Falcon Oil & Gas Complete Phase 1 Exploration at Mako Trough

Falcon Oil & Gas reported the completion of its first phase of operations in the Mako Trough, and provided updates on the Company's operational activities and financial position. The Company also filed its second quarter financial information and accompanying management discussion and analysis (MD&A) with the Canadian Securities Administrators.

Marc A. Bruner, Falcon President, Chairman and CEO, said, "I am pleased to announce that Falcon has successfully completed the first phase of exploration in the Mako Trough and has achieved several critical milestones in the last 18 months. With six exploratory wells drilled to date, we believe we have discovered a very significant basin centered gas resource. We have flowed gas from both the Szolnok and Basal Conglomerate formations, proving the presence of the basin centered gas accumulation which was confirmed when the Hungarian Government awarded us a production license in May of this year. In addition to this, we have also flowed oil and gas on test from the Endrod Formation, where we believe we have discovered a potential basin centered, fracture oil play."

Mr. Bruner continued, "We also recently completed the acquisition of over 1,100 square kilometers of 3D seismic data. As we move forward to the next project phase, we will be analyzing this seismic data along with all the other data we have acquired in order to optimize our planning. As announced previously, we are also talking with other potential partners who have expressed interest in participating in this very exciting project."

Operational Update

As part of the first phase of exploration, Falcon completed the following activities over the last 18 months:

  • Successfully drilled six exploratory wells including the deepest well in Hungary;
  • Secured a production license from the Hungarian government covering all oil and gas in the identified basin centered gas accumulation (BCGA) resource under the exploration license;
  • Acquired over 1,100 square kilometers of 3D seismic data;
  • Conducted extensive testing and evaluation of the exploration wells, as outlined below.

Delineation wells

  • Testing of Pusztaszer-1 delineated the Northwestern extent of the Mako Trough, established the presence of mobile gas in the Szolnok, and confirmed the ability to frac at this depth;
  • The Szekkutas-1 well established mobile gas in the Northeastern portion of the basin in the objective horizons of the Endrod and Szolnok;
  • Magyarcsanad-1 tested the Southern end of the Mako Trough, and flowed gas and oil from natural fractures in the Endrod Formation. As previously announced, as part of Falcon's overall testing program, Falcon executed two facture stimulations of the Magyarcsanad-1 exploration well at the end of July 2007. To date, results confirmed flowed gas and oil from fractures. The well has yet to fully clean out fracture fluid, therefore the following are initial indications of flow rates only.

The Pre-Fracture Treatment (natural flow) unstabilized flow through perforations at 4,058-4,062 meters yielded an initial rate of 387 barrels of oil per day (bopd) and declined to 63 bopd in 23 days. The gas rates over the same period were 665 thousand cubic feet per day (mcfg/d) and 137 mcfg/d respectively. Additional perforations were added at 4,135-4,137 and 3,909-3,910.5 meters and the well was then fracture treated in stages with a total of 329,000 pounds of proppant and 9,200 bbls of fluid. Falcon has recovered 60% of the frac volume to date. The Post Fracture Treatment unstabilized flow yielded an initial rate of 91 bopd and declined to 35 bopd in 19 days. The gas rates over the same period were 400 mcfg/d and 85 mcfg/d, respectively.

The well is currently shut-in for bottom hole pressure evaluation and analysis. Falcon is also evaluating the recent in-flow production and temperature logs. Based on the test results to date, Falcon believes that the oil is coming out of a natural fracture system, and the Company is examining all potential future completion techniques to develop this fracture play, such as the drilling of horizontal wells that might join up multiple fracture zones. The seismic data should help considerably in defining the fault and fracture patterns in this resource, and these options will be examined as part of the near term technical data review period.

Other exploratory wells

  • Mako-7 was drilled as a second deep basin test. Petrophysical and mudlog analysis indicated the presence of hydrocarbons in a 2.5 km column in the Szolnok, Endrod and Basal Conglomerate Formations;
  • Mako-4 was drilled to the Szolnok formation and is suspended pending completion of the current geologic review.
  • The Mako-6 was the first deep test in the Basin, reaching a total depth of 5,692 meters. A test of the Synrift was attempted which proved tight. An interval at the base of the Basal Conglomerate was tested with initial rates of up to 700 mcfg/d, with associated hydrogen sulfide of 400 parts per million (ppm), and diminishing. The test was aborted when a suspected down-hole failure occurred. Material extracted from plugged tubing was identified as part of a barite plug that had been placed below the test interval. Following a planned evaluation program, the Mako-6 could be re-entered for possible testing in the Upper Basal Conglomerate, Endrod and Szolnok formations. The Company has not established a time table for additional work to be performed in the well bore.

The focus of Falcon's current activity will be to analyze the results gathered to date alongside information from the 3D seismic program as part of a technical and operational review period in order to plan and implement the final project phase of resource development. The Company believes that this is the prudent and best approach in order to determine which wells to complete, and how to best complete the wells.

Because Falcon is not drilling during this phase, the non-active personnel and machinery are being released, as is prudent to manage costs.

In line with the requirements of the Hungarian government, Falcon plans to submit the development plan to the Hungarian government by the end of 2007.

Financial Update

As of June 30, 2007, Falcon reported approximately $53 million in cash and cash equivalents.

Strategic Partner Update

Falcon continues its search to identify a strategic partner or partners who could add value to the Company's oil and gas project in Hungary by contributing to the technical understanding of the assets, accelerating development, securing services required for commercial production of oil and gas, and/or granting access to high-value end markets. Discussions are taking place, and confidentiality agreements have been established with prospective partners. The type of partnerships currently under consideration are farm-in joint ventures that explicitly prohibit acquisitions of Falcon stock. The Company is committed to informing investors when a strategic partner has been identified.