Unconventional 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 1.25 Gas Production (billion cubic feet per day) 1.00 0.75 0.50 0.25 0.0 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- Waipawa-Whangai 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. 1 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 Whangai to 20% or more in 500 Miocene turbidite HI (mg HC/g TOC) 400 fan sandstones and shallow- 300 marine neogene 200 limestones. 100 Type III 0 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 8 EXCELLENT 0 predict the Kerogen type of the 30 HI50 0 HI 15 GA S samples, which are indicative of HI oil or gas as the hydrocarbon OILAND GA S type associated with the Shale. OIL 6 In the case of the Waipawa- Whangai Formation this index suggests that the samples are TOC (wt%) predominantly Type-I Kerogens 00 HI5 that are more oil-prone than gas. 4 VERY GOOD 2 GOOD Waipawa Whangai FAIR This oil-rich Waipawa Black Shale in outcrop demonstrates the POOR profuse internal fracturing within the formation. 0 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 8 EXCELLENT 0 30 HI50 0 HI 15 GA S HI OILAND GA S OIL 6 TOC (wt%) 00 the east coast Basin HI5 4 is a cretaceous- cenozoic fore-arc VERY GOOD basin situated across 2 GOOD Waipawa the australian-Pacific Whangai plate margin. Basins FAIR POOR of this type can be 0 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 900 Crude Oil Proved Reserves, Millions of Barrels 800 700 600 500 taG oil’s 400 strategy centers on new Zealand, 300 Papua new Guinea, 200 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 Canada 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 TSX-V: TAO www.tagoil.com 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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