PROJECTS: SUGARLOAF HOSSTON PROJECT, TEXAS USA
(EME Interest between 6%-18%)

Empyrean signed the original farm-in agreement with Houston based Texas Crude Energy Inc ("TCEI") on 6 April 2006. Although the Sugarloaf-1 well was successfully drilled to a total depth of 20,896 ft, the primary objective reservoir, the Hosston sandstones, proved to have insufficient permeability to provide economic gas production.

However, significant gas shows and fluorescence were encountered higher in the section in the secondary objective. Electric log analysis indicated the presence of a 92 ft gross column of gas in fractured limestones of the Austin Chalk.

The gas discoveries in this carbonate reservoir had two immediate effects. Firstly, the operator increased the land acquisition programme within the area of mutual interest (which stood at approximately 19,500 acres in April 2007); and secondly, it activated negotiations which resulted in the conclusion of a second farm-in agreement between Empyrean and TCEI.

This second agreement involved the division of the prospective area into Blocks A and B and pertained only to the next 16 wells to be drilled on Blocks A or B (subsequent to Sugarloaf-1). TCEI remains the operator in Block B. A major oil and gas company (name undisclosed for confidentiality purposes and to protect competitive advantage) is the operator in Block A.

The operational momentum of Empyrean is manifest in the increased working interest it has been able to negotiate after consummating a second farm-in agreement with TCEI. This second farm-in agreement is over an area divided into Blocks A and B. Empyrean started with a 6% working interest in the whole of Block B acreage, and subsequently drilled the Sugarloaf-1 well. The additional farm-in covers the next 16 wells to be drilled on either Block A or B, after Sugarloaf-1. The deal earns Empyrean a 7.5% working interest where these wells are drilled on Block A and an additional 12% working interest where these wells are drilled on Block B (i.e. the original 6% plus a further 12% resulting in 18%). Following the successful flow testing of two wells on Block A, a drilling programme is being designed to appraise and develop this exciting new field that has been named the Sugarkane Field.

BLOCK B

• Sugarloaf-1 Well (Empyrean Interest 6%)

Remedial cementation was required prior to the fraccing operations of the lower part of the gas-bearing chalk interval in which there are at least three separate intervals of enhanced porosity development. Testing operations began on 11 September 2007.

The first fracc attempt was unsuccessful due to premature screen out of the proppant with only 6% entering the formation; all of which required redesigning a second fracc attempt which was executed on 19 October 2007.

Despite initial gas flows of 387mcfgpd with associated condensate, the flow rate declined. Following the completion of swabbing operations and the setting of production tubing, the well was shut in until results from wells already being drilled and tested in Block A could be used to modify the continued testing programme of the remaining porous zones of the Austin Chalk.

• Kennedy-1H Well (Empyrean Interest 6% - 18%)

Above: Cross Section Block A & Block B

This well was originally called Sugarloaf-2 and is the second well to be spudded in the 16 well deal mentioned above. It is located 1.6 km from Sugarloaf-1 well. The zone targeted in the horizontal section of approximately 5,000 ft of Austin Chalk reservoir is believed to correlate with the producing section in the Sugarkane Field discovery well located 8 km to the west of Kennedy-1H well.

Backround gas readings increased significantly on entering the Austin Chalk.

The rig was released on 8 December 2007 following the emplacement of a 4 ½" liner in the horizontal part of the well. On 15 February 2008 it was announced that fraccing and testing procedures were necessarily dependent on the results of the operations in the adjacent Block A, and it was not until 16 April 2008 that Empyrean received notification of the details of the final completion programme.

The fraccing operation was carried out on 14 May 2008. A total of 95,000 lbs of sand and 5182 barrels of fluid were injected under pressure into four sets of perforations over an approximate 600ft horizontal interval. Initial flow results of gas condensate and fracc fluid recovery were announced on 25 May 2008, and since then the well has been slowly expelling the fracc fluids prior to the measuring of full gas condensate flow.

The result is particularly relevant to the overall prospectivity of the area as it has shown that the so-called "middle pay zone" contains gas condensate and could therefore add 150% to the recoverable reserves attributed to the "upper pay zone".

As of 29 May 2008 the plan was to run pressure gauges while the well was continuing to flow, then shut in the well for a prolonged pressure build up. There still remained approximately 4,120 barrels of fracc fluid to recover.
  

BLOCK A

• TCEI JV Block A-1 Well (Empyrean Interest 7.5%)

TCEI JV Block A-1, a horizontal appraisal well, was spudded on 22 May 2007. Two sidetrack operations were required to get the well to total depth. A total depth of 14,586 ft (measured depth) was finally reached on 29 August 2007.

Gas shows were encountered over the whole horizontal length of approximately 2,500 ft. Multiple gas flares measuring up to 65' were recorded over approximately a 1,000 ft horizontal length, including an interval of about 600 ft that produced a constant gas flare.

A 4 ½" liner was cemented to 14,586 ft on 3 September 2007 which again was an operation not without its problems. Fraccing and testing operations were put on hold until the adjacent the TCEI JV Block A-2 well could be made available for seismic monitoring purposes. This technique enables the operator to determine the efficacy of the fracc operation at the TCEI JV Block A-1 well. The first attempt to fracc on 13 December 2007 resulted in the fracc being unable to be injected into the reservoir, as did a second attempt on 20 December 2007. Sufficient injection rates required to fracc could not be achieved without exceeding the 7" casing limitations, and on 17 January 2008 Empyrean announced that 4½" casing was being tied to the top of the liner and being run to surface to enable higher injection pressures. Three further attempts to pump the fracc sand to the reservoir under high pressure were unsuccessful.

The operator made the decision to shut down the well on 9 February 2008 and initiate a detailed reservoir engineering post-mortem which includes a 3-D simulation study. This study was performed to re-evaluate the options on offer.

Operations recommenced on site on 14 April 2008. On 21 April 2008 Empyrean announced to shareholders that "the well unexpectedly began to flow commercial quantities of gas and condensate during operations to prepare the well for a fracture stimulation and flow test programme". Initial flows of 2.0 mmcfepd were measured which increased to 2.4mmcfepd before the well was shut in to obtain pressure build up measurements.

An acid fracc was successfully completed over a 900ft horizontal interval through five sets of perforations on 28 May 2008.
 

• TCEI JV Block A-2 Well (Empyrean Interest 7.5%)

The operation resulted in a six fold increase in deliverability. On 28 May 2008 Empyrean was able to report an average gas flow of 2.5mmcfgpd accompanied by 950 bcpd and no water through a 14/64" choke. This equates to approximately 12 mmcfgepd based on present gas and condensate prices.

On the same day the well was shut in to measure pressure build up as part of the normal reservoir and production engineering procedures. This well already has a sales line connected to it enabling all production to be sold soon after flowing.

TCEI JV Block A-2 well, located between the Sugarkane discovery well and the TCEI JV Block A-1 well, is the third well to be drilled in the 16 well deal. It is a vertical well and may test any of the three Austin Chalk intervals that were intercepted at Sugarloaf-1 well.

The TCEI JV Block A-2 well was spudded on 16 August 2007 and was in fact a re-entry of a well previously drilled in 2006. In that well an electric wireline tool had become stuck permanently and the TCEI JV Block A-2 was designed to avoid the fish by drilling a directional leg.

A total depth of 12,084 ft was reached and 5 ½" production casing set at 12,068 ft. Since then the well has been used to monitor fraccing operations in the TCEI JV Block A-1 well located to the south. During drilling, the gas backround increased to 350 units in the Austin Chalk and this zone will be fracced and tested, most likely after operations at the TCEI JV Block A-1 are completed.
 

• TCEI JV Block A-3 Well (Empyrean Interest 7.5%)

The TCEI JV Block A-3 well is the fourth well in the 16 well deal and the third located in Block A in which Empyrean is a participant. It lies southwest of the TCEI JV Block A-1 well and has as its target the same producing interval of the Austin Chalk that was intercepted at the Sugarkane No1 well gas-condensate discovery.

The well was spudded on 24 October 2007 and on 12 November 2007 reached a total depth of 12,457 ft in an 8 ½" vertical pilot hole. Gas shows over a 185 ft interval rose to a maximum of 350 units, almost 10 times the backround. After electric logs were run the well was kicked off at 11,480 ft to begin horizontal drilling in the Austin Chalk reservoir. A 7" casing shoe was set at 12,272 ft.

During the horizontal drilling operation, three sidetracks were made to precisely target high permeability pay zones. The third and final sidetrack spanned 13,230 to 15,100 ft. Significant shows and flares were recorded while drilling the entire 2,800 ft of open hole. The well continually tried to flow despite the high mud weights being used. This persuaded the operator to stop drilling at 15,100 ft, short of the original 17,800 ft, and attempt a natural open hole test. A plug was set at the base of the 7" casing and the rig released and replaced by a smaller and less expensive workover rig.

Workover operations commenced on 29 January 2008. The operator was forced to leave in the open hole a fish made up of a length of 2 7/8" tubing and a 5 7/8" rock bit. It is permanently lodged in the horizontal part of the open hole in the interval 12,676 ft to 13,097 ft.

On 2 April 2008 a production packer was emplaced in the 7" casing at 11,720' to begin the open hole testing procedure. On 14 April 2008, Empyrean was finally able to announce the initial test results of a significant gas-condensate discovery. Initial flows through a 12/64" choke were measured at 1.9mmcfgpd with 460 barrels of condensate per day. Based on present day prices for gas and condensate this would be equivalent to 6.6 mmcfepd.

This open hole test has been conducted without stimulation. It compares favourably with other similar fields in the region which exploit the Austin Chalk. The Brookeland Field in Tyler County, for example, has an approximate equivalent rate of 1.4 mmcfepd ("million cubic feet of equivalent per day") per thousand feet of horizontal. The TCEI JV Block A-3 well produces comparatively at 2.4 mmcfepd. A typical well for one operator in the Brookeland Field has approximately 12,000 ft of horizontal with average initial rates of over 16 mmcfepd. The TCEI JV Block A-3 well provides evidence that longer horizontal completions targeting the natural fracture swarms that exist intermittently in the reservoir should result in even better deliverability.

The TCEI JV Block A-3 well will be flow tested then shut in as part of the normal reservoir and production engineering procedure. During the shut in period the operator will be supervising the construction of production facilities and pipeline connection. Condensate will be separated in situ and trucked to the appropriate markets.

SUMMARY

PARTNER

• Texas Crude Energy Inc.

Texas Crude, a Houston based international oil and gas exploration/production company, is the operator of the Block B Sugarloaf Prospect

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