TAG_ShaleReport_08-31-08 by rlessiter


                                   Resource opportunities
                                   in australasia
                                   Fractured shale plays are emerging across the United
                                   States and around the world. As the largest acreage
                                   holder of Whangai-Waipawa shale in New Zealand,
                                   TAG Oil brings its technical and operational expertise
                                   to bear in unconventional gas and oil exploration.

                                   if it’s unconventional, it could be in play
“advanced technologies have        in response to the charge that ‘easy oil is gone,’ the exploration
been behind the logic-defying      and production industry is increasingly turning to shale…and
trends in e&P, allowing economic   the technology of hydraulic fracturing…to transform uncertain
access to domestic resources       reservoirs into commercially viable operations.
that are concentrated in deeper
formations, tighter zones,         Technology-driven, unconventional resource plays—particularly projects in search
deeper water, more sensitive       of gas or oil production from fractured shale—are sprouting up across the United
                                   States and around the world. As extraction technology improves, areas once
environments, and increasingly
                                   thought to contain resources that would never see the light of day are today
more unconventional settings.”
                                   considered to be some of the most prolific and popular in the industry. Why have
U.S. Department of Energy
                                   these unconventional reservoirs remained undeveloped, and what’s changing?
                                       Shale, which consists mainly of consolidated clay-sized particles, is the Earth’s
                                   most common sedimentary rock. It looks like the slate of a chalkboard and gener-
                                   ally has ultra-low permeability. In many oil fields, shale forms the geologic seal
                                   that retains the oil and gas within conventional producing reservoirs, preventing
                                   hydrocarbons from escaping to the surface. In a handful of basins, however, lay-
                                   ers of shale—sometimes hundreds of feet thick and covering millions of acres—
                                   are both the source rock and a reservoir sequence for oil and gas. These shales
                                   have one thing in common: they are rich in organic carbon.
                        Unconventional oil: how big
                        is the prize?
                        Early low-permeability wells were consid-
                        ered failures because they did not naturally
                        produce at commercial rates. Technology
                        simply wasn’t up to the challenge, making
                        the oil and gas held in these unconventional
                        sources much more difficult—and therefore
taG oil’s
                        more costly—to develop than conventional
unconventional          oil and gas resources. But reduced oil sup-                                         Dave Francis and Alexandra Johansen ignite an East
efforts are aimed       plies, regional tightening in gas supplies,                                         Coast Basin gas seep.

at tapping the          continued rising demand for oil and gas on
                        a global scale, and advancements in drilling                                        cast, production from unconventional sources
potentially vast oil                                                                                        are anticipated to grow to 5.7 million barrels
                        and completion technology have resulted in
and gas resources       an ever-increasing interest in tapping these                                        of oil per day in 2025, up from 1.8 million
                        unconventional oil and gas reserves.                                                barrels of oil per day in 2003.
locked in fractured
                              A recent study by leading oil and gas
shales. Recent                                                                                              Unconventional gas:
                        research firm, Wood Mackenzie, argues
completion tech-                                                                                            even bigger rewards
                        that the global unconventional hydrocarbon
nologies and            prize is potentially enormous. In a report                                          As consumer demand for cleaner burning
success in compa-       entitled “Unconventional Hydrocarbons –                                             fuels grows, gas becomes an even more at-
                        The Hidden Opportunity,” Wood Mackenzie                                             tractive long-term opportunity. Based on its
rable formations
                        estimates nearly 3.6 trillion barrels of uncon-                                     lower carbon footprint, it’s clear that every
in the U.S. suggest     ventional, undeveloped oil equivalent. That                                         cubic foot of gas brought to market can be
that extraction and     is triple the 1.2 trillion barrels of conventional                                  sold. At the end of 2006, proven reserves
                        oil considered recoverable from conventional                                        of conventional gas in the ground stood at
recovery of this very
                        oil reserves. And, in the Energy Information                                        around 6,300 trillion cubic feet. When po-
major resource may      Association’s long-term reference case fore-                                        tential unconventional in-ground gas sources
lie within reach.
                         Growth in Barnett Shale Production

                              Gas Production (billion cubic feet per day)





                                                                                1997   1998   1999   2000         2001          2002            2003             2004

                        Advanced drilling and completion technology is responsible for the dramatic production increase
                        in East Texas’ Barnett Shale and other developing fractured shale plays which share similarities
                        to New Zealand’s Waipawa-Whangai shales.

                                                                                                        Fractured Shale Opportunities in Australasia   |   August 2008 page 2
are added to these estimates, the future of                                              east coast Basin
gas in homes and industry suddenly becomes
a vast investment opportunity. In a 2005
presentation, IHS Energy estimated untapped
unconventional gas reserves alone at 90,000
trillion—that is 90,000,000,000,000,000—
cubic feet.1

taG oil brings new energy to                                                                                                                                              the east coast shale
an ancient resource
                                                                                                                                                                          play, where the
With 2.2 million net acres of permit hold-
ings, TAG Oil is the largest acreage holder of
Waipawa-Whangai oil                                                                                                                                                       shale system is most
and gas shale in secure, stable New Zealand.                                                                                                                              widely and thickly
Employing its considerable technical and                                                                                                                                  developed, represents
operational experience, the company has
                                                                                                                                                                          one of the most
taken the leadership role in exploring and
developing these high-potential shale beds                                                                                                                                important acreage
                                                                                     TAG Oil holds two permits in New Zealand’s East
in the largely untapped East Coast Basin of                                          Coast Basin, covering 2.2 million acres.                                             positions in the his-
New Zealand, where the Whangai-Waipawa
                                                                                                                                                                          tory of australasian
fractured shale formations are widespread                                            formations together have always been viewed
and most thickly developed.                                                          as high-quality source rock, though they were                                        shale exploration.
     This project represents an exciting oppor-                                      never considered to be producible until the
tunity to unlock a very major unconventional                                         success of the Barnett Shale in Texas. Extrac-
oil and gas resource. The Waipawa-Whangai                                            tion success there, where reserves are esti-
                                                                                     mated by the U.S. Geological Survey to be in
                                                                                     excess of 25 trillion cubic feet, has provided
                                                                                     a model for shale exploration throughout
                                                                                     the world. And continuing developments in
                                                                                     drilling capabilities and hydraulic fracturing
                                                                                     technology support the premise that unlock-
                                                                                     ing a major reserve in the Waipawa-Whangai
                                                                                     shale is well within reach.
                                                                                      Ken Chew, VP of Industry Performance and Strategy, IHS Energy:
Oil seep in TAG Oil’s East Coast Basin permit.                                       “World Oil and Gas Resource and Production Outlook,” 28 June 2005.

    comparison of the Waiapawa-Whangai to the Bakken and Barnett Shales
 Unit                                           Bakken                    Waipawa                      Barnett                  Whangai

 Depth (m)                                  2700 - 3500                    0 - 5000                 1980 - 2590                  0 - 5000
 Net Thick (m)                                  10 - 50                     10 - 60                     15 - 60                300 - 600+
 BI-I Temp °C                                  80 - 110                    70 - 110+                       93                    70 - 110+
 TOC %                                          1.1 - 12                      3 - 12                      4.5                    0.2 - 1.7
 Vit Refl R                                    0.3 - 1.2                   0.3 - 0.4                  1.0 - 1.3                   0.4 - 1.4
 Total Porosity %                                 8 -12                      9 - 23                      4-5                       16 - 31
 Reserves (mmcf / well)                    100k - 1,500k                     TBD                    80k - 1,500k                     TBD

Barnett data: GNS NZ Gov’t, Field, Brad (2006), Curtis (2002), Hollis et al (2005) - Bakken Data: Flannery, Jack; Kraus, Jeff; 2006 Search and Discovery
Article #10105; Integrated Analysis of the Bakken Petroleum System, US Williston Basin - Waipawa, Whangai Data; GNS, NZ Gov’t; Francis, David; 2007
Reservoir Analysis of Whangai Formation and Waipawa Black Shale, PEP’s 34348 & 38349, onshore East Coast Basin, Core Labs report 2007-12-18

                                                                                                                                     Fractured Shale Opportunities in Australasia   |   August 2008 page 3
                       The Waipawa Black Shale is a fractured,                                                            also been identified in other areas of New
                       poorly bedded, organic-rich siltstone. Out-                                                        Zealand. The Waipawa Black Shale is normal-
                       crop sampling indicates an average total                                                           ly 30m or more thick and achieves a maxi-
                       organic carbon (TOC) value’s of 5% and                                                             mum thickness of 70m in Southern Hawke’s
                       average Hydrogen Index (HI) of 245 with                                                            Bay. The organic carbon is primarily of marine
                       maxima of 12% TOC and 550 HI, respec-                                                              origin, although significant terrestrial organic
                       tively. The formation occurs throughout                                                            matter is evident in some samples.
                       TAG Oil’s East Coast Basin acreage and has
Potential reservoirs
include sandstones      Waipawa-Whangai Source Rock Potential

of various ages                                      600
                                                                 Type 1                  Type II
and porosities up                                                                                                                                         Waipawa
to 20% or more in                                    500

Miocene turbidite
                          HI (mg HC/g TOC)

fan sandstones
and shallow-                                         300

marine neogene


                                                                                                                                               Type III
                                                             0          25              50           75             100         125     150          175               200

                                                                                                   OI (mg CO2 /g TOC)

                       Source: Geological &
                       Nuclear Science
                       This Hydrogen Index has been
                       created from Waipawa-Whangai
                       Formation outcrop samples.
                       The results graphed help
                                                                                                                                              EXCELLENT                0
                       predict the Kerogen type of the                                                                                                            30



                                                                                        GA S
                       samples, which are indicative of

                       oil or gas as the hydrocarbon
                                                                                                                          OILAND GA S
                       type associated with the Shale.                                                                                                       OIL
                       In the case of the Waipawa-
                       Whangai Formation this index
                       suggests that the samples are
                                             TOC (wt%)

                       predominantly Type-I Kerogens                                                                                                                   00
                       that are more oil-prone than gas.


                                                                                          GOOD                                                            Waipawa

                                                                             FAIR       This oil-rich Waipawa Black Shale in outcrop demonstrates the
                                                                 POOR                   profuse internal fracturing within the formation.
                                                             0                      5                     10                   15               20                          25

                                                                                                   S2 (mg HC/g ROCK)
                                                                                                            Fractured Shale Opportunities in Australasia |                 August 2008 page 4
                                                 OI (mg CO2 /g TOC)

 Waipawa-Whangai Source Rock Potential

                                                                                  EXCELLENT             0



                                         GA S

                                                              OILAND GA S
   TOC (wt%)

                                                                                                                                         the east coast Basin
               4                                                                                                                         is a cretaceous-
                                                                                                                                         cenozoic fore-arc
                                                                              GOOD                                                       basin situated across
                                          GOOD                                             Waipawa                                       the australian-Pacific
                                                                                                                                         plate margin. Basins

                                                                                                                                         of this type can be
                   0                 5              10             15               20                       25                          prolific producers
                                                 S2 (mg HC/g ROCK)                                                                       of oil and gas, as
                                                                                                                                         in indonesia,
Source: Geological & Nuclear Science
Samples taken from the Waipawa Formation indicate high                                                                                   california and
TOC values, indicative of good to excellent quality source
rocks. Although the TOC values are lower in the Whangai                                                                                  other active plate
than the Waipawa Formation, the immense thickness of
the formation, up to 1500 feet in some areas, more than                                                                                  margins worldwide.
compensates for the lower values. In some instances, the                                                                                 the Waipawa-
two formations could work together as one system.
                                                                                                                                         Whangai Shale
The Whangai Formation is a poorly bedded,
siliceous or slightly calcareous mudstone, with                                                                                          System in particular
localized development of greensand and well                                                                                              is comparable in
bedded calcareous facies. The formation is                                                                                               toc and oil and gas
300 to 600 m thick throughout much of the                        The multiple fracturing systems observed in the
                                                                 Whangai Formation at the Gaddums Hill outcrop.                          maturity levels to
East Coast Basin. The basal and main Whan-
gai facies, Rakauroa Member, has an average                                                                                              fractured shale plays
                                                                     Fracturing is achieved by using hydraulic
TOC of 0.8% in the western sub-belt, with                       pressure created by pumping fluid into open                              such as the Bakken
maximum TOC values of 1.7% and 336 HI.                          cracks in the shale, and by keeping these                                Shale in Montana
Although its TOC content is lower than the                      cracks open by injecting solid propping materi-
Waipawa Black Shale, the Whangai Formation                                                                                               and the Barnett
                                                                als (proppants) along with the fluid pumped
is heavily fractured and can be nearly twenty                   into the formation. The pumped fluid, under                              Shale in east texas.
times as thick.                                                 pressures of up to 8,000 psi, is enough to crack
                                                                shale as much as 3,000 feet in each direction
the science and art of
                                                                from the wellbore. And opening fractures in
hydraulic fracturing
                                                                the shale is the key to good production.
With light sweet crude reaching more than                             Because of shale’s extremely low permeabil-
$80/bbl and natural gas rising above $6/                        ity, the best fracture treatments are those that
MMBtu in September, interest in develop-                        expose as much of the shale as possible to the
ing exploration and extraction technologies                     well bore. The greater the exposure, the faster
continues to grow.                                              the oil or gas will be produced.

                                                                                                    Fractured Shale Opportunities in Australasia   |   August 2008 page 5
                               A simple fracturing job may pump a                         eastern Montana alone is estimated to reach
                          mixture of water and sand into the well.                        200 million to 250 million barrels.
                          The water creates the pressure to initiate                           To date, over 600 wells have been drilled
                          the fractures, then carries the sand into the                   in the middle member of the Bakken Shale
                          cracks as they grow. When the fluid pres-                       Formation, and 356 producers were pump-
                          sure is released, the grains of sand hold the                   ing oil in Richland County as of August 2006.
                          cracks open. Although water and sand are                        In the mid-Bakken play, which only began in
                          the cheapest fluid and proppant, they are not                   December 2003, over 200 mid-Bakken wells
“Recent years’ dra-       always the best. High-tech fracturing fluids                    have been permitted and nearly 100 wells
                          are more viscous, and better able to maintain                   were producing as of February 2007.
matic changes in
                          the proppant in suspension, allowing it to                           Because of new horizontal drilling and
technology are            travel deeper into the fractures and reduce                     completion technologies, the potential recov-
making existing           the amount of settling that occurs before the                   erable resource base for the Bakken Forma-
energy reserves           fractures close. Advanced designs for artificial                tion is massive. A recently published study by
                          proppants used in addition to sand also do a                    USGS scientist Leigh Price provides estimates
stretch further while
                          better job of holding open the cracks.                          from 271 to 503 billion barrels (mean of
keeping long-term                                                                         413 billion) of oil equivalent in place. If this
energy costs lower
                          Real-world technology yields                                    bears out, it could increase the estimate of
                          real gains                                                      technically recoverable crude oil resources in
than they otherwise
                          The Bakken Shale play in the Williston Ba-                      the U.S. by billions of barrels. For perspec-
would have been.”
                          sin, which straddles Montana, North and                         tive, consider that the current estimate of all
Testimony of Chairman     South Dakota, and dips up into Canada, now                      technically recoverable crude oil resources in
Alan Greenspan before     contains the highest-producing onshore field                    the U.S., not including Bakken oil resources,
the Committee on Energy
                          established in the lower 48 states in the past                  is 174.67 billion barrels.
and Commerce, U.S.House
of Representatives —
                          56 years, according to the Department of
June 10, 2003             Energy. Output at the Elm Coulee oil field in

                          Pumped fluid is enough to crack shale as much as 3,000 feet in each direction from the wellbore.
                          A 2500’ horizontal well with 10 staged fractures contacts over 400 times the amount of reservoir
                          than a conventional vertical well through the same formation.

                                                                                     Fractured Shale Opportunities in Australasia   |   August 2008 page 6
 Williston Basin Proven Reserves

   Crude Oil Proved Reserves, Millions of Barrels




                                                    500                                                                                                       taG oil’s

                                                                                                                                                              strategy centers
                                                                                                                                                              on new Zealand,
                                                                                                                                                              Papua new Guinea,
                                                                                                                                                              and the timor Sea,
                                                    100                                                                                                       where our leadership

                                                     0                                                                                                        team has extensive
                                                          1994   1995   1996   1997   1998   1999   2000    2001   2002   2003   2004   2005
                                                                                                                                                              experience and a
The middle member of the Bakken Shale formation is responsible for the explosive increase                                                                     proven track record
in Williston Basin oil production over the past few years.
                                                                                                                                                              of success.

the numerous opportunities                                                                                 encouraging acreage, whether
of the east coast Basin                                                                                    pursuing conventional or
The East Coast Basin of New Zealand is                                                                     unconventional means
a lightly-explored Cretaceous-Cenozoic                                                                     Whether pursuing oil and gas in the Waipa-        *The term barrels of oil equivalent
                                                                                                                                                             “boe” may be misleading, particularly
fore-arc basin situated across the Australian-                                                             wa-Whangai fractured shale, or exploring for       if used in isolation. A boe conversion
                                                                                                                                                              ratio of six thousand cubic feet (6
Pacific plate margin. Basins of this type can                                                              conventional oil and gas, this lightly explored    mcf) to one barrel (1 bbl) is based on
                                                                                                                                                              an energy equivalency conversion
be prolific producers of oil and gas, as seen                                                              basin presents a unique opportunity for first      method primarily applicable at the
in Indonesia, California and other active plate                                                            movers.                                            burner tip and does not represent a
                                                                                                                                                              value equivalency at the wellhead.
margins worldwide. Thus far, only one well                                                                                                                    The term “undiscovered resources”
                                                                                                                                                              are those quantities of oil and gas
per 800,000 acres has been drilled in the en-                                                                                                                 estimated on a given date to be
                                                                                                                                                              contained in accumulations yet to
tire East Coast Basin, and the great majority                                                                                                                 be discovered. There is no certainty
of these had significant oil and gas shows.                                                                                                                   that any portion of the undiscovered
                                                                                                                                                              resources will be discovered and that,
      In addition to the unconventional poten-                                                                                                                if discovered, it may not be economi-
                                                                                                                                                              cally viable or ethnically feasible to
tial in the Waipawa-Whangai shale, TAG Oil’s                                                                                                                  produce.

acreage contains at least 50 known Mio-
cene/Pliocene structural leads and defined
prospects, many at fairly shallow depths.
This translates to relatively low drilling costs,
which enables TAG Oil to explore major up-
side potential with limited
financial exposure. Potential reservoirs include
sandstones of various ages and porosities of
up to 20% or more in Miocene turbidite fan
sandstones and shallow-marine Miocene lime-
stones. A recent independent technical assess-
ment conducted by Sproule International Ltd.
estimates the mid-case undiscovered resource
potential* of the defined prospects to be in
excess of 1.7 billion barrels of oil equivalent.
taG oil ltd.
(Corporate Office)
1050 Burrard Street
Suite 2901
Vancouver, BC V6Z 2S3

Tel: 1.604.609.3350
Fax: 1.604.682.1174

taG oil ltd.
(Technical Headquarters)
233 Broadway
P.O. Box 262
Stratford 4332
Taranaki, New Zealand

Tel: 06.765.6643
Fax: 06.765.6654


Forward-looking Statements Certain statements contained in this document constitute forward-looking statements. These statements relate to anticipated future
events or TAG Oil’s future performance. All statements other than statements of historical fact may be forward-looking statements. Forward-looking statements are
                                                                     ,            ,       ,          ,          ,
often, but not always, identified by the use of words such as “seek” “anticipate” “plan” “continue” “estimate” “expect” “may” “will” “project” “predict”“potential”
                                                                                                                         ,      ,     ,         ,         ,          ,
           ,        ,        ,        ,         ,
“targeting” “intend” “could” “might” “should” “believe” and similar expressions. These statements involve known and unknown risks, uncertainties and other factors
that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. TAG Oil believes that the expectations underly-
ing those forward looking statements are reasonable but no assurance can be given that these expectations will prove to be correct and therefore such forward-looking
statements included in this document should not be unduly relied upon. These statements speak only as of the date of this document.

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