Orca Exploration Group Inc. Updates Status In Tanzania And Italy

Orca Exploration Group Inc. announces the successful completion of its SS-11 development well in Tanzania, provides an update on the Company's operations and announces a bridge loan facility.

SS-11 successfully completed

On the 30 May 2012, the SS-11 development well in the Songo Songo field was successfully completed. Orca estimates that the well will be tied in and on stream by September 2012 and management's expectation is that the well will be highly productive. It is expected to be initially infrastructure constrained to a maximum of approximately 40 MMcfd. The total cost of SS-11 is estimated at US$38 million.  The increased cost is primarily due to additional rig time and the fact that the rig was mobilized from Syria specifically for this one well.

SS-11 was drilled towards the crest of the reservoir structure encountering 352 metres of high quality Neocomian reservoir at a 40 degree inclination and was completed with a large 5-1/2" chrome completion.  While the Company believes that the well may be capable of producing up to 70 million standard cubic feet per day (MMcfd) unconstrained, actual productive capacity and production rates cannot be determined until the well is tied in and flow tested. The well will be tied in through the flow line of SS-5, which well has been formerly shut-in and now being suspended due to the gradual deterioration in wellbore integrity.

SS-12 development well deferred

Mounting unpaid TANESCO receivables and unresolved negotiations with the Government Negotiating Team ("GNT") have resulted in a decision by Orca to defer drilling the SS-12 development well at this time. The Company's initial plan was to move the rig to drill SS-12 immediately following the completion of SS-11.  The Company intends to return to SS-12 and drill the well when additional deliverability is required and the issues with TANESCO and the GNT have been resolved.

Tanzania Government secures financing for Infrastructure Expansion Project

In late June the Government of Tanzania announced that it had entered into a lending agreement with the Export-Import Bank of China to fund approximately US$1.2 billion in energy infrastructure expansion.  The majority of the funds will be used to construct a new 24- to 36-inch pipeline to be laid between Mnazi Bay and Somanga Funga, and to twin the existing 16-inch pipeline between Somanga Funga, the onshore tie-in to Songo Songo, and Dar es Salaam with a new 36-inch pipeline. This is designed to increase pipeline capacity allowing transport in excess of 210 MMcfd.

"Orca Exploration and PanAfrican Energy Tanzania would like to congratulate the government of President Kikwete on recently achieving this important milestone in infrastructure expansion to meet the growing energy needs of Tanzania," said Orca Chairman and CEO W. David Lyons. "As the first and principal natural gas producer in Tanzania, we have been solid partners with the Government of Tanzania for over a decade. Our company has spent in excess of $200 million over this period building a natural gas industry in Tanzania in good faith and on the strength of our contracts and PSAs and we are committed to provide a sustained, secure supply of natural gas. Orca and PanAfrican Energy are very conscious of the potential for natural gas to contribute to Tanzania's energy needs, and we look forward to continuing to play our part in realizing this potential."

No increase in SS-9 corrosion levels

Corrosion testing was completed on SS-9 as of 1st June 2012. The test did not show any material increase in corrosion levels in the production tubing at critical locations and SS-9 has been confirmed safe to continue production for another nine months, subject to successful integrity pressure tests. The plan is to shut in SS-9, currently producing 30 MMcfd, when SS-11 is brought onstream. Following shut-in SS-9 will still be available to provide spare capacity and redundancy allowing more thorough testing of all production wells during the remainder of the year.

Offshore rig for Songo Songo West drilling released

Orca had earlier announced its intention to secure a jack-up rig, expected to arrive in Mozambique in Q3 2012, to drill the Songo Songo West exploration well in Q4 2012. The Company will not proceed with the drilling of Songo Songo West until the TANESCO receivables are brought current and GNT issues are successfully resolved. In the interim Orca will be actively seeking a more cost effective method to test the resource potential of Songo Songo West.

Government Negotiating Team status of discussions

As reported in the Company's 2011 Annual Report, in February 2012, the Government of Tanzania announced that it was setting up a Government Negotiation Team to discuss a number of issues in relation to the Company's Songo Songo Production Sharing Agreement ("PSA") with the Tanzania Petroleum Development Corporation ("TPDC") that was signed in October 2001.

The scope of the GNT is to discuss a number of points that were raised by the Parliamentary Committee for Energy and Minerals into the workings of the PSA. This includes, but is not limited to, TPDC back in rights, profit sharing arrangements, the divestment of the downstream assets, cost recovery and Orca's management of the upstream operations. Orca has been and will continue to discuss these matters in good faith with the GNT, but reserves its rights to vigorously defend its position in accordance with Tanzanian and International law should no satisfactory agreement be reached.

TPDC has indicated that they wish to exercise their right to 'back in' to the field development by contributing 20% of the costs of the future new wells, including SS-10 and SS-11, in return for a 20% increase in the profit share percentage for the production emanating from these wells. The implications and workings of the 'back in' will be discussed with the GNT and there may be the need for additional reserve and accounting modifications once these discussions are concluded. For the purpose of the reserves certification, it has been assumed that they will 'back in' for 20% for all future new drilling activities and other developments and this is reflected in the Company's net reserve position.

The Company's cost pool in Tanzania was recovered early in Q2 2011. This resulted in a reduction in the percentage of net revenue attributable to the Company. The level of cost gas increased during 2012 as a result of significant expenditure on the drilling activities. TPDC is still in the process of auditing the historic cost recovery pool and is currently disputing US$34 million of costs that have been allocated to the cost pool for the period 2002 through to 2009. The Company contends that the disputed costs were appropriately incurred on the Songo Songo project in accordance with the terms of the PSA.

Negotiations with the GNT are ongoing. In this regard, Orca submitted a proposal in mid-May, which was subsequently rejected by the GNT. The Company has today received a counter proposal which it requested and now intends to assess and subsequently meet with the GNT thereafter to further discussions. To the extent that it is not possible to satisfactorily resolve the differences with the GNT, the Company will utilise the extensive dispute mechanisms outlined in the PSA which include international arbitration.

Italy drilling programme on track

Drilling of the La Tosca farm-in well is scheduled to commence in August 2012. Northern Petroleum Plc, as operator, plans to drill the well in the Longastrino Block in the Po Valley region of Northern Italy. Under the terms of the farm-in agreement, Orca will pay 100% of the costs of the La Tosca 1 well up to €4.3 million and 70% thereafter for the drilling phase, together with back-in costs of €0.6 million to earn a 70% interest in the block.

If the well is tested and completed, Orca will earn an additional 5% (taking it to 75%) by paying 100% of the testing costs up to €1.3 million and 75% thereafter.  There are a number of other prospects on the Longastrino block that will be evaluated following the finalisation of the drilling of the La Tosca well.

Offshore Italy, the Elsa appraisal opportunity is potentially moving ahead following an announcement by the Italian Government on 26th June 2012 proposing certain changes to the offshore drilling restrictions imposed in mid-2010. The new decree states that the drilling ban will now apply to activities up to 12 miles offshore (previously the exclusion zone was 12 miles from marine parks and 5 miles from other coastal areas), but importantly the restrictions no longer apply to existing licences (both exploration and production). In addition, the decree includes a provision for a 3% hike in royalty rates payable on offshore production (to 7%) which will be allocated to state budgets to support environmental oversight. Although this represents a degree of fiscal tightening, the Company notes that Italy's tax regime for oil and gas producers remains amongst the most favourable worldwide.

The decree is effective immediately and must be ratified by Parliament within 60 days. During this process the decree can be amended, but major changes are generally seen as unlikely. It is expected that this will have positive implications for the Elsa appraisal project, currently on hold. Assuming the decree is passed into law as stated, it is expected that drilling could commence mid-2013 following the completion of an environmental assessment study by Orca's partner and operator Petroceltic International plc.

Bridge Loan Facility to fund Tanzania operations

The Company has entered into a loan agreement with Stanbic Bank Tanzania Limited, a subsidiary of Standard Bank, for a senior secured bridge loan facility of US$10 million. The loan is repayable six months after drawdown amortized over the ensuing 12 months. The loan attracts interest at 3-month LIBOR plus 8% per annum, with an additional 2% interest premium should TANESCO payments exceed 240 days overdue. Proceeds will be used to fund the Company's ongoing operations and working capital requirements in Tanzania, including payment of current corporate taxes due. The Company has withheld remittance of VAT relating to overdue TANESCO payments until said payments are received.

Orca Exploration Group Inc. is an international public company engaged in natural gas exploration, development and supply in Tanzania and oil and gas appraisal in Italy. Orca trades on the TSXV under the trading symbols ORC.B and ORC.A.

Neither the TSX Venture Exchange nor its Regulation Service Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.

Forward Looking Statements

This press release contains forward-looking statements. More particularly, this press release contains statements concerning, but not limited to, timing of S-11 development well being tied in and expectations of management regarding production from the well; infrastructure constraints in respect of the SS-11 development well; estimated cost for the S-11 development well; expected drilling results from the S-11 development well; the Company's plans with respect to the SS-12 development well; planned infrastructure expansion in Tanzania; the Company's plans with respect to the S-9 well and future testing of other wells; anticipated increase to plant capacity as a result of the Songo Songo plant expansion; the reserve potential of Songo Songo West; discussions with TPDC and the GNT regarding the PSA and the Company's plans to defend its position, including the use of dispute mechanisms; discussions regarding disputed costs in respect of the PSA; timing of drilling of wells in Italy and the Company's anticipated earnings from such wells; the Company's plans for the Longastrino block; the status of the Elsa appraisal opportunity; terms of decree issued by the Italian Government and anticipated implications on the Elsa appraisal opportunity and expected timing of drilling; terms of loan agreement with Stanbic Bank Tanzania Limited; and the Company's strategic plans. Although management believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results, levels of activity, performance or achievement since such expectations are inherently subject to significant business, economic, operational, competitive, political and social uncertainties and contingencies. Many factors could cause Orca's actual results to differ materially from those expressed or implied in any forward-looking statements made by Orca.

These forward-looking statements involve substantial known and unknown risks and uncertainties, certain of which are beyond Orca's control, including, but not limited to, the impact of general economic conditions in the areas in which Orca operates; civil unrest; industry conditions; changes in laws and regulations including the adoption of new environmental laws and regulations and changes in how they are interpreted and enforced; increased competition; the lack of availability of qualified personnel or management; fluctuations in commodity prices; foreign exchange or interest rates; stock market volatility; competition for, among other things, capital, drilling equipment and skilled personnel;  failure to obtain required equipment for drilling; delays in drilling plans; failure to obtain expected results from drilling of wells; effect of changes to the PSA on the Company; changes in laws; imprecision in reserve estimates; the production and growth potential of the Company's assets; obtaining required approvals of regulatory authorities; risks associated with negotiating with foreign governments; ability to access sufficient capital; and risk that the Company will not be able to fulfill its obligations. In addition there are risks and uncertainties associated with oil and gas operations, therefore Orca's actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking estimates and, accordingly, no assurances can be given that any of the events anticipated by the forward-looking estimates will transpire or occur, or if any of them do so, what benefits that Orca will derive therefrom.

Such forward-looking statements are based on certain assumptions made by Orca in light of its experience and perception of historical trends, current conditions and expected future developments, as well as other factors Orca believes are appropriate in the circumstances, including, but are not limited to, the ability of Orca to add production at a consistent rate; infrastructure capacity; commodity prices will not deteriorate significantly; the ability of Orca to obtain equipment in a timely manner to carry out exploration, development and exploitation activities; future capital expenditures; availability of skilled labour; timing and amount of capital expenditures; uninterrupted access to infrastructure; the impact of increasing competition; conditions in general economic and financial markets; effects of regulation by governmental agencies; that the Company will have sufficient cash flow, debt or equity sources or other financial resources required to fund its capital and operating expenditures and requirements as needed; current or, where applicable, proposed industry conditions, laws and regulations will continue in effect or as anticipated as described herein; and other matters.

The forward-looking statements contained in this press release are made as of the date hereof and Orca undertakes no obligation to update publicly or revise any forward-looking statements or information, whether as a result of new information, future events or otherwise, unless so required by applicable securities laws.

SOURCE Orca Exploration Group Inc.

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