Zargon Oil & Gas Provides Capital Budget Update

Zargon Oil & Gas Ltd. announces its 2015 capital budget and provides a Little Bow Alkaline Surfactant Polymer tertiary flood project update.

Capital Budgets

Zargon's 2015 budget has been set at $46 million and includes $13 million of Little Bow ASP chemical costs, $2 million of phase 1 optimization costs, $6 million of Little Bow ASP phase 2 development costs, plus $25 million of conventional (non-ASP) field capital expenditures directed to existing oil exploitation projects. Depending on the corporate cash flows realized throughout the 2015 calendar year, the conventional capital program may be increased or decreased in order to maintain stable debt levels after the payment of dividends.

Zargon's 2014 total capital budget has been increased from $52 million to $57 million (before net dispositions of $12 million).

This budget includes $11 million of Little Bow ASP chemical costs, $8 million of ASP phase 1 construction and sanctioning costs, $2 million of ASP phase 1 optimization costs, plus $36 million of conventional (non-ASP) field capital expenditures directed to existing oil exploitation projects. Following $34 million of capital expenditures in the first half of the year, the remaining second half expenditures of $23 million are anticipated to be roughly equally divided between the third and fourth quarters. The increase in the 2014 capital program reflects additional costs for phase 1 ASP optimizations and the acceleration of some conventional projects into the lower cost pre-winter period. For the upcoming winter months, non-ASP field activities will be kept to a minimum.

Little Bow Alkaline Surfactant Polymer Project

Zargon continues to be encouraged by the early injection data for the Little Bow ASP enhanced oil recovery project.

Commencing in March 2014, Zargon initiated the injection of large volumes of a dilute chemical solution into a partially depleted Little Bow Mannville I Pool in order to recover substantial incremental oil reserves. To date, ASP injections have totaled approximately 2 million barrels, and represent just less than 10 percent of the total chemical bank (ASP and Polymer only) to be injected.

Encouragingly, pattern injection rates are balanced and are meeting or exceeding reservoir models. We have also observed numerous indicators that are precursors to ASP production, namely: increased produced gas-oil ratios, reduced producer total inflow volumes, changes in the produced water chemistry, minor produced polymer concentrations and increasing injection pressures. Finally, at one producer (02/10-32-14-18 W4), we have observed 12 barrels per day of first incremental ASP production volumes as evidenced by tripling of oil production volumes with a corresponding increase in produced oil cuts.

Although we view these production indicators very positively, phase 1 incremental ASP production volumes are small. Currently, phase 1 production capability is averaging approximately 260 barrels per day, which is marginally ahead of the 250 barrels per day baseline rate for the pre-ASP waterflood project. Over the next few months, a material ramp up in production is anticipated and we will provide timely updates to outline material progress. For further information regarding the Little Bow ASP project, please refer to our updated corporate presentation, which is available at www.zargon.ca.

Consistent with our prior communications, Zargon's internal estimates continue to forecast incremental phase 1 production volumes to commence in the 2014 fourth quarter and increase to a 2014 year end rate of 150 barrels of oil per day. Incremental ASP production is expected to average 700 barrels of oil per day in 2015 and then increase to 1,550 barrels of oil per day in 2016, once phase 2 production begins.