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Bengara II PSC Block East Kalimantan Province, Indonesia

Overview

Bengra monument

The Company presently owns a 12% interest in the Bengara II Block. The Bengara II Block is located in the Tarakan Basin mostly onshore but partially offshore astride the Bulungan River Delta in the Indonesian province of East Kalimantan. It covers a single contiguous area of approximately 240,000 acres. A minimum of 10,000 feet of prospective deltaic sediments is expected to exist in the eastern portion of the Block and the presence of high quality reservoir sands in close juxtaposition to organically rich and thermally mature source rocks is well documented. Sedimentary conditions for the generation and preservation of hydrocarbons in the Bengara II Block are ideal throughout the entire expected stratigraphic section.

Geology

Geologically, the Bengara II Block lies in the Tarakan basin near major oilfields at Tarakan and Bunyu. More than 320 million barrels of oil and 96 billion cubic feet of gas have been produced from the Tarakan basin. The Tarakan basin is one of five Tertiary rifted-margin sedimentary basins making up eastern Borneo on the eastern margin of the broad area of Southeast Asia, stable through Tertiary time, known as the Sunda platform. The five eastern Borneo basins initially are thought to have developed from a single large depocenter, which was later separated into distinct features through the imposition of cross-high structures. These basins are some of the deepest in Indonesia and seismic surveys indicate depths greater than 20,000 feet in the Tarakan basin southeast of Bunyu Island. Several sub-basins or depocenters exist in the Tarakan basin. One of these is the Bulungan sub-basin now occupied at the surface by the Bulungan River delta. The Bengara II Block lies mostly within the Bulungan basin.

Both oil and natural gas prone hydrocarbon source rocks are widely distributed throughout the sedimentary section found in the Bengara II Block area. Generally source rocks from shale intervals throughout the Tertiary are high in organic content. Basin depths and geothermal gradient combine to place many excellent quality source rocks in thermally mature environments very close to and interbedded with suitable reservoir units. The company considers the quality of source rocks in the Bengara II area to be excellent. The lithology of the confirmed petroleum source rocks is coals and organic rich shales and silts of the Middle Miocene Naintupo, Meliat and Tabul Formations. The hydrocarbons in this area were generated from lacustrine, coastal plain and deltaic plain deposits. The widespread occurrence over the basin of hydrocarbon prone source rocks at all levels of maturity implies that long distance lateral migration is not necessary to provide hydrocarbons to accumulate in traps.

History

Hydrocarbon exploration in Northeast Kalimantan began in 1897 when wells were drilled near oil seeps on Tarakan Island. In 1901 the Pamusian Field was discovered and is the largest field in the Tarakan Basin and has been producing to the present day with a cumulative production of 193 million barrels of oil. Bunyu Field was discovered in 1929 and is the second largest oil field in the Tarakan Basin with cumulative production of over 83 million barrels of oil.

A striking feature of the Bengara II Block is the presence of a few old well bores actively leaking oil into surface lakes. According to local residents near the site, as many as 15 wells were drilled by a Dutch company in 1915 and a small oil production operation existed on the site for several years thereafter. Further site investigations with a wireline unit are planned to determine the depths of the existing well bores and obtain rock and oil samples at depth if possible.

Since 1938, only two wells have been drilled in the Bengara II Block. One of these wells resulted in a natural gas discovery. The Muara Makapan No.1 was drilled in 1988 by P.T. Deminex from a swamp barge positioned on one of the Bulungan River Delta mouth channel distributaries. The well was drilled to a total depth of 10,800 feet and tested 19.5 million cubic feet of gas per day together with 602 barrels of condensate per day. The well was plugged and abandoned as a gas discovery.

Concerning reservoir rocks, the series of rocks deposited in the Bulungan basin since the Late Oligocene period is predominantly one of a series of overlapping fluvio-deltaic systems prograding basinwards generally west to east. Such fluvio-deltaic systems offer definite advantages for the petroleum prospects of an area by depositing reservoir and source facies in often close proximity. Numerous fluvio-deltaic sedimentary environments are conducive to generation of clean, porous high-quality reservoir sands. Often the sands occur as bars or channels and frequently a stratigraphic component is present in their trapping. Clear analogs to the Mahakam Delta region to the south in the Kutei basin exist in the Bengara II area.

Nearly 2,200 line kilometers of 2D seismic data available within the Bengara II Block appear to be adequate for both detailed and reconnaissance interpretation purposes. Some localized areas may benefit from reprocessing. New seismic is required in places where no reconnaissance grid exists and for prospect confirmation in other localities.

The Bengara II Joint Venture presently has identified several separate and unique Plays within the Bengara II Block as well as 22 prospects and numerous seismically identified leads, many associated with seismic character anomalies and direct hydrocarbon indications. Some well defined prospects present immediate drilling targets.

Current Developments

Exploration within the Block is in its formative stages and it is premature to make meaningful resource estimates. However, the existing exploration work to date indicates that there may be a number of potential petroleum accumulations of commercial size in the Bengara II Block. Analysis of source rocks indicates an almost 50/50 propensity for oil and wet gas.

The key to successful prospecting in the Bengara II Block will focus on identifying traps and understanding sand distribution. Presence of source, maturity, seals and reservoirs is proven from drilling results on the block and adjacent to the block.

Continental-GeoPetro (Bengara-II) Ltd. ("C-G Bengara") owns 100% of the underlying rights to explore for and produce oil and natural gas within the contract area designated as the Bengara II Block, which rights have been granted under a production sharing contract dated December 4, 1997 (the "Bengara II PSC") with Pertamina. Until recently, we owned 40% of CG Bengara and Continental Energy Corporation ("Continental") owned the remaining 60% and, through it, the rights to the Bengara II PSC. On September 29, 2006, we executed a definitive agreement to sell 70% of our interest in C-G Bengara to CNPCHK (Indonesia) Limited ("CNPC"). We have retained a 12% stake in C-G Bengara and the Bengara II PSC. Continental has likewise sold its interest and retained an 18% interest in C-G Bengara and the Bengara II PSC.

CNPC is a wholly owned subsidiary of CNPC (Hong Kong) Ltd. who is party to the agreements as guarantor. CNPC (Hong Kong) Ltd. is a publicly held company based in Hong Kong and its shares trade on the Hong Kong Stock Exchange under the listing number 0135.HK. CNPC (Hong Kong) Ltd. is a 52% owned subsidiary of the China National Petroleum Company based in Beijing, PRC.

In accordance with the terms of our agreement dated September 29, 2006 to sell 70% of our interest in C-G Bengara to CNPC, CNPC has:

  1. Purchased 14,000 and 21,000 shares of C-G Bengara from us and Continental, respectively, at a cost of $1 per share. As a result of the transaction, we and Continental own 6,000 and 9,000 C G Bengara shares, respectively, retaining a 12% and 18% interest in C-G Bengara, respectively.
  2. Paid the sum of $18.7 million (the "Earning Obligation") into a special joint venture account at a Hong Kong international bank. The funds will be under joint signature control of CNPC, ourselves and Continental, and will be expended exclusively to pay for 2007 drilling in the Bengara II PSC area.
  3. Agreed to provide development loans to pay 100%, and thereby "carry" our share and Continental's share of all C-G Bengara's exploitation, drilling, and development expenditures attributable to the Bengara II PSC, after the Earning Obligation funds are expended, until an additional amount of U.S. $41.3 million over and above the Earning Obligation funds has been expended.
  4. Agreed to pay a cash bonus totaling $5,000,000, in the proportions of $2,000,000 to us and $3,000,000 to Continental, respectively, contingent upon and within fourteen business days of the receipt by C-G Bengara of the written approval from governmental authorities approving the development of the first commercial oil or gas discovery within the Bengara II PSC contract area.

The Earning Obligation funds of $18.7 million, together with the $6.3 million previously spent, will satisfy all of the past and future work commitments on the Bengara II PSC.

During 2007, C-G Bengara drilled a total of 4 wells on the Bengara II PSC. The results are as follows:

  1. The Seberaba-1 was originally planned to reach a total depth of 4,000 meters (13,120 feet). Drilling of the Seberaba-1 terminated at a depth of 2,914 meters (9,558 feet) in the third of three sidetracks made from the original wellbore. Testing activity of the Seberaba-1 has been suspended. Approximately 150 barrels of crude oil has been recovered by swabbing. Flow test and pressure build up tests to date have proved inconclusive due to apparent formation damage. Any future re-entry is expected to be conducted with a different drilling mud and testing fluid program to avoid damage to the target reservoir intervals.
  2. Drilling of the Seberaba-3 has been completed to a total depth of 2,594 meters (8,508 feet). An open hole drill stem test successfully flowed oil and minor gas at surface from one zone. The open hole test confirms lateral continuity of the Seberaba reservoir with at least one of the three zones from which oil was recovered during testing of the Seberaba-1 discovery well. The Seberaba-3 has been logged and casing has been set.
  3. Drilling activity on the Seberaba-4 has been terminated. Seberaba-4 failed to encounter an expected reservoir sand anticipated at 2,450 meters (8,036 feet) probably because the wellbore penetrated a normal fault and the expected reservoir interval was faulted out. The Seberaba-4 wellbore has been suspended and preserved for possible re-entry.
  4. Drilling of the Punga-1 has been completed at a total depth of 2,500 meters (8,200 feet). The well has been logged and casing has been set. A testing program may be conducted in the future by CG-B2 to evaluate zones with oil and gas shows.

The technical information provided by drilling and testing results to date confirm the presence of an oil accumulation. However the data is not yet adequate to conclusively demonstrate the extent of the oil accumulation or that it has sufficient size of oil reserves to economically justify a full commercial development. Further technical information is required prior to commencing development. C-G Bengara has prepared a preliminary plan of development for the Seberaba discovery based upon drilling and testing results from the Seberaba-1 and 3 wells. Additional technical information is needed prior to finalizing the formal plan of development and submitting it for approval to Indonesian oil and gas authorities. Approval of the formal plan of development will automatically invoke the final 20-year production period of the Bengara-II PSC through December 3, 2027. C-G Bengara has submitted the preliminary plan to the Indonesian authorities together with a request for additional time to implement the plan and thereby obtain the additional data needed to further appraise and prove up the Seberaba discovery prior to completing and submitting the formal plan of development. Approval is expected but not assured.

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