Underground Energy secures rig for near term drilling program and provides operational update

SANTA BARBARA, CA, Feb. 6, 2012 /CNW/ - Underground Energy Corp. ("Underground", "UGE" or the "Company") (TSX VENTURE: UGE) today announced that it has signed a drilling contract with Houston-based Key Energy Services to secure a drilling rig for the initial portion of the Company's 2012 drilling program. The contract provides for drilling and completing a minimum of five wells with an option for an additional five wells.

The rig is expected to move to the first location and commence drilling at the Company's recently acquired Zaca Field Extension ("Zaca") project in Santa Barbara County, California by mid-February. Site preparations are currently being finalized at this location. Underground has budgeted approximately US$7 million for the initial five-well program, which will be comprised of three wells at Zaca and two additional wells at one or more of the Company's other assets. The rig has been sized and equipped to be deployed at the Zaca and Asphaltea projects in the Santa Maria Basin and the Company's other projects in the San Joaquin Basin. The locations for these additional two wells and the subsequent five optional wells will be dependent upon ongoing seismic and geological interpretation and the results of the initial drilling program.

The Company has received all necessary approvals to spud its first step-out development well at Zaca and is currently filing its Notices of Intent to Drill permit applications with the California Division of Oil, Gas and Geothermal Resources for the additional wells at Zaca as well as at Asphaltea and Devil's Den.  Land use permits have already been granted for each of these projects.

The first well at Zaca will be a 6,530 foot deviated well, drilled to a location, which has been de-risked through seismic and existing well data, in the main Monterey intervals that have historically been the most productive in the existing Zaca field. This well will be drilled as a 10-acre offset to two existing wells that have each produced more than 500,000 barrels of oil. The well has been designed from recently acquired seismic to cross two thrust faults below the primary Monterey target to test potentially virgin pressured reservoirs below each thrust fault. The well is expected to take approximately two weeks to drill followed by an additional week to complete.

The historical production from the 61 vertical wells previously drilled into the western part of the existing Zaca field, utilizing primary recovery techniques only, has been robust. These wells had average initial production ("IP") rates in excess of 200 bopd and have produced in excess of 500,000 barrels of oil per well. Even the last 18 of these vertical wells, which were infill wells drilled in pressure depleted reservoirs in the 1970's through the 1980's, had average IP rates in excess of 70 bopd and have produced in excess of 375,000 barrels of oil per well.

"Following the acquisition of Zaca and several other California assets in late November 2011, we have moved quickly to locate, purchase and reprocess existing seismic data and acquire more than 30 miles of new 2D swath seismic data over the Zaca field extension area," said Bruce Berwager, COO of Underground.  "The seismic has allowed the Company to select several attractive, low risk drilling targets in the area and we are moving rapidly to complete preparations for drilling our first development wells. We are pleased that the Key Rig 98 is now under contract, its crew has extensive California experience."

"While the existing Zaca oil field has produced more than 32 million barrels of oil to date utilizing primary recovery techniques, and although we believe our lease contains a significant amount of oil which can be recovered utilizing these same techniques, we are also excited about the potential to increase oil recovery further by utilizing the latest enhanced oil recovery techniques (EOR)," said Michael Kobler, President and CEO of Underground. "To this end, we have also engaged one of the leading EOR engineering firms to evaluate the feasibility of a variety of EOR techniques at Zaca."

In conjunction with the recent 2D swath seismic acquisition at Zaca, the Company acquired two additional seismic lines over its Asphaltea project in the Santa Maria Basin in December 2011. These lines were acquired to enhance the previously acquired seismic by filling in data gaps in this geologically complex area. Processing and interpretation of the additional seismic data from Asphaltea is ongoing and once complete the Company will be in a position to select its initial well location at Asphaltea.

The Company continues to process and interpret seismic and evaluate well data at a number of its other properties in California and Nevada. GLJ Petroleum Consultants, the Company's independent qualified reserves evaluator, has initiated work on the Company's 2011 year-end NI 51-101 compliant reserves assessment, which is expected to be completed by the end of February.

About Key Energy Services

Key Energy Services is the largest onshore, rig-based well servicing contractor based on the number of rigs owned. Key provides a complete range of well intervention services and has operations in all major onshore oil and gas producing regions of the continental United States and internationally in Mexico, Colombia, the Middle East, Russia, and Argentina.

About Underground Energy Corporation

Underground Energy is focused on identifying, acquiring rights to, exploring for, developing and producing oil reserves from shale formations in North America using the latest exploration and recovery techniques and technologies. Underground focuses on identifying and acquiring sizable land positions and prospects in historically prolific but under-explored shale formations as well as in emerging shale plays that, in both instances, hold large volumes of prospective resources. Underground currently holds hydrocarbon rights on approximately 80,303 net acres of highly prospective lands in California and Nevada with an initial focus on the Monterey shale in California. Underground is listed on the TSX Venture Exchange under the ticker symbol "UGE". For more information on Underground, including a copy of the Company's latest corporate presentation, please visit www.ugenergy.com. Underground's regulatory filings are available under the Company's profile at www.sedar.com.

Cautionary Statements

Statements in this press release contain forward-looking information and forward-looking statements within the meaning of applicable securities laws (collectively, "forward-looking information").  Forward-looking information is frequently characterized by words such as "plan", "expect", "project", "intend", "believe", "anticipate", "estimate" and other similar words, or statements that certain events or conditions "may" or "will" occur.  In particular, forward-looking information in this press release includes, without limitation, statements with respect to: (i) the Company's planned 2012 drilling program and the anticipated costs thereof; (ii) the prospectivity of Underground's leases for a significant amount of oil; (iii) the potential to increase oil recovery using EOR; and (iv) the timing for completion of Underground's independent reserve evaluation.  Readers are cautioned that assumptions used in the preparation of forward-looking information may prove to be incorrect. 

Although we believe that the expectations and assumptions reflected in the forward-looking information are reasonable, there can be no assurance that such expectations or assumptions will prove to be correct. In particular, assumptions have been made that: (i) Underground will be able to obtain equipment and regulatory approvals in a timely manner to carry out exploration and development activities; (ii) Underground will have sufficient financial resources with which to conduct its planned capital expenditures; and (iii) the current tax and regulatory regime will remain substantially unchanged. Certain or all of the forgoing assumptions may prove to be untrue.

Forward-looking information is based on the opinions and estimates of management at the date the statements are made, and is subject to a variety of risks and uncertainties and other factors (many of which are beyond the control of Underground) that could cause actual events or results to differ materially from those anticipated in the forward-looking information.  Some of the risks and other factors could cause results to differ materially from those expressed in the forward-looking information include, but are not limited to: operational risks in exploration, development and production; delays or changes in plans; competition for and/or inability to retain drilling rigs and other services; competition for, among other things, capital, acquisitions of reserves, undeveloped lands, skilled personnel and supplies; risks associated to the uncertainty of reserve and resource estimates; governmental regulation of the oil and gas industry, including environmental regulation; geological, technical, drilling and processing  problems and other difficulties in producing reserves; the uncertainty of estimates and projections of production, costs and expenses; unanticipated operating events or performance which can reduce production or cause production to be shut in or delayed; incorrect assessments of the value of acquisitions; the need to obtain required approvals from regulatory authorities; stock market volatility; volatility in market prices for oil and  natural gas; liabilities inherent in oil and natural gas operations; access to capital; and other factors.  Readers are cautioned that this list of risk factors should not be construed as exhaustive. 

The forward-looking information contained in this news release is expressly qualified by this cautionary statement.  Underground does not undertake any obligation to update or revise any forward-looking statements to conform such information to actual results or to changes in our expectations except as otherwise required by applicable securities legislation.  Readers are cautioned not to place undue reliance on forward-looking information.

Certain information contained herein is considered "analogous information" as defined National Instrument 51-101.  Underground is unable to verify whether such information has been prepared in accordance with NI 51-101 and the Canadian Oil and Gas Evaluation Handbook and Underground is unable to confirm whether such estimates have been prepared by a qualified reserves evaluator. The information on the IP rates and aggregate production of wells drilled and located on the western part of the Zaca field was obtained from California Division of Oil, Gas and Geothermal Resources on August 24, 2011. The information has been provided to demonstrate the potential for similar IP rates and aggregate production for certain wells to be drilled by Underground under its 2012 drilling program.

BOEs may be misleading, particularly if used in isolation. A BOE conversion ratio of 6 Mcf: 1 bbl has been used and is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

Neither the TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.

SOURCE Underground Energy Corporation

For further information:

Peter Ballachey
Chief Financial Officer
Underground Energy Corporation
Tel: 805-845-4700 x 17

Simon Clarke
Vice President, Corporate Development
Underground Energy Corporation
Tel: 604-551-9665

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Underground Energy Corporation

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