Otto Energy Firms Up Rig Contract for Philippine Operations

Otto Energy

Otto Energy Limited's subsidiary NorAsian Energy Limited has now entered into a 3-year (plus options) Bare Boat Charter of a new build Multi Purpose Semi Submersible Rig ("MPSS") with a delivery time of October 15, 2007. The MPSS will have on board production capacity of 15,000 barrels of fluid per day ("bfpd") initially, increasing up to 45,000 bfpd to accommodate production from up to three wells on the Calauit Oilfield.

The charter requires 6 periodic payments over a 12 month period totaling US$11.25 million (Otto share US$4.1m), commencing on October 15, 2006, which includes prepayments of:

--Mobilization Costs; and

--67 days for mooring and re-entry of the Calauit 1B well, drill out cement plugs, cleanup, kick-off, sidetrack, horizontal drilling (up to 3,000 feet), and completion, followed by production testing.

It is currently estimated that the time required from re-entry to commencement of production testing will be in the order of 30 days, allowing for up to 30 days of production testing within this initial period.

In order to maximize production from the field, especially during the field decline period, the charter day rates will decrease from US$125,000/day to US$85,000/day over a 2-year period. In consideration, the JV will pay a 5.0% Net Profits Interest on Calauit oil production after amortization of capex, deduction of operating cost, Government share (including applicable taxes), applicable royalties and recovery of all costs to the rig owner.

The charter has an "Early Termination Fee" of US$5 million, which is accumulated from initial net production revenue of the field and includes de-mobilization costs should the Joint Venture no longer require the unit. There is no termination fee after 3 years and NorAsian has the option to extend the charter for three (3) additional Option Periods of 90 days each at the lower day rate. The termination fee is only payable to the extent that net revenue from production reaches US$5.0m.

Otto has agreed revised farmin arrangements with Vital Resources Corporation ("Vital" - the successor to Bentley Oil International Limited).

Otto anticipates initial production of approximately 15,000 barrels of oil per day if the reentry of Calauit 1B is successful.

The proposed charter timetable for the delivery of the MPSS enables the NorAsian/Vital Joint Venture to complete detailed planning studies including detailed reservoir modelling for the full 3 well field development of the Calauit Oilfield. The timetable also provides sufficient time to carry out a 3D Seismic Survey over the field (if an appropriate seismic vessel is available in the area and the reservoir modelling and field development plan indicates that this is warranted or desirable) and to secure long lead items, arrange third party contracts for rig management and ancillary services such as storage and shuttle tankers and to negotiate crude oil off-take arrangements.

Commenting on the signing of the BBC and the revised farmin, Otto's Managing Director Dr Jaap Poll said:

"The MPSS is an important step forward for the company. Chartering the MPSS for up to 3 years (or more) provides certainty of being able to put the Calauit 1B well on an Extended Production Test ("EPT"), fully develop the Calauit Oilfield with two additional wells and to be in a position to drill and test its other exploration prospects in a range of water depth.

The current tight rig market has made it almost impossible for small and mid size companies to secure rigs and production units on flexible long-term contracts. In addition, the joint venture requires a mix of exploration drilling and production facilities to meet its diverse requirements. Such flexibility is essential for NorAsian's drilling and production plans and the charter now provides the Company with that flexibility. The revised farmin terms reflect the requirements and payment schedule of the charter.