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Uinta Basin Overpressured Gas Prospect

Avalon Energy Corporation has an undivided 85% working interest in the Shotgun Draw Prospect in the prolific natural gas producing Uinta Basin , located in the US Rockies, Utah . The lease comprises 13,189 acres with a potential 4 TCF recoverable gas and is overpressured by a 0.55 – 0.85 gradient. Figure 5

According to available data in the area, the prospect property has been delineated using several hundred miles of seismic. The seismic data confirms the thick Emery pay section and shows several sediment wedges in the prospect area. The data supports a basin wide deep gas accumulation covering the entire field. The Shotgun Draw Prospect (Map) borders other leases owned by EOG Resources Inc. and EnCana Corporation. Bill Barrett Corporation is also nearby.

Major energy companies today recognize that tight gas reservoirs, where geological formations make production complex, and coal-bed methane, where gas is extracted from coal deposits, are two of the more important near term sources to boost North American production of natural gas as demand outstrips supply and drives up prices.

The US Geological Survey estimated (in 1995) basin-center and deep-basin gas resources in the Rocky Mountain Laramide basins to be 250 TCF. The Drunkards Wash Field, just south of the prospect area is estimated to be between 2-4 TCF of recoverable gas. The Jonah Field Overpressured Gas Plain, which is analogous to our prospect area, has similar overpressuring, depth, reservoir rocks and is estimated to be 2.5+ TCF.

Often covering several townships, basin centered gas accumulations are typically large and continuous in areal extent. They also form a special group of continuous-type gas accumulation which differs significantly from conventional accumulation in their geological and production characteristics. Figure 3

The new giant fields in the Rockies include:

• Cedar Hills, Williston Basin
• Jonah Field, Green River Basin
• Cave Gulch Field, Wind River Basin
• Greater Drunkards Wash Field, Uinta Basin
• Tongue River Coals, Powder River Basin
• Pinedale Anticline, Green River Basin
• Rlison-Mamm Creek – Divide Creek etc., Piceance Basin
• And Biogenic Coalbed Methane, Raton Basin

The Potential for Giant Gas Reserves

The Ferron Figure 9 and Emery Figure 8 formations were deposited as clastic wedges that pinch out across the basin into marine shale. These clastic wedges contain thick total coal (up to 250 feet) deposited in a stacked sequence adjacent to stacked shoreface sands. Deep burial of the coal beds resulted in the generation of large volumes of thermogenic gas. Overpressuring is also present east of the prospect but without the good reservoir quality of the prospect.

The geologic conditions previously mentioned are major components of the Basin Centered Gas Concept that has gained credibility over the past few years beginning with the Elmworth field in Alberta , Canada . This field was penetrated by at least 56 wells looking for deeper objectives before John Masters, President of Canadian Hunter Exploration, determined that the vast area of supposedly “tight” sandstones were actually productive even though the sands themselves demonstrated little porosity and permeability. Several similarities exist between Elmworth field and the Company"s Uinta Basin Overpressured Gas Prospect:

• Both are in front of the Foothills Disturbed Belt
• In both areas the Cretaceous/Tertiary is very thick in the basin but much thinner on the shelf.
• Both have abundant coals with high gas contents.
• In Canada there is as much as 400 TCF of gas recoverable from the sandstones and 50 TCF in the coals.
• In both areas shoreface sands play an important role as gas reservoirs.
• In both areas the trap is a dynamic capillary pressure trap and cuts across stratigraphic and structural boundaries

Thermogenic Gas Generation

The following is a comparison of the thermogenic gas generated in three areas, the Emery, Blackhawk, and Ferron Reservoirs. Figure 6

Thermogenic Gas Generated in the Emery  Figure 11

Area of gas generation = 13 Townships
Average coal thickness = 75 ft.
Gas generated @ R o of > 1.0 = 10,000 cfg/ton
(13) Townships 299,520 acres x 75 ft. (aver. coal thickness) = 22,464,000 acre/ft
22,464,000 acre/ft x 1850 tons/acre/ft = 41,558 billion tons
41,558 billion tons x 10,000 cfg/ton =
415.6 TCF of Gas Generated

Thermogenic Gas Generated in the Blackhawk  Figure 11

Area of gas generation = 13 Townships
Average coal thickness = 75 ft.
Gas generated @ R o of > 1.0 = 10,000 cfg/ton
(13) Townships 299,520 acres x 75 ft. (aver. coal thickness) = 22,464,000 acre/ft
22,464,000 acre/ft x 1850 tons/acre/ft = 41,558 billion tons
41,558 billion tons x 10,000 cfg/ton =
415.6 TCF of Gas Generated

Thermogenic Gas Generated in the Ferron  Figure 11

Area of gas generation = 20 Townships
Average coal thickness = 24 ft.
Gas generated @ R o of > 1.0 = 10,000 cfg/ton
(20 Townships) 460,800 acres x 24 ft. (aver. coal thickness) = 11,059,200 acre/ft
11,059,200 acre/ft x 1850 tons/acre/ft = 20,460 billion tons
20,460 billion tons x 10,000 cfg/ton = 204.6 TCF of Gas Generated

The amount of gas generated per township in all fairways is: Blackhawk 32.0 TCF
Emery 32.0 TCF
Ferron 10.2 TCF
TOTAL GAS 74.2 TCF

If we assume that 10 percent of the gas generated is recoverable, we would be able to recover 7.42 TCF per township. (205 BCF per Section or 51 BCF per 160 Acre location)

Uinta"s 13,189 acres/23040 acres per township x 7.42 TCF per township = 4.2 TCF.

Assuming $4.00 per MCF, the estimated value of the gas in Avalon"s Prospect Area is $16.8 Billion (4.2 TCF x $4 Billion per TCF).

John Masters wrote in 1984:

“Finding a giant Deep basin-type gas field is technologically relatively simple…. We prefer Mesozoic-Tertiary sands of dominantly low permeability but with well sorted marine shoreline sands present for moderate reservoir quality, adjacent coal or organic shales, adequate thermal maturity, located structurally deep in the basin, with abnormal pressures, and anomalous electric log resistivity, or better small recoveries of gas with no water.”

The Uinta Basin Gas Prospect has all of these characteristics! Figure 7

The Prospect area has been delineated using several hundred miles of seismic. The seismic data confirms the thick Emery pay section and shows several sediment wedges in the prospect area. Figure 10 Avalon feels the data supports a basin wide deep gas accumulation covering the entire prospect area. Figure 12

LAK Ranch Oil Interest

Avalon Energy Corporation has a 0.70% (0.70 of1%) proportionate, reducible, Gross Overriding Royalty interest in the LAK Ranch Oil Project located in Newcastle, Wyoming.  This royalty interest equates to $0.42 per barrel based on a price of $60.00 per barrel for Avalon.

Derek now holds a 95% working interest in the LAK Ranch project and is the project operator. The LAK Ranch Project is a strong fit for Derek's corporate focus of using enhanced oil recovery (EOR) techniques to develop new production from reservoirs in North America. Derek and its partner, SEC Oil and Gas Partnership are confident in the ability of Derek's management to drive this project forward as promptly as possible in 2007. Assuming successful development of the project, the companies expect to recover between 30 and 70 million barrels of oil using thermal recovery techniques. The LAK Ranch oil contains high levels of naphtha and is expected to command a premium to West Texas Intermediate (WTI) benchmark pricing.”

Based on Avalon’s ongoing agreement with respect to the LAK Ranch, if Derek sells any or all of its interest in the LAK Ranch Property, it will pay to Avalon, subject to adjustments, 7.5% of the net sales proceeds on the first USD $7,500,000 and 1% on any balance over and above USD$7,500,000.

The LAK Ranch field, originally discovered in the 1920s, covers approximately 7,500 acres in the Powder River basin. Historically, oil production has been sporadic from a limited number of wells completed in the Newcastle Sand due to the abnormally low reservoir temperature in this part of the basin. However, the oil contains high levels of naphtha and the viscosity should respond dramatically to the application of heat through steam injection. To date, Derek has completed SAGD test well pair that was drilled to a depth of 1,000 feet and 1,800 feet horizontally into the Newcastle sand formation. More than 5,000 barrels of oil were recovered in limited preliminary testing. Avalon, through its predecessor Asdar has received royalty payments from the sale of every barrel of oil sold to date.
The development program will include additional horizontal producing wells, new steam injection wells and the expansion of surface facilities. The first well of a 12 well program was spudded on Monday, March 5, 2007.  The 12 well program is on track and management anticipates tie in to facilities and steaming to commence in May 2007.
The 12 vertical well program totaling approximately 13,250 feet will consist of a pattern of four injector and eight producer wells targeted to produce from the Newcastle sandstone formation. Derek's consultants selected the well placements based on targets identified using the $1.1 million USD, high definition 3D seismic survey completed over 2880 acres (4 ½ square miles) of the 8000 plus acre LAK Ranch property. Within the program area, the pay zone is estimated to be 40 to 70 feet thick. The estimated drill budget is US Two Million One Hundred Thousand Dollars (US $2.1 Million).
This 12 well program is being conducted jointly with a third party on a fifty-fifty cost basis, with the third party receiving fifty percent of the revenue until payback on their initial investment is met. Once payback is met, the third party's revenue interest (only on the 12 well program production) will revert to forty percent. Derek will have a 95% working interest in any current and future development and production on the property outside this 12 well program area.