GeoPetro Updates on Sale of Cook Inlet Project

The Cook Inlet Project

Over the past five years, GeoPetro has acquired a 100% working interest in approximately 123,000 acres onshore in the Cook Inlet region of Alaska (the "Alaska Leases"). The leasehold position consists of two separate target areas, the Point MacKenzie Prospect and the Trading Bay Prospect, which have been selected for oil and gas exploration. The Point MacKenzie Prospect is located twelve miles northwest of Anchorage. The Trading Bay Prospect is located fifty miles west of Anchorage across the Cook Inlet. GeoPetro believes that the acreage may contain significant accumulations of conventional oil and gas.

Transaction Terms

GeoPetro has sold its entire working interest in the Alaska Leases to Linc Energy (Alaska) Inc. ("Linc"), subject to the reservations, terms and conditions set forth in the Linc-GeoPetro Lease Purchase and Sale Agreement. Linc is a wholly-owned subsidiary of Linc Energy Ltd., an Australian-based company publicly traded on the Australian Stock Exchange ( - News). Linc has a market capitalization of approximately US $650 million.

Linc will acquire all of the Alaska Leases for the following consideration:

  • A cash payment of US $1.0 million will be deposited by Linc in an escrow account, to be released to GeoPetro upon approval of the assignments of the Alaska Leases to Linc.
  • In addition, GeoPetro will receive a US $4.0 million payment from the proceeds from any oil and gas production from the Alaska Leases.
  • After GeoPetro has received the US $4.0 million payment specified in paragraph (b) above, GeoPetro will thereafter receive an overriding royalty interest of 10% of 8/8ths on the Alaska Leases issued by the State of Alaska and the Alaska Mental Health Trust and an overriding royalty interest of 7% of 8/8ths on the Alaska Leases issued by Cook Inlet Region, Inc.
  • Linc has agreed to pay all of the costs of maintaining the Alaska Leases at least through the end of the primary terms thereof.
  • Following the assignments of the Alaska Leases to Linc, Linc will diligently commence and prosecute the drilling of the Frontier Spirit #1 exploration well to evaluate a conventional natural gas prospect identified and developed by GeoPetro.

Frontier Spirit #1 Exploration Well

The initial target in the Cook Inlet Project was identified by GeoPetro after the Company reprocessed certain 2-D seismic data which it acquired from AMOCO on the Point MacKenzie Block. GeoPetro has identified a sizeable initial target with an estimated resource potential of up to one trillion cubic feet of natural gas. The prospect covers approximately eighteen sections (11,500 acres) under structural closure, and the Frontier Spirit #1 well will target conventional gas in the Middle and Lower Tyonek Formations. A striking feature of this prospect is the presence of a "direct hydrocarbon indicator" ("DHI") overlying the target formations that is visible on the seismic data. A DHI is a seismic anomaly that is indicative of a natural gas accumulation. The North Cook Inlet and Beluga River Gas Fields, both located approximately 40 miles southwest of the Point MacKenzie Block, are estimated to have had original ultimate recoverable reserves of 2.3 and 1.2 trillion cubic feet of gas, respectively, before substantial production commenced in the 1970s.

GeoPetro has constructed a drill pad and access road at the Frontier Spirit #1 location. The well will be located less than two miles from the Enstar 20" natural gas pipeline which has abundant spare capacity. This proximity to a major pipeline provides rapid and relatively inexpensive access to the lucrative Anchorage gas market.

The Frontier Spirit #1 well is expected to be drilled by Linc in 2010.

Additional Prospects Targeted in the Cook Inlet Project

Preliminary log analysis and seismic data indicate the Point MacKenzie and Trading Bay Blocks may contain conventional accumulations of natural gas reserves in Tertiary sandstones in addition to the prospect identified at the Frontier Spirit #1 location. Structural anticlines and/or domes occur on the lease blocks and may contain large undrilled gas reservoirs. Sandstone units also pinch-out toward the margins of the basin and may have formed stratigraphic traps on the lease blocks. In the past, oil and gas exploration has focused on oil production and anticlinal gas traps, but stratigraphic accumulations have been largely unexplored in the Cook Inlet.

One of the prospects identified as a high priority target on the Trading Bay Block is the Cottonwood Creek Prospect. This prospect is based on a well drilled by Shell in 1967 looking for Hemlock Formation oil. The well encountered significant gas shows in the shallower Tyonek sandstone formation at approximately 3,000 feet which were corroborated by an apparent gas column on the well logs. The well was drilled on a closed structure identified from Shell's 2-D seismic data (GeoPetro has acquired and reprocessed certain Shell seismic data). A gathering line of approximately five miles would be required to tie in the Cottonwood Creek Prospect location with the Chevron-Marathon 16" regional pipeline which runs through the Trading Bay Block.

GeoPetro Management Comments

Commenting on the successful Cook Inlet Project transaction, GeoPetro's Chairman, President and CEO Stuart J. Doshi said:

"We are very pleased to have Linc as operator and working interest owner in the Alaska project. The sale will provide Linc a major foothold in the Cook Inlet. We look forward to a long and mutually rewarding relationship with Linc. Their significant commitment to the exploration and development of the Cook Inlet Project has confirmed our belief in the resource potential of this significant acreage position. This transaction is consistent with our business strategy of gaining control of key acreage in projects which individually have the potential to be 'company makers', performing extensive geologic and geophysical evaluations thereon, and leveraging through strategic transactions with other resource companies. It also allows us to further focus our human and capital resources on our remaining core area projects.

Pursuing a diversified portfolio of high potential reserve targets has been a key Company strategy since inception. The significant resource potential of this Project coupled with our retained interest positions us for a significant enhancement of shareholder value upon a commercial discovery."