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September 2011, THIRD QUARTER 2011 - EXPLORATION AND PRODUCTION NEWS

MOHAWK PROSPECT, COLUMBIA COUNTY, ARKANSAS

The Hagaman-Smith et al #1 well developed a tubing leak in October 2010. In light of the workover cost and the remaining reserves to be produced the well was considered as uneconomic. In November 2010, the well was plugged and abandoned.

BAKERSFIELD ARCH PROSPECT, KERN COUNTY, CALIFORNIA

Compass Global Resources finally decided to convert the recently drilled VPC #71X-22 well into a water disposal well in November 2010. The well is presently shut-in awaiting final permit approval.
Three idle wells are being recompleted. The 77X-15 well was recompleted in November 2010. It produces 58 barrels of oil per month in December 2010 and in January 2011. The well has been idled until a gas line can be run and operate more efficiently the pumping unit motor and thereby reduce operating expenses. The 28X-14 well is in test mode after returned to production near the beginning of August 2011. Tests suggest a stabilized rate in the range of 7 to 10 barrels of oil per day. The 17X-14 well returned to production at the end of August 2011 and is also in testing period.
At that time, the operator proposed to drill the CGR VPC #71X-33 well at the end of September/beginning of October. Two or three development locations would be proposed and also four proposed wells returned to production should the well be successful. An offset well to the Waterbank 36X-14 well, the 56-14 well, will also be proposed in the near future. The operator also identifies a deeper sand objective that will require seeking new partners due to the development costs.
In September, we learned that the Californian Division of Oil, Gas & Geothermal has been changing processes and procedures on how wells and produced water disposal projects are approved and meet the Californian Environment Quality Act criteria. Therefore there are delays on permit granting and the operator hopes to resume its development activities in the second quarter of 2012.

CHALLENGER PROSPECT, MADERA & MERCED COUNTIES, CALIFORNIA

Two well proposals were submitted by the operator in October 2010. The Champ #1-22 well, drilled in late November beginning of December, reached a total measured depth of 5,500 feet (1 676.40m). The encountered Blewett sands did not have sufficient porosity for a commercial well. Thus the well was plugged and abandoned. New well data was acquired and integrated into the 3D seismic data volume to better characterize the AVO anomalies. The second proposed well will be drilled once the 3D seismic will be well understood.
Since its inception, the Will E. Coyote #33-1 well produced a total of 445,396.83 cubic feet of gas.

RUSHNESS 3D PROSPECT, RUSH & NESS COUNTIES, KANSAS

Three newly identified structures were approved by the partners in October 2010.
The Wells #13-15 well was spudded in late December 2010 and the drilling finalized at the beginning of January 2011. This well reached a total measured depth of 4,513 feet (1,375.56m) and unfortunately did not encounter any oil or gas shows while drilling. The well was therefore plugged and abandoned on January 3rd, 2011.
Other Cherokee “A” sand and Mississippian structures to be drilled were proposed in January 2011.
The Brenner #20-12 well was drilled in April/May and reached a total measured depth of 4,687 feet (1,428.60m). Two drill stem tests have been achieved in the Mississippian formation where oil shows were observed while drilling. An acid job was performed and swabbing did not confirm the commerciality of the well. The completion was then temporarily suspended.
The Brenner #20-10 well was drilled in mid-May and reached a total measured depth of 4,665 feet (1,421.90m). Although few oil shows were encountered while drilling the production tests proved the Warsaw dolomite to be tight with no commercially developed porosity. The well was then plugged and abandoned.
The Boese #9-16 well drilled at the end of May beginning of June and reached a total measured depth of 4,450 feet (1,356.36m). Oil shows were encountered in the Mississippian formation while drilling and drill stem tests recovered free oil. The well was then completed and it is presently producing at a daily rate of 8 barrels of oil.
The Wells #13-13 well with the Cherokee sands as objective was drilled in June and reached a total measured depth of 4,380 feet (1,335m). As oil shows were observed while drilling and production tests confirmed oil presence, the well was completed in the Cherokee sands. The well is presently producing water free at a mean rate of 11 barrels of oil per day.
Following this completion, the Brenner #20-12 was then squeezed and recompleted at the Mississippian formation after an acid job was performed. Initial production was in the range of 7 barrels of oil per day. Today, the well is making 6 barrels of oil per day.
In July, the operator decided to shoot a small 320-acres 3D seismic on some missing parts of the previously acquired 3D. The data was then analysed and interpreted to better define the structure in this area. A three well proposal was submitted to the partners in August and approved. At the end of September, the operator initiated the drilling of the Wells #13-13A well.

BALL RANCH PROSPECT, KENEDY COUNTY, TEXAS

The Clark & Sain #10 well was plugged and abandoned in March 2011. The lease continues to cashflow from the existing wells whereby the production curves are reaching their maturity whereby the annual declines are not as severe as prior years.

BLUESTONE PROSPECT, STERLING & MITCHELL COUNTIES, TEXAS

In May 2011, the operator proposed to extend the area of mutual interest by acquiring a 640-acres section lease southwest of the prospect area. Arbol Resources, Inc. went non-consent on this decision.

BOOKER 3D PROSPECT, LIPSCOMB/OCHILTREE COUNTIES, TEXAS

In February/March 2011, the horizontal Loesch 1118 #3HM well was drilled and reached a total vertical depth of 7,437.35 feet (2,266.90 m) and a total measured depth of 10,831 feet (3,301.29 m). In mid-April, the well was put in production after a 14-stages frac was performed in the Cleveland sands. The well produced 4 million cubic feet of gas and 5,979 barrels of oil from May through July 2011. Mid-August, the operator proposed two new wells to test the Hepler sands.

MATAGORDA BAY PROSPECT, CALHOUN COUNTY, TEXAS

The proposed directional well, the State Tract 127 #1 well, was drilled in July and August 2008. The well reached a total measured depth of 12,464 feet (3,799.03m) and a total vertical depth of 11,167 feet (3,403.70m). Numerous gas shows were encountered while drilling in the Nodosaria Blanpiedi sands and oil was identified in the sidewall cores taken in the Margulina Texana and Bolivian Mexicana formations. The Nodosaria Blanpiedi sands were tested in November/December 2008 and tested levels were not commercial. Unfortunately the Bol Mex sand, with the best potential in the well, was never tested because the contracted operator filed for bankruptcy in 2009 and allowed the lease to expire prior to the planned test which was approved by all partners. The well was temporarily abandoned and Arbol Resources, Inc became temporarily the new operator of the well. ARI participated in the 2010 spring GLO sale and a new lease was purchased and granted. A new operator, South Bay Resources, LLC was sought and found. The Bol Mex completion is planned for the end of September or early October 2011.

MOODY RANCH PROSPECT, CHAMBERS COUNTY, TEXAS

The initial test well of the prospect, the Moody Foundation #1 well, was drilled from the end of August to the end of October 2010. After numerous mechanical problems, the well reached a total measured depth of 13,750 feet (4,191m). Two Frio sand levels have been tested and finally the F19 one was put in production in the following months after the completion. The well produced 33,906 cubic feet of gas and 14,763 barrels of oil from March to the end of August 2011.

SMITH RANCH PROSPECT, CROCKETT COUNTY, TEXAS

The first test well, the Smith Bros #1 well, was spudded in mid-December 2008. It reached a total measured depth of 9,502 feet (2,896.21m). The well was completed in January/February 2009. The various acid jobs in the Ellenburger and Fusselman formations followed by the production tests did not prove the well to be commercial. The well was then plugged and abandoned in April 2009. In May 2009, a new interpretation of the 3D seismic was done integrating the result of the Smith Bros #1 well. In June 2009, the second test well, an offset of the producing Tabasco #2-1 well, was proposed to the partners although the operator resigned after the Smith Bros #1 well. A new operator, Burk Royalty Company, Ltd, was found in September 2010.
Therefore the Harris #1 directional well was drilled in January and February 2011. After numerous mechanical issues, the well was sidetracked and reached a measured total depth of 9,565 feet (2,915.41m). As shows and porosities encountered were weak, Arbol Resources, Inc. decided to non-consent on the completion decision.
Presently, the operator is actively farming out his interests.

PAUL’s DRAW PROSPECT, CAMPBELL COUNTY, WYOMING

In October 2010, the subsurface pumps of the Trend Federal #14-9 & the Jazbo #7-1 wells were repaired and the wells put back into production. Arbol Resources, Inc. did not sell its working interest in the Wyoming properties; however, Trend sold all of its working interest along with operations to Merit Energy Company, a Dallas based oil & gas company.

MARACAS FIELD, CESAR BASIN, COLOMBIA

The gas exploitation project continues to evolve slowly.
The acquisition process of the landowner’s right-of-way agreements is now completed. The work necessary for the environmental licences is still in course.
It is highly probable that the future tie-in could be done to the Drummond installations instead of the main pipeline Ballena-Barancabermeja.
The choice of the pipeline was agreed and the Fiberspar 4” pipeline was manufactured packed and is currently stored in Houston, Texas, waiting for exportation to Colombia. The “in ground pipe installation” will be done by Dascia Ltda with various assistance from Fiberspar’s technicians.
All the PIDs for the installation of the treatment plant have been completed and the service company was chosen. It is Topen Oil & Gas Services SA with assistance from Prosep Technologies Inc.’s technicians.
The treatment plant exportation is foreseen for October and the pipeline exportation for December.
In January 2011, we learned the termination of the 4743 decree of 2005 which allowed partial or total exoneration of custom taxes. Consequently, Texican Oil will pay a 10% fee on all the imported equipment in Colombia.
The Ministry of Mine and Energy also reported to us in a letter dated March, 30th of 2011 that the gas royalty would be comprised between 6.4% and 20%. Given the expected production rate, Texican Oil should pay 6.4% royalty on gas at the wellhead.
Also the index reference for the Guajira gas price calculation is now the “Platts US Gulf Coast Residual Fuel N°6 1% Sulfur fuel oil”.
According to our Colombian advisors, given the amount of gas flared in the atmosphere it is probable the government will also apply the royalty on this gas. Therefore the use of this flare gas is being studied.
A HAZOP study of the gas exploitation project was conducted in late October.
The rainy season started in September and according to the Colombian weather institute IDEAM, the Niña phenomenon could occur as last year and therefore delay the rainy season to March 2012 (http://www.eltiempo.com/vida-de-hoy/ciencia/ARTICULO-WEB-NEW_NOTA_INTERIOR-10223486.html).
The gas plant and pipe installation will start as soon as the rainy season is over.