Magellan Energy Updates on Gas Production in Tennessee

Magellan Energy has provided an update on its gas production in Morgan County, Tennessee.

The solution, originally put in place to resolve the high BTU situation in Anderson, Morgan, Fentress and Scott Counties, has so far been unable to resolve the problem on a consistent enough basis to allow for continuous natural gas production. This affects all producers in the area and includes Magellan's Anderson, Martin and Lankford leases. Revenues from the oil produced from the Anderson and Martin leases will continue without disruption.

To recap, in late 2008, the federal government, through the agency FERC, mandated that any gas with a BTU count higher than 1100 was unsafe and should not be transported in interstate pipelines or sold to consumers. Gas originating from oil wells usually has a high BTU count, and this is especially true in the Burville area where the Anderson and Martin wells are located. As a result, Magellan, as well as many other area producers, had their wells shut in by Citizens Gas for a protracted period of time.

To resolve the issue, Citizens Gas placed a large compressor in its Burville collection and distribution system. This facility is where Citizens Gas receives its gas supply from the east Tennessee gas pipeline and from various local gas producing wells in Scott, Morgan, Fentress and Anderson counties.

This system, unfortunately, has not been able to completely stabilize the high BTU issue in order to consistently meet the FERC requirements. It is a gathering and distribution system collectively, which means that after the gas has been gathered and blended, it is immediately distributed for sale to residential and commercial properties. The inconsistent BTU count has meant that this system cannot be safely utilized and an alternative method had to be found. Limited natural gas production was actually realized because of the inability of the initial system to keep the BTUs to an acceptable level.

Area producers are in the process of disconnecting their lines and reconnecting them to an alternate system which is strictly a collection line. The gas will then be carried to a separate Citizens Gas high pressure line where it will be blended. This will avoid having the gas distributed to residential and commercial properties prior to the collective BTU count being absolutely stabilized and maintained to acceptable levels.

It was only through the implementation and sustained operation of the initial solution that its inconsistencies were revealed. Magellan believes that the possibility of further disruptions have been addressed with this new solution. Our partner and operator of the projects, TMD Energy Inc., is continuing to work with Citizens Gas to rework the lines as quickly as possible.

A potentially huge consumer of natural gas in Tennesee has come to the forefront with TVA's announcement that a natural gas-fired electric plant in Rogersville is scheduled to come online in late 2011 and will require up to 160 million cubic feet of natural gas daily. Tennessee is now producing about 16 million cubic feet of gas, but has immense potential to produce a great deal more, with the most potential coming from the Chattanooga Shale. Magellan and other area producers stand to benefit greatly from this enormous new demand source. The Lankford Lease wells have been drilled to the shale formation and the Company is confident that a significant amount of gas from the formation exists on their lease. The Company intends to frac at least two of the wells at the earliest opportunity to increase natural gas production and is considering additional horizontal drilling to maximize long-term gas production from the Chattanooga Shale.

"While this has admittedly been a setback for Magellan and the other producers in the area, a solution has been found and is being implemented," stated Apolinar Carcasona, President of Magellan Energy. "Our wells have realized significant natural gas production in the past, we believe that we have the resources for significant production to come, especially with the huge market opportunity that the Rogersville electric plant brings to area producers. In time we foresee a steady flow of gas and a lucrative future for Magellan and its shareholders. We will make every attempt to keep our shareholders apprised of progress as it is made."


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