Mr. Simon Hatfield reports

WESTERNZAGROS ANNOUNCES FIRST QUARTER 2014 OPERATIONAL AND FINANCIAL RESULTS

WesternZagros Resources Ltd. has released its operating and financial results for the first quarter ended March 31, 2014. A summary of the activities, the financial statements, and the accompanying management's discussion and analysis are available at the company's website and on SEDAR.

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 3-D 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 1.5-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 3-D 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-per-cent 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 one 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 under way 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 multibillion-barrel light oil field.

"On our Garmian block, the KRG has accepted our declaration of commerciality for the Sarqala oil field 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 neighbouring 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."

WesternZagros is evaluating a range of financing 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. to act as its financial adviser. 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 continuing 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 supergiant 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 Dec. 23, 2013, and design work is under way 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 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 cleanup 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-per-cent 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 dihydrogen sulphide. 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 3-D seismic data. The revised resources assessment has been audited by the company's independent reserves evaluator, Sproule International Ltd., as of Feb. 10, 2014, resulting in a revised mean estimate of gross unrisked contingent resources of 750 million barrels of oil equivalent (MMboe), an increase of 5 per cent 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 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) six interval at the Kurdamir-2 well (deepest test conducted in base of Oligocene at minus-1,966 to minus-1,986 metres subsea (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 minus-2,049 and minus-2,081 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, that is down to the deepest point drilled to date in the Oligocene reservoir at minus-2,228 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 3-D 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 3-D seismic data clearly show 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 minus-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, that is on a combined basis this would allow the conversion of approximately one billion barrels of prospective oil resources to contingent resources;
• Work has continued during the first quarter to identify possible future drilling locations on the Kurdamir block, utilizing the 3-D 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 minus-2,049 to minus-2,081 mSS.
• The company continues to monitor the progress and results from wells that are drilling on neighbouring blocks but still on the Kurdamir/Tophkana structure. The Tophkana-2 well currently being drilled by Talisman on its neighbouring 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 neighbouring 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.
• WesternZagros's share of exploration and evaluation (E&E) expenditures during the first quarter of 2014 included 50 per cent of Garmian block costs and 60 per cent of Kurdamir block costs. WesternZagros's share for these activities and other capitalized costs was $26.0-million, comprising $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, $600,000 for development planning, and $4.3-million for local office and other production-sharing-contract-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 3-D 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 barrels per day of oil. Additional phases will be completed as further development wells are drilled targeting the approximately one 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 toward 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 Dec. 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 financing the completion of its exploration and appraisal activities on the Garmian and Kurdamir blocks. WesternZagros invests its cash, 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, comprised entirely 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 financing 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 adviser. 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 continuing 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;
• The timing for repayment of outstanding debt.

We seek Safe Harbor.