Melbana Energy Limited has signed a non-binding Letter of Intent (LOI) with Anhui Guangda Mining Investment Co Ltd (“AGMI”) with respect to its Block 9 Production Sharing Contract (“Block 9 PSC”) in Cuba.

The terms of the LOI state that AGMI will:

1. Fully fund the drilling of a minimum of three exploration wells in Block 9, one on each of Melbana’s three highest ranked and high impact targets (Alameda, Zapato and Piedra) prior to July 2020, with two exploration wells to be drilled prior to November 2019;
2. Replace the current cash backed bank guarantee for US$2.275Million provided by Melbana for the benefit of Cupet with an equivalent bank guarantee using its own banking facilities;
3. Fully fund 100% of all exploration, appraisal, development and production activity and costs and provide any required bank guarantees for Block 9 while AGMI remains a participant in the Block 9 PSC (20+ years remaining);
4. At its election, assume operatorship of Block 9.

In the event of a successful development, Melbana would recover its back costs of ~US$3.5million from the authorized cost recovery pool as well as 12.5% of the profit oil.

Melbana and AGMI are targeting to complete a binding definitive agreement by 1 December 2018 with AGMI considering using the April 2018 drilling slot made available to Melbana by a local operator in addition to the other options available at their disposal.

The farmout follows from the recently released prospective resource assessment of Block 9 by independent expert McDaniel & Associates Consultants, who have significant Cuban experience certifying reserves for TSX listed Sherritt International. Their independent assessment identified a best estimate Oil in Place of 15.7 billion barrels and Prospective Resources of 718 million barrels1 of oil equivalent from three prospects and 16 leads. The assessment included a best estimate prospective resources of 270 million barrels1 of oil in the five targeted objectives contained within Melbana’s preferred high impact exploration prospects Alameda (3 objectives in well), Zapato and Piedra.

Melbana Energy’s CEO, Robert Zammit, said:
“We are very pleased to have agreed LOI terms for the Block 9 farmout with AGMI where the minimum commitment to fully fund the drilling of our three preferred high impact prospects occurs at no further cost to Melbana shareholders. As AGMI proceeds with further activity in the block, Melbana will also be fully carried for all further activity and costs, including any appraisal, development, production costs and bank guarantee obligations while earning a 12.5% share of the profit oil under the Block 9 PSC and recovering its back costs of approximately US$3.5Million in the event of a commercial development.

AGMI is prepared to commit significant resources to complete a drilling and development program in Cuba and has substantial experience operating onshore in multiple jurisdictions. We have a mutual understanding of the opportunity that Block 9 provides for significant oil discoveries and we look forward to finalizing a binding agreement late in the current quarter.”

Overview of Block 9 PSC, Onshore Cuba

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.

Zapato Prospect
The proposed Zapato-1 well location is in the central portion of Block 9 and is designed to test a Lower Sheet closure in close proximity to the shallower Motembo oil field, which has historically produced a high quality light oil. The Zapato feature has a crest at approximately 2,000 metres and is a robust structure with nearly 1,000 metres of vertical relief.

Recently completed gravity and magnetic study commissioned by Melbana and undertaken by Cuba’s specialist technical laboratory CEINPET over the Zapato prospect has indicated a strong gravity and magnetic alignment with the structural interpretation Melbana’s technical team derived from seismic and surface data. This result is supportive of Melbana’s assessment of the prospectivity of Zapato as a large carbonate duplex structure along strike from the Motembo discovery which produced light 56oAPI oil.

Block 9 has high quality detailed pre-existing gravity and magnetic data sets. In the type of geology present in Cuba it is common to use a combination of seismic, magnetic and gravity data sets to define prospectivity.

Carbonate duplex structures such as Zapato are being targeted by Melbana due to their potential to contain Varadero style oil accumulations and are able to be identified using this technique by their combined gravity and magnetic response which differentiates them from low prospectivity intervals.

Piedra Prospect
The Piedra prospect is a large robust structure targeting fractured carbonate objective, adjacent to the San Anton oil discovery. It is a seismically mapped structure that coincides with a large closed gravity high, which were successfully drilled in past (eg Varadero). The San Anton oil field recovered 19.5O API oil from shallow section and at Piedra a lighter more mature can be expected at its depth. The crest of Piedra is at approximately 1,700 metres with nearly 1,400 metres vertical relief.