88E Video Transcript, page-2

Paul Basinski
Well thank you all this is quite an honour for me and thank you Tim and Graeme… it’s extraordinary what’s happened since this group sitting at the front, we met at the Globe, had more than a few cocktails, and it’s astounding what the Long Term Investors Group (have done) - it’s been extraordinary.

And the impact that it’s had on the company that Dave and I share and private(ly) I want to thank each and every one of you for your support and for actually being here. We would like to make this a fun opportunity as well as an educational one.

So I remember last year when we were visiting at the Globe…

…one of the questions that came up is… this project is quite a long time in the making… and the question was… how do you come up with it?

How does this happen? Because basically… this is a representation of using a toolbox that we put together, that we established in 2004 and 2005.

Anyway, people ask… what is this about? What is this thing? How did we get to this point?

And what I wanted to do first off - a number of people asked “tell me about this ACB thing” - and I just wanted to touch briefly on that - we’re gonna hit a few of the other high points - I don’t wanna be up here a belabour all of this stuff - I just wanna give you a feeling of the contexts for how we got here in the first place.

So - how was Icewine identified?

Well, we used the same technique that we used in the Eagleford in 2005 - and it’s kind of ironic because the workflow we’ve come up with now that we have all of the data is basically a page out of that same book.

The first well we drilled was called the Kundi (sp?). It looks almost exactly the same as the Eagleford - all of the characteristics - other than our reservoir’s quite much better. And we ended up doing a completion and that was for deeper objective and it ended up being the discovery at Eagleford. And we’ve taken kind of a page out of that - it’s a “best practises”. And so we’ll have plenty of time to be able to explain what that’s all about - but effectively the way we do this is… that I’m a big fan of studying history. And about the science of innovation and thought. Because - you know - you don’t find billion barrel fields all the time.

I was taught by John Masters - a gentleman that took me under his wing a long time ago - and effectively the approach that I’ve taken - and I think this approach works in all of life - is that, if you can become proficient in many different spheres then it allows you to be able to recombine things in ways that they haven’t been recombined before - to see things - to imagine outcomes that haven’t happened.

So when you do that - I call that “A” - then you get to “C” - that’s the “wow” - we have this idea, now it’s a crazy idea generally, it horrifies everyone - right - how can you get oil out of a shale? - that was the situation at Eagleford… well, real simple, you just had to get it into the right properties and make it a gas in the sub-surface and the rock wouldn’t know the difference, and when you bring it to the surface it’s mostly oil.

But like Dave said - the secret is… you can have a bunch of ideas - but most of them don’t work. So the ideal is, to fail fast, fail frequently, and fail smart. Cycling. Thomas Edison said “I didn’t fail 10,000 times discovering the incandescent light-bulb - I just eliminated 9,999 things that couldn’t work”.

So the point is, that the whole idea is once you get to this “a-ha” moment, that doesn’t mean anything. Now what you have to do is bring in subject matter experts - and now it’s not about knowing the answer. The problem with the regular scientific method. This is the original scientific method that happened before the scientific method. This method is the empirical method.

So what you do is when you have this idea you would [combine and recombine it with fundamentals] (?) who are the subject matter experts and these (Why? Why Not? What If?) are the “three W’s” in the Harvard Business Review - this is what they teach in business school - “Why?" "Why Not?" and "What If?” - and this is the basis of disruptive innovation. (Clayton) Christensen came up with this in 1997.

So the point is that, then what happens is - you start to “ping” - you ask questions - you “flesh it out” - and when you get to a certain point and it looks like it’s not going to work you learn from it, and you move on to the next one.

So what you are seeing here is the results of a zillion failures - but every once in a while the meteor hits - and this happened to be one of those after the Eagleford when we were using the same techniques.

I love quotes - another Edison quote: “I failed my way to success”
(I’m the living embodiment of that)

Thomas Jefferson: “The harder I work, the luckier I get”
(and guess what - that’s the secret!)

Winston Churchill: “If you’re going through hell, keep going”
(Churchill was right! We’ve been doing plenty of this talking about the stock price)

So - we are moving forward with this, and we are very very excited - and we’re really looking forward to clarifying some of the questions and uncertainty you have.

So we all know this - I think you’ve been picking it up as we go forward - but “what are the characteristics of a World Class Resource Play?”

These things don’t grow on trees - they’re very rare.

The first thing is - you have to have Resource Concentration. You have to have the oil in the ground. You have to have a lot of oil in the ground per acre/foot. If you don’t have that - you’re dead.

So that’s Porosity, Oil Saturation and Net Pay.

And that’s something that we have. And we had a searchers(?) company - name’s gonna go unsaid - who took a look at this and said this is the best shale reservoir they’ve seen in the world. I don’t know about that - but it’s the best one I’ve seen.

We have the resource concentration - we have an extraordinary reservoir.

As Dave said - that doesn’t mean anything about getting it out of the ground - that means we have the oil there.

The next thing is that you have the oil - but it has to be in this volatile phase.

And the reason why the volatile phase is so important - it’s very rare oil.

If you go out and ping the internet and look for the oil production of volatile oil - you won’t see any numbers. Because it’s only recently understood even what it was. It’s always gone with either black oil or wet gas. But the point is that it has extraordinarily different properties.

So in the sub-surface it’s in what they call super-critical phase.

And what we’ve learned at the EagleFord is when you produce it - it flows like a gas. When it gets to the surface, most of the gas is very, very rich oil. But - as it leaves the pores, and the pressure goes down and then gas forms in the pores - the gas in the pores creates another energy system in order to increase the recovery factor. That’s the reason why you get recovery factors because you basically have another artificial assist. And that’s the reason why EOG and ConocoPhillips have such extraordinary wells.

So this is an unusual phase and it provides it’s own energy in order to be able to get recovery factors that are like 15%, 20%, 25%. So this is extraordinarily important.

Once we have the Volatile Oil Phase - this is where we are now… do we have the right Rock & Fluid Mechanics?

Because at the end of the day it’s about the stimulated rock volume and the amount of hydrocarbon in the stimulated rock volume we can keep propped open?

So - we can frack this thing, but how high does it go? Is there propane embedment? How will it last as you bring down the pore pressure, because then effective stress goes up?

So these are the important questions. And right now - we are on the edge of this.

But the first thing we’ve got to be able to understand is - we have to collect the data so that we can understand these things - ‘cause if we just get a flow rate, that doesn’t tell us. Because the only thing you’ll know if you get a flow rate like in the Eagleford which was 320 wells - they were lousy wells - took them a long time to figure out how to do it. But we don’t have 320 wells.

So what we’re going to do is we’re going to use a vertical well and we’re going to do these injection followup tests and these neat little tools we’re going to be able to characterise a lot of these parameters so we can take the well flow that we get out of the vertical and scale it up because industry is very well aware of what the scaling factor from a vertical to a horizontal well is. Like in the biggest shale play going on in the Bakken (/ Latin ?) America, it’s mostly vertical wells - only now that they’re starting to convert over.

There’s a lot of stuff going on under the hood we don’t talk about - and I just wanted to give you a feel for it. We’re looking at kerogen - comparing the visual kerogen to the pyrolysis - we’re being able to identify what the nature of the kerogen is, what it’s kinetics are, that tells you whether it’s going to be… how much oil it’s going to produce, what phases it’s going to have. Everything we do is mathematics… everything’s based on physics. Everything’s based on these relationships - and if we don’t have an R-squared of at least 85, we don’t use it.

And so, that’s why it takes such a long time in order to be able to figure out - there’s a lot of IP that goes into this, in order to be able to find these relationships. Because if you have a return-reflectance of say 1.1, what does that mean? Is that oil? Is that gas? What is it? It can be all kinds of different things, and unless you understand these transforms you’re just guessing. We can’t afford to guess in Alaska - it’s too damn expensive!

We have these unbelievable spreadsheets - we have zillions of numbers - we have all this IP where we’re doing these maturation profiles. We’ve got thermal gradients all the way from Tierra to Fuego up to where we are - these are all constraining parameters. It’s easy to take a look and say “well yeah” - but that’s not how you get there. We have one well and 500 square miles. If you take the conventional approach, with the wave with the technique that we came up with in the Eagleford - we had actually less control in the Eagleford when we put that together than this.

And the whole point is that - if you’re looking for volatile oil then you’re looking for thermal gradients and you’re looking for seals. And that’s a very different exercise than what everyone else (is doing) - and that allows you skip a lot of steps and basically weed out huge areas - because you just know that it can’t work. And that’s the secret. It’s not finding it - it’s ruling out everything that can’t work. And that’s the origin of the Achilles Heels. Because if you’re trying to prove it - you can never prove anything - but you can sure prove that it’s impossible - and that’s how we’ve focused on doing this.

And we have core gas - and we’ve been able to convert that into a critical phase and API gravity - now we take the viscosity and these are run in all of our simulators when we talk about the flows we know the viscosity - and the viscosity is an amazing thing. If you go 10 miles to the north of us (Great Bear?) the viscosity is 15 times higher than we are - and when you put that into the flow equation that means 15X the flow rate. That means a (great well?) or something on the North Slope that you’re dead. So viscosity is key.

And on this core we have these ash beds we’ve done a lot of research on those - because it’s something we have to contemplate in our completion plan. We’ve looked at thorin(?) - we’ve looked at all these other characteristics because what we have to understand is the holistic package and how it will frack.

Lastly what I wanted to say is - Dave and I have an unusual relationship - we’re kinda Mars and Venus (Dave: “I’m Mars”) - the thing is we have this really unique relationship and somehow it’s working. It’s amazing - I mean sometimes we wanna kill each other, but that’s ok - we both have skin like an elephant!

The point is - that what we have between us - in these little itsy-bitsy companies - we have this differential expertise. We have proven methods. Dave has got a proven track record. We have proven methods that have worked before. We have the world's leading experts. In Houston we have the world’s leading experts - everything we do is QC’d by all of these guys - and if there’s a flaw we go back - like Dave said, we’re always evaluating.

The bottom line is - people may think we’re pivoting - that maybe we’ve lost interest. I can tell you that the project that we are representing in the HRZ has never looked better. And we are close on the tic-tac-toe board to the last step. But at the end of the day if we can’t stimulate it, we can’t keep it open and we can’t keep it propped then we’ve got a problem. But we have all the pieces in play and frankly I’m not aware of another play in the world that’s got this materiality - ten year term - plenty of time great leases - a state that’s bending over backwards - right next to the pipeline... we’ve got all the fundamentals and now we've just got to execute - do that vertical well and see what happens.

It’s risky. We don’t know what the outcome’s going to be. But we’ve sure come a hell of a long way from where we were even 18 months ago.

Next up... Q&A- I'll post questions and answers individually