Underground Energy Kicks Off Drilling Program in California

Underground Energy Corp. has initiated drilling at its Zaca Field Extension Project ("Zaca") in Santa Barbara County, California. As part of its previously announced five well drilling program, the Company will initially drill two wells from the same drilling location at Zaca and will then complete and test both wells with initial results from the first well expected by mid-April.

The first well will be a vertical well and is expected to reach a depth of approximately 6,250 feet. The second well will be deviated, drilled perpendicular to the primary fracture plane, and is expected to reach a depth of approximately 6,500 feet. The initial well will be drilled to a de-risked location situated on one of the seismic lines acquired by the Company in December and the second well will be a 10-acre offset to two existing wells that each produced more than 500,000 barrels of oil.

The historical production from the 61 vertical wells previously drilled in the western part of the existing Zaca field, utilizing primary recovery techniques only, averaged initial 30-day production ("IP") rates in excess of 200 barrels of oil per day ("bopd") and have produced in excess of 500,000 barrels of oil per well. Even the last 18 of these vertical wells, that were infill wells drilled in pressure depleted parts of the reservoir in the 1970's through the 1990's, had average IP rates in excess of 70 bopd and have produced on average more than 375,000 barrels of oil per well.

"We have commenced our 2012 drilling program with an initial focus on the Zaca Field Extension in the Santa Maria Basin which we believe has the potential to generate near term production and material reserve additions for the Company. We expect to be able to drill and generate results in fairly short order," said Mike Kobler, President and CEO of Underground Energy. "Our goal with the initial step-out wells is to determine the pressure and production potential in this part of the reservoir in comparison with historical levels and to bring on new production for the Company. California has significant infrastructure in place for heavy oil and given the fact that our benchmark has been trading at a premium to WTI for more than a year, even production in line with historical infill drilling is expected to provide robust economics."

These wells are the first wells of an initial five-well program for which Underground has budgeted approximately US$7 million. The program is comprised of three wells at Zaca, two additional wells at one or more of the Company's other assets, with a subsequent option for up to five additional wells. The locations for the additional two wells and the five optional wells will be dependent upon ongoing seismic and geological interpretation and the results of the initial drilling program.