Canoel Assumes Operatorship of Large Oil Exploration Block in Mongolia

Canoel has taken a major step in a new direction by entering into an Agreement to become the operator of a large oil exploration block in Mongolia. The Agreement provides that a Canoel subsidiary will become the controlling shareholder of Block XXIII (as such block is designated by the Mongolian Petroleum Authority) by purchasing such interest from the present shareholder who will continue a
co-venture partner.

The agreed terms call for the Company to purchase shares of the entity presently holding the rights to explore and develop Block XXIII and for seller/co-venture partner to retain an amount of free carried working interest of 6% through the first commercial discovery. The Corporation is required to pay up to approximately US $46 million over the next five years, but only a small portion of that amount during this next year. In order for the Corporation to conclude this purchase of shares, it will seek the required approval of the TSX.

Block XXIII is located in the Mongolian part of the Gobi desert, immediately north of the boundary with China. It covers 13'575 square
kilometres (about 3.37 million acres). The railway line from the Mongolian capital, Ulan Bator to Beijing runs through the eastern part of the Block; railway is the most important method of transportation for crude oil in mainland Asia.

Block XXIII includes a structural feature that separates the highly prospective Erlian Basin in China from the East Gobi Basin in Mongolia. The biggest field in the Erlian Basin, the Ershan field, is said to contain reserves of 500 million barrels of oil in Lower Cretaceous sediments. It produces currently about 60'000 bopd, all of which is transported to a refinery at Dong Wu, China. In Mongolia, two smaller discoveries have been made in the East Gobi Basin. The Zuunbayan Field and the Tsagaan fields are located a few kilometers north of Block XXIII and are producing about 1'600 bopd from Lower Cretaceous sediments at relatively shallow depths. These discoveries were made by Roc Oil, and the fields are now operated by a subsidiary of PetroChina.

No intensive exploration activity has been carried out in Block XXIII. The Soviets conducted regional gravity and magnetic surveys and shot in 1970 a small amount of seismic lines. A significant amount of the results of these surveys has been published in Soviet academic publications. No wells have been drilled in Block XXIII since the Soviet exploration efforts.

The Mongolian Petroleum Authority imposes certain minimum work commitments on those to whom it grants licenses in blocks such as Block XXIII. Accordingly, these commitments to do seismic testing and drilling are spread over the next 5 years.

Hans Oesterle, Vice President for Exploration, said, "Preliminary work identified several large structures in Block XXIII under major regional thrust faults. These leads need to be verified by modern seismic data; but the current size of the mapped structures is such that any discovery will be of significant size. Future production will satisfy local requirements, but surplus production can be transported by railway to the Chinese refinery at nearby Dong Wu."