26 April, 2006
SPECIAL ANNOUNCEMENT
Dear Shareholder,
Lakes advises that it has had preliminary discussions with Sinopec of China a multi national, in relation to our tight gas project onshore Gippsland Basin Victoria. Sinopec is now sending a delegation to assess our Gippsland gas projects with a view to potentially joining with us in developing these projects. The delegation is due to arrive in Melbourne within a few days.
More than $30 million has already been spent in PEP157 by your company. Lakes Oil has lodged an application for a Retention Lease over a large portion of the permit where Lakes Oil has established the existence of tight gas (see attached map).
Further exploration is planned in PEP 157 to test tight gas "plays" - pending rig availability.
Due to the current high oil price Lakes Oil is moving ahead to urgently re-open its discovery well "Hunters Lane 1" at Lakes Entrance originally drilled in 1997 with a view to commercialisation.
Geothermal - Lakes Oil through its fully owned subsidiary company "Geothermal Energy Victoria Pty Ltd" intends to apply for areas which have recently been released by the Victorian Government.
Sinopec East China Branch
Lakes Oil will host a delegation from Beijing who will assess Lakes Oil's onshore Gippsland tight gas projects, in order to determine whether to join with us in the next phase of this exciting new Victorian energy asset. During their stay they will visit the fields and evaluate the current data.
Lakes Oil is also holding discussions with several USA based groups who have also expressed interest in our Victorian activities.
Tight Gas Discoveries
During the past two years. Lakes Oil has continued to drill "wild cat" wells in PEP 157, choosing to explore the permit on a wider front either by drilling new prospects or, in some cases, re-assessing old wells (many dating back to the 60's) using state-of-the-art log interpretation conducted by US-based industry experts who are acknowledged world leaders in tight gas technology.
On the basis of these new interpretations, Lakes Oil believes that it now has enough evidence to show that a major new onshore tight gas/oil province is being delineated. This is based on our concept of basin centred Strzelecki gas, which directly challenges conventional thinking and is gradually gaining acceptance amongst knowledgeable experts who operate in the tight gas area.
Many shareholders have asked why we continued to drill "wild cat" wells in PEP 157, instead of working to bring into production the very promising Wombat, Trifon and Gangell tight gas fields. The answer is that permit PEP 157 is due to expire later in 2006 and, under the current Victorian Petroleum Act, permits are granted for only a maximum of 10 years. (Lakes has held PEP 157 for 7 years having purchased the permit from Roma Petroleum after that company left Victoria in 1999).
This legislation, enacted in the 1990's before the discovery of tight gas in Australia, was intended for conventional gas which is usually confined to structures and normally requires only a small number of wells to bring any discovery into production. However, with tight gas there is not always a structure to contain the gas; more often it is in what are called in the USA "basin centres". These can occur over large undefined areas and, unlike conventional reservoirs, the gas occurs over multiple levels and frequently needs artificial stimulation to allow gas to flow to the surface. Most importantly, it requires many wells to be drilled over a large area to achieve commercial productions - similar to coal bed methane.
Lakes Oil now intends to lodge an application for a retention lease over a large proportion of PEP 157. This will give the company the time it needs to bring the numerous areas into production. Lakes Oil is confident that it can commercialise this potentially large resource in a timely fashion, to meet the significant increase in gas demand in the eastern States. Discussions have already taken place with prospective power generation and industrial users. The importance to Victoria of this new onshore gas province should not be under estimated. The offer of gas could encourage meaningful industry migration in both the energy and chemical sectors to this strategic region, and help alleviate high youth unemployment in the area.
The long discovery and commercialisation lead times pertaining to unconventional energy reserves has been fully acknowledged by the Victorian Government. In this regard the Minister, The Honourable Theo Theophanous is to be congratulated on his initiative in introducing geo-thermal legislation in Victoria, where the need for up to 15 years to develop highly prospective unconventional geothermal energy resources is properly recognised. It is hoped that in due course this positive step will be applied to tight gas which is also an unconventional energy resource. Lakes Oil is keen to seek out geo-thermal energy opportunities and, through its wholly owned subsidiary Geothermal Energy Victoria Pty Ltd, will apply for several of the areas which have just been released by the Victorian Government.
Halliburton Report
Halliburton USA has completed a comprehensive report titled "Integrated Reservoir Study" covering the Wombat, Gangell and Trifon gas prospect areas. Based on this work, their recommendation is to move to a second phase assessment aimed at optimising the requisite drilling and completion programs to move into production. Lakes Oil has agreed to this further report and is delighted with the assistance being given by Halliburton.
PEP 155 - Hunters Lane 1 Onshore Gippsland Basin, Victoria
Lakes Oil is planning the re-opening of the Hunters Lane - 1 well as soon as possible. This discovery well was drilled in 1997 to a depth of 430 metres. The well encountered heavy bio-degraded oil together with water. At that time the oil price was low and the well was not economic. However, discussions in both Australia and the US suggest that by utilising appropriate separation technology it is possible that the field could be commercially viable at current oil prices. A full assessment of its commerciality is now being urgently undertaken.
Lakes Oil will re-open the well and test the economics of pumping the oil and water to the surface, centrifugally removing the water, and recovering the oil.
PEP 166
The Loy Yang 2 well has been drilled and cased ready for fracture stimulation. The results to date indicate positive indications of oil and tight gas whilst drilling and have exceeded our expectations. We look forward to "fraccing" this well as soon as appropriate equipment is available.
PEP 158 - Onshore Gippsland Basin, Victoria
Subject to the availability of a suitable rig, Lakes Oil has selected two drilling targets sited on known geological highs "Alberton 1" and "Napier 1". We believe these wells will also add to our "tight gas" play and lead us to other targets in PEP 158.
PEL 57 - Onshore Otway Basin, South Australia
A geo-chemical survey is due to commence in May to assess areas within the permit suitable for seismic or drilling activity.
PEP 163 and PEP 164 Onshore Otway Basin Victoria
A seismic survey in both these permits is due to commence in May 2006.
From the above you can ascertain that Lakes Oil has a very full program ahead. In recent months Lakes Oil has confirmed its position as Victoria's most active onshore exploration company.
Yours sincerely
LAKES OIL N.L.
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