As a result of the preliminary information which Falcon has gathered over the last several weeks of testing, Falcon continues to be highly optimistic about its Mako Trough project, and the commercial viability of this 54.9 tcf Contingent Resource (estimated recoverable portion)1,2. (The 54.9 tcf figure is based on a P50 probability, as described in the Scotia Report, dated September 15, 2006, previously filed on Sedar at www.sedar.com.) These interim results are summarized in the technical review below. Falcon emphasizes that these results have so far confirmed all of the expectations and estimates previously announced publicly, and that it has achieved its original objectives first defined in 2005:
--Conduct a continuous drilling program on the Tisza and Mako Licenses; --Identify the primary target zones for hydrocarbon development; --Confirm and define the over-pressured gas cell of the Mako Trough; --Shorten the lead time to first production from the Mako Trough.
Falcon further points out the following:
1. The Delineation Wells: The Pusztaszer-1, Szekkutas-1, and Magyarcsanad-1 wells (the "Delineation Wells") are currently being tested and evaluated. As described in detail in the Operational Update below, we have encountered significant hydrocarbons in the Delineation Wells. The primary purpose of the Delineation Wells was for these wells to serve as a benchmark in identifying the boundaries of the Basin Centered Gas Accumulation ("BCGA") and to aid the Company in understanding the mechanics of the BCGA system within the Mako Trough.
2. Established Existence of BCGA: The original purpose of the Delineation Wells and the overall work program to date -- to prove the existence of the BCGA -- has been completely accomplished with the Hungarian government's formal written acknowledgement and acceptance of the existence and large extent of the BCGA, as issued by the government and announced by the Company on December 21, 2006. This was the most important milestone in the process of securing a long-term production license. Falcon is extremely pleased with the status of its ongoing efforts toward obtaining a long-term production license covering all or most of the BCGA underlying the Company's licenses. When issued, the production license will be valid for 35 years, with the possibility of extending it for an additional 17.5 years.
The Hungarian Geological Survey's "Expert Opinion" (issued on December 21, 2006), states that Falcon's report "demonstrates a continuous BCGA cell" and that it "recommends approval of the estimate of unconventional gas . . ." as calculated in the Scotia Report -- that is, 54.9 tcf, including 42.2 tcf in the Szolnok formation (based on a P50 probability). The Geological Survey further states in its Expert Opinion that "the [Scotia Report] . . . data can be legitimately used toward a mining plot [long-term production license] designation."
3. Deep Wells: Completion work has commenced on the Mako-6 deep well but no zones have been perforated as of this date. Falcon has drilled the Mako-7 in the center of the BCGA and that well is preparing to log through casing. When the Mako-7 is completed, the 801 rig will be moved 18 kilometers to the northwest where the Mako-8 well will continue with Falcon's deep test strategy.
4. Szolnok Development Plan: The Szolnok formation is currently estimated to contain approximately 77% of the total 54.9 tcf assigned in the Scotia Report (based on a P50 probability). Now that the Company has received the Hungarian government's unequivocal recognition of the BCGA, the Company is proceeding under an aggressive and comprehensive BCGA evaluation plan initially targeting the Szolnok segment of the shallower BCGA gas system. The Szolnok is the horizon in the Mako Trough most analogous to the well-established BCGA projects in the U.S., such as the Pinedale Anticline in Wyoming. The Szolnok program will include multiple wells to be drilled to the base of the Szolnok formation and completed in the Szolnok (and above, if warranted). With wells averaging 10,000 to 14,760 feet (3,000 to 4,500 meters) in depth in the center of the Basin, the Company expects this development plan to include drilling and completion costs averaging approximately $10 million per well for the initial wells and $7 million for the full cycle development wells. This is the same trend of cost reduction due to operational improvement and economy of scale demonstrated in the established North American BCGA developments.
The Szolnok plan has already been initiated with the drilling of the new Mako-4, which is currently at 3,300 feet (1,012 meters), as the first dedicated "shallow" well clearly inside the hydrocarbon-generating area of the Mako Trough BCGA. This location is within the axis of the Mako Trough, approximately five kilometers southeast of the Mako-6 and 13 kilometers northwest of the Magyarcsanad-1 well, both of which had significant gas in the Szolnok as interpreted from electric and mud logs. Following the Mako-4, Falcon is currently planning to drill three additional Szolnok tests. These wells will be drilled to the northwest of the Mako-4. The Földeák-1 well will be located less than one kilometer east of the Mako-6. The Szikancs-1 will be drilled six kilometers northwest of Mako-6 and less than one kilometer east of the Mako-7. Szikancs North-1 is projected to be drilled approximately four kilometers northwest of the Mako-7.
Falcon intends to drill, case and complete these four wells with multiple fracture stimulation treatments over as large an interval of the gross pay section as possible, followed by flow-testing and tying into the existing Falcon pipeline. These locations, in the vicinity of Falcon's existing pipeline facilities, will allow for efficient use of the Company's and third party infrastructure and related facilities (gathering and pipelines, processing facilities, etc.). The wells will be drilled with the Crosco 403 rig, which will continue to focus exclusively on drilling wells in the Szolnok evaluation plan. The development plan for 2008 will include significantly expanding these development operations with multiple rigs.
5. Incidental H2S: As referenced in the Operational Update below regarding the Szekkutas-1, the Company encountered traces of hydrogen sulfide (H2S) in the Triassic formation that appeared to be present in or migrating from the Endrod or Triassic formations. Falcon believes that these traces do not indicate a broader presence of H2S in other zones, nor do they represent a significant problem. This opinion is based on the facts that the Company did not encounter H2S in the Magyarcsanad-1 well, and that this is likely to be limited to the Triassic formation, which is not present throughout the Basin. Encountering H2S caused a delay in Falcon's ongoing testing of the S-1, while Falcon awaited delivery of H2S monitoring and safety equipment. The Company determined that all safety precautions must be implemented immediately, and has done so, without regard to delays. Testing has resumed and the Company is carefully monitoring the situation.
6. Financial Strength to Continue Existing Program: Falcon has no debt and over $110 million in cash in its account, which Falcon presently believes is more than sufficient for the exploration phase of its operations, including the testing program and the Szolnok program, as described above.
In summary, Falcon is extremely pleased with its progress to date and remains prepared to overcome any challenges it may face as it continues operations in Hungary.
Executive Summary Pusztaszer #1: A total of three fracs were performed in the Pusztaszer #1, of which two were in the Basement Gneiss Breccia at 3825-3865 and 3745-3815 meters. Although no gas was recovered in the first two fracs, the third frac recovered significant gas. The third frac was a test of a limited sandstone interval in the Szolnok formation at 3368-3378 meters. This resulted in a positive test with gas recovered at the perimeter of the BCGA gas cell in the over-pressured Szolnok formation. The well is currently shut-in for pressure build-up, and the Company has not completed testing. Additional Szolnok and Algyo zones of interest remain to be evaluated.
Executive Summary Szekkutas #1: The Szekkutas #1 was drilled as a gas cell Delineation Well on the eastern margin of the BCGA. Two zones within the Basement Triassic consisted of naturally fractured Dolomite. These intervals 3505-3495 meters and 3437-3447 meters, proved to contain minor gas.
A thin, naturally fractured, marl-rich Endrod section of the BCGA was then fracture treated though perforations at 3386-3391 meters. During flow back and clean up after frac, traces of hydrogen sulfide (H2S) were detected. The production test was immediately halted until appropriate monitoring and safety equipment could be mobilized to location. A revised testing program was developed to minimize the impact of H2S on personnel and equipment. It is believed that the H2S encountered on this test is derived from Triassic Dolomites through natural fractures that continue up into the Endrod. Commingling the gas flow stream with other formations in this well and gas from other wells will easily enable pipeline specifications to be met. Completion Operations have now resumed and flow testing will follow.
Upon conclusion of the Endrod test, a further 550 meters (1804 feet) of the shallower gas bearing Szolnok formation will be tested and evaluated. ApexPE (well known as BCGA fracture treatment specialists) has been contracted and will manage and direct the overall fracture treatment strategy.
Executive Summary Mako #6: The Mako 6 was drilled to a depth of 5692 meters, where 5 ˝" casing was set. Due to extreme bottom hole pressures (17,100 psi), temperatures (238 degrees C), APA (well known high pressure/high temperature experts) was contracted for the completion design strategy. APA concluded that specialized equipment is required and the Company is in the process of assembling this equipment.
The precautionary measures, completion equipment, materials, and applied safety factors now implemented meet or exceed the Company's key service providers' Health, Safety and Environment company policies. This will now allow the contractors to provide the services required to safely and successfully test the well.
Falcon's current schedule has operations commencing on or about the end of February and fracture treating the lower most Synrift section during March. ApexPE will be actively involved in the design, management, and execution of the stimulation operations.
Executive Summary Magyarcsanad #1: While drilling this well, Falcon encountered a gas influx which equated to a 4000 psi shut-in well pressure. The high pressure gas influx originated in the Endrod formation at 4,057 meters. Upon cementing the 5-1/2" casing the Company encountered another high-pressure gas influx through a channel in the cement allowing the migration of gas to surface. The gas is currently being vented and flared in a controlled manner with the liquid hydrocarbons being gathered and stored. Upon measurement and testing, Falcon determined that the gas is of good quality and the condensate is sweet.
Rigless operations are scheduled to commence within the next three weeks that will include a circumferential survey of the cement quality. Falcon is currently finalizing a workover and completion program for the well that will include the termination of the migrating gas and condensate flow as well as the testing of the Endrod and Szolnok formations.
This well provides an important delineation accepted by the Hungarian Authorities to the southern most part of the Mako Trough BCGA cell.
Executive Summary Mako #7: The Mako-7 reached a TD on December 21, 2006. This well was drilled to a Hungarian record depth of 6,085 meters MD. Cement clean out and completion operations are presently underway. When operations are complete, the 801 rig will be mobilized to the Mako-8 location for a 5,700-meter well to test synrift facies or Basement, whichever occurs first.
Executive Summary Mako #4: Rig 403 initiated drilling on January 30, 2007. This well represents a dedicated shallow Szolnok test. The projected total depth is 4,200 meters. As of this report Falcon has drilled and set the 13-3/8" casing at a depth of 1,012 meters. Drilling operations are continuing as programmed.
Falcon Oil & Gas Ltd. is a British Columbia corporation that is in the business of oil and gas exploration and production. It has operations in Hungary through its wholly owned subsidiary TXM Oil and Gas Exploration, LLC, and in Romania through its wholly owned subsidiary JVX Energy Corporation.
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