Sterling Energy Upgrades Mustang Island Production Facilities

Sterling Energy says production in the third quarter averaged 8.6 mmcfged, compared with 8.5 mmcfged in the first half of 2006. Shut-ins owing to the pipeline repairs on Gryphon and the planned upgrade at Mustang Island areas, held back production. Energy prices have been lower than in the first half. Gas accounts for some 80% of US production and gas prices to date in the second half have generally ranged between $5.5 and $7.25 per mcf, recently moving over $8 per mcf with the early onset of colder conditions.

The Matagorda Island 520 SE/4 # 4 ST was successfully re-completed in September, increasing net production from 1 mcfgd to 500 mcfgd. Sterling has a 59.5% net revenue interest in the well.

At Mustang Island in the Western Gulf of Mexico, Sterling has completed early, a $4.8 million upgrade of its pipeline and processing facilities to accommodate increased third party production, commencing shortly. Sterling paid $0.25 million of the costs of these upgrades, the remainder being paid by a third party user. This work has resulted in periods of shut-in of the system to accommodate this work. Sterling's transportation and processing revenues are expected to double to over $2.6 million per annum and it will enable an extension of the life of some of its wells.

Sterling has farmed out its interest in the High Island 52 Field (50% WI), subject to the drilling of a well in Q1 2007. This farmout excludes Sterling's royalty interest in the Gryphon wells located in the NE quadrant of High Island 52, which have been generating in excess of $0.5 million net per month. Sterling will receive cash of $0.3 million if no well is drilled or it is not commercial. In the event of any development, it will have a 2.75% ORRI and will be relieved of the field abandonment costs, which exceed $2 million net.

Abandonment operations are underway on High Island A-68/83 where production ceased in 2003. Seven wells are being plugged and decommissioning of the existing platforms will take place in 2007.

The non-operated Galveston 303 #7 well is drilling earlier than expected. Sterling has a 17.3% WI in this 10,873 foot well to capture 1 bcf of net reserves. The well is expected to reach total depth in late-November.

The higher potential drilling is expected to start in late November, on the North Theall Heirs #1 exploratory well located onshore south Louisiana. Sterling has a 34% WI in this high risk 15,000 foot well, targeting a net 10-30 bcfge.

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