View Report - Lexam VG Gold Inc.

Transcription

A SUMMARY REVIEW INCLUDING A WORK
PLAN AND BUDGET PROPOSAL TO TEST
OIL AND GAS PROSPECTS ON THE
SAN LUIS BASIN PROPERTY, COLORADO, USA
FOR
LEXAM EXPLORATIONS INC.
prepared by
Neil Hoey, P.Geo., Senior Associate Geologist
Watts, Griffis and McOuat Limited
Thomas A. Watkins, B.Sc., M.Sc.
Consulting Geologist
and
Kim Parsons, B.S., M.S., MBA.
Consulting Geophysicist
June 19, 2006
Toronto, Canada
Watts, Griffis and McOuat Limited
Consulting Geologists and Engineers
Watts, Griffis and McOuat
TABLE OF CONTENTS
Page
1. SUMMARY ..........................................................................................................................1
2. INTRODUCTION................................................................................................................3
3. PROPERTY LOCATION AND ACCESS.........................................................................5
4. PROPERTY DESCRIPTION .............................................................................................7
5. GEOLOGY AND HYDROCARBON POTENTIAL......................................................11
6. EXPLORATION HISTORY.............................................................................................18
6.1 LEXAM (CHALLENGER) 1992 AND 1993 ...........................................................18
6.2 LEXAM 1995 ............................................................................................................19
6.3 LEXAM 1996 ............................................................................................................19
6.4 LEXAM-SONAT 1998 .............................................................................................19
6.5 LEXAM 1999-2002...................................................................................................20
6.6 LEXAM-PETRO-HUNT 2002-2004 ........................................................................20
7. SEISMIC INTERPRETATION AND WORK PROPOSAL – 2005/2006....................21
7.1 GENERAL.................................................................................................................21
7.2 CONCLUSIONS .......................................................................................................21
7.3 RECOMMENDATIONS...........................................................................................29
7.4 PROPOSED WORK PROGRAM AND BUDGET ..................................................31
CERTIFICATES.....................................................................................................................33
REFERENCES........................................................................................................................37
LIST OF TABLES
1.
2.
Proposed work program and budget Phase 1 ................................................................31
Proposed work program and budget Phase 2 ................................................................32
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TABLE OF CONTENTS
(continued)
Page
LIST OF FIGURES
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
Property location map .....................................................................................................6
Lexam land holdings .......................................................................................................8
Proposed future disposition of surface rights................................................................10
Geological map – Luis Maria Baca Grant No. 4...........................................................12
Geological cross section – San Luis basin ....................................................................13
Detailed geological cross section – basin margin .........................................................15
Oil and gas prospect location map ................................................................................17
Seismic time structure map for the cretaceous..............................................................22
Seismic section - Chevron Line CF-8402 .....................................................................23
Seismic section - Sonat Line A .....................................................................................24
Seismic section - Sonat Line B .....................................................................................25
Seismic section - Petro-Hunt Line PH-6.......................................................................26
Seismic section - Petro-Hunt Line PH-7.......................................................................27
Seismic section – Petro-Hunt Line PH-3 ......................................................................28
Seismic section - Chevron Line CF-8402, high amplitude reflectors in tertiary ..........30
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1. SUMMARY
Lexam Explorations Inc. ("Lexam") retained Watts, Griffis and McOuat Limited
("WGM") to assist in compiling an independent summary technical review of the oil and gas
potential of its large land holdings in southern Colorado. This review has concentrated on the
evaluation of seismic survey data acquired on the Lexam property in 2004, in addition to
seismic data collected previous to that. The 2004 data were gathered by Petro-Hunt, LLC
("Petro-Hunt"), which held an option on the property at the time, and were received by Lexam
in 2005.
Deep drilling targets have been developed following this evaluation.
A
recommended work program and budget forms an integral part of this report. This report is to
be used to support a public financing on the Toronto Venture Exchange ("TSX-V") in
accordance with Tier Maintenance Requirements Policy 2.5 as a Tier 2 issuer.
The recommended program is broken down into two phases, 1) A 3D seismic survey in order
to more completely define individual fault blocks, potential structural/stratigraphic targets on
the flanks of the Crestone structure and the potential for finding gas in the lower Tertiary
section 2) Drilling of a 14,000 ft (4,265 m) well to test the Crestone East Prospect. The total
proposed budget to complete Phase 1 is projected to be US$1,454,250.00 and Phase 2 is
estimated to be US$8,764,875.00. Phase 2 of the recommended program is not contingent on
phase one of the program, due to the Crestone East drill targets structure being well defined
by the available 2D seismic data.
The San Luis Basin property lies within 45 mi (72 km) of ongoing oil and gas production
analogous to that postulated to be represented by the Crestone East drill target and although
the target is high-risk, there is significant potential for discovering large amounts of natural
gas and oil in the San Luis Basin. Economic accumulations of oil and gas require the
presence of favourable source and reservoir rocks, thermal maturity and a sealed trap. In the
case of the recommended well, the presence or absence of favourable reservoir rock and
whether or not the interpreted structure is and has remained a sealed trap, are the primary risk
factors. The oil shows in Challenger Gold Inc.’s ("Challenger"), a predecessor to Lexam,
shallow drillholes are evidence for the thermal maturity of the source rocks and that oil was
formed in the basin and moved out of the source beds. Based on the available data, it is
reasonable to expect good porosity and permeability in potential reservoir rocks of the Dakota
Sandstone, even at the depths predicted for the Crestone East Prospect. However, the actual
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presence of the various factors required for economic success can only be determined by
drilling.
Lexam management, some of whom were senior executives of Goldcorp Inc. during the
development of its Red Lake Mine to the status of one of Canada’s largest gold producers
have extensive experience in managing large operations. If exploration proves successful,
Lexam anticipates receiving the spot price for its oil and gas production since management
does not intend to hedge any production. This strategy used for the sale of gold from the Red
Lake Mine turned out to be very positive for Goldcorp shareholders.
WGM is of the opinion that the San Luis Basin property is a property of merit and holds very
good potential for the discovery of commercial deposits of oil and/or natural gas. We support
the proposed exploration work program and budget summarized above and presented in more
detail in the body of this report.
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2. INTRODUCTION
Lexam Explorations Inc. ("Lexam") is a Toronto Venture Exchange ("TSX-V") -NEX
Board listed, Toronto-based junior exploration company. In addition to the Baca Land Grant
property, that is the focus of this report, Lexam holds several inactive mineral exploration
properties, with gold and base metal potential. Lexam has been engaged in oil and gas
exploration for more than 10 years and while the company has no direct experience as an
operator of oil and gas wells, Lexam’s management team, which consists mainly of former
Goldcorp Inc. officers, have significant experience running a large-scale, profitable operation.
Under their guidance, the Red Lake Mine became Canada’s largest gold mine in terms of
annual ounces of gold produced. Goldcorp also participated in various producing oil and gas
wells throughout the province of Alberta. Watts, Griffis and McOuat Limited ("WGM")
was engaged to assist Lexam in compiling an independent summary technical review of the
oil and gas potential (including a proposed work program and budget) of its large land
holdings in southern Colorado. This report is to be used to support a public financing on the
TSX-V in accordance with Tier Maintenance Requirements Policy 2.5 as a Tier 2 issuer.
Information used in the preparation of this report was obtained from previous reports of work
on the property and new interpretive technical data were generated and evaluated during the
course of the present study. The proposed budget was prepared following discussions with
local service providers. The independent co-author of the report, Mr. Neil Hoey, P.Geo., did
not visit the property, as it was determined that no significant technical information which
could have impacted the contents of the report, would have been obtained from such a visit.
A list of the material reviewed is provided in the "References" section at the end of this
report.
In general, Imperial units are used throughout the report, and rounded Metric equivalents are
provided where appropriate. Currency amounts are generally quoted in US$. As of mid-June
2006, the exchange rate was roughly C$1.10 per US$.
WGM has not verified title to the Lexam property but has relied on information supplied by
Lexam in this regard.
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This report or portions of this report are not to be reproduced or used for any purpose other
than to support a public financing as discussed above, without WGM’s prior written
permission in each specific instance. WGM does not assume any responsibility or liability for
losses occasioned by any party as a result of the circulation, publication or reproduction or
use of this report contrary to the provisions of this paragraph.
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3. PROPERTY LOCATION AND ACCESS
The Baca Land Grant property is located in Saguache County, south-central Colorado, in the
Crestone Mining District, about 150 miles (240 km) southwest of Denver. It lies east of
Highway 17, just north of its junction with Highway 112. It is situated on the east side of the
San Luis Basin and is accessed via paved and dirt roads and jeep trails that cross the property.
Relative to ongoing oil and gas production, the nearest production similar to that proposed for
exploration by Lexam is approximately 45 mi (72 km) to the northeast in the Florence Field
and 110 mi (175 km) to the southwest in the San Juan Basin.
While no in-depth studies of product marketing and transportation issues have been
undertaken, there is a small gas pipeline connecting the northern San Juan Basin with the
Denver area, passing within 25 mi (40 km) of the initial Lexam drill target. Alternatively, a
new 100 mi (160 km) pipeline would be required to connect to larger lines that service the
Raton Basin. In the event of an oil discovery, product would likely be transported to Denver
by tanker truck.
The location of the property is shown on Figure 1.
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4. PROPERTY DESCRIPTION
The majority of Lexam’s property consists of a large tract of land originally granted to a
subject by the King of Spain in the late 1700s (the Luis Maria Baca Grant No.4, the "Grant").
There are 100,000 acres (40,500 ha) of fee land in the Grant, which is located in Townships
41 to 43N, Ranges 10 to 12E (Figure 2).
On the Grant, Lexam presently owns a 100% interest in the hard mineral rights and a 75%
interest in the oil and gas rights. Fifty percent of the hard mineral rights were acquired from
Baca Minerals, Inc. in 1987. Later, the other 50% interest in the hard mineral rights and 50%
of the oil and gas rights were purchased from Newhall Land and Farming Company. The
additional 25% of the oil and gas rights were acquired in 1996 from the Baca Corporation.
Surface access and use is provided by Lexam’s fee simple ownership, and is further provided
for by a Surface Use Agreement with American Water Development, Inc. ("AWDI").
Signed in 1992, the agreement is a 20-year paid-up lease that is binding on surface owners
who may be successors in ownership to AWDI. The agreement may be extended beyond the
lease term should production be achieved from the property. Lexam’s title to the minerals is
continued by the annual payment of Saguache County property taxes. In 2005, this payment
amounted to US$18,500.
Any production relating to oil or gas on Lexam’s current holdings in Colorado is subject to a
1½ % royalty applicable to Lexam’s 75% interest.
The remaining 25% of the oil and gas rights is owned in fee simple by a major U.S. oil and
gas company (ConocoPhillips). This 25% was leased to Petro-Hunt, LLC ("Petro-Hunt") of
Dallas, Texas during the two years Petro-Hunt held a seismic option on Lexam’s oil and gas
interests. There is currently no agreement between Lexam and ConocoPhillips covering the
conduct of work on the property.
Lexam also owns various interests in varying percentages to the hard minerals and oil and gas
rights on lands located to the north and west of the Grant (see Figure 2). These interests were
included with the purchases of the parcels described above. Further title work will be
necessary to clearly establish the details of this ownership. Such questions are not material
with regard to the present exploration and development plans of Lexam for the Grant.
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The surface of the Grant is currently owned by the Nature Conservancy, with the intent to
eventually convey ownership of the surface to the Federal government.
The Federal
government intends to assign various parcels of surface rights in the Grant to agencies of the
Federal government. Lexam’s current understanding of which agencies will control which
parts of the surface rights in the Grant is shown on Figure 3. To date, there has been no
indication that the Federal government is interested in acquiring Lexam’s mineral rights.
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5. GEOLOGY AND HYDROCARBON POTENTIAL
The property is underlain by a series of Precambrian metamorphic and intrusive rocks, a thin
section of lower Paleozoic sediments, Pennsylvanian-Permian age conglomerates and the
sedimentary package which forms the San Luis Basin. Structurally, the geologic setting is
dominated by the presence of the San Luis Basin, one of a series of Miocene to Pleistocene
extensional basins that comprise the Rio Grande Rift in New Mexico and Colorado and the
adjacent Sangre de Cristo Range.
The geology of the northeastern portion of the property is characterized by a series of
Laramide thrusts within the Sangre de Cristo Mountain Range. Precambrian metamorphic
and intrusive rocks and lower Paleozoic sediments have been thrust against a thick sequence
of Pennsylvanian – Permian conglomerates and arkosic sediments of the Sangre de Cristo
Formation. Along the west flank of the Sangre de Cristo Range, outcrops of chloritic fault
breccia are part of a low angle detachment fault of Miocene age which forms the eastern
margin of the San Luis Basin (Figure 4). The San Luis Basin consists of two half grabens, the
western Monte Vista Graben and the eastern Baca Graben, separated by the Alamosa Horst.
The sedimentary package of the eastern San Luis Basin includes a possible section of pre-rift
Permo-Penn sediments, pre-rift Mesozoic sediments of the Morrison Formation, Dakota
Sandstone and Mancos Shale and the syn-rift sediments of the Miocene Santa Fe Formation
and the Pliocene to Pleistocene Alamosa Formation (Figure 5). Except for two small outcrops
of Mesozoic sediments that are present near the margin of the basin, surface exposures on the
property are comprised of Quaternary deposits of gravel and aeolian sand.
Interpretations of the San Luis Basin, prior to Lexam’s work, postulated a regional uplift
between the San Juan Sag on the west and the Raton Basin on the east that rose during the
Laramide about 55 to 60 mybp. The interpreted uplift persisted until about 35 mybp when
Tertiary sediments and volcanics began to accumulate on the denuded Precambrian basement.
During the last 30 my, tectonic drive has been provided by the extension of the northern Rio
Grande Rift. No Mesozoic sediments were believed to have been preserved within the area
now underlain by the present day San Luis Basin.
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Lexam discovered an oil-bearing Mesozoic section with Jurassic through Cretaceous age
outcrops along the west flank of the Sangre de Cristo Range and a seismic character in the
Baca Graben that is remarkably similar to the Mancos-Dakota-Morrison section in the Raton
basin to the east and the San Juan Sag to the west. Twenty-seven of the 42 shallow mineral
exploration drillholes that Challenger Gold Inc. ("Challenger"), a predecessor to Lexam,
drilled on the property in 1992 and 1993 encountered oil in fractured Precambrian rocks and
Mesozoic sediments.
Seventeen of these holes intersected Mesozoic sediments of the
Morrison Formation, Dakota Sandstone and Mancos Shale that occur as rotated fault blocks
in the hanging wall of the basin-bounding detachment fault (Figure 6). Regional geological
data, combined with well data from the San Juan Sag and the Wet Mountain Valley, suggest
that excellent porosity can be expected in the Dakota Sandstones in the San Luis Basin. In
these adjacent basins, thicknesses range from 50 to 120 ft (15 to 37 m) with porosities of 15 to
21%.
The basins of the Rio Grande Rift, including the San Luis Basin, are structurally analogous to
oil producing, extensional basins in Nevada and a number of producing rift basins around the
world. Hydrocarbon-bearing Cretaceous rocks have been found in the Albuquerque and
Espanola basins on the New Mexico side of the Rio Grande Rift. Exploration work carried
out by Lexam since the early 1990s has demonstrated that these rocks are also present in the
San Luis Basin. Based on samples, shows, palynology, oil typing, outcrops, gravity, and a
seismic correlation borrowed from the Raton Basin, 35 miles (56 km) to the SE, it appears
that the Baca Graben contains a preserved Mesozoic package approximately 3,000 ft (900 m)
thick at depths of 7,000 ft to 17,000 ft (2,100 to 5,200 m).
Oil and gas traps in pre-rift Cretaceous sediments of the San Luis Basin are associated with
rift-related transfer zones. Two types of structural traps, closed structures and rotated fault
blocks located close to the margin of the basin, have been mapped seismically. Combination
structural-stratigraphic traps are likely present, but there are currently not sufficient seismic
data to identify specific targets.
In addition, a blanket accumulation of hydrocarbons may be present in the deep parts of the
Baca Graben. The San Luis Basin is bracketed by giant, basin-centred gas accumulations in
all surrounding basins where Cretaceous rocks are present at depths greater than 8,000 ft
(2,400 m). The San Juan, D-J and Piceance basins have all produced large amounts of oil and
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gas from the Cretaceous units. The burial history of the Cretaceous section and estimated
temperature gradient in the San Luis Basin, place prolific source rocks of the Mancos Shale
within the oil/gas generation window beginning 10 to 15 mybp (Morel and Watkins, 1997).
Lexam’s primary exploration targets are the closed structures of the Crestone East and
Crestone West prospects, located in the northwest quadrant of the property (Figure 7). The
Crestone East Prospect is a 4,060 acre (1,650 ha) closed structure that is well defined by
seismic data. The 6,945 acre (2,800 ha) Crestone West Prospect requires additional work to
fully define and map the interpreted closure on the west side of the prospect.
At Pole Creek, a shallow 1,300 acre (525 ha) oil target is present in the hanging wall of the
basin-bounding detachment fault near the eastern margin of the basin. This structural setting
is analogous to the Grant Canyon, Bacon Flat and Blackburn fields in Nevada, where
productive reservoir rocks are preserved in similar fault blocks. The strong shows of live oil
encountered in Lexam’s previous mineral exploration drill holes occur immediately up-dip
from the Pole Creek Prospect.
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6. EXPLORATION HISTORY
6.1
LEXAM (CHALLENGER) 1992 AND 1993
Strong shows of live oil were encountered in 27 mineral exploration drillholes in 1992 and
1993. Oil shows, present for more than four miles (2.5 km) along strike, constitute a large,
concealed seep that is located along the margin of the basin. Subsequently, Cretaceous
Mancos Shale and Dakota Group sandstones and Jurassic Morrison Formation were identified
in outcrop and in 17 shallow drillholes. All of the drilling was conducted by Challenger.
Gas chromatography-mass spectrometry analyses on saturate biomarkers indicated the oil is
Cretaceous in origin. Cretaceous sediments are a major source for oil and gas produced in the
Rocky Mountain region. Palynology studies confirmed the age of black shales as Cretaceous.
Total organic carbon ("TOC") measurements on Mancos Shale, ranged from 1.63 to
7.31 Wt%, indicating that the Mancos Shale in this area is an excellent source rock for
hydrocarbons.
Well data compiled from the San Juan Sag and the Wet Mountain Valley documents porosity
for the Dakota Sandstone ranging from 50 ft (15 m) of 15% to 120 ft (36 m) of 21%.
Regional geological studies indicated that excellent porosity can be expected to be present in
the Dakota Sandstone.
Public domain gravity and magnetic data were combined with proprietary gravity,
aeromagnetic, MT and seismic surveys, and the results of drilling to map and interpret the
basin. A low angle, detachment fault, developed during the early stages of rifting, was shown
to form the eastern margin of the basin.
Prolific source rocks of the Mancos Shale and excellent reservoir rocks of the Dakota Group
are the principal components of a Cretaceous section interpreted to be present in the deep
basin, and as detached blocks in the hanging wall of the detachment fault.
Mesozoic
sediments are interpreted to be underlain by a thick section of Permo-Penn sediments
comprised mainly of conglomerates and arkosic sandstones of the Sangre de Cristo
Formation.
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6.2
LEXAM 1995
Lexam drilled the Baca #1 and Baca #2 wells in 1995 to confirm the presence of a Cretaceous
section on the Deadman Creek block (see Figure 4). Both wells encountered a thin, faulted
section of Mancos Shale in the hanging wall of the detachment fault. Traces of biodegraded
oil were observed in thick intervals of both wells. The strongest shows were present in a
350 ft (105 m) interval of the Baca #2 well starting at 6,620 ft (2,000 m). Shows are present
in Tertiary Santa Fe Formation, Mancos Shale and Precambrian gneiss.
Data obtained from the Baca #1 and Baca #2 wells indicated that a more complete Cretaceous
section is present on deeper blocks adjacent to the Deadman Creek structural high and in
deeper portions of the basin.
6.3
LEXAM 1996
Twenty miles (32 km) of proprietary seismic data and 221 gravity data points were acquired
and integrated with well control, existing gravity and magnetic data and surface geology. The
structural style of the basin, combined with the internal stratigraphic character of the seismic
reflections and onlap character from the new seismic data, strongly supported the presence of
a thick Cretaceous to Jurassic section in the Baca Graben.
Integration of the Lexam data with seismic data from previous surveys delineated a large
structural closure (Crestone Prospect) and several structural benches or fault blocks with
preserved Cretaceous reservoirs at depths of 7,000 ft to 12,000 ft (2,100 to 3,700 m). Both
trap types are located up-dip from oil-generating Cretaceous source rocks, with numerous
faults providing migration pathways to the defined traps.
6.4
LEXAM-SONAT 1998
Sonat Exploration Company ("Sonat") entered in to an option agreement with Lexam and
acquired 31 mi (50 km) of 2D seismic data over the Crestone Prospect and portions of the
deep basin. The new seismic data confirmed east-west closure on the Crestone structure and
showed strong evidence for the onlap of Tertiary, syn-rift sediments onto Cretaceous Mancos
Shale.
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Sonat relinquished its option agreement with Lexam in 1999.
6.5
LEXAM 1999-2002
Lexam acquired, reprocessed and reinterpreted seismic line CF-8402 located over the
Crestone Prospect. An excellent correlation was observed between the character of the
seismic response from the interpreted Cretaceous section observed on CF-8402 and the
character of published seismic data with known Cretaceous units from the Raton Basin and
the San Juan Sag.
High-amplitude seismic traces in the Miocene Santa Fe section located above the top of the
Crestone structure were interpreted as bright spots caused by the presence of gas in
unconsolidated, basin-fill sediments. These indications of gas in the Tertiary section create
an additional target, thereby increasing the potential of the Crestone Prospect and provide
additional evidence for the presence of a Cretaceous sedimentary section in the San Luis
Basin. Flattening of the seismic section on a series of Tertiary horizons shows that the area of
the Crestone Prospect was structurally high throughout the development of the basin.
6.6
LEXAM-PETRO-HUNT 2002-2004
In 2004, Lexam signed an agreement with Petro-Hunt, a large privately held oil and gas
company with substantial domestic and international operations, covering the continued
exploration and evaluation of Lexam’s oil and gas holdings in the San Luis Basin. As part of
its work on the property, Petro-Hunt acquired, processed and interpreted an additional
60 miles (96 km) of 2D seismic data in 2004 and purchased and reinterpreted approximately
50 miles of Chevron 2D seismic data to further define structural closure on the previously
identified Crestone Prospect. Petro-Hunt relinquished the option in December 2004. Lexam
received all of the Petro-Hunt proprietary seismic data, valued at approximately US$419,000,
in March 2005.
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7. SEISMIC INTERPRETATION AND WORK PROPOSAL – 2005/2006
7.1
GENERAL
The conclusions and recommendations included in this report are based on interpretation of
the Petro-Hunt seismic data conducted by Kim Parsons and Thomas Watkins in late 2005 on
behalf of Lexam. The data, conclusions and recommendations have been reviewed and are
supported by Neil Hoey, P.Geo., the independent co-author of this report. The primary focus
of this work has been the evaluation of the Petro-Hunt data in relation to the exploration
potential of the Crestone Prospect.
Figures 8 through 15 illustrate the recently interpreted Petro-Hunt seismic data and additional
seismic information from previous surveys. The Cretaceous time structure map (Figure 8)
shows the location of the Crestone East, Crestone West and Pole Creek oil and gas prospects
based on the integrated seismic data. Figures 9, 10 and 11 show structural closure on the
Crestone Prospect from data collected prior to the Petro-Hunt survey.
7.2
CONCLUSIONS
1. Mapping and interpretation of the Petro-Hunt seismic data, in conjunction with Lexam’s
existing data, confirm the structural closure on the Crestone Prospect;
2. The prospect is divided into eastern and western fault blocks (Figures 8 and 10). Closure
on the Crestone East block is well constrained by seismic information, covering an area
that is approximately 4,060 acres (1,640 ha) in size. Closure on the western margin of the
Crestone West block, approximately 4,950 acres (2,000 ha) in area, is not as well
constrained by the available seismic data and is partially fault dependent;
3. Seismic Lines PH-6 and PH-7 (Figures 12 and 13) indicate that closure on the north
margin of the structure is greater than previously anticipated, due to the presence of a
more clearly defined sub-basin immediately north of the prospect;
4. Closure on the western margin is partially fault dependent, as depicted on Petro-Hunt Line
PH-3 (Figure 14);
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5. High-amplitude reflectors located above and to the north of the Crestone East structure
(Figure 15) suggest that gas may also be present in the lower Tertiary section. There is
insufficient information on the character of the lower Tertiary sediments to determine the
potential of this target; and
6.
Although drilling of the recommended well on the Crestone East Prospect is considered
high risk, there is significant potential for discovering large amounts of natural gas and oil
in the San Luis Basin. Economic accumulations of oil and gas require the presence of
favourable source and reservoir rocks, thermal maturity and a sealed trap. In the case of
the recommended well, the presence or absence of favourable reservoir rock and whether
or not the interpreted structure is and has remained a sealed trap are the primary risk
factors. The Crestone East structure is well defined by the available 2D seismic data. Oil
shows in Lexam’s (Challenger’s) shallow drill holes are evidence for the thermal maturity
of source rocks and that oil was formed in the basin and has moved out of the source beds.
Based on well data from adjacent basins and regional geological studies, it is reasonable
to expect good porosity and permeability in potential reservoir rocks of the Dakota even at
the depths predicted for the Crestone East Prospect. However, the actual presence of the
various factors required for economic success can only be determined by drilling.
7.3
RECOMMENDATIONS
1. Phase 1: In order to more completely define individual fault blocks, potential
structural/stratigraphic targets on the flanks of the Crestone structure and the potential for
finding gas in the lower Tertiary section, prior to drilling additional wells, a 3D seismic
survey should be preformed on the property. In the technical report dated January 10,
2006 it was recommended that a 3D seismic survey be conducted after an initial well was
drilled to basement on the Crestone East Prospect. This report recommends that the 3D
seismic work be carried out before the first well is drilled due to the difficult market
conditions for drill equipment. If a 3D seismic survey was performed between well #1
and well #2, there is a high probability that the Company would not be able to keep the
drill equipment at the project while the 3D seismic survey was being undertaken.
Therefore it is reasonable to conclude that it would take an additional twelve months to
get another drill on the project. By performing the 3D seismic survey first, the Company
can proceed to drill back-to-back if it so desires and reduce the amount time required to
explore and evaluate the property;
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2. Phase 2: The oil and gas potential of the Crestone East Prospect should be tested by
drilling an initial well to basement at an estimated depth of 14,000 ft (4,265 m); and
3. Prior to drilling, leasing the ConocoPhillips 25% undivided oil and gas interest and
leasing additional oil and gas rights over the Crestone West Prospect on the west side of
the Baca Grant are strongly recommended.
7.4
PROPOSED WORK PROGRAM AND BUDGET
The proposed work programs and budgets for Phases 1 and 2 are detailed in Tables 1 and 2
respectively.
TABLE 1
PROPOSED WORK PROGRAM AND BUDGET PHASE 1
Work-type Description – Phase 1
Cost
(US$)
Detailed Geological and Geophysical Evaluation
Contract Oil and Gas Geologist
15 days @ $800/day
Contract Geophysicist
15 days @ $800/day
$12,000.00
12,000.00
Well Design and Well Permitting
Well Design
Survey of Well Locations
Reclamation Bonds
State of Colorado Permit Preparation
Surface Bonds
Well Site Archeological Clearance
Baseline Water Quality Sampling
$10,000.00
20,000.00
10,000.00
10,000.00
4,000.00
2,500.00
30,000.00
3D Seismic Survey
26 Sq Mi @ $40,000 per Sq Mi
Survey Design
5 Days @ $800.00 per day
Archeological Clearance – 110 line miles @ $550 per mile
$1,040,000.00
4,000.00
60,500.00
Plan of Operations (Federal Permitting)
$75,000.00
Land and Legal
Title Opinion
Legal Representation
$20,000.00
55,000.00
$20,000.00
1,385,000.00
2006 Property Taxes
Sub-Total
Contingency (5%)
$69,250.00
PHASE 1 TOTAL
US$1,454,250.00
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TABLE 2
PROPOSED WORK PROGRAM AND BUDGET PHASE 2
Work-type Description – Phase 2
Estimated Drilling Costs (14,000 ft well (4,265 m) – Crestone East)
Dry Hole Cost (76 day drilling time)
Completion Cost
Sub-Total
Cost
(US$)
$6,500,000.00
1,847,500.00
$8,347,500.00
Contingency (5%)
417, 375.00
PHASE 2 TOTAL
US$8,764,875.00
- 32 -
CERTIFICATE
To Accompany the Report entitled
"A Summary Review Including a Work Plan and Budget Proposal to Test Oil and Gas
Prospects on the San Luis Basin Property, Colorado, USA
for Lexam Explorations Inc." dated June 19, 2006
I, Neil Hoey, do hereby certify that:
1.
I reside at 53 Westbrook Cresc., Komoka, Ontario, Canada, N0L 1R0.
2.
I am a graduate from Brock University, St. Catharines, Ontario with an Honours B.Sc.
Degree in Geological Sciences (1981), and I have practised my profession
continuously since that time.
3.
I am a member of the Association of Professional Geoscientists of Ontario
(Membership Number 0672).
4.
I am a Senior Associate Geophysicist with Watts, Griffis and McOuat Limited, a firm
of consulting geologists and engineers, which has been authorized to practice
professional engineering by Professional Engineers Ontario since 1969, and
professional geoscience by the Association of Professional Geoscientists of Ontario.
5.
I am a Qualified Person for the purposes of NI 51-101 with regard to oil and gas
exploration and have prepared numerous technical reports.
6.
I have not visited the property. I have reviewed the technical data regarding the
property as provided by Lexam Explorations Inc. and the co-authors of this report.
7.
I have no personal knowledge as of the date of this certificate of any material fact or
change, which is not reflected in this report.
8.
Neither I, nor any affiliated entity of mine, is at present, under an agreement,
arrangement or understanding or expects to become, an insider, associate, affiliated
entity or employee of Lexam Explorations Inc. or any associated or affiliated entities.
9.
Neither I, nor any affiliated entity of mine own, directly or indirectly, nor expect to
receive, any interest in the properties or securities of Lexam Explorations Inc., or any
associated or affiliated companies.
- 33 -
10.
Neither I, nor any affiliated entity of mine, have earned the majority of our income
during the preceding three years from Lexam Explorations Inc. or any associated or
affiliated companies.
11.
I have read NI 51-101 and have prepared this report in compliance with NI 51-101 and
with generally accepted Canadian oil and gas industry practice.
signed by
" Neil Hoey "
Neil Hoey, P.Geo.
June 19, 2006
- 34 -
CERTIFICATE
I, Thomas A. Watkins, do hereby certify that:
1.
I reside at 412 22nd Street, Golden, Colorado USA 80401.
2.
I am a graduate from the Colorado School of Mines, Golden, Colorado USA
with a B.Sc. Degree in Geological Engineering (1972) and a M.Sc. Degree in Geology
(1976) and I have practised my profession continuously since that time.
3.
I am a member of the American Association of Petroleum Geologists (Member No.
74113-5).
4.
I am a Consulting Geologist and former employee of Lexam Explorations Inc. with
30 years of experience in mineral exploration and oil and gas exploration. I have
visited the Lexam property. By virtue of holding shares in Lexam Explorations Inc., I
am not "independent."
5.
6.
7.
8.
signed by
" Thomas A. Watkins "
Thomas A. Watkins, B.Sc., M.Sc.
June 19, 2006
- 35 -
CERTIFICATE
I, Kim Parsons, do hereby certify that:
1.
I reside at 6324 South Hanover Court, Englewood, Colorado USA 80111.
2.
I am a graduate from Texas A&M University USA with a B.Sc. Degree in Geology
(1981), from Stanford University with a M.Sc. Degree in Geophysics (1983), and from
Colorado State University with an MBA in Finance (1993) and I have practised my
profession continuously since that time.
3.
I am a member of the Society of Exploration Geophysicists, American Association of
Petroleum Geologists, Denver Geophysical Society, and Rocky Mountain Association
of Geologists.
4.
I am a Consulting Geophysicist with 21 years of experience in oil and gas exploration.
By virtue of holding shares in Lexam Explorations Inc., I am not "independent."
5.
6.
7.
8.
signed by
" Kim Parsons "
Kim Parsons, B.S., M.S., MBA.
June 19, 2006
- 36 -
REFERENCES
Baldridge, W.S., Dickerson, P.W., Riecker, R.E., and Riolek, J. (editors)
1984
Rio Grande Rift, New Mexico Geological Society, Northern New
Mexico Guidebook.
Keller, G.R. and Cather, S.M. (editors)
1994
Basins of the Rio Grande Rift: Structure, Stratigraphy, and Tectonic
Setting, Geological Society of America, Special Paper 291.
Morel, J. and Watkins, T.
1997
More data point to potential in S. Colorado sub-basin, Oil and Gas
Journal, September, 1997.
Ross, P.R. (Steinmetz, R. (editor))
1992
Chance of success and Its use in Petroleum Exploration, in The
Business of Petroleum Exploration, 375 p.
Shirley, K.
1995
An Oil Find That Was Good As Gold, AAPG Explorer, July, 1995.
- 37 -

View Report - Lexam VG Gold Inc.

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