign. The availability of these items lie on the critical path to the commencement of drilling so this is an important milestone and one that begins the countdown to testing the potential of the target prospects in Block 9. Contracts for the supply of other key items of inventory are being finalised and expected to be signed shortly. There has been considerable upward pressure on prices and shipping times for the supply of key inventory items over the past few months, but these have not had a material impact on either the drilling budget or the supply lead times due to the efforts of Melbana's preferred supplier to remain as close as possible to their original terms.

Mobilisation of Key Project Management Personnel

Melbana is now preparing to deploy the first member of its expatriate project management team to Cuba to prepare for the commencement of drilling operations. Cuba work visas for these people have been received and the Drilling Manager is expected to arrive in Cuba in the next month. Several senior members of Sonangol's technical team will also form part of the project management team and will relocate to Cuba as required over the coming months. Melbana's Cuban personnel will continue to manage local administrative requirements, regulatory and community liaison and other important local issues associated with this drilling program.

Site Preparations

Work on the well pad and related site infrastructure is now more than half complete. Work has been proceeding without any material interruption nor has there been any lost time due to injury. Site access protocols and health monitoring have thus far been successful in ensuring no incidence of COVID-19 amongst the personnel working on site.

Appointment of Drilling Contractor

Negotiations with Melbana's preferred drilling contractor, selected following an international tender for the provision of these services, were concluded in November 2020 and formal documentation mostly agreed shortly thereafter. Prior to execution, it was decided to amend this contract to establish clearer protocols in the event of a significant disruption to the movement of people during the drilling program were significant COVID related border restrictions to be implemented at that time. These amendments are now largely complete, with some remaining points pertaining to liability and insurances still to be resolved. It is expected that the agreement with the drilling contractor will be signed and announced in the near future.

Economic Environment

Effective 1 January 2021, Cuba eliminated the Cuban Convertible Peso (CUC) leaving the Cuban Peso (CUP) as the only official currency of Cuba. This change necessitated a review of contracts that had been denominated in CUC to amend them for the CUP consistent with regulations. This took some time but these changes are now largely complete. This currency change is not expected to materially impact the drilling schedule or the projected cost of the two well drilling program.

COVID-19

Cuban authorities have announced that as of tomorrow, 6 February 2021, tourists and Cubans arriving from abroad will be required to present a recent negative COVID-19 test upon arrival and then serve a short period of quarantine at a Government approved hotel whilst awaiting the results of a test that will be given on their 5th day in the country. The arrival protocol for people travelling to Cuba on business may be more relaxed but, in any case, this development is not expected to cause any delay to the drilling program. Cuba has a competent health system and its management of COVID-19 has been amongst the best internationally - particularly regionally.

Political Environment

The result of the U.S. election is generally considered to be a positive development for Cuba. Under the previous administration, existing elements of the sanctions the U.S. had in place against Cuba (that had previously been in suspension) were made active and other elements were more rigorously enforced. The economic impact on Cuba was severe. Operations for Melbana's two well drilling program was able to continue, regardless, and is expected to be able to continue to do so going forward assuming the scope and severity of these sanctions are not increased. This would seem to be a reasonable assumption given the softer rhetoric coming from the new U.S. administration towards Cuba, which would be consistent with the more conciliatory line taken by the previous administration of which the current U.S. President was a member.

Funding

Melbana has received the funds from a January cash call made on its partner in the Block 9 drilling program. These funds, along with Melbana's contribution for its working interest (which has been mostly funded by Melbana having being reimbursed its Past Costs for Block 92), are being used to advance planning, civil works and the procurement of long lead items of inventory.

The joint venture has cash on hand of about $16.5 million and the next cash call is projected to be made in about two months' time to align with payments expected to be made upon the appointment of other contractors.

Overview of Block 9 PSC

Block 9 PSC (Block 9) covers 2,380km² onshore of the north coast of Cuba. It is in a proven hydrocarbon system with multiple producing fields within close proximity, including the Majaguillar and San Anton fields immediately adjacent to it and the multi-billion barrel Varadero oil field further west. Block 9 contains the Motembo field, the first oil field discovered in Cuba. Melbana is prequalified as an onshore and shallow water operator in Cuba and was awarded Block 9 on 3 September, 2015. Melbana’s established position in Cuba provides it with a strong early mover advantage.

Alameda Prospect - highest ranked prospect in Block 9
The Alameda Prospect is currently the highest ranked exploration target in Block 9 PSC. Alameda is a large structure located in the western part of Block 9 and is in a similar structural position to the Varadero field, the largest oil field in Cuba, approximately 35km away.

The proposed Alameda-1 well which will test a combined exploration potential of over 2.5 billion barrels Oil-in-Place and 140 million barrels of recoverable oil of recoverable oil on a 100% unrisked, best estimate basis and 279 million recoverable barrels aggregate high side potential.

The primary objective at Alameda ranges in depth from approximately 3,000 to 3,700 meters. The presence of oil in the Alameda structure is supported by the Marti-5 well drilled within the prospect closure in a down flank position nearly 30 years ago and which recovered 24° API oil and had numerous oil shows extending over a 850 metre gross interval from the Lower Sheet section.

This exploration well has been designed as a mildly deviated well, with a total measured depth of 4,000m to enable the well to penetrate three independent exploration objectives; the primary Alameda objective as well as the shallower N and Amistad (formerly U1) objectives.

While characterised as an exploration well, the chance of success at Alameda-1 benefits from two old wells, Marti-2 and Marti-5, both of which recovered oil from Amistad/ U1 and Alameda objectives respectively. The Amistad/U1 objective is a structure indicated on seismic as being updip of the tested oil recoveries in the Marti-2 well. Alameda-1 is estimated to take approximately 80 days to drill. In the event of a discovery at Alameda there would be significant follow up potential, with a number of additional leads in close proximity.

KeyFacts Energy: Melbana Energy Cuba country profile