Service Contract 44 ("SC 44"): GGX 100%

GGX was incorporated as a public company with the sole asset being a 100% interest in SC 44, located onshore Cebu in the Philippines. Exploration wells had been drilled on surface anticlines during the 1960s, within the area now covered by SC 44, and some of these exploration wells had flowed natural gas to surface and/or recovered significant volumes of oil during open-hole testing.

There had been no further evaluation of these discoveries since the 1960s and because the price of natural gas and electricity has increased significantly over the last 40 years it was decided to evaluate the natural gas flow potential of the original discoveries and assess their potential as a fuel supply for a natural gas fired power station. Electricity from this station would be sold to the island of Cebu which has a total population of just under 4 million people.

Gas2Grid entered into a Co-Operative Deed with Marubeni whereby Marubeni has an option to fund and develop any power units needed to generate electricity. If Marubeni exercises its option it would become responsible for electricity generation and sales with Gas2grid selling Marubeni natural gas as a feedstock for the power station.

The political climate within the Philippines is stable, production sharing terms for commercial oil and gas production offer the Contractor some of the best returns anywhere in the world and the Gas2Grid Board has a wealth of experience working within the Philippines.

SERVICE CONTRACT

Issued:                            January, 2004

Area:                               750 sq km

Holder:                            Gas to Grid Limited (100%)

Term:                               7 years (Production Areas grant an additional 25 years)

Signature Bonus:          US$50,000

Commitment:                 Year 1:   US$    200,000 (G&G Studies)
                                          Year 2:   US$    500,000 (1 well)
                                          Year 3:   US$    500,000 (1 well)
                                          Year 4:   US$ 1,000,000 (1 well plus 100kms seismic) 
                                          Year 5:   US$    500,000 (1 well)
                                          Year 6:   US$    500,000 (100kms seismic)
                                          Year 7:   US$    500,000 (1 well)

Royalties:                         None

Profit Share:                     60% DOE/40% Contractor

Cost Recovery:                70% of gross income/5-10 year capital expenditures depreciation

Income Tax:                     32% - paid out of Government share

The Philippines Department of Energy ("DOE") approved a variation in the SC 44 contract terms by agreeing to an extension of time, until the 28th December, 2008, for Gas2Grid Limited to complete Sub-Phase 2 of the Service Contract and the proposed work program under that extension. The work program comprises the following commitments:

1. Geochemical Survey
2. Reservoir Study
3. Aero-Gravity Survey
4. 100 kms seismic acquisition
5. Swab Test M-1 and NM-1
6. Drill one new well

The DOE approval was accompanied by a 25% relinquishment of SC 44, accomplished from non-prospective areas with basement outcrop or shallow basement. The Company applied for a further variation to the licence terms in December, 2008 by requesting tha Sub-Phases 2 and 3 be combined. The Company is waiting on a response from the Philippine Department of Energy.

Geological Setting

The island of Cebu and the surrounding marine areas form part of the Visaya Basin which is a Tertiary-Recent age sedimentary basin. The Visayan Basin is interpreted to be a back-arc basin developed behind the Philippine Trench and island arc with overall east-west accretion. The island of Cebu is itself interpreted to be a large, north-south trending anticline that was uplifted and which has developed a series of smaller anticlines along the crest of the island. It is these anticlines, many of which have surface expression, that are the main targets for petroleum exploration.

Stratigraphy

Late Miocene to Pliocene Barili Formation: The formation is characterised by limestone, cream to buff, sometimes white to light grey, soft, occasionally tends to marl, foraminifera and coral fragments are common with some interbedded claystone, light to medium grey, slightly silty, very calcareous.

Late Miocene to Pliocene Maingit Clastics: The Maingit Clastics are represented by clastics interpreted to have been deposited in upper to middle bathyal conditions. The sandstones are interpreted to be turbiditic and potentially laterally extensive. The Maingit Clastics are composed largely of claystones, dark grey to black, soft, occasionally hard and often silty. Claystone occasionally grades to siltstone that is interbedded with sandstones that are up to 17 metres thick. The sandstones are typically light grey, very fine to medium grained, subangular to subrounded quartz grains, poorly sorted, trace coal fragments, dark mineral grains, pyrite, calcareous cement common, sometimes friable.

Middle Miocene Unconformity

Middle Miocene Toledo Formation: The Toledo Formation is dominated by claystone, interbedded with sandstone, that rarely exceeds 50 feet in thickness. Thin limestone interbeds increase toward the base of the formation. The claystone is medium to dark grey, occasionally green/grey, silty, hard and fissile. The sandstone is generally light grey, fine to medium grained, subangular with subrounded quartz grains, feldspathic, with occasional calcite cement and sometimes friable. The limestone is cream, pink to white, dense and fossiliferous.

Early Miocene Unconformity

Early Miocene Malubog Formation: The Malubog Formation, is composed primarily of claystone and shale interbedded with sandstone at the top of the formation. The shale is dark grey to brown, occasionally black, containing carbonaceous fragments, dense, hard, with some slickenside surfaces. The sandstones are typically grey, very fine to medium grained with subangular to subrounded quartz grains, feldspar and calcite with trace pyrite.

Malolos-1
Hydrocarbon Shows

Malolos-1 was located on the mapped crest of a surface anticline and the well spudded into limestone of the Barili Formation prior to penetrating the Maingit Clastics, Toledo Formation and eventually reaching total depth in the Malubog Formation. Major regional unconformities occur at the top of the Middle Miocene Toledo Formation and the top of the Early Miocene Malubog Formation. Bedding dips of up to 60^o- 80^o were measured in Malolos-1 and these high dips are related to the thrust faulting that cores the anticline.

Hydrocarbon shows occur in almost every porous reservoir interval in Malolos-1. Hydrocarbon shows in the Late Miocene to Pliocene Maingit Clastics sandstone cuttings and core material were described as bright, yellow to whitish yellow, good kerosene odour, with pale straw cut and high total gas. Again in the Middle Miocene Toledo and the Early Miocene Malubog Formations, the hydrocarbon shows, which were once again in sandstone, were described as bright, pale yellow fluorescence, kerosene odour and pale straw yellow cut with high total gas. Zones of interest were subsequently drillstem tested. Malolos-1 was drilled to a total depth of 2,748m and 7 inch casing run to total depth, cased hole testing may have been conducted but there are no records indicating such a program was undertaken.

To view Malolos-1 Drillstem Tests information please click here.

Nuevo Malolos-1
Well  Objectives and Play Concepts

Nuevo Malolos-1 was drilled in late 2006 - early 2007 to a total depth of 1,945 metres and it was designed to test for commercial gas and oil in the Malolos anticline, being sited about 15 metres west and twinning Malolos-1. The new well aimed to test and produce from the gas sandstones encountered in Malolos-1 at 2,500-3,000 feet (762-914m) and 3,300-3,500 feet (1,006-1,067m). A shallow gas sandstone was tested by DST-6 in Malolos-1 and flowed at estimated rates of up to 5 million cubic feet/day. Nuevo Malolos-1 was not designed to appraise the deeper (approximately 2,300m) gas sandstone tested by DST-8 in Malolos-1 at 6,050-6,150 feet (1,844-1,875m) nor the oil bearing sandstones of the Malubog Formation which on drillstem tests recovered clean, waxy oil of approximately 39^o API.

To view Nuevo Malolos-1 Results please click here.

HYDROCARBON MICRO-SEEPAGE SURVEY

An "Onshore Hydrocarbon Micro-seepage Survey" was completed within SC 44 in December, 2007 with encouraging results that indicated significant levels of hydrocarbon seepage. 270 samples were collected for microbial analysis and 36 samples were analysed for sorbed soil gas over an area within SC 44 that covered the Malolos and Barili surface anticlines. The sample interval was +/- 250-500 metres with the principal survey objectives being to:

• Determine the presence and location of significant hydrocarbon micro-seepage anomalies
• Determine the composition of the hydrocarbons
• Identify areas that require additional geological and geophysical surveys to assist with exploration/appraisal well locations

Microbial Results

Three significant micro-seepage anomalies were identified which in total covered parts of both the Malolos and Barili areas. The anomalies have a linear distribution when mapped and are likely to be located along existing faults which in turn core the anticlines. This is interpreted to mean that the micro-seepage survey has the capacity to identify key fault systems that core potential sub-surface hydrocarbon traps, which in turn will assist with future seismic line location, among other things.

Sorbed Gas Results

Sample analysis yielded results that are consistent with hydrocarbons that have been sourced from oil with associated thermal gases. This is consistent with previously acquired Malolos well test data in which wet gas and oil have been recovered.

Future Plans

Well Work Overs
The Nuevo Malolos-1 well is interpreted to contain net sandstone reservoirs that aggregate over 200m measured thickness (beds are dipping at 60^o) and these sandstones are also interpreted to contain oil and gas with excellent mud log shows. The sandstones possess both high porosity and high permeability and they should be capable of flowing oil and gas at commercial rates - supported by core analysis and by referencing the core to the electric logs. Well flow test results indicate that the formation is either damaged or tight and it is believed that the reason the sandstones will not flow at commercial rates is due to near well bore damage caused by the drilling process (mainly the drilling mud type).

It may be possible to overcome the near well bore damage and test the well at commercial flow rates of oil and/or gas. There are numerous ways of remediating these damaged reservoirs and these include a small fracture stimulation ("frac"), acid application, nitrogen clean-up and drilling new formation with non-invasive drilling fluids/gas. A workover program is being devised for hopeful implementation in the first half of 2009 . Delays may be encountered in sourcing contractors to complete the program and works may be limited by funding. Similar remediation programs have previously been implemented on similar reservoir types  elsewhere in South-East Asia.

The same interpretation of formation damage is made of the Malolos-1 well. It was encouraging to find that the 7 inch casing in the 1960 vintage Malolos-1 well still had integrity. This means that Malolos-1 is also available for formation remediation and production in the event that Nuevo Malolos-1 work over operations is successful.

Nuevo Malolos-1: Electric Log and Test Summary of 838.2 metre Sandstone

Seismic Acquisition

The Malolos Anticlne requires a grid of good quality seismic data in order to image and map the subsurface oil bearing reservoirs. In addition, SC 44 also contains a significant number of anticlinal leads and prospects identified by surface geological and satellite photo mapping.

 New seismic data acquisition is required to further evaluate these leads and convert them into drilling prospects. There are no land seismic crews working in the Philippines and the Company made contact with a number of seismic contractors regarding mobilisation of a land seismic crew into the Philippines to conduct surveys on behalf of a number of Operators. Commitments for an aggregate of at least 1,000 line kilometres of survey, of which the Company would commit to approximately 100 kilometres, is likely to attract the entry into the Philippines of a competent contractor.

Several onshore Service Contract Operators have registered interest in acquiring land seismic data and the Company is trying to prepare a pricing schedule from seismic contractors before finalizing commitments with other Philippine Operators. The Company has also identified that previous seismic data acquired in SC 44 was not acquired with parameters conducive to the imaging of steeply dipping beds and significant improvements could be made in acquisition parameters with any new program.

Historically, SC 44 seismic data quality in areas with low dipping beds is of excellent quality but deteriorates significantly in areas of steep dip and intense faulting.




Saavedra Lead - Moalboal Field Mapping: Philippine based geological consultants have conducted a field survey over the Moalboal area located in the southwestern part of the licence initiated because the Moalboal area has been interpreted as being a surface anticline and a potential hydrocarbon prospect. Field mapping confirmed westerly and northerly dip and the presence of a likely anticline. Although outcrop on the island is poor, consisting of massively bedded limestone, there is sufficient dip evidence to indicate anticline. A strike and dip seismic line will be required to further map the prospect.

Philippines Other: In early 2008 international operators JAPEX and KUFPEC drilled an offshore exploration well located in Tanon Strait, within a few kilometers of the western boundary of SC 44. The exploration well was designed to test an anticlinal trap with Tertiary age marine sediments as the major target. Although oil shows were reported the well was plugged and abandoned. JAPEX and KUFPEC withdrew from their Tanon Strait service contract after encountering legal challenges from Philippine NGOs representing marine environmental concerns with offshore drilling. ASX listed Otto Energy are also planning to drill and offshore exploration well close to the eastern boundary of SC 44. Once again the main exploration target is an anticlinal trap with tertiary age marine sandstones as the main reservoir objective.

To view Previous Exploration please click here.