Philippines

SERVICE CONTRACT 44 ("SC 44"): Gas2Grid Limited - 100%

(Updated 15 June 2012)

Location of SC44 on Cebu Island in the Philippines

SC44 Exploration Overview

Gas2Grid Limited has a 100% interest in SC 44, located onshore Cebu in the Philippines. Petroleum exploration wells drilled during the 1960s on surface anticlines, within the area now covered by SC 44, 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 a power station located within SC 44 would be sold on the island of Cebu, which has a total population of just under 4 million people. The island of Cebu and the Visayan region has a shortage of electricity supply with most of the electricity being sourced from geothermal fields from the nearby island of Leyte or from local, coal fired power stations.

Gas2Grid has 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 natural gas to Marubeni 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 44

Issued:	January, 2004
Area:	750 sq km
Holder:	Gas2Grid 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)
*The Philippines Department of Energy ("DOE") in March, 2011 approved a variation to the SC 44 contract terms by agreeing to an extension of time, until the 28th July, 2012, for Gas2Grid Limited to complete Sub-Phase 3 of the Service Contract and the proposed work program under that extension. The current outstanding work program comprises the following commitments: Malolos-1: well work-over Drill three exploration wells
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

Geological Setting The island of Cebu and the surrounding marine areas form part of the Visayan 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. Sediment supply was from the north-west where a continental cratonic area was the provence. 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-light grey, soft, occasionally tends to marl, foraminifera and coral fragments are common with interbedded claystone, light-medium grey, slightly silty, very calcareous. Late Miocene to Pliocene Maingit Clastics: The Maingit Clastics are represented by clastic sediments 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 17 metres 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.

WELLS

Malolos-1

Hydrocarbon Shows

Malolos-1, drilled in 1960, is located onshore central Cebu and approximately 50 kilometres west-southwest of Cebu City (2 million people) to a total depth of 2,748 metres (9,016 feet) targeting Tertiary age marine sandstone reservoirs. It is sited on the mapped crest of a surface anticline, 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 60o - 80o were measured in Malolos-1 and these high dips are related to sedimentary dip and thrust faulting, that cores the anticline.Hydrocarbon shows occur in almost every porous reservoir interval in Malolos-1 from the Late Miocene to Pliocene Maingit Clastics where 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, hydrocarbon shows were once again in sandstone where they were described as bright, pale yellow fluorescence, kerosene odour and pale straw yellow cut with high total gas. Zones of interest were subsequently drill-stem 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 762 - 914 metres and 1,006 -1,067 metres. 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 2,300 m) gas sandstone tested by DST-8 in Malolos-1 at 1,844 -1,875 metres nor the oil bearing sandstones of the Malubog Formation which on drill-stem 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 which recorded 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.

MALOLOS-1 WELL WORKOVERS

The well flowed gas to surface and recovered oil during open hole drill-stem testing and the recent re-entry and workover efforts have focussed on recompleting the shallow (above 3,000 feet - 915 m) hydrocarbon bearing intervals that had previously tested hydrocarbons. It was assessed that the sandstone bearing intervals may have been damaged during the drilling and completion process in 1960.Following the drilling of Neuvo Malolos-1 and the 2006 workover of Malolos-1, it was considered by management that a workover on the fully cased Malolos-1 well, offers the Company the lowest cost and nearest term, low risk operation to try to produce commercial gas and oil flow rates. The type of formation damage interpreted to occur in this well is common and similar to damage that has been successfully overcome in other hydrocarbon-bearing sandstones deposited within Tertiary age sedimentary basins worldwide.

2006: Immediately prior to drilling Nuevo Malolos-1 in December, 2006 the rig was set up over the Malolos-1 well and cement plugs drilled out to a depth of 1,012 metres (3,320 feet). Gas was recorded as percolating in the wellbore during the re-entry operations including drilling out cement plugs; gas was circulated out of the hole. Cased hole electric logs were run (GR-CBL-CCL-Caliper). A cement squeeze was attempted (1,132-1,581 feet; 345 – 482 m) over previously perforated intervals. A cement plug was set and polished with a top at 3,159 feet (963 m).Tubing and a packer were run into the hole with the packer set at 2,498-2,500 feet (761.5 – 762 m). Perforated the interval 2,696 - 2,775 feet (821.8 - 845.8 m) in order to conduct a cased-hole test; the well flowed gas to surface for approximately 5+ minutes followed by water and then the well died. A swabbing unit was mobilized from Australia a few months later. Fluid level on day 1 was 164 feet (50 m) from surface (formation pressure 1,105 psi); final swab of day tagged fluid level at 262 feet (80 m). Fluid level on day 2 was 187 feet (57 m) from surface (1,095 psi). A total of 52.2 bbls of water was swabbed over 2 days but no gas. Water salinity was increasing throughout the swab test and it was analysed at 6,000 ppm at the end of swabbing.

2010, Phase 1: In March 2010, well workover and testing program involved assessing the well status, swabbing the previously perforated interval (2,696 - 2,775 feet; 821.8 - 845.8 m) and running cased hole logs. Initial inspection discovered natural gas in both the annulus and the tubing with about 450 psi pressure and these accumulations were produced to depletion. The annulus built up gas storage a second time when the well was shut-in after the initial flow and depletion. The tubing did not re-charge with gas after being initially depleted.The well workover and testing program of the shallow hydrocarbon bearing intervals in Malolos-1 confirmed the presence of natural gas, the 2,696 foot (821.8 m) sandstone contains a gas interval that sits on water. It also established that reservoirs are of excellent quality and they have not been badly damaged during the drilling and completion process. The existing perforations have established contact with the underlying water bearing interval.

Malolos-1: Gas flare, June, 2011

2011, Phase 2: Gas and oil bearing sandstones are present deeper in the Malolos-1 well but they were not targeted during the Phase 1 workover which was conducted in March, 2010. Following the successful completion of the Phase 1 workover the Company commenced the Phase 2 workover in April 2011. The Phase 2 workover involves:

a well re-entry
nitrogen stimulation and flow testing of the shallow gas bearing intervals (which continue to produce gas and oil at low rates) - completed
setting casing to isolate the shallow gas bearing intervals - completed
drilling out the existing cement plugs and cleaning the cased hole from 1,000 metres to about 2,100 metres - completed but encountered junk at 2,190 metres
cased hole electric logging - completed
a decision on recompletion and flow testing of selected oil and gas bearing sandstones at the deeper levels (below 1,000 metres) - to be done in 2012.

A ‘nitrogen enhancement’ was conducted on the shallow perforations (between 367 – 777 metres). This operation was conducted down the annulus, with a packer and the production tubing still in place, isolating the slightly deeper 822 metres sandstone interval.The nitrogen enhancement has improved gas production from the shallow reservoirs and it has resulted in natural gas flowing to surface from the annulus. Although the flow has not been continuous, gas immediately charges the annulus and pressure build up once the well is shut-in. Oil has also been recovered from the annulus. The well was cyclically flowed and shut-in over a few week period in order to try and induce continuous gas flow which was not achieved.

The essential equipment required to conduct the Phase 2 workover was eventually sourced with delays and access to and evaluation of the deeper hydrocarbon bearing intervals commenced on 30 October 2011.

Malolos-1, cased hole, workover operations involved using a coiled tubing unit with the well being cleaned out to a depth of 3,270 feet (996.8 metres). A cement plug was drilled out between 3,260 - 3,270 feet (993.7 - 996.7 metres) – continued clean out to 3,400 feet (1,036.3 metres) when traces of oil and gas were observed at the surface with about 20 psi surface pressure. The well was then cleaned out to 6,000 feet (1,828.8 metres) and a wiper trip conducted with slight resistance encountered between 3,512 - 3,518 feet (1,070.5 -1,072.3 metres). Surface pressure increased to 480 psi and oil and gas flowed to surface for over 1 ½ hours – total oil recovered was just over 20 barrels.

The clean out continued to a depth of 7,190 feet (2,191.5 metres). At this depth an obstruction was intersected in the hole which has been determined to be 2 7/8 inch tubing. It is likely that this tubing is attached to a packer, both of which (“junk”) form part of the original (1960) cased hole testing equipment which became stuck at that time and were left in the hole. Attempts to mill out the junk were unsuccessful and the mill bit plus some other equipment was left in the hole during this work. Fishing attempts with an overshot on the coiled tubing unit were unsuccessful but the mill bit has since been successfully fished out of the hole with the wireline unit.

Malolos-1: Phase 2 Workover with Coiled Tubing Unit (November, 2011)

Malolos-1: Oil recovery, June, 2011

Cased-hole Wireline Logging: Cased-hole wireline logs have been successfully recorded from above the junk in the hole located immediately above the oil sandstone reservoir (7,190 feet - 2,191.5 metres) to surface. Data quality is excellent. The main logging tool employed in the well is the pulsed neutron (PNN) which under good conditions has the ability to differentiate the sandstone reservoir intervals and also separately recognize oil, gas and water.

These data were processed and interpreted by the logging contractor with excellent results. Numerous sandstone reservoir intervals were identified and these intervals have a good correlation with those intervals interpreted from the original, open-hole wireline logs. In addition, previously perforated intervals (in 1960) have been identified.

The contractor has identified both possible gas and water bearing sandstone reservoir intervals. 5 sandstone reservoir intervals have been interpreted as being gas bearing and they warrant cased-hole flow testing.

Testing Program: the forward plan is to perforate and flow test the main sandstone reservoir intervals that have been interpreted as being gas bearing based on both the cased-hole and open-hole wireline logs. Testing will commence in early 2012 as soon as all equipment can be mobilized to site and the previously unknown, existing well perforations, are secured. The wireline contractor interpretation of the PNN tool that logged the well are as follows over the main zones of interest:

Malolos-1 Well Schmatic

"Sandstone 12 (5,607 – 5,612 feet) and Sandstone 13 (5,631 – 5,637.5 feet): These layers are in fact middle and bottom zone of larger heterogeneous reservoir. With average porosity of 16%, average initial water saturation of 45% and recent water saturation of 34% for Sandstone-12 and average porosity of 13.5%, average initial water saturation of 64% and recent water saturation of 43% for Sandstone-13, indicate that they are hydrocarbon promising. Large SSN-LSN separation indicates gas saturation.

Sandstone 14 (5,845.5 – 5,860 feet): With average porosity of 17.5%, average initial water saturation of 52% and recent water saturation of 34% this, apparently homogeneous, reservoir shows good production potential. Judging according to SSN-LSN separation, large on the bottom and narrow on the top, it seems that reservoir properties get worse upward. Anyway, it presents very promising gas production reservoir.

Sandstone 18 (6,292.5 – 6,304.5 feet): With average porosity of 17.5%, average initial water saturation of 61% and recent water saturation of 47%, this layer can be considered as hydrocarbon promising. According to SSN-LSN separation it is gas saturated.Sandstone 20 (6,664 – 6,673 feet): With average porosity of 17%, average initial water saturation of 37% and recent water saturation of 38 %, this layer is considered as highly hydrocarbon promising. Large SSN-LSN separation indicates gas saturation. It is recommended for completion to the depth of 6,675 ft.

Sandstone 21 (6,701.5 – 6,721.5 feet): With average porosity of 12.5%, average initial water saturation of 52% and recent water saturation of 33%, this layer is considered as best hydrocarbon promising. Large SSN-LSN separation indicates gas saturation. Recommended for completion to the depth of 6,721 ft."

The flow test results will not in any way influence either the well location or the likely success of the upcoming three exploration well drilling program. The three new wells are mainly targeting different play types and the well locations have been determined based on good seismic control.

SEISMIC ACQUISITION

A 54 kilometre seismic acquisition program was completed in March, 2010 with field operations being curtailed by the onset of the wet season. Phase 2 seismic acquisition commenced on the 9th November 2010 with data acquisition completed on the 16th December 2010 for a total 61.3 kilometres recorded (a total 115.3 kilometres in Phases 1 and 2). Field data quality is generally excellent.

The newly acquired seismic data is of excellent quality where it has been acquired over ground not affected by outcropping limestone. The interpretation of the data has also been completed providing good geologic insight over selected areas of Service Contract 44. The new data has clearly identified, for the first time, the Cebu Limestone carbonate reef play and the younger turbidite sandstone traps, both structural and structural/stratigraphic. The newly acquired seismic data is generally of high frequency enhancing the ability to identify and map reservoir targets.

The Cebu Limestone reef targets were interpreted to be present within SC 44 before the new seismic data was acquired and it has been extremely pleasing to now, conclusively identify this exploration target, as it greatly enhances the value of SC 44.

The Cebu Limestone is of Miocene age and similar age limestone reefs are prolific oil and gas producers elsewhere in the Philippines (e.g. Malampaya, Nido) and they are also prolific oil and gas producers in neighbouring Indonesia.

The 2011 seismic survey acquisition commenced on 3 July 2011and has been completed with 66.9 kms of new data acquired and interpreted. The seismic program has delineated three new drilling prospects that will be tested in the first half of 2012 plus numerous other potential prospects that warrant further investigation.

Saavedra Lead - Moalboal Field Mapping: a field geological survey over the Moalboal area located in the south-western 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.

2012 Seismic and Prospects Map

DRILLING RIGS

Gardner Denver 500 SCR 800 HP drilling rig has been loaded onto the ship that will transport it to Cebu. The rig will arrive in Cebu in mid-June where it will be transported to the Gas2Grid yard in San Fernando where it will undergo maintenance prior to commencing drilling operations. It is anticipated that the drilling rig will spud the first of the three exploration wildcat wells in August.

The USA rig, constructed in 1996, was shipped to Taiwan where it has been employed drilling deep, hot water wells. The rig is a Gardner Denver 500, SCR (electric), 800 HP with the capacity to drill to 2,750 metres with 114 mm drill pipe and 3,660 metres with 89 mm drill pipe. Gas2Grid has its own drilling engineers and rig crews will be sourced locally in the Philippines. It is estimated that the total cost for this rig, including refurbishment, will equate to the total cost of engaging an external contractor to drill the 3 exploration wells.

In addition, the Company has acquired a Brewster N2 workover rig which is currently on location undergoing an upgrade. This rig is capable of setting surface conductor and surface casing as well as completing wells for production and conducting and workovers. This rig will be also used for the Malolos-1 workover and testing program.

RIG 2: Superboy

Refurbishment of Rig 1

2012 DRILLING PROGRAM

The Company will drill three new exploration wells commencing in the first half of 2012. The new wells will target both the Miocene carbonate reefs and Tertiary age sandstone reservoirs trapped within anticlines. These prospects were originally identified by the 2010 Seismic Survey and drilling locations finalized by the 2011 Seismic Survey.

The Jacob-1 access road and well pad are currently under construction and will be completed within the next few weeks. Site works have also commenced at the Gumamela-1 wellsite and vegetation clearing has been completed at the Ilang-1 wellsite. Drilling is expected to commence in August. Unavoidable delays have been incurred shipping the rig from Taiwan.

Jacob-1 Prospect Map

Jacob-1 Seismic

Site Progress: Jacob-1 Drilling Location

Ilang-1 Prospect Map

Ilang-1 Seismic

Site Progress: Ilang-1 Drilling Location

Gumamela-1 Prospect Map

Gumamela-1 Seismic

Site Progress: Gumamela-1 Drilling Location