Elko Energy

Elko is a Canadian registered oil & gas exploration company which has interests in exploration and production in the Danish and Dutch North Sea. Its major asset in the Danish North Sea is a 33% working interest in exploration and production license 02/05 and the adjoining exploration and production license 01/11, close to the prolific Central Graben oil kitchen. Technical work indicates the potential for significant resources on these combined licenses. Elko also holds a royalty interest in gas-bearing license blocks P1 and P2 in the Dutch North Sea. Elko is a 100% wholly owned subsidiary of Xtract Energy Plc.

Through its Danish subsidiary, the Company originally participated in the largest exploration license in Denmark with an area of 5,372 sq km offshore. Geologically it contains part of two structural elements, the East North Sea High in the west and the Horn Graben in the east. During 2009, technical studies were undertaken in order to attract a partner to help fund drilling in 2011.

Following the reprocessing of approximately 3,000 km² of seismic data in relation to License 02/05 in Denmark, Gaffney Cline and Associates completed an evaluation of the chalk interval. The evaluation identified a large chalk channel some 90 km long by 10 km wide across the 02/05 license. It has the potential to be good reservoir quality sediment and a possible conduit for hydrocarbon migration. The chalk channel was shown to have the potential to hold a considerable volume of hydrocarbons and to be in addition to the previously identified deeper Rotliegendes sandstone prospect.

On 1 June 2010, it was announced that an agreement with Altinex Oil Denmark A/S ('Altinex') had been finalised under which Altinex farmed in to the 02/05 license offshore Denmark. Altinex is part of the Noreco Group, being a 100% subsidiary of Norwegian Energy Company ASA ('Noreco'). Noreco became operator of the 02/05 license with 47% working interest, Elko retains 33% and the remaining 20% continues to be held by the existing partner, Danish North Sea Fund ('DNSF'). This agreement was completed in March 2011.

The partners intend to test the overall play concept through the first well. Although individual leads have a low overall probability of success, the chances of success in proving the overall play concept is judged by the partners to be considerably higher. If the overall play concept is proven, this could be expected to attract considerable industry interest and lead to a corresponding increase in asset value.

In mid June 2010, an updated independent Competent Persons Report was prepared for Elko by TRACS International Ltd ('TRACS') covering the 02/05 license area in order to quantify the hydrocarbon resource base. Upon completion of the farm in, the total net attributable prospective resources to Elko reported in the CPR, become 3,557 billion cubic feet, under a gas scenario, 936 million barrels under an oil scenario.

On 21 September 2010, it was announced that the 02/05 license partners had submitted an application for an adjoining area immediately to the west of the 02/05 license area. The application was made in the same working interest percentages as in the 02/05 license, namely Noreco 47% and operator, DNSF 20% and Elko 33%. This license 01/11 was awarded on 1 February 2011. Part of license 02/05 was relinquished during the application for License 01/11.

In February 2011, both assets were independently evaluated by TRACS and it was reported that the Danish acreage covers three substantial leads which could be charged with either oil or gas.

In the Netherlands sector of the North Sea, Elko held two gas-bearing exploration blocks. Block P1 is located on the southern margin of Southern Permian Gas basin and covers approximately 209 km² (51, 645 acres). Seven wells have been drilled by previous operators, of which five encountered gas. Block P2 is directly adjacent and east of Block P1 and covers approximately 416 km² (102,796 acres) Elko held a 60% interest in the two licenses, with the Dutch State company, Energie Beheer Nederland B.V., as its participating partner.

A National Instrument 51-101 independent engineering report was prepared by TRACS International during 2008 on the hydrocarbon resources contained within the P1 and P2 Blocks. The report estimated hydrocarbon gas in place at over 250 bcf within the Slochteren sandstone with additional prospects identified which could contain a further 500 bcf.

In the Netherlands, the geology, geophysical and reservoir engineering definitions of the P1-FA field were developed to create an outline field development plan. The internal reservoir modelling of the P1 Block, P1-FA field concluded that the optimal development plan requires five long-reach horizontal wells to sustain a plateau production rate of 120 mmscf/d for up to 4 years.

Reprocessing of previous 3D seismic to Pre Stack Depth Migration (PSDM) on Block P2 was also completed. The data showed greatly improved imaging over the existing discoveries and prospects. Subsequent remapping of the eastern part of the block revealed several large undrilled structures, each with a high geological chance of success. The resulting larger resource estimate for Block P2 makes the whole development potentially more compelling given the lower incidence of carbon dioxide when compared to the P1-FA structure.

In mid June 2010, an updated independent Competent Persons Report ('CPR') was prepared by TRACS covering the existing discovered gas reservoirs and identified prospects on Blocks P1 and P2 in order to quantify the hydrocarbon resource base.

Contingent Resources: Five confirmed discoveries have been assessed with an un-risked best estimate net attributable hydrocarbon gas to Elko of some 280 billion cubic feet (46.67 million barrels of oil equivalent). TRACS assigned commercial chance of success for the five discoveries in the range 40% to 75%. The chance of commercial success is the currently perceived chance, or probability, that these contingent resources will mature into reserves by means of a viable development scenario.

Prospective Resources: Six key prospects in the exploration portfolio amount to some 291 billion cubic feet (48.5 million barrels of oil equivalent) un-risked best estimate net attributable hydrocarbon gas to Elko. TRACS assigned probability of success for the six exploration prospects in the range of 45% to 65%. The estimated probability of success is the currently perceived chance, or probability, that the prospective resources will mature into contingent resources.

On 21 September 2010, it was announced that an agreement had been finalised under which Chevron Exploration and Production Netherlands B.V. ('Chevron') purchased Elko's licenses in Blocks P1 and P2. In consideration for their total interest in the Blocks, Elko will receive an overriding royalty up to 5% of the sales value from Chevron gas delivered into the Dutch National Transmission System and Chevron condensate delivered onshore. Chevron anticipates drilling the first well on the acreage in 2011. Under the terms of the arrangement, Chevron will also pay Euro 4.3 million in cash at completion, for past costs. This transaction and transfer of operatorship was completed on 9 December 2010.

On 26 August 2009, Elko and its subsidiary Dragon Energy Inc ('Dragon') signed an overriding royalty agreement whereby Elko will benefit from a 2.5% overriding royalty from future revenues from the Kotaneelee field, over a maximum term of five years capped at an aggregate value of CDN$750,000. In exchange Elko returned to Dragon 15,600,000 common shares representing its 51% ownership and Jack Bray, Peter Moir and Andy Morrison resigned from the board of Dragon. Dragon holds a 30.667% working interest in the Kotaneelee field in the Yukon Territory, Canada operated by Devon Energy Corp. Gas production at Kotaneelee is in decline and gas prices in North America are depressed resulting in a significantly weakened revenue stream from current production levels. The disposal of Dragon eliminated a potential liability from Elko's balance sheet.