Cache Martini Oil Field

The Cache field is located in Montezuma County, Colorado, one mile east of the Utah state line and 10 miles east of the giant Aneth field. The Aneth field was discovered in 1956 and originally estimated to contain 1,500 million barrels of oil making it a classic “giant” oilfield. Extensive drilling and development activities were undertaken during the 1960s and secondary recovery was instituted only a few years after discovery. The field has been under waterflood since1961 and a major CO2 flood was begun on the McElmo Creek Unit in 1985. The field contains two reservoir units named the Desert Creek and the Ismay. In our opinion, the Aneth Field is an analogue for the Cache Field.

The Cache field was discovered in 1964, to date a total of 24 wells on an average 40-acre spacing have been drilled. Most of these wells were drilled throughout the 1960’s and most are now shut-in. Initial well production was between 1,400 – 3,000 BOPD per well but well production quickly declined, as is to be expected from a gas-solution drive reservoir. These rapid declines lead to the application of a secondary recovery method by implementing a water injection strategy. Short-term improvements in recoveries were initially seen in some wells as the water injection developed but current opinion is that significant damage was done to the cement bonds in the wells when the field operators used hot acid solutions to improve the reservoir performances within the oil zones. These hot acid solutions are most likely to have destroyed the integrity of the bonds and seals between the pipe and the wall rocks and allowed the water bearing formations to comingle with the oil bearing reservoirs.

Oil-Project3

Production of the high quality, sweet, 44 – 45° API oil has continued to the present day and is now producing at a current rate of 12 BOPD from one well, which coincidently is well No.1, the first well drilled by Amoco when it discovered the Field in 1964. Well No. 20, was producing at about 20 BOPD but the casing is leaking and it has been shut-in pending repair and Well No. 10 is also Shut-in with the Operator looking to undertake a side track. As it currently stands the field infrastructure is no longer viable due to mechanical issues and the deteriorating borehole integrity discussed above.

At the Cache Field the Pennsylvanian age Ismay reservoir is the main producing reservoir. It is generally found at a depth of ~1,700 metres, averages 55 metres thick and is comprised of a series of limestones, dolomites, shales and anhydrides deposited in a biohermal / biostromal carbonate mound. The Desert Creek reservoir is described as being water wet, but considering the very poor well completion practices, acidizing and dubious production methods employed during its early life, we believe that any oil in this reservoir could have been by-passed, flushed or isolated by the original production techniques used by the operator.

Like the Aneth field, the primary trapping mechanism at the Cache field is mostly stratigraphic, with a minor structural component as the porous and permeable limestones pinch out away from the core of the mound.

We considered the property to be sufficiently prospective, subject to varying degrees of risk, to warrant further development drilling activities to assess its economic potential. The work proposed by ROG will include; in-fill drilling of six wells within the current well grid down to a 20-acre spacing; and employing modern oil field completion practices along with the opportunity to utilise modern horizontal / multi-lateral drilling technology and extraction techniques, could result in sustainable economic flow rates from these new wells.

We understand that ROG’s will drill its initial well to test the production / completion model that it has developed, which if successful, will be followed by further drilling and a 3D seismic program over the field. ROG will closely evaluate and most probably develop water flood techniques and if considered appropriate may introduce CO2 flooding techniques that have been shown to be successful at Aneth Field. The Operator and ROG expect that this overall approach to developing the field could result in at least 20% of the remaining reserves being recoverable (5.1 – 6.0 Million Barrels).

Production records indicate that to date approximately 5 million barrels of oil have been produced from the Cache field. Early field studies indicated that Original Oil in Place (“OOIP”) was estimated to be 24 million barrels, suggesting that only about 20% of the OOIP has been produced and that further production should be available. At both the Aneth and Cache Fields, early introduction of water floods lifted production however; at Aneth, the most significant additional production, estimated to be 11.9% of OOIP, has been achieved using CO2 flooding, work overs and infrastructure upgrades. No such additional recovery work has so far been attempted at the Cache Field. In addition, recent geophysical and petrophysical analyses suggest that we should expect additional oil to be available for production as there are still areas within the field where no previous drilling has been undertaken.

HIGHLIGHT

  • Producing gas well in Wyoming, USA completed to a depth of 14,000ft for a total historic investment of US$8 million
  • Currently producing profitably on a small scale but all infrastructure in place to significantly increase production in the future
  • Estimated 2 – 5 BCF of gas recoverable through the existing well
  • Gold Nugget is in a proven gas field in the Wind River Basin, Wyoming, USA. This region is considered one the biggest gas fields in the USA. The lease area contains 2 significant gas formations which are both very productive on adjacent lease areas to Gold Nugget
  • Total aggregate consideration for acquisition is US$800,000
  • Acquisition in line with ROG’s intention is acquire profitable fields which has significant in ground reserves at a significant discount to the invested capital that can be exploited with rising energy prices

Red Sky Energy Limited (ASX:ROG) (“the Company” or “Red Sky”) is pleased to announce that it has executed a binding Term Sheet with Hudson White LLC to purchase the Gold Nugget 1-23 gas well (“Gold Nugget”) and surrounding acreage. Gold Nugget is in a proven gas field in the Wind River Basin, Wyoming, USA. The 1-23 well, the discovery well, was completed in 2004 to a depth of 14,000 ft with an ‘all-in’ cost of over US$8 million. All infrastructure, including pipelines, are in place to support current and future development of the lease.

This is the Company’s second acquisition which is in line with its business plan to acquire quality onshore US based oil and gas assets with small but profitable existing production profiles which can be substantially increased in an environment of rising energy prices. This acquisition demonstrates the opportunities which are currently available and by which the Company can acquire at a significant discount to the in ground asset and associated.

The total consideration for Gold Nugget is US$800,000, to be satisfied by a combination of cash and shares which is yet to be agreed. In executing this agreement ROG will pay a deposit of US$100,000 with completion to be finalised within the next 60 days and subject to final sign-off of due diligence.

To satisfy the consideration Red Sky is in advanced discussions with a number of groups to procure a funding facility. This will provide the Company not only with the ability to complete the acquisition with cash instead of issuing further equity but will also provide significant further resources for ROG to take advantage of additional opportunities which are presenting with compelling valuations. However the cost of drilling the first new hole in the Cache oilfield has decreased further since the acquisition finalised providing additional cash not anticipated to be available.

Gold Nugget currently produces 150 MCF of gas and 5 barrels of oil per day. It is the Company’s expectation that production can be improved through simple optimisation techniques to 300 – 500 MCF per day, providing approx. US$35,000 to $50,000 per month of revenue. The Company will shortly begin optimising existing production. Historical work completed at Golden Nugget has generated an estimate of between 2 – 5 BCF of gas which is recoverable from the 1-23 well. Multiple wells can be drilled on 5 acre spacing in To this point only 10% of the recognized porosity has been produced which leaves an additional 90% remaining behind pipe providing substantial upside at existing Gold Nugget well.

Gold Nugget, over 320 acres, consists of multiple discrete sandstone reservoirs the best of which are the Lower Fort Union Formation at between 8,600ft – 11,700ft and the Lance Formation at between 11,700ft and 13,500ft. There is a large gas column in both the Fort Union and Lance formations which represents nearly 3000ft of gross pay. Due to the thousands of feet of stacked Fort Union and Lance reservoirs and the Billions of cubic feet of gas, additional wells would be needed to completely deplete these resources. Gas fields adjacent to Gold Nugget in the same producing trend have down-spaced wells to 5-acres and closer to fully

Speaking of the acquisition of the Gold Nugget lease, ROG Chairman, Mr Kerry Smith said “The Gold Nugget acquisition is a great fit with ROG’s current business model. It has current profitable production, behind pipe proven recoverable reserves and offset proven locations. With an acquisition cost of $800,000 to acquire a piece of infrastructure that cost in excess of US$8 million to complete this represents a significant opportunity for ROG. Not only does this well at Gold Nugget have an ability to significantly increase its gas production without any significant investment but the lease itself contains a significant in ground gas resource. Whilst this development is unlikely in the short to medium term within Red Sky, the Company now has an asset that can provide substantial leverage to rising gas prices and will assess a number of pathways as how best to develop it including joint venture opportunities.”