Syntroleum & YFP to Develop Nigeria Block OML 113

Syntroleum Corporation's subsidiary has executed a Heads of Agreement (HOA) to further delineate and potentially develop an oil and gas discovery in Oil Mining Lease (OML) 113 offshore Nigeria. The OML 113 license covers approximately 454,000 acres located offshore in western Nigeria near the border with Benin. OML 113 is owned 100 percent by the Yinka Folawiyo Petroleum Company Ltd (YFP), a leading Nigerian oil independent.

OML 113 includes the previously discovered Aje Field, a partially delineated crude oil, natural gas and condensate accumulation located fifteen miles offshore. Although the Aje Field contains potentially commercial volumes of crude oil, condensate and natural gas liquids, it has needed a viable development solution since its discovery in 1996 due to the large natural gas volumes present, a problem Syntroleum believes can be solved by its gas-to-liquids (GTL) technology, and in particular by its previously announced GTL Barge concept.

The Aje Field is defined by high quality 3D seismic data and two tested wells that were drilled in 1996-1997 from a surface location in 300 feet of water. The Aje-1 discovery well encountered natural gas, condensate and crude oil pay in a thick sequence of Turonian-age sandstones. The Aje-1 flowed at stabilized rates of 2,389 barrels of oil per day from 37 feet of net pay in the oil zone, and tested at combined rates of 60 million cubic feet of gas and 1,729 barrels of condensate per day from three drill stem tests in the 157 feet of net pay in the overlying gas cap.

The Aje-2 appraisal well confirmed the oil, gas and condensate pays in the Turonian sands seen in Aje-1, and discovered a new deeper oil pay in the Cenomanian interval which flowed at stabilized rates of 3,866 barrels per day of 44 degree API light sweet crude and a nominal volume (6.7 million cubic feet/day) of natural gas. The flow tests were all of relatively short duration that were designed to determine reservoir deliverability, not reservoir limits, and may not be indicative of actual production rates. These tested reservoirs are located at drilling depths between 6,700 feet and 8,000 feet below sea level, in water depths ranging from 300 feet to 5,000 feet. The Aje-1 and Aje-2 were suspended as future production wells in the field, pending further appraisal drilling and field development.

OML 113 was originally granted to YFP as Oil Prospecting License (OPL) 309 in 1991 under the Nigerian government's Indigenous Program, which was put in place to encourage the development of a locally owned and operated Nigerian upstream oil industry. Following the successful drilling, testing, and suspension of the Aje-1 and Aje-2 wells in 1997, OPL 309 was converted to OML 113 in June 1998 with an initial term of 20 years. Under the hydrocarbon laws of Nigeria, this conversion to an Oil Mining License marks the recognition by the Nigerian government that an exploitable hydrocarbon accumulation has been discovered. The term of OML 113 runs through July 2018 and may be extended upon application to the Nigerian petroleum authorities.

Under a study agreement announced earlier, Syntroleum and Sovereign Oil and Gas acquired the data tapes from YFP's previously shot 3D seismic survey and reprocessed them using a computer-intensive technique called Pre-Stack Depth Migration (PSDM). This reprocessing has resulted in new mapping of the Aje Field that confirms a large four-way dipping anticlinal structure. The Aje-1 and Aje-2 well penetrations appear to be located near the downdip edge of the field. Based on this new 3D seismic mapping, the next appraisal well (Aje-3) drilled at the crest of the Aje Field structure should penetrate the Turonian and Cenomanian reservoirs approximately 400 feet updip to the productive zones in the Aje-1 and Aje-2 wells. Syntroleum believes the Aje-3 well has the potential to confirm large commercially viable crude oil and condensate volumes as well as natural gas reserves sufficient for Syntroleum's GTL Barge.

Based on Sovereign's technical evaluation of Aje's commercial oil and gas potential and additional work carried out by Syntroleum involving the GTL Barge as a possible development solution for the Aje Field's gas reserves, Syntroleum and YFP have now executed the above mentioned HOA. Under the terms of the HOA, Syntroleum will bring in a qualified industry participant with offshore operating experience to join it in the drilling of the Aje-3 appraisal well. YFP will assign OML 113 participating interests and technical operatorship to Syntroleum and the industry participant following execution of the normal commercial agreements with the industry participant and the subsequent required approvals by the Nigerian governmental authorities.

After receiving their OML 113 interest assignment, Syntroleum and the other participant(s) will be obligated to drill one appraisal well in the Aje Field (Aje-3) estimated to cost approximately $10 million. This initial well commitment will be backed by a letter of credit, and YFP's share of the commitment well(s) and the Aje Field development costs will be carried by the participants if they elect to proceed with field development. If such development occurs, the participants' costs will be recovered on an accelerated basis out of a majority share of hydrocarbon sales revenues until project payout occurs. A successful result in the initial commitment well will require Syntroleum and the other participant(s) to drill one additional (contingent) commitment well on OML 113.

Any crude oil and condensate produced from OML 113 is subject to attractive fiscal terms under Nigeria's royalty and petroleum profits tax regulations. The Aje Field project economics could be additionally enhanced by Nigeria's fiscal incentives for gas, designed to encourage natural gas development projects, including GTL. As a further economic plus, all GTL volumes produced from OML 113 would be exempt from inclusion within Nigeria's OPEC quota under current rules. Syntroleum's GTL Barge is designed to produce a nominal 20,000 barrels per day of GTL and natural gas liquids production.

"Syntroleum's GTL technology offers a viable path to monetize the significant gas accumulation which has been discovered in the Aje Field," stated Tunde Folawiyo, Group Executive Director of the Yinka Folawiyo Group of Companies and chief executive of YFP. "YFP has been seeking partners with a comprehensive approach to the Aje Field development which would include generating value from our natural gas volumes, in addition to developing Aje's crude oil and condensate volumes. We believe Syntroleum's Aje Field development concept will generate significant additional value from our gas through the application of their GTL Barge technology. We also recognize additional gas-prone exploration targets on trend with Aje on OML 113 which can provide future opportunities for our group. We believe that having a viable gas development solution is key to both the efficient development of OML 113 and to unlocking the value of Nigeria's huge proven gas reserves."

"The Aje Field is the first of a number of discovered, partially delineated oil and gas fields in West Africa that we are pursuing on behalf of Syntroleum," said Joseph Bruso, President of Sovereign Oil & Gas in Houston. "The Aje Field has thick reservoir sands that tested oil, gas, and condensate at high rates. Our PSDM results show a 12,000 acre structure updip from the tested wells, indicating the potential for a large commercial accumulation of crude oil, natural gas and condensate. Because this field is still in the appraisal stage, there is still risk. If the Aje-3 appraisal well is successful it could confirm that the Aje Field is capable of producing 20,000 to 40,000 barrels per day of crude oil and condensate, and another 20,000 barrels per day of GTL products and natural gas liquids. This project demonstrates Syntroleum's ability to use its GTL technology to obtain an equity position in natural gas projects with potentially large liquid hydrocarbon volumes."

"Since we announced our joint development agreement with Sovereign Oil & Gas in February of this year, we have been working together very closely to identify and high-grade a number of attractive opportunities for our GTL Barge concept," stated Jack Holmes, President and Chief Operating Officer for Syntroleum. "Implementation of a GTL Barge project within an integrated field development plan on previously discovered, liquid-rich natural gas is an ideal application for our small plant model. We believe this strategy will realize significant value for our shareholders and for our industry participants. We are extremely pleased to join Mr. Folawiyo and YFP on the OML 113 project, and while there is additional appraisal work to be done to confirm commerciality, we look forward to implementing a successful oil and gas development of the Aje Field incorporating the GTL Barge."

Yinka Folawiyo Petroleum Co Ltd. (YFP), a leading, privately-owned Nigerian oil independent, is a member of the Yinka Folawiyo Group of Companies (Folawiyo Group) based in Lagos, Nigeria. In addition to its upstream oil and gas business, the Folawiyo Group is a leader in private-sector electrical power generation in Nigeria through its wholly owned subsidiary Yinka Folawiyo Power Ltd (Y.F. Power). Y.F. Power facilitated with its partners the first Independent Power Project (IPP) in Nigeria with nine natural-gas-fired power barges, which provide electric power to the Nigerian national grid. The Folawiyo Group is also a leader in Nigeria's retail banking and real estate sectors, and owns extensive transportation, agribusiness and fisheries operations, among others.

Sovereign Oil & Gas, led by its President and chief executive Joseph M. Bruso, is currently active in West Africa, with extensive worldwide experience in international upstream new business development and E&P operations management. Sovereign team members have managed more than twenty international E&P projects over the past fifteen years, including the development of the offshore gas assets for the first natural gas-to-power project in West Africa in 1995, and the discovery and initial development of Equatorial Guinea's Zafiro field, which now produces approximately 300,000 bpd of crude oil. Two of Sovereign's recent projects will be drilled in the second half of 2004, located offshore Nigeria in OML 115 and offshore Equatorial Guinea in Block K. Under its exclusive world-wide joint development agreement with Syntroleum, Sovereign identifies and works to obtain equity positions for Syntroleum in already discovered stranded natural gas assets.

Syntroleum Corporation owns a proprietary GTL process for converting natural gas or synthesis gas into synthetic liquid hydrocarbons. The company plans to use its technology, as well as other third party gas processing technologies, to develop and participate in gas monetization projects in a number of global locations.