Neon Drills Ahead at Paloma Deep

Neon provided the following update regarding the ongoing drilling operations at the Paloma Deep exploration well in the San Joaquin Basin, onshore California. The well spudded on September 21, 2011 and made excellent progress in drilling to a depth of 10,463 feet, encountering good oil and gas shows within the Paloma sands and high gas readings within the overlying Antelope shale. These results are encouraging and a further announcement regarding their potential economic significance will be made after evaluation of wireline logs at the intermediate casing point, anticipated to occur in two to three weeks time.

On October 6, the drilling operation encountered difficulties with the drill pipe becoming stuck and subsequently shearing while pulling out of hole. Efforts to retrieve the bottom hole assembly were unsuccessful and to avoid further delay the Company opted to cement the lower portion of the wellbore and sidetrack the well. The sidetrack operation was completed successfully on October 15 and drilling has recommenced, reaching a depth of more than 6,200 feet at the time of this report. As a consequence of the sidetrack operation the well has been redesigned with a new proposed Total Depth (TD) of 13,200 feet, and a contingent TD of 15,500 feet should wellbore conditions warrant the deepening without compromising the ability to run production tests over the shallower zones where hydrocarbon indications have already been encountered.

In the event that it is deemed inadvisable to drill deeper than the proposed TD of 13,200 feet, the Round Mountain Formation would be the only prospective zone not tested by the well. At this stage it is considered more important to preserve the ability to production test shallower zones, should wireline logging analysis indicate that testing is justified.

Neon is operating the well with a 75% working interest, while partner Solimar is participating with a 25% working interest. Pursuant to the terms of an earlier Farmout Agreement, Solimar is paying a promoted share of the dry hole costs, up to an agreed cost cap.


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