What's It All Mean??, page-13

Hi Charl

I will bring your point 6 to include in your point 1 question.

1. I have erred there. 789 boo is in fact from the Cambay field. From the June Qtrly on 24/7 ;
"Gross oil production 589 boo from Cambay 77H flow back post qtr end " 589 boo would then
relate to the approximate period between 14/7 {when flow-back commenced} to 21/7 {interim
flow back report revealing light oil recovered}. So in fact, approximately 80 bopd & 666mscfgd
from 77H NOT 100bopd & 833mscfgd. The 4mmscfgd was just that, GAS only as the analysts
have done.@ $8mscfg, yes gives $32K per day. Better to just work on actual prices attributed
to both gas & condensate produced. Premium light crude currently at $93 a barrel, call it
$90 {condensate may be less} so getting toward 11;1 ratio rather than 12;1 ratio gas v oil on
PRICES received.

2&3. Let's put the corporate tax to one side for the moment then. I have alluded in past
posts to the economies of scale with future wells, less cost per well, overheads remaining
constant but dwindling as a % of revenue etc. Let me assume for argument that the above
rate for 77H at 80 bopd and 666mscfgd for the 1st 7 days doubles giving 160 bopd & 1.33mmscfgd
as the initial 24 hr POST CLEAN UP PRODUCTION TEST. I have to assume also {just for calculations}
that this is the average flow per day over 2 years to extract what is hopefully a 3bcfg reservoir for
THIS well at 350m lateral etc. No declines therefore. Declines will of course occur, generally about
40% over the 1st year. We don't know that info yet, so assume for working purposes no declines.
That's why I would be hoping for a greater 24hr flow rate than 160 bopd & 1.33mmscfgd for
THIS CONCEPT well to make it commercial as a STAND ALONE well.

160 bopd {@$90 bbl} = $14 400 + 1.33mmscfgd {@$8mscfg} $10 650 = 25K per day.
Oilex's gross revenue over 2 years = $8 250 000 LESS cost for THIS well {$5.4m} = $2.8m.
About $2.5m for salaries, admin etc over those 2 years, leaves $300k or 3.75% ROI.

Now, lets say we have 5 wells producing at THIS rate only over the 2 years it takes to
deplete the reservoir. Of course future wells will be double or triple the laterals and frac
stages, should 77H prove itself as a CONCEPT well and we can hopefully expect a
doubling or more of these rates that I have presently ESTIMATED.

Well cost comes down to $10m v $12/$13m for this well. Maybe as low as $8m with
multiple future wells and own drilling rigs etc. Oilex's share is now $3.6m per well.
5 wells over two years at this sustained flow gives revenue of $41.25m less $18m
well costs and STILL $2.5m for salaries,admin etc. No corporate tax applies.
So even at these flow rates, 5 wells would produce $21.25m NET revenue over 2 years
on an investment of $20.5m. ROI = 103%!

So, yes, if looked at in this context, then even at a consistent flow rate of 160bopd & 1.33mmscfgd
multiple wells like this would in fact PROVE commercial PROVIDED the well cost can come
down 20% or so and overheads as above remain stable.

That corporate tax rate however MUST come into play at some stage. I think from memory we
can write off or re-coup all field development costs and expenses {tax losses over many years}
before the tax kicks in. How much is that? Not sure unless I went over the entire $$ spent
so far to get to this stage. 76H alone cost us about $6-8m didn't it? Anyway, we may be able
to produce from the 1st 5 wells WITHOUT paying any corporate tax. Even if we were to pay
tax on the above revenues at those rates, it would still be about 63% ROI.

I hope I have got this right, based on my assumptions & figures. If so then it does paint
an entirely different picture for multiple wells even at these flow rates, you are entirely
correct then. A sustained flow from 77H of approx 3mmscfgd {equivalent} over 2 years
to deplete a 3bcfg reservoir is { if applied over 5 wells on the above assumptions} well &
truly commercial, even with a 40% corporate tax being triggered.

4. Agreed, enough said then.

5.1. Up to the company should 77H prove is itself as a concept well. Condensate/gas
will flow better than oil and ultimate recovery is generally higher than oil wells. I think
it probably cancels out the higher price PURE light crude would get v condensate. At
this stage its probably condensate, semantics as you say, no big deal.

5.2. Where the SP settles on initial flow rates I don't know. If my musings above are
pretty accurate then I have a fair idea where the SP SHOULD be. If the flows are
exceptional for a CONCEPT well only {say 6mmscfgd or higher} then imo, the SP
should at least double in the short term, PURELY for the potential this offers for
bigger and smarter wells in the future. All options fully converted would put about
$30m into our coffers which could fund easily fund the next 5 wells. It depends on the
timing of conversion of course which will be dependent on the 24hr post clean up
production test. If it is 6mmmscfgd then for mine, most options will be converted
before the SEP 15 expiry date. If it is around the 2.5-3.0mmscfgd {with declines
taken into account now} then maybe SP may stay steady or appreciate slightly depending
on decline rates and the 'cushion" that this initial flow rate offers. Depends how punters
read this sort of initial flow and consider future potential as I have attempted to do. We
may have to raise debt for the next wells if SP and hence options are not converted
on a "marginal" flow rate for this concept well. Once again, I don't know how others will react
on a flow of only 2mmmscfgd, but for mine, as a CONCEPT well only, a flow of 3mmscfgd
as outlined above would still be a very good result , even with declines on this rate of 40%
in the 1st year.

5.3. 2 years is a realistic well life IF the reservoir contains 3bcfg AND we flow at 4mmscfgd
over that period. If we flow 4mmmscfgd initially declining to 2.5mmscfgd after the 1st year
then it would take 3 years to deplete a 3bcfg reservoir, affecting ROI. I still make that over
50% ROI with a corporate tax of 40% kicking in.

All these musings are a waste of time of course, if 77H can't prove itself as at least a
concept well. Flow rates and composition of fluids irrelevant if the reservoir can only
ultimately deliver 1bcfg or less.

GLTAH