Derek Oil & Gas Corporation - Newcastle Formation

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History:

The first discovery of oil in the Powder River Basin was in the Lower Cretaceous Newcastle Sandstone on the east flank of the basin in about 1887. From the 1950's to the 1980's, several attempts were made to extract oil from the LAK Ranch area using enhanced oil recovery methods (EOR). As many as 33 exploratory/production wells were drilled and three separate attempts were made at EOR during this period. Derek acquired certain interests in the LAK Ranch field in 1997 with the objective of using horizontal wells and steam-assisted gravity drainage (SAGD) technology to develop the field, based on successful application of the technique in oil producing areas of Alberta and California. Work began on the LAK Ranch project with the drilling of four delineation wells in 1997. Further delineation drilling, geological studies and thermal simulation modeling culminated in the drilling of a horizontal well pair in 2000. An oil recovery plant was constructed during 2000 -- 2001 with the capacity to process 2,000 barrels of oil per day. Steam injection was initiated in March, 2001 and two separate steam/production cycles were carried out by the beginning of 2002, recovering 5,363 barrels of oil and demonstrating the economic potential for development. This pilot operation identified areas requiring further technical and geological study necessary to proceed to commercial production. In late 2003, Derek established a partnership with Ivanhoe Energy (USA) Inc., a company with extensive experience in enhanced oil recovery operations, to design, operate and develop the LAK Ranch property.

In December, 2006 Derek purchased all of Ivanhoe's interest in the LAK Ranch project, including ownership of the US$1.1 million high definition 3D seismic survey.

Subsequent to this purchase, Derek planned and executed a 12 well development program on a portion (approximate 20 acre drainage area) of the LAK Ranch project, targeting the Newcastle Sandstone in a pay zone estimated at 40 to 70 feet thickness. This 12 well program consists of eight vertical producer wells and four injector wells, arranged in an "inverted five-spot" pattern. Steam for this 12 well program is provided by the existing 27 MMBTU/hr steam generator.

This 12 well program is being conducted jointly with a third party on a fifty-fifty cost basis, with the third party receiving fifty percent of the revenue until payback on their initial investment is met. Once payback is met, the third party's revenue interest (on production from the 12 well program area only) will revert to forty percent.

Geology/Production:

The Lower Cretaceous Muddy Sandstone and Newcastle Sandstone oil plays are developed in a suite of stratigraphic traps related to the depositional environments of the reservoirs (Ref: Dolton and others, 1990). The reservoirs along the eastern edge of the Powder River Basin are interpreted as alluvial and estuarine deposits filling channels incised into the underlying marine Skull Creek Shale (Ref: Stone, 1972). This productive trend is predominantly northeast to southwest and major fields include Fiddler Creek, Fiddler Creek East, Osage, Clareton, Skull Creek and Mush Creek. Production from these six fields through 1991 was over 74 million barrels of oil and 5 billion cubic feet of gas (Ref: Wyoming Oil and Gas Conservation Comission, 1992).

On the LAK Ranch property, oil is located in the Upper Marine and Lower Channel sequences of the Newcastle Formation. These sequences are separated by a thin shale unit. Across the mapped area of the property, the Newcastle Formation (upper and lower sandstones plus shale) varies from zero to 100 feet in thickness. The structure on the property is a west-southwest plunging syncline (bowl-shaped structure). The Newcastle Formation outcrops on surface on the northeast portion of the property and plunges to depths of about 2500 feet on the western property boundary. Oil is currently being produced from the Newcastle Formation at depths of approximately 1100 to 1200 feet at the pilot operation.

Production from the Newcastle Sandstone has totaled approximately 9700 barrels of oil since Ivanhoe Energy took over as operator. Since Ivanhoe commenced continuous steaming operations in October, 2005 daily production has risen to average between 45 and 50 barrels of oil as of March, 2006.

Oil Characteristics & Pricing:

Oil extracted from the Newcastle Formation at LAK Ranch has an average API gravity of about 19.4 degrees. The oil is low in sulphur (0.28%), with an average porosity of 25% and an average permeability of 500 to 1000 millidarcies. The average oil saturation is 60 to 65%. The oil is naphthenic, with low paraffin, a favourable temperature/viscosity curve and is alkaline sensitive.

Crude oil from the LAK Ranch property is currently being sold to Teppco Crude Oil, L.P. at a price of WTI less US$14.25 per barrel (Effective 01Oct07).