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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

environments, and increasingly more unconventional settings.” U.S. Department of Energy

States and around the world. As extraction technology improves, areas once thought to contain resources that would never see the light of day are today considered to be some of the most prolific and popular in the industry. Why have 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 generally 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, layers 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?

TAG Oil’s unconventional efforts are aimed at tapping the potentially vast oil and gas resources locked in fractured shales. Recent completion technologies and success in comparable formations in the U.S. suggest that extraction and recovery of this very major resource may

Early low-permeability wells were considered 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 more costly—to develop than conventional oil and gas resources. But reduced oil supplies, regional tightening in gas supplies, continued rising demand for oil and gas on a global scale, and advancements in drilling and completion technology have resulted in an ever-increasing interest in tapping these unconventional oil and gas reserves. A recent study by leading oil and gas research firm, Wood Mackenzie, argues that the global unconventional hydrocarbon prize is potentially enormous. In a report entitled “Unconventional Hydrocarbons – The Hidden Opportunity,” Wood Mackenzie estimates nearly 3.6 trillion barrels of unconventional, undeveloped oil equivalent. That is triple the 1.2 trillion barrels of conventional oil considered recoverable from conventional oil reserves. And, in the Energy Information Association’s long-term reference case fore-

Dave Francis and Alexandra Johansen ignite an East Coast Basin gas seep.

cast, production from unconventional sources are anticipated to grow to 5.7 million barrels of oil per day in 2025, up from 1.8 million barrels of oil per day in 2003.

Unconventional gas: even bigger rewards As consumer demand for cleaner burning fuels grows, gas becomes an even more attractive long-term opportunity. Based on its lower carbon footprint, it’s clear that every cubic foot of gas brought to market can be sold. At the end of 2006, proven reserves of conventional gas in the ground stood at around 6,300 trillion cubic feet. When potential unconventional in-ground gas sources

lie within reach. Growth in Barnett Shale Production Gas Production (billion cubic feet per day)

1.25

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

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August 2008 page 2


are added to these estimates, the future of 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

East Coast Basin

TAG Oil brings new energy to an ancient resource

The East Coast shale play, where the

With 2.2 million net acres of permit holdings, TAG Oil is the largest acreage holder of Waipawa-Whangai oil and gas shale in secure, stable New Zealand. Employing its considerable technical and operational experience, the company has taken the leadership role in exploring and developing these high-potential shale beds in the largely untapped East Coast Basin of New Zealand, where the Whangai-Waipawa fractured shale formations are widespread and most thickly developed. This project represents an exciting opportunity to unlock a very major unconventional oil and gas resource. The Waipawa-Whangai

Waipawa-Whangai shale system is most widely and thickly developed, represents one of the most TAG Oil holds two permits in New Zealand’s East Coast Basin, covering 2.2 million acres.

formations together have always been viewed as high-quality source rock, though they were never considered to be producible until the success of the Barnett Shale in Texas. Extraction success there, where reserves are estimated 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 unlocking a major reserve in the Waipawa-Whangai shale is well within reach.

important acreage positions in the history of Australasian shale exploration.

Ken Chew, VP of Industry Performance and Strategy, IHS Energy: “World Oil and Gas Resource and Production Outlook,” 28 June 2005.

1

Oil seep in TAG Oil’s East Coast Basin permit.

Comparison of the Waiapawa-Whangai to the Bakken and Barnett Shales Unit

Bakken

Waipawa

Barnett

Whangai

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

8 -12

9 - 23

4 - 5

16 - 31

Depth (m)

Total Porosity %

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

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The Waipawa Black Shale is a fractured, poorly bedded, organic-rich siltstone. Outcrop sampling indicates an average total organic carbon (TOC) value’s of 5% and average Hydrogen Index (HI) of 245 with maxima of 12% TOC and 550 HI, respectively. The formation occurs throughout TAG Oil’s East Coast Basin acreage and has

also been identified in other areas of New Zealand. The Waipawa Black Shale is normally 30m or more thick and achieves a maximum thickness of 70m in Southern Hawke’s Bay. The organic carbon is primarily of marine origin, although significant terrestrial organic matter is evident in some samples.

Potential reservoirs include sandstones

Waipawa-Whangai Source Rock Potential

of various ages

600

Type II

Type 1

and porosities up

Waipawa

Whangai

to 20% or more in

200

100

0

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. 8 The results graphed help predict the Kerogen type of the samples, which are indicative of oil or gas as the hydrocarbon type associated with the Shale. 6 WaipawaIn the case of the Whangai Formation this index suggests that the samples are predominantly Type-I Kerogens that are more oil-prone than gas.

0

EXCELLENT

15

limestones.

GA S

HI

marine Neogene

300

HI50

and shallow-

400

TOC (wt%)

fan sandstones

HI (mg HC/g TOC)

Miocene turbidite

500

OILAND GA S

HI

30

0

OIL

HI5

4

00

VERY GOOD

2

GOOD

Waipawa

Whangai

This oil-rich Waipawa Black Shale in outcrop demonstrates the profuse internal fracturing within the formation.

FAIR

POOR

0 0

5

10

15

20

S2 (mg HC/g ROCK) Fractured Shale Opportunities in Australasia |

25 August 2008 page 4


OI (mg CO2 /g TOC)

Waipawa-Whangai Source Rock Potential

EXCELLENT

15

0

HI50

8 HI

GA S

OILAND GA S

30

0

OIL

6

TOC (wt%)

HI

HI5

4

The East Coast Basin

00

is a CretaceousCenozoic fore-arc

VERY GOOD

2

GOOD

basin situated across the Australian-Pacific

Waipawa

Whangai

plate margin. Basins

FAIR

of this type can be

POOR

0 0

5

10

15

20

25

S2 (mg HC/g ROCK)

of oil and gas, as in Indonesia,

Source: Geological & Nuclear Science

California and

Samples taken from the Waipawa Formation indicate high TOC values, indicative of good to excellent quality source rocks. Although the TOC values are lower in the Whangai than the Waipawa Formation, the immense thickness of the formation, up to 1500 feet in some areas, more than compensates for the lower values. In some instances, the two formations could work together as one system.

The Whangai Formation is a poorly bedded, siliceous or slightly calcareous mudstone, with localized development of greensand and well bedded calcareous facies. The formation is 300 to 600 m thick throughout much of the East Coast Basin. The basal and main Whangai facies, Rakauroa Member, has an average TOC of 0.8% in the western sub-belt, with maximum TOC values of 1.7% and 336 HI. Although its TOC content is lower than the Waipawa Black Shale, the Whangai Formation is heavily fractured and can be nearly twenty times as thick.

The science and art of hydraulic fracturing With light sweet crude reaching more than $80/bbl and natural gas rising above $6/ MMBtu in September, interest in developing exploration and extraction technologies continues to grow.

prolific producers

other active plate margins worldwide. The WaipawaWhangai Shale System in particular is comparable in The multiple fracturing systems observed in the Whangai Formation at the Gaddums Hill outcrop.

Fracturing is achieved by using hydraulic pressure created by pumping fluid into open cracks in the shale, and by keeping these cracks open by injecting solid propping materials (proppants) along with the fluid pumped into the formation. The pumped fluid, under pressures of up to 8,000 psi, is enough to crack shale as much as 3,000 feet in each direction from the wellbore. And opening fractures in the shale is the key to good production. Because of shale’s extremely low permeability, the best fracture treatments are those that expose as much of the shale as possible to the well bore. The greater the exposure, the faster the oil or gas will be produced.

TOC and oil and gas maturity levels to fractured shale plays such as the Bakken Shale in Montana and the Barnett Shale in East Texas.

Fractured Shale Opportunities in Australasia

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“Recent years’ dramatic changes in technology are making existing energy reserves stretch further while keeping long-term energy costs lower than they otherwise would have been.” Testimony of Chairman Alan Greenspan before the Committee on Energy and Commerce, U.S.House of Representatives — June 10, 2003

A simple fracturing job may pump a mixture of water and sand into the well. The water creates the pressure to initiate the fractures, then carries the sand into the cracks as they grow. When the fluid pressure is released, the grains of sand hold the cracks open. Although water and sand are the cheapest fluid and proppant, they are not always the best. High-tech fracturing fluids are more viscous, and better able to maintain the proppant in suspension, allowing it to travel deeper into the fractures and reduce the amount of settling that occurs before the fractures close. Advanced designs for artificial proppants used in addition to sand also do a better job of holding open the cracks.

eastern Montana alone is estimated to reach 200 million to 250 million barrels. To date, over 600 wells have been drilled in the middle member of the Bakken Shale Formation, and 356 producers were pumping oil in Richland County as of August 2006. In the mid-Bakken play, which only began in December 2003, over 200 mid-Bakken wells have been permitted and nearly 100 wells were producing as of February 2007. Because of new horizontal drilling and completion technologies, the potential recoverable resource base for the Bakken Formation is massive. A recently published study by USGS scientist Leigh Price provides estimates from 271 to 503 billion barrels (mean of 413 billion) of oil equivalent in place. If this bears out, it could increase the estimate of technically recoverable crude oil resources in the U.S. by billions of barrels. For perspective, consider that the current estimate of all technically recoverable crude oil resources in the U.S., not including Bakken oil resources, is 174.67 billion barrels.

Real-world technology yields real gains The Bakken Shale play in the Williston Basin, which straddles Montana, North and South Dakota, and dips up into Canada, now contains the highest-producing onshore field established in the lower 48 states in the past 56 years, according to the Department of 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

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Williston Basin Proven Reserves

Crude Oil Proved Reserves, Millions of Barrels

900 800 700 600

TAG Oil’s

500

strategy centers

400

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

The middle member of the Bakken Shale formation is responsible for the explosive increase in Williston Basin oil production over the past few years.

The numerous opportunities of the East Coast Basin The East Coast Basin of New Zealand is a lightly-explored Cretaceous-Cenozoic fore-arc basin situated across the AustralianPacific plate margin. Basins of this type can be prolific producers of oil and gas, as seen in Indonesia, California and other active plate margins worldwide. Thus far, only one well per 800,000 acres has been drilled in the entire East Coast Basin, and the great majority of these had significant oil and gas shows. In addition to the unconventional potential in the Waipawa-Whangai shale, TAG Oil’s acreage contains at least 50 known Miocene/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 upside 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 limestones. A recent independent technical assessment 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.*

experience and a proven track record of success.

Encouraging acreage, whether pursuing conventional or unconventional means Whether pursuing oil and gas in the Waipawa-Whangai fractured shale, or exploring for conventional oil and gas, this lightly explored basin presents a unique opportunity for first movers.

*The term barrels of oil equivalent “boe” may be misleading, particularly if used in isolation. A boe conversion ratio of six thousand cubic feet (6 mcf) to one barrel (1 bbl) is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. The term “undiscovered resources” are those quantities of oil and gas estimated on a given date to be contained in accumulations yet to be discovered. There is no certainty that any portion of the undiscovered resources will be discovered and that, if discovered, it may not be economically viable or ethnically feasible to produce.


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 underlying 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.


http://tagoil.com/_new/pdf/TAG_ShaleReport_Aug2008