MercoPress. South Atlantic News Agency

Falkland Oil & Gas Limited Exploration Update

FOGL, the oil and gas exploration company is pleased to announce an exploration update with respect to its licence interests offshore the Falkland Islands and in particular to its 100% owned and operated southern licences. FOGL also holds a 49% interest in licences collectively referred to as the northern licences in which BHP Billiton holds 51% and is operator.

Highlights

• Site Survey for FOGL's 100% owned southern licences to commence in H1 2011
• 1,300km of 2D seismic may also be acquired to assist with prospect definition and selection of drilling locations
• Negotiations are currently underway with respect to securing a suitable deep-water rig for drilling in FOGL's acreage
• Analysis of Toroa results shows no adverse implications for FOGL's deepwater prospects

Site Survey

In order to provide further drilling options across FOGL's acreage, FOGL will undertake a site survey programme in the first half of 2011.

The vessel is currently mobilising to the Falklands and the survey programme is expected to commence in late February 2011. The vessel will undertake surveys on a number of separate sites including Vinson, in the Tertiary channel play, and a prospect within the mid Cretaceous fan play that will be selected on the basis of work currently being undertaken.

The Company is also considering a site survey on Inflexible, a Springhill fault-block and Undine, a prospect in the Tertiary fold-belt play. These prospects are similar to those that Borders and Southern intends to drill later this year and one of the aims of the site survey programme is to develop options to drill such prospects in the event that Borders and Southern has encouraging drilling results.

In addition the Company may elect to acquire up to 1,300 km of new 2D seismic data, using the same vessel. This data will assist with prospect definition and aid the selection of drilling locations.

Data from the site surveys will be incorporated into environmental impact statements (“EIS”), to be submitted to the Falkland Islands Government (“FIG”) later in 2011 as part of the approval process for drilling.

Rig negotiations

Negotiations are currently underway with respect to securing a suitable deep-water rig for drilling within FOGL's acreage. A further update will be provided when and if, these discussions result in a firm contract being agreed.

Full results from Toroa exploration well

As announced in July 2010, the Toroa F61/5-1 exploration well, which was drilled to a total depth of 2476 metres, did not encounter any reservoired hydrocarbons and was plugged and abandoned. However the initial data provided some encouragement and a full review has been undertaken. The information will be used to aid future drilling plans.

The full compilation and assessment of the Toroa drilling results has taken longer than originally planned. The delay is a result of a number of factors including problems with initial transport of samples to the laboratory in North America and the later requirement for additional analysis by another specialist geochemistry contractor.

The rationale for drilling Toroa was based on the following principles and sound technical considerations:

• The prospect offered a potentially large hydrocarbon resource in the event of success.
• The targeted Springhill reservoir is proven in adjoining basins in Argentina, where large stratigraphic traps, similar to Toroa, are known to contain oil and gas.
• Toroa had encouraging, albeit slightly ambiguous seismic amplitude and AVO (amplitude versus offset) responses.

A positive anomaly had also been seen on CSEM (Controlled Source Electro Magnetic) data gathered over the prospect, which again whilst encouraging, was difficult to fully assess given the un-calibrated nature of the data in an undrilled frontier basin.

The main risk prior to drilling was integrity of the trap. In order for hydrocarbons to be trapped in Toroa an effective side seal was required. Such a seal is created by sands passing laterally into sealing shales and is referred to as a stratigraphic trapping mechanism. There are many giant fields (>500 million barrels) that rely on such stratigraphic seals.

Reservoir Potential

Potential reservoir sands were encountered in the Jurassic to Cretaceous aged Springhill Formation, but these were found to be water bearing. Based on wire-line log interpretation over 30 metres meters of net sand were penetrated, with porosities ranging from 18% to 32%. As such, the Springhill play is still viable elsewhere within FOGL's acreage.

A thick sequence of very good quality sands was also encountered in the overlying mid Cretaceous section. This enhances the potential of the deep-water mid Cretaceous fan play that FOGL has been actively pursuing across its acreage.

Source Rock Potential

The Toroa well was drilled on the basin margin and as such, is not an ideal location to evaluate potential source rocks. Organic rich shales, that provide the source for hydrocarbons, are more likely to be developed in the deeper parts of the basin. Extensive geochemical analysis has been undertaken on drill cuttings and sidewall core samples collected from the Toroa well. Approximately 120 metres of shales with high Total Organic Carbon (TOC) were identified. TOC content ranged from 12.0% to 18.5%. These shales are considered good quality source rock by generally accepted oil industry standards.

Rock-Eval pyrolysis was undertaken on the shale samples. This is a technique that evaluates the type and the maturity of the organic matter within the shales, as well as determining its petroleum potential.

This analysis indicated that these are deltaic shales with a mixture of marine and terrigenous (land derived) organic matter, that were subsequently buried to produce a Type II/III mixed, oil/gas prone source rock, which is almost mature for oil generation at the well location. It is therefore likely that similar shales will have been sufficiently buried, in the basinal areas to the east of the Toroa well, to have generated hydrocarbons.

The analysis of gasses in the well suggests deep burial of a source, down-dip from the well.

Reason for failure of the Toroa prospect

FOGL's post-drill analysis suggests that Toroa had no lateral seal to trap migrating hydrocarbons. The seismic amplitude and AVO response, which had been interpreted to be hydrocarbon filled sands, were probably the result of a lithological effect (rock type) and in particular due to low density carbonaceous shales and coals that were found overlying the Springhill reservoir. These lithologies may have also contributed to the 'false positive' anomaly seen on the CSEM data.

Implications for future exploration elsewhere in the basin

FOGL believes that the results of the Toroa well have no negative impact on the plays and prospects in the deepwater area of our licences. In particular, they have no bearing on the risk or hydrocarbon potential of Loligo and other prospects within the Tertiary channel play which lie over 250 kilometres away to the north east of Toroa. The seismic amplitude and AVO response at Toroa resulted from the presence of certain rock types that are highly unlikely to be present in the deep-water plays within the Company's acreage.

Tim Bushell, Chief Executive of FOGL, said:

“The Toroa exploration well was the first well in a previously undrilled frontier basin and although the outcome was disappointing the full analysis of the data has provided encouragement. The mid Cretaceous and Tertiary plays are entirely unaffected by the result and we are pursuing these in 2011. As such we have decided to undertake further site surveys in the now 100% owned southern licence area. In the meantime, we continue to work to secure a suitable deepwater rig and negotiations are currently underway.”