Mahalo Energy Ltd.
TSX: CBM
December 12, 2006
Mahalo Announces Contingent Resource Study by Sproule Associates Limited
CALGARY, ALBERTA - Mahalo Energy Ltd. is pleased to provide results of three Contingent Resource Studies by Sproule Associates Limited (the "Sproule Reports") dated December 12, 2006. The effective date of the Sproule Reports is March 31, 2006.
Sproule Associates Limited ("Sproule") was retained by the Company to provide an independent evaluation of contingent resources on certain of its United States shale and Canadian coal bed methane ("CBM") properties.
In order to estimate the contingent resource on the Company's Caney and Woodford Shale properties in Oklahoma and certain Horseshoe Canyon and Mannville CBM properties in Canada, Sproule was required to estimate original gas in place volumes. The aggregate sum of these estimated gas in place volumes (as totaled by the Company) ranges from 3.2 to 4.3 trillion cubic feet of raw gas, net to the Company's working interest and before royalties. The information obtained from the study will provide additional economic and statistical characterizations of the contingent resource underlying these properties and facilitate the creation of specific development plans.
It is important for the reader to differentiate between "contingent resources" and "proved and probable reserves". The contingent resources evaluated in the Sproule Report do not constitute "reserves" and therefore do not include the Company's already established proved and probable reserves. A separate, independent study of the Company's proved and probable reserves will be conducted effective December 31, 2006.
Methodology and Presentation
Sproule utilized different methodologies to evaluate the contingent resource. Volumes of CBM gas in place were calculated using coal gas content, density, thickness and area. The calculation of shale gas volumes is significantly more complex. The Woodford and Caney shales are both "organic shales" and as such, have sorbed gas, similar to a CBM reservoir as well as conventional "free gas" stored in the pore space.
The Company provided Sproule with gas composition, sorption data, reservoir pressure data, geophysical logs and core data on both the Caney and Woodford shale to facilitate the evaluation of free and sorbed gas volumes. This data was obtained from wells drilled on the Company's lands to minimize extrapolation from data taken further away. Using this data, Sproule calculated free gas using standard volumetrics and sorbed gas using gas content, thickness, density and area. It should be noted that the data as provided was consistent with other published shale gas data in the basin.
Sproule evaluated Mahalo's contingent resource on the basis of low, best and high estimates as defined in the Canadian Oil and Gas Evaluation Handbook ("COGEH").
Low estimate: This is considered to be a conservative estimate of the quantity that will actually be recovered from the accumulation.
Best estimate: This is considered to be the best estimate of the quantity that will actually be recovered from the accumulation.
High estimate: This is considered to be an optimistic estimate of the quantity that will actually be recovered from the accumulation.
Discovered Resources
COGEH defines discovered resources as "those quantities of oil and gas estimated on a given date to be remaining in, plus those quantities already produced from, known accumulations". It should be noted that Sproule has estimated "original gas in place", a quantity which the Company deems to be equivalent to the term "discovered resource".
The following table summarizes the discovered resource volumes presented as original gross gas in place in the Sproule reports. Company interest gross gas in place was calculated by Mahalo using original gas in place multiplied by the Company's estimated working interest.
Discovered Resource Company Interest Gross Gas
in Place
(Bcf - Billion Cubic Feet) (Bcf - Billion Cubic Feet)
----------------------------------------------------------
Low Best High Low Best High
Estimate Estimate Estimate Estimate Estimate Estimate
-------- -------- -------- -------- -------- --------
Caney Shale 10,341.6 12,051.0 13,710.6 2,612.8 3,044.6 3,463.9
Woodford Shale 1,863.3 2,162.7 2,424.8 451.2 523.6 587.1
-------- -------- -------- -------- -------- --------
USA 12,204.9 14,213.7 16,135.4 3,064.0 3,568.2 4,051.0
-------- -------- -------- -------- -------- --------
Horseshoe
Canyon Coal 71.5 71.5 71.5 54.9
Mannville Coal 205.2 290.1 342.3 178.4 243.3 297.6
-------- -------- -------- -------- -------- --------
Canada 276.7 361.6 413.8 178.4 298.2 297.6
-------- -------- -------- -------- -------- --------
Grand Total 12,481.6 14,575.3 16,549.2 3,242.4 3,811.5 4,348.6
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Contingent Resources
COGEH defines contingent resources as "those quantities of oil and gas estimated on a given date to be potentially recoverable from known accumulations but are not currently economic". The Sproule Reports state that for the shale gas,"the contingencies that result in classification as a contingent resource include, but are not limited to: existence and interconnectivity of a natural fracture system, permeability to gas, gas content, and an appropriate field development plan", and that for the coalbed methane, the contingencies include but are not limited to "permeability to gas, gas saturation and/or content and an appropriate field development plan". Sproule also states that with any contingent resource, "there is no certainty that it will be technically or economically viable to produce any portion of the reported contingent resource."
The following table reflects the Company's interest in estimated technically recoverable sales gas volumes along with related estimated recovery factors as per the Sproule Reports. These volumes represent recoverable raw gas less associated field and process shrinkage.
Low Estimate Best Estimate High Estimate
------------------ ------------------- -------------------
Technic Technic Technic
Estimat -ally Estimat -ally Estimat -ally
-ed Recover -ed Recover -ed Recover
Recovery -able Recovery -able Recovery -able
Factor Sales Gas Factor Sales Gas Factor Sales Gas
(%) (Bcf) (%) (Bcf) (%) (Bcf)
------------------------------------------------------------
Caney
Shale 0 0 5.5 157.4 14 455.8
Woodford
Shale 0 0 5.0 24.6 11 60.8
Horseshoe
Canyon Coal 20-25 10.3 50-52 25.5 75-82 38.7
Mannville
Coal 5-40 23.3 20-55 76.4 40-65 145.0
------ ------ -------
Grand Total 33.6 283.9 700.3
----------------------------------------------------------
----------------------------------------------------------
The Sproule Reports presented a range of recovery factors on Canadian coal since multiple properties were evaluated.
Additional Information
The following table summarizes Mahalo's expected initial production rate, ultimate recovery and capital costs per well and ultimate well spacing per section. Note: These values are based on internal Company estimates and data interpretation.
Estimated Estimated
Peak Ultimate Ultimate
Production Raw Gas Capital Spacing
Per Well Recovery Costs Per (Wells per
(Mcf/d) (Bcf/Well) Well (M$) Section)
Caney Shale (1) 500-1,500 1.4-2.5 2,200-3,750 8-16
Woodford
Shale (1) 1,500-5,000 2.5-3.5 3,000-4,500 2-6
Horseshoe
Canyon Coal 90-300 0.15-0.6 275-350 6-8
Mannville
Coal (2) 1,500-3,000 1.8-2.7 3,200-4,000 1-2
(1) Contemplates horizontal wells.
(2) Contemplates multi-lateral horizontal wells.
All of the study areas have infrastructure capacity to facilitate the delivery to market of the assigned resource. Certain lands in the Canadian Mannville study are operated under farm-in agreements, and as such have further earning requirements.
Comments by Mahalo
It is important to note that the Sproule Reports only take into account information available up to the effective date, March 31, 2006. The time lapse between the effective date and the issue date was primarily due to the high complexity of shale reservoirs as well as the large volume of geological data that had to be dealt with. In addition, there were delays resulting from anticipated changes in the suggested disclosure requirements for the reporting of contingent resources.
Shale gas rates and recovery factors reflect limited production data as of the effective date of the reports. In addition, recovery factors used for shale in the Sproule report do not take into account the results of the majority of the horizontal wells in the basin, as most of these were drilled and publicly released in recent months.
In the opinion of the Company, data subsequently announced by other operators in the vicinity would suggest average rates and recovery factors that are significantly higher. Numerous Woodford wells have been reported at initial rates well over 5,000 Mcf/d. In addition, Mahalo operates a Caney well that came on at over 1,000 Mcf/d, and although this data point was used in Sproule's evaluation, it did not become material in the context of the other vertical Caney wells in the basin. As a result, the Company expects recovery factors to be significantly higher than those estimated in the Sproule Report. Most of the commercial rates announced by other operators in the area came after March 31, 2006, the effective date of the Sproule Report, and as such, Sproule was not able to consider them in this evaluation.
The Company believes that the major limiting contingencies in the Caney shale currently center on new technology such as slick water fracturing and on various other completion techniques, similar to that experienced in the geologically equivalent Barnett shales in Texas. The Company does have a commercial test on its lands; however, to date, the repeatability has not been such that the gas contained within the Caney shale can be classified as proved and/or probable reserves. Mahalo has taken multiple Caney shale cores, shot 3-D seismic and continues to interpret related data with respect to completion design.
It should be noted that there is both Caney and Woodford production from a small number of wells on the study area as well as a major commercial Woodford shale project operated by Newfield Exploration in the same county (Hughes County), approximately 15 miles south of the study area. The Company believes that the announcement of significant new commercial rates in the Woodford shale through the use of horizontal wells and increased hydraulic fracture stimulation density lends significant promise to near term Woodford shale commerciality.
For every one per cent increase in the recovery factor for Mahalo's shale gas-in-place, there would be a corresponding increase of approximately 33 Bcf in the Company's recoverable sales gas volumes. Due to the relative immaturity of these plays, as well as the rapid development in the last year, the Company expects that estimated recovery factors for shale will grow significantly with time.
About Mahalo
Mahalo is a junior, unconventional natural gas producer, focusing on the production and development of coal bed methane and shale gas deposits in the United States and Canada.
For additional information on the Company, please go to the Company's profile on SEDAR at www.sedar.com or the Company's website at www.mahaloenergy.com
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