For inclusion in the AIM Admission Document

Transcription

1 Competent Person s Report Interests held by Northcote Energy, Ltd. in the United States of America as of 01 November 2012 Prepared for Northcote Energy, Ltd. For inclusion in the AIM Admission Document by Moyes & Co. 20 December, 2012 Page 1 of 53

2 20 December 2012 Moyes & Co Douglas Ave Suite 1221 Dallas TX The Directors Northcote Energy Limited Formerly Everest Energy Limited C/O Ogier Fiduciary Services (BVI) Limited Nemours Chambers, Road Town, Tortola VG1110 British Virgin Islands The Directors The Directors Beaumont Cornish Limited, Shore Capital Stockbrokers Ltd 2nd Floor, Bowman House, Bond Street House 29 Wilson Street, 14 Clifford Street London London EC2M 2SJ W1S 4JU RE: COMPETENT PERSON S REPORT ON INTERESTS HELD BY NORTHCOTE ENERGY, LTD. The Directors of Northcote Energy Limited (formerly Everest Energy Limited) ( Everest ) have requested Moyes & Co. ( Moyes ) to prepare an independent report on the reserves, resources, and value of the producing properties and undeveloped leasehold mineral interests of Northcote Energy, Ltd. ( Northcote ). This report is to be included in an admission document to be issued by Everest in connection with its acquisition of Northcote and subsequent admission to the AIM Market ( the Admission Document ). Northcote has existing oil and gas production and reserves and is also focused on expanding its production and reserves in one of the conventional resource plays in the USA, referred to as the Mississippian Lime Resources Play. The undeveloped minerals, leasehold, and prospects are principally in the Mississippian formation, Layton and Cleveland sands, and Hunton oil and gas plays in Oklahoma, USA. Moyes hereby consents to the inclusion of this report, with the inclusion of its name, in the form and context in which it appears, in the Admission Document. Very truly yours, P. Dee Patterson, P.E. Managing Director Moyes & Co. dpatterson@moyesco.com Page 2 of 53

3 Table of Contents 1 Executive Summary Introduction Summary Northcote s Lease Holdings and Producing Assets General Nature of USA Petroleum Rights Mississippian Lime Horizontal Play Current Activity Petroleum Geology Reservoir Analysis Reserves Oil and Gas Prices Planned Expenditures Conclusions Disclosures Data Qualifications of Moyes & Co Basis of Report Responsibility Appendix A Northcote Assets Appendix B Summary of Reserves by Asset Appendix C Cash Flow Forecasts Appendix D Glossary of Terms and Abbreviations Appendix E Definitions of Oil and Gas Reserves Page 3 of 53

4 1 Executive Summary Northcote Energy, Ltd. ( Northcote ) is an independent oil and gas investment company based in London and Dallas, that is engaged in the acquisition, exploitation, and development of oil and gas properties located onshore in the United States, in what is referred to as the Mississippian Lime Resources Play. Northcote owns certain rights to producing assets and certain drilling leases in Oklahoma: Leases in Osage and Woods Counties, Oklahoma, totaling net acres (6,626 gross) with 11 producing leases. The working interests in 10 producing leases (9 Mississippian wells and 1 Layton well) and an additional override interest in one of the producing leases in Oklahoma are in Osage County and are operated by Glenn Supply Company, Inc ( Glenn Supply ) of Tulsa, Oklahoma; these produce a net 28.5 BOEPD and provide cash flow to support the completion of the development program on the leases. Combined with the behind pipe reserves, production is expected to reach net 579 BOEPD by early 2014, these assets provide a base for a long life cash flow allowing for greater expansion in both Osage and Woods Counties. In Woods County, Northcote has 1 producing lease, 1 drilled well awaiting completion of pipelines, and a 12 well continuous drilling program scheduled for The Woods County properties are primarily operated by Midstates Petroleum Company (acquirer of Eagle Energy of Oklahoma) ( Midstates ) although other operators including Chesapeake Energy Corporation ( Chesapeake ) and SandRidge Energy, Inc ( Sandridge ) are also active and propose wells in the area in which Northcote has lease interests. Northcote holds three option agreements allowing for the acquisition of additional working and override interests in Osage County. Together the option agreements would permit Northcote to acquire up to an additional 18.33% (average) working interest and additional override royalty interests of 2.19% (average) in the nine leases in Osage County producing Page 4 of 53

5 from the Mississippian. These interests, if acquired, would substantially increase the reserve and NPV set forth herein. The Northcote assets contain a net 665 MBO and 1,688 MMcf of Proved Reserves (1P), 670 MBO and 1,702 MMCF of Proved and Probable Reserves (2P), and 674 MBO and 1,717 MMcf of Proved, Probable, and Possible Reserves (3P). The table in 1-1 is the summary of appendix C. Reserve Class/Category As of November 1, 2012 Gross Reserves Net Reserves Net Cash Flow Oil & Condensate (Mbbl) Natural Gas (MMcf) Oil & Condensate (Mbbl) Natural Gas (MMcf) Future Net Revenue ($000) Future Net OPEX & Taxes ($000) Future Net Capital ($000) Future Net Cash Flow ($000) NPV 10% ($000) Proved Developed Producing 417 1, ,958 1,466-1, Proved Developed Behind Pipe 2,492 6, ,376 52,178 7,185 1,104 43,889 28,488 Proved Shut In Proved Undeveloped 3,464 9, ,625 1, ,089 4,359 Total Proved 6,672 18, ,678 65,818 10,246 2,053 53,518 33,817 Probable Behind Pipe Probable Undeveloped 1,800 5, Total Probable 1,800 5, Total 2P 8,472 24, ,685 66,076 10,284 2,095 53,698 33,919 Possible Behind Pipe Possible Undeveloped 2,100 6, Total Possible 2,100 6, Total 3P 10,572 30, ,694 66,376 10,328 2,143 53,906 34,036 Figure 1-1: Summary of Northcote Reserves Page 5 of 53

6 The tables in 1-2 and 1-3 are these same net reserves, cash flows, and present worth s separated by their respective Osage and Woods County locations. Reserve Class/Category (Osage County) As of November 1, 2012 Gross Reserves Net Reserves Net Cash Flow Oil & Condensate (Mbbl) Natural Gas (MMcf) Oil & Condensate (Mbbl) Natural Gas (MMcf) Future Net Revenue ($000) Future Net OPEX & Taxes ($000) Future Net Capital ($000) Future Net Cash Flow ($000) NPV 10% ($000) Proved Developed Producing ,920 1,461-1, Proved Developed Behind Pipe 2,492 6, ,376 52,178 7,185 1,104 43,889 28,488 Proved Shut In Proved Undeveloped ,976 1, ,639 4,109 Total Proved 3,077 7, ,655 65,073 10,137 1,949 52,987 33,512 Probable Behind Pipe Probable Undeveloped Total Probable Total 2P 3,077 7, ,655 65,073 10,137 1,949 52,987 33,512 Possible Behind Pipe Possible Undeveloped Total Possible Total 3P 3,077 7, ,655 65,073 10,137 1,949 52,987 33,512 Figure 1-2: Summary of Northcote Reserves for Osage County, Operated by Glenn Supply Reserve Class/Category (Woods County) As of November 1, 2012 Gross Reserves Net Reserves Net Cash Flow Oil & Condensate (Mbbl) Natural Gas (MMcf) Oil & Condensate (Mbbl) Natural Gas (MMcf) Future Net Revenue ($000) Future Net OPEX & Taxes ($000) Future Net Capital ($000) Future Net Cash Flow ($000) NPV 10% ($000) Proved Developed Producing Proved Developed Behind Pipe Proved Shut In Proved Undeveloped 3,000 8, Total Proved 3,595 10, Probable Behind Pipe Probable Undeveloped 1,800 5, Total Probable 1,800 5, Total 2P 5,395 16, , Possible Behind Pipe Possible Undeveloped 2,100 6, Total Possible 2,100 6, Total 3P 7,495 22, , Figure 1-3: Summary of Northcote Reserves for Woods County, Operated mainly by Midstates Northcote is party to a series of standard Joint Operating Agreements ( JOA ) on both the Osage and Woods County leases. These contain certain provisions detailing Northcote s funding commitments and its rights and obligations in respect of the leases. The operator of each of our current and planned wells is detailed in Appendix A. Section 4 of this report contains further analysis of reserves on a project basis. The table in Figure 1-4 shows the sensitivities to the major uncertainties of revenue, capital cost, operating expense, and discount rate. The table shows the impact of a plus or minus 10% change in each of the variables and percentage change in the variable, except for discount rate. The table shows the change in Net Present Value from a 10% discount rate to a 15% and 20% discount rate. Page 6 of 53

7 Sensitivities (M$), Impact on Net Present Value Variable -10% +10% PDP Reserves (NPV10 = $937) Revenue 754 1,122 Change % -20% 20% Capital Change % 0% 0% OPEX 1, Change % 9% -9% Discount Rate, NPV15 Change % Discount Rate, NPV20 Change % % % 1P Reserves (NPV10 = $33,817) Revenue 30,005 37,631 Change % -11% 11% Capital 34,007 33,627 Change % 1% -1% OPEX 34,031 33,605 Change % 1% -1% Discount Rate, NPV15 Change % Discount Rate, NPV20 Change % 28,459-16% 24,544-27% 3P Reserves (NPV10 = $34,036) Revenue 30,169 37,904 Change % -11% 11% Capital 34,240 33,832 Change % 1% -1% OPEX 34,252 33,821 Change % 1% -1% Discount Rate, NPV15 Change % Discount Rate, NPV20 Change % 28,635-16% 24,688-27% Figure 1-4: Northcote NPV10 Sensitivities by Category Page 7 of 53

8 2 Introduction 2.1 Summary Northcote is an independent oil and gas company based in London and Dallas, that is engaged in the acquisition, exploitation, and development of oil and gas properties located onshore in the United States. Northcote owns acreage and producing assets and intends to participate in developmental wells, principally located in the Mississippian formation, commonly referred to as the Mississippian Lime Resources Play. 2.2 Northcote s Lease Holdings and Producing Assets Northcote owns certain rights to producing assets in Oklahoma. These comprise: Leases in Osage County, Oklahoma, totaling 1,680 gross acres with 10 producing leases. Nine of these producing leases are producing from the Mississippian formation and one lease is producing from the shallower Layton formation. Leases in Woods County, Oklahoma, covering 5,026 gross acres of which approximately 3,800 will be held by production on completion of the contemplated drilling program. On the leases in Woods County, 1 is a producing well, 1 drilled well awaiting completion of pipelines, and a 12 well continuous drilling program currently scheduled for 2013, with further drilling anticipated in These assets are summarized in the table below and are detailed in Appendix A. SUMMARY TABLE OF ASSETS Operator Interest (%) Osage County, OK Glenn Supply Woods County, OK Midstates, Chesapeake Osage County, OK Glenn Supply Woods County, OK Midstates, Chesapeake Development 27.9% to 29.7% WI with mean NRI 75% of WI 0.02% to 0.50% WI with mean NRI 78% of WI Production 27.9% to 29.7% WI with mean NRI 75% of WI 0.02% to 0.50% WI with mean NRI 78% of WI Lease Expiry Date Total Gross Lease Area (acres) HBP 1,600 < 3 years 5,026 HBP 1,600 HBP 1,239 WI = Working Interest; NRI = Net Revenue Interest; HBP = Held By Production In respect of the Woods County Development Lease interest, the contemplated drilling program will further secure the leases as upon completion and initiation of production operations the leases become HBP. A single well will typically secure up to 320 to 640 acres, thus a single well can hold by production one to three additional drilling locations. Oklahoma Summary: Northcote holds acreage in Osage and Woods County, Oklahoma. Page 8 of 53

9 Osage County The Osage project consists of 9 horizontal wells, targeting the Mississippian and 1 vertical well targeting the Layton. The current Mississippian wells are all horizontal wells and in total have 21 laterals that expose over 25,000 feet of reservoir rock that has been produced naturally. The 10 producing wells are located in three sub-areas all in close proximity, as detailed in appendix A. These areas also have secondary objectives up hole that have seen significant development in the surrounding areas. From West to East the sub areas are informally named Big Hill, Little Drum, and Mathis. The project is operated by Glenn Supply; however, Northcote intends to become a bonded operator in the State of Oklahoma and Osage County. The Company does not have any fixed obligations over the timing or the order of the fracture stimulation program at Osage County; however the Company s plans are described in section 6. The Company plans to frac its horizontal wells, as set out below, to realize their upper potential as fracture stimulation has been demonstrated, by recent industry activity in the play, to be a critical component of maximizing production and reserve recovery from Mississippian wells. The Mississippian is a compartmentalized reservoir that can demonstrate significant variance in porosity over short intervals; fracture stimulation increases the connectivity of more porous areas within the wellbore. The first fracture stimulation is expected to be at the Mathis area in early The Mathis is located in section 11 of 25N 5E on the far East end of the play and has two wells, Steele 2-11H and Steinberger 1H-10 that produce from the Mississippian formation. Both of these wells could benefit from fracture stimulation and it is expected that the Steele 2-11H well, will be the first Osage County area to be targeted in the fracture stimulation program. The Little Drum area is located in Sections 16, 17 and 18 of 25N-4E and has four total wells; four producing from the Mississippian formation, Lauren (MS2), Little Drum (MS1), Sarah (MS1) and West Little Drum (MS2). The first project in Little Drum will be to run a salt water disposal line to the Big Hill area in preparation for the first stimulation of a Mississippian lateral. The Sarah (MS1) well has only one lateral and is a good candidate for the Company s second fracture stimulation, following the frac of Steele 2-11H and is expected to be performed in early The funding for the fracture stimulation of Sarah (MS1) well is dependent on the results of the first fracture stimulation of Steele 2-11H being in line with the expectations set out in this report. Sarah (MS1) is planned as the first stimulation at Little Drum because it has the least complicated wellbore. Following a successful stimulation of the Sarah (MS1) well, there are three other Mississippian wells on the lease with seven unfrac d laterals that will all be frac d in 2013 or early The Big Hill area is located in section 12 of 25N-3E and has three horizontal wells, Big Hill 1H-12, Big Hill 2H-12 and Big Hill 4H-12 that produce from the Mississippian formation and also contains the vertical oil well Burkhart #3, which produces from the Layton. The Big Hill section is the planned location for the Company s third production enhancement, which will be the fracture stimulation of the Big Hill 1H-12 well, which is intended for May The ability of the Company to fund the fracture stimulation of this well and each of the six other remaining unfrac d wells, from internally generated cash flow, will be dependent upon the wells performing in line with the expectations set out in this report. The fracture stimulation of the other two Mississippian laterals at Big Hill 2 and 4 is currently expected in Page 9 of 53

10 The Burkhart #3 well was drilled to exploit 13 feet of productive Layton sand, which were observed in the mud logs when the Big Hill 4H-12 was drilled. As explained above Big Hill 4H-12 was completed in the Mississippian as originally planned but the Burkhart #3 well was drilled to target the Layton sand. The Burkhart #3 well indicates that there are further development opportunities for additional wells targeting the shallower Layton and Cleveland sands in the southern portions of the Osage leases. Consequently, in addition to the planned fracture stimulation of the Mississippian wells, the company intends to revisit the Layton sand by drilling new vertical wells, Layton #1 and #2 as further described in section 6. In addition to the planned Layton #1, in January 2013,and Layton #2 well in October 2013, Northcote intends to further develop uphole potential, including the Layton sand, on an opportunistic basis both through new drilling and eventually through recompletion of existing well bores. Furthermore, it is expected that because of the favorable production results from these two wells, that the Mathis area will be the first Osage County area for additional Mississippian drilling, which is expected to occur in In respect of the 10 producing wells, each has access to one of three production facilities, located within each section. Each locations facility contains at least one salt water disposal well, at least one water separation unit and water and oil tanks along with monitoring equipment. Oil extraction is by contracted vehicles. When the lease ends because the well ceases to be in production, each lease has plug and abandonment obligations ( P&A ), which are required to be met by the WI partners. Northcote and its WI partners have in place plans to ensure that their P&A obligations are met in a responsible manner. The incremental cost of plugging and abandoning each well is not currently expected to be significant. Figure 2-1: Northcote Lease Outline for Osage County Woods County Page 10 of 53

11 Northcote currently holds an approximate average of 0.35% (35 percent of one percent) working interest, detailed in Appendix A, in the Woods County prospects and has started negotiations for increasing the working interest position further. Northcote intends to participate in each well proposed by the operator. The operators are planning a continuous Woods County drilling program, in which Northcote will participate, and the drilling program currently indicated by the operator, Midstates, includes 12 new wells through 2013 or roughly 1 per month, targeting the Mississippian. As a non-operating working interest partner in the Woods County prospect Northcote has the right to participate in all wells, which are proposed on the lease by the operator, however as non-operator the Company cannot control the timing of the drilling program. Other operators active in the area may from time to time propose wells which include leasehold held by Northcote. The only other operator to have proposed a well at the date of this report, in which the Company plans to participate, is planned for late 2012/early 2013 and has been proposed by Chesapeake as operator. The wells are operated under standard JOA in respect of each producing well. Furthermore the current Woods County lease has 10 additional locations that could be drilled in The currently drilled and planned wells will take total drilling on the Woods County lease to 25 wells, which is expected to hold an approximate 3,800 to 4,000 gross acres by production assuming that each well is a producing well. In addition to the planned 22 wells currently contemplated in section 6 (planned expenditures), the Woods County lease has the potential for additional locations based on continued successful drilling results. Each well has its own production facility with a water separation unit, water and oil tanks along with monitoring equipment and is tied in to a salt water disposal well for reinjection of produced waste water volumes. Oil extraction is by contracted vehicles. When the lease ends because the well ceases to be in production, each lease has plug and abandonment obligations ( P&A ), which are required to be met by the WI partners. Northcote and its WI partners have in place plans to ensure that their P&A obligations are met in a responsible manner. The incremental cost of plugging and abandoning each well is not currently expected to be significant. Northcote's Woods County leases are situated between and on trend with some of the most productive areas in the Mississippian Play. Chesapeake has developed the area northwest of Northcote. Chesapeake is credited with kicking off the play with the Serenity well that produced over 130 MBO in the first year. Eagle, since purchased by Midstates, has developed to the east-southeast in Alfalfa County and is the operator of the majority of Northcote s Woods County leases. From time to time other operators with leases in the area of Northcote s Woods County leases may propose wells through Oklahoma s forced pooling statutes which encourage development of oil and gas leases. Northcote has in the past and may in the future elect to participate in certain of these wells while in other cases it may sell some acreage for cash and or over-riding royalty interests in such wells. Active operators in the area with whom Northcote has elected to participate with are Chesapeake and Midstates. Their drilling has resulted in many of the best producing wells in the play. Finally, to the northeast Sandridge has made dozens of wells to date and continues to develop the area. Together these companies have pioneered some of the most successful strategies for completing and producing the Mississippian. Geologically this area is situated on the Anadarko Shelf and is part of a vast Mississippian age basin that at last estimate may cover more than 16 million acres in NW Oklahoma and Western Kansas. Page 11 of 53

12 During the vertical drilling stage of the Mississippian development the rocks had been treated as a thick, almost undifferentiated lime section with weathering at the top that is loosely referred to as the Chat. Many wells only "notched" in the top of the formation and produced until they watered out. Later, more vertical wells drilled the entire section and placed fracs (small by today s standards) on the most favorable intervals as determined by electric and mud logs. Current thinking on Mississippian deposition is focused on repetitive depositional systems primarily laid down in basin ward, prograding wedges. This concept has become critical to understanding oil, water relationships and the key to determining at which interval the "lateral" well bores should penetrate. Much of the oil is probably sourced from the Mississippian but it is the contact to the organic rich Woodford that allows the wells to have such large reserves. In spite of the high organic content these wells will always make water in their production mix, but with the high expected volumes and the tremendous flush production after treatment these are very economical targets and Northcote is in an excellent area for continued development of this expanding play. Figure 2-2: Woods County Map Page 12 of 53

13 2.3 General Nature of USA Petroleum Rights Unlike in other parts of the world, onshore mineral (including petroleum) rights in the United States are primarily vested in, or derived from, the original landowner rather than the State. Mineral rights can be held separately from ownership of the surface rights. Holders of mineral rights may lease their mineral rights to operators who wish to drill wells or to non-operators who wish to participate in the drilling of wells on the acreage owned by the mineral rights holder. Individual leases are usually much smaller in size than is common elsewhere, and a company s rights holdings in an area will often comprise many small leases rather than fewer, larger, ones. Leases are typically granted for a relatively short period, such as three to five years, unless production is established on the lease. At that point some or all of the leases can continue to be held while production operations continue, the exact area reflecting the permitted drilling density for the particular formation being produced. Osage County, Oklahoma, due to its status as tribal lands of the Osage Nation, differs in certain ways from privately owned onshore leases in the United States. The Osage Mineral Estate is the oil, gas, and other mineral sub-surface of the approximately 1.47 million acre Osage Reservation. The Osage Tribal Allotment Act of 1906 established that the Osage Nation is the beneficial owner the Osage Mineral Estate. The United States holds title to the Osage Mineral Estate in trust for the Osage Nation. No individual or group of individuals owns the Osage Mineral Estate. The Bureau of Indian Affair s (a bureau of the United States Department of Interior) Osage Agency manages the Osage Mineral Estate. Since there is only one Fee Lease mineral owner for the entire county all leasing is from the tribe by auction or negotiated concession similar to other lands managed by the United States federal government. This process reduces title work and risk; however lessor title chain is still the same process as privately owned mineral leases. The terms of the concession agreements are typically negotiated directly with the Osage Nation and these concessions usually cover large lease areas. The lease auctions are under standard terms, whereby the successful bidder in the mineral lease auction has a period of 18 months to develop the acreage. The drilling of wells, and the rates at which they can be produced, are controlled by the relevant regulatory body; in Oklahoma it is the Oklahoma Corporation Commission ( OCC ). These regulatory bodies are charged with ensuring the orderly and optimum development of reservoirs and, as such, establish field rules which define the maximum drilling density allowed in an area and compliance with all environmental regulations. The net impact of this ownership and regulatory environment is that acquiring and maintaining leases in good order may take considerably more effort than that usually required in other countries. The Northcote leases are generally small lease tracts that will be combined with other leases to form a drilling unit. The drilling unit can be formed voluntarily or compulsorily by state commission ruling such as the OCC. Through either arrangement, the leaseholder has the option to join in the drilling of the well, farm out the lease to a third party to support the drilling of the well, or sell its interest in the lease. If the leaseholder elects to join, an operator is selected and a JOA, a standardized contract based on model forms that carry standard amendments that address issues common to the oil and gas industry, between co-tenants or separate owners of oil and gas properties being jointly operated, is executed. A JOA sets out terms and agreements between the owners for operation of a lease. One of the parties to the JOA is designated operator for the joint account. The JOA sets out the provisions for decision making and accounting procedures, among other things, key provisions of a JOA often include: Page 13 of 53

14 identification of leases and lands associated with a well; identification of the property interests of the parties in a well; commitment of the parties to participate in operations on the lease; procedure for dealing with disagreements among the parties about operations to be conducted; duties of the operator, including operations, accounting, insurance and other activities;. sharing of expenses for and the allocation of liability with respect to joint operations; and, remedies for a party s failure to pay its share of expenses; and, rights of the parties in production from well. There are no obligations to drill a well on any of the leases except to extend the lease beyond its primary term. Leases have a primary term in which the lease will expire if production is not established. Drilling operations will need to commence on, or prior to, the lease expiration date in order to perpetuate the lease. As long as there is continuous activity on the lease of a drilling or production nature, the lease will continue. The lease will terminate on the later of the primary term expiry date or the end of production from the well(s) in the spacing unit containing the lease. Should Northcote acquire new leases, the terms may provide for a cash payment to the owner of the mineral interest called a lease bonus. The primary term of the lease is negotiable, but usually is 3 to 5 years. In that time Northcote would need to drill a well and establish production to perpetuate the lease. Page 14 of 53

15 3 Mississippian Lime Horizontal Play 3.1 Current Activity The Mississippian Lime Horizontal Drilling Play is a re-activation of the development of the Mississippian Lime formation in northern Oklahoma and southern Kansas. The Mississippian oil and gas bearing system is a proven commercial trend producing from several thousand vertical wells for more than 50 years. The play area includes multiple counties of the Northwest Shelf of the Anadarko Basin and the Nemaha Uplift in North Central Oklahoma and Southern Kansas. The core of the play involves drilling horizontal laterals in existing vertical wells or new horizontal wells in the vicinity of historical Mississippian producers or dry holes. These liquid-rich zones were once thought to have been extinguished by vertical, conventional drilling many years ago. Now, with the technological advancements made with horizontal drilling and fracing, operators are able to unlock vast amounts of hydrocarbons. Active companies in the play include Chesapeake, SandRidge, Range Resources Corporation ( Range Resources ), EOG Resources, Inc, Midstates, and Red Fork Energy Ltd ( Red Fork Energy ). There are currently approximately rigs actively drilling in the play. Since the beginning of 2009, there have been over 600 horizontal wells drilled in the play and approximately 56 wells have a meaningful production history that can be used to estimate their ultimate recovery. A map of the historical Mississippian production and a listing of the operators and their focus area are shown in Figure 3-1. Range Resources, Red Fork Energy, and SandRidge are the larger active companies in the area of the Northcote area of interest. Figure 3-1: Mississippi Lime Historical Wells and Companies Focus Areas. (Courtesy of Oil and Gas Journal) 3.2 Petroleum Geology The Mississippian Oil trend is an expansive carbonate stratigraphic trap producing at shallow depths ranging from 4,500 to 7,000 feet below the surface. The reservoirs lie at the regional Pennsylvanian/Mississippian unconformity, as a result of uplift, alteration and erosion of shallow marine Mississippian carbonates. A graphic of the target Mississippian formation is shown in Figure 3-2. Page 15 of 53

16 The uppermost Mississippian member is a widespread debris-flow deposit formed through a combination of uplift and erosion of the Mississippian Limestone, consisting of varying amounts of weathered chert, limestone and dolomite called the Mississippi Chat. The Mississippian Lime underlies the chat and also exhibits good reservoir characteristics. The formation was subject to weathering and digenesis and erosion at the regional unconformity. This results in greatly varying reservoir properties both horizontally and vertically. Where the digenesis and weathering have enhanced the reservoir properties, the porosity is generally 15 to 20% and can be more than 100 feet thick. Where it has not been enhanced, the porosity is only 4-6% and has low permeability. This results in laterally discontinuous reservoirs that are ideally developed with horizontal drilling technology. The formation s geology is well understood as a result of the thousands of vertical wells drilled and produced there since the 1940s. The horizontal wells drilled in the play have lateral lengths of between 2,500 ft and 5,000 ft and are fracture stimulated in 6-12 stages. The fracture stimulation treatments are not as large as those in the Bakken play or the other unconventional resource play such as the Eagle Ford. Because of the shallow depths and smaller fracture stimulation treatments the typical completed well cost ranges from $2.4-$4.0 million. Current drilling times are approximately days from spud to rig release. Figure 3-2: Mississippian Lime Horizontal Play Concept Cross Section 3.3 Reservoir Analysis The active operators in the play have published significant information on their results and expectation on the performance of wells in the play. This information corroborates that the Mississippian Lime Horizontal Play is a region that is appropriate for development. Furthermore the Page 16 of 53

17 data collected from these operators can be used to further understand the characteristics, performance and behavior of wells that are drilled in the play. SandRidge currently has over 2 million acres under lease and the company has completed over 300 wells in the play, as of December They estimate they have about 8,000 potential drilling locations. SandRidge s published type curve for well performance is 456 MBOE with expected well recoveries ranging from 300 to 500 MBOE at an average drill and complete cost of $3.2 million including allocated salt water disposal well costs. SandRidge plans to operate an average of 29 rigs in the Mississippian play in 2012, and drill 380 wells during the year. Of the 29 rigs, 5 of them are dedicated to drilling salt water disposal wells, emphasizing the heavy water production from the Mississippian that drives operating costs. Chesapeake has approximately 1.8 million net acres under lease and has drilled approximately 50 wells in the trend. Chesapeake is currently producing 11,300 BOEPD from the Mississippian oil play and estimates that its production mix is composed of 40% crude oil, 15% natural gas liquids, and 45% natural gas. Chesapeake s published type curve is 360 MBOE with a cost to drill and complete wells of $2.8 million, including salt water disposal facilities. Chesapeake is currently operating 22 rigs in this play. Range Resources has published a type curve based on seven wells that have been completed and the average estimated ultimate recovery (EUR) is 485 MBOE. The type curve is for a 2,200 ft horizontal lateral well completed with a 12 stage fracture treatment. They indicate this equates to 4-9% of the original oil in place. Range Resources has 125,000 net acres prospective for the Mississippian oil play and plans to operate as many as three rigs here in Figure 3-3 shows a typical log section for the Mississippian Lime. The tops of the productive formations are highlighted including the Mississippi Lime, Chat, Woodford, and Arbuckle. Figure 3-3: Mississippian Type Log Gamma measures the radioactivity of rock and is most often used to quantitatively derive clay, or shale, volumes. Gamma ray will decrease in the presence of carbonates because of the general lack of shales. The decrease in gamma over these formations is a result of the carbonates in the Mississippian along with the harder dense limestone. Most rock materials are insulators, while their enclosed fluids have conductive properties and for water saturation is tied to salinity (resistivity increases with more saline water). Hydrocarbons are infinitely resistive. The low resistivity in these formations is an indicator of good porosity and high water saturation, emphasizing the need for water disposal facilities. Page 17 of 53

18 The main pay in the Mississippi Lime is the Chat portion of the Mississippi Lime formation. The Chat has very high porosity (>30%), but contains high water saturations and most wells produce significant water with the oil. Moyes has analyzed the performance of 56 Mississippian Lime horizontal wells that were completed between 2007 and The wells had 30 day average initial rates ranging from 60 to 750 BOPD. The average estimated oil recovery was 366 MBO from this sampling of wells. This is shown below in Figure 3-5. A type curve based on the analysis is shown in Figure 3-6. Figure 3-4: Mississippian Lime Ultimate Recovery Reserve Distribution Page 18 of 53

19 Figure 3-5: Mississippian Lime Type Curve Hydraulic fracturing is the primary choice for enhancing production in a majority of low-permeability reservoirs and is often required for a well to produce at economical rates. The combined effects of intersecting natural and hydraulically fracturing the reservoir is largely responsible for improved productivity from horizontal wells as compared with production from vertical wells. Horizontal wells increase reservoir contact area and decrease pressure drawdown. The effectiveness of hydraulic fractures depends mainly on the fracture length and on the fracture conductivity. A hydraulic fracture completion will allow the wellbore to reach further into the formation matrix, increasing the amount of contact with high quality reservoir rock, and typically has the effect of increasing productivity 2 to 30 times compared to an untreated well. In low-permeability reservoirs this results in immediately higher flow rates and higher ultimate recoveries. Generally, the oil and water production rates will increase proportionately. Gas production rates will also increase, but to a lesser extent because the increased mobility of the reservoir fluids. While the typical Mississippi Lime horizontal well will produce without the benefit of a multi-stage hydraulic fracture stimulation, production of fluids will typically increase 10 times the pre-treatment rates. We expect that a successful hydraulic fracture stimulation will allow these wells to produce at rates of or in excess to 300 bopd while maintaining a water cut of 75-95%, especially during flow back of the fracturing fluid. Page 19 of 53

20 4 Reserves Estimates of oil and natural gas reserves owned by Northcote are shown in the table below. The Proved Developed Producing (PDP) Reserves are from the wells that are producing as of the effective date of this report. The Proved Developed Non-Producing (PDNP) Reserves include shut-in and behind-pipe reserves. The Proven Undeveloped (PUD) Reserves are from undeveloped well locations that are directly offsetting commercial producing wells. The Probable Reserves are from undeveloped well locations that are offsetting PUD well locations and the Possible Reserves are from undeveloped well locations that directly offset a Probable location, given there is justification for the reservoir to extend to the location. The properties evaluated are all those in which Northcote holds an interest in Oklahoma. The producing properties (shown in Appendix A) have been evaluated using decline curve analysis and any plans for enhanced production were accounted for with incremental reserves. The undeveloped leasehold has been evaluated based on analogy with offset production. The offset production was evaluated using decline curve analysis. The cost and timing assumptions for enhanced production and undeveloped wells are shown in Section 7. The table in 4-1 is the summary of appendix C, which shows as of 1 November, 2012, Northcote s net reserves, future net cash flow, and present worth discounted at 10% per annum (NPV) have been estimated to be as follows. Reserve Class/Category As of November 1, 2012 Gross Reserves Net Reserves Net Cash Flow Oil & Condensate (Mbbl) Natural Gas (MMcf) Oil & Condensate (Mbbl) Natural Gas (MMcf) Future Net Revenue ($000) Future Net OPEX & Taxes ($000) Future Net Capital ($000) Future Net Cash Flow ($000) NPV 10% ($000) Proved Developed Producing 417 1, ,958 1,466-1, Proved Developed Behind Pipe 2,492 6, ,376 52,178 7,185 1,104 43,889 28,488 Proved Shut In Proved Undeveloped 3,464 9, ,625 1, ,089 4,359 Total Proved 6,672 18, ,678 65,818 10,246 2,053 53,518 33,817 Probable Behind Pipe Probable Undeveloped 1,800 5, Total Probable 1,800 5, Total 2P 8,472 24, ,685 66,076 10,284 2,095 53,698 33,919 Possible Behind Pipe Possible Undeveloped 2,100 6, Total Possible 2,100 6, Total 3P 10,572 30, ,694 66,376 10,328 2,143 53,906 34,036 Figure 4-1: Summary of Northcote Reserves The tables in 4-2 and 4-3 are these same net reserves, cash flows, and present worth s separated by their respective Osage and Woods County locations. Page 20 of 53

21 Reserve Class/Category (Osage County) As of November 1, 2012 Gross Reserves Net Reserves Net Cash Flow Oil & Condensate (Mbbl) Natural Gas (MMcf) Oil & Condensate (Mbbl) Natural Gas (MMcf) Future Net Revenue ($000) Future Net OPEX & Taxes ($000) Future Net Capital ($000) Future Net Cash Flow ($000) NPV 10% ($000) Proved Developed Producing ,920 1,461-1, Proved Developed Behind Pipe 2,492 6, ,376 52,178 7,185 1,104 43,889 28,488 Proved Shut In Proved Undeveloped ,976 1, ,639 4,109 Total Proved 3,077 7, ,655 65,073 10,137 1,949 52,987 33,512 Probable Behind Pipe Probable Undeveloped Total Probable Total 2P 3,077 7, ,655 65,073 10,137 1,949 52,987 33,512 Possible Behind Pipe Possible Undeveloped Total Possible Total 3P 3,077 7, ,655 65,073 10,137 1,949 52,987 33,512 Figure 4-2: Summary of Northcote Reserves for Osage County, Operated by Glenn Supply Reserve Class/Category (Woods County) As of November 1, 2012 Gross Reserves Net Reserves Net Cash Flow Oil & Condensate (Mbbl) Natural Gas (MMcf) Oil & Condensate (Mbbl) Natural Gas (MMcf) Future Net Revenue ($000) Future Net OPEX & Taxes ($000) Future Net Capital ($000) Future Net Cash Flow ($000) NPV 10% ($000) Proved Developed Producing Proved Developed Behind Pipe Proved Shut In Proved Undeveloped 3,000 8, Total Proved 3,595 10, Probable Behind Pipe Probable Undeveloped 1,800 5, Total Probable 1,800 5, Total 2P 5,395 16, , Possible Behind Pipe Possible Undeveloped 2,100 6, Total Possible 2,100 6, Total 3P 7,495 22, , Figure 4-3: Summary of Northcote Reserves for Woods County, Operated mainly by Midstates. The future net revenue is based on the 1 November 2012 NYMEX futures strip prices for WTI Oil and Henry Hub Gas. The future net cash flow is the future net revenue, less estimated future net OPEX (well operating cost and production taxes) and future net capital. The total reserves are those defined as natural gas and liquid hydrocarbon reserves to Northcote s interest after deducting all royalties, overriding royalties, and reversionary interests owned by outside parties that become effective upon payout of specified monetary balances. All reserves estimates have been prepared using standard engineering practices generally accepted by the petroleum industry and conform to the guidelines adopted by the Society of Petroleum Engineers. Page 21 of 53

22 5 Oil and Gas Prices The production and undeveloped leases have readily available access to both the oil and gas markets. Production from the existing leases is gathered from the well head to a central processing facility on the lease where the gas is sold into a transportation network and the oil is either sold into a pipeline and transported to a refinery or is trucked from the lease to a pipeline terminal where it is then transported to a refinery. The benchmark for pricing products in the United States is West Texas Intermediate Crude and Henry Hub Natural Gas. The prices in this report are based on the futures strip for these two benchmark products. The oil and gas prices beyond the end of the strip are held constant at the end of NYMEX Strip prices. West Texas Intermediate (WTI) FOB Cushing, Oklahoma, forms the physical basis for futures trading (NYMEX Sweet, Light Crude). Future Crude Oil prices are based on NYMEX Light Sweet Crude plus or minus a differential for gravity adjustment and transportation. Figure 5-1 shows the historical prices and forward curve for NYMEX Sweet Light contracts as of 1 November Figure 5-2 shows the historical Henry Hub and futures strip prices as of 1 November Natural Gas prices are based on NYMEX HH Natural gas plus or minus an adjustment for BTU content and transportation. NYMEX has futures SWAPS markets that provide future basis differentials for the various regions in the United States as compared to Henry Hub Pricing. The differentials from the NYMEX Futures Swaps Market are used to regionally adjust the Henry Hub Futures gas prices to the local market. Figure 5-1: Historical and 1 November 2012 NYMEX Futures Contract Crude Oil Prices Page 22 of 53

23 Figure 5-2: Historical and 1 November 2012 NYMEX Futures Contract US Domestic Gas Prices Figure 5-3 shows the ANR to Henry Hub swap differential. ANR is one of the major trading reference points in Texas. The NYMEX ANR to Henry Hub Basis Swap Differential is used to estimate the relative price of Texas natural gas verses Henry Hub Market. This basis differential trades out through March The basis differential is expected to increase from a negative $0.13/MMbtu average in 2013 to a negative $0.1650/MMbtu by The forecast gas price for Oklahoma used the Henry Hub NYMEX Strip less the ANR to Henry Hub Basis differential to arrive at the wellhead gas price. Page 23 of 53

24 Figure 5-3: NYMEX 1 November 2012 ANR-Henry Hub Basis Swap Differential The western region of the Mississippian Lime is an oil play with a little bit of casing head gas. The close proximity to Cushing Oklahoma, home of the storage facility upon which NYMEX oil is priced, indicates that there will be a very small transportation price differential for the oil produced from this play. Page 24 of 53

25 6 Planned Expenditures Northcote s initial focus in Osage County will be on the fracture stimulation program of the producing leases and also the drilling of two new Layton Wells. In Woods County, Northcote expects to participate in 12 wells in 2013, which is in line with operators current drilling program in Woods County. On admission, Northcote expects to have sufficient funds to allow for the following: - In Osage County, Northcote intends to initiate the fracture stimulation program in early At Admission Northcote will be able to finance the first four well fracture stimulations of the Osage frac program, being Steele 2-11H, Sarah (MS1), Big Hill 1H-12 and Lauren (MS2), without the need for every frac to be fully in line with directors expectations. Based on the $440,000 per frac cost (to 100% WI), Northcote's initial share of capital expenditure for its working interest for the first four wells is expected to be $492,000, which, alongside the group satisfying the farm-in obligations, increases the capital cost of the first four fracs to a total of $1.3 million. - In Osage, Northcote also intends to further develop the Layton sand acreage through the drilling of two new wells in 2013, being Layton #1 and Layton #2. Based on the $250,000 per well drilling cost (to 100% WI), Northcote s initial share of capital expenditure for the drilling of the two wells will be approximately $74,250 per well and hence a total working interest cost of $148,500 (to Northcote s WI). - In Woods County it intends to participate in each well as proposed by the operator. The perwell costs associated with the Woods County leases will range from approximately $11,000 per well to $19,000 per well based on the $3,800,000 cost (to 100% WI) of a new well and the working interests set out above. Therefore, Northcote has allocated a total of $228,000 towards this. - Furthermore the additional capital will allow the Enlarged Group to be able to fully finance, at the Directors election, the exercise of the royalty option at a cost of $285,000 for an average 2.2% royalty interest in the Osage wells. The following table discloses certain assumptions on the current expected Spud/Frac dates for the work program. While not the operator, Northcote retains a high degree of flexibility in respect of managing the timing of the planned new well/ frac programs in Osage County. The ability of the Company to fund, from internally generated cash flow, the fracture stimulation and drilling program at Osage County and the drilling program at Woods County will be dependent upon the wells performing in line with expectations set out in this report. Page 25 of 53

26 Lease/Well County Township Range Section WI NRI Spud/Frac Net Acres Behind Pipe Steele 2-11H Osage 25N 05E % % Sarah (MS1) Osage 25N 04E % % Big Hill 1H-12 Osage 25N 03E % % Lauren (MS2) Osage 25N 04E % % Steinberger 1H-10 Osage 25N 05E % % West Little Drum (MS2) Osage 25N 04E % % Big Hill 2H-12 Osage 25N 03E % % Big Hill 4H-12 Osage 25N 03E % % Little Drum (MS1) Osage 25N 04E % % Undeveloped NORTHCOTE CAPITAL SCHEDULE Layton 1 Osage 25N 03E % % Layton 2 Osage 25N 04E % % Braden School 1 Osage 25N 05E % % CHK Well Woods 26N 14W % 0.187% Mississippian 01 Woods 26N 15W % 0.293% Mississippian 02 Woods 26N 14W % 0.186% Mississippian 03 Woods 27N 15W % 0.390% Mississippian 04 Woods 26N 14W % 0.352% Mississippian 05 Woods 26N 15W % 0.187% Mississippian 06 Woods 26N 15W % 0.126% Mississippian 07 Woods 27N 15W % 0.049% Mississippian 08 Woods 26N 15W % 0.055% Mississippian 09 Woods 26N 15W % 0.341% Mississippian 10 Woods 26N 14W % 0.049% Mississippian 11 Woods 26N 15W % 0.293% Mississippian 12 Woods 26N 15W % 0.341% Mississippian 13 Woods 26N 14W % 0.079% Mississippian 14 Woods 26N 14W % 0.188% Mississippian 15 Woods 26N 15W % 0.146% Mississippian 16 Woods 26N 15W % 0.039% Mississippian 17 Woods 26N 15W % 0.088% Mississippian 18 Woods 26N 15W % 0.014% Mississippian 19 Woods 26N 15W % 0.059% Mississippian 20 Woods 26N 15W % 0.049% Mississippian 21 Woods 26N 15W % 0.106% Mississippian 22 Woods 26N 14W % 0.352% Figure 6-1: Northcote Future Development with Assumed Capital and Well Timing dates are in US format. The behind pipe reserves in Osage County require a fracture treatment that is expected to cost $440,000 per well. The Layton wells in Osage County are expected to cost $250,000 per well, the Mississippian well in Osage County is expected to cost $2,500,000, and the Mississippian wells in Woods County are expected to cost $3,800,000 per well. Northcote intends to initiate the fracture stimulation program with stimulation of two producing wells in late Based on the $440,000 per well cost (to 100% WI), Northcote s initial share of capital expenditure for fracture stimulation of its initial two wells will be approximately $123,000 per well. Page 26 of 53