Blugrass Energy's LOI with Petro Grande on the Val Verde & Crockett County acreage covers 16,554 leased acres in the highly prospective Val Verde Basin. Petro Grande estimates the natural gas project to have over 500 Bcf of natural gas. The acreage is on trend with numerous giant gas fields including the Gomez Field with cumulative production of 10.6 Tcf and the Brown Bassett field with 1.6 Tcf. The Massie South Extension, consists of 11,747 acres located due south of the existing Massie Field. Exploration potential includes numerous deep targets within the Ellenburger and Strawn formations as shown by 3D seismic studies. The Crockett County property, known as the Childress-Soto Ranch prospect, consists of 4,807 acres near the multipay Miller Field (Ellenburger, Strawn, Devonian and Canyon formations). This project merges into the Ozona Canyon gas field where there are currently producing wells on the lease. The company has identified numerous potential drill targets for the projects are in the Canyon Sands formation at a depth of 6,300 feet, the Strawn formation at a depth of 12,000 feet and the Ellenburger formation at a depth of 14,000 feet. There are several major companies in the Val Verde Basin in Anadarko Petroleum (NYSE: APC), Chevron (NYSE: CVX), Occidental Petroleum (NYSE: OXY), Devon Energy (NYSE: DVN) and Chesapeake Energy (NYSE: CHK) one of the largest gas producers in the nation.

The primary formations in the Val Verde Basin are the Canyon, Devonian, Strawn and Ellenburger formations, each capable of making commercial production wells, of which Blugrass will have 80 potential locations that on average would produce 2.5 Bcf per day. Canyon wells base initial flow rate are 18,000 Mcf per month per well, Strawn wells are estimated to have initial flow rates of 3-10 MMcfd and Year 1 average initial flow rates of 2.5 MMcfd and Ellenburger wells initial flow rates of 10-50 MMcfd and Year 1 average flow rates of 10 MMcfd.

Regional Overview & Geology

Cumulative production from the 18 gas plays in the Permian Basin was 42.3 Tcf through 1986. Most of the reservoirs included in the Gas Atlas were discovered from the 1940s through the early 1970s. The plays with the highest production through 1986 were Ellenburger Fractured Dolostone, Devonian Carbonate—Deep Delaware and Val Verde Basins, and San Andres and Grayburg Platform Carbonate. The Upper Pennsylvanian and Lower Permian Slope and Basinal Sandstone play in the Val Verde Basin was one of the most active gas-producing plays in the United States in the 1990s. In 1991, 24 percent of new completions in tight gas sandstones were made in this play, more than 400 new Canyon gas wells were drilled in 1994. Production from reservoirs in the Val Verde Basin has increased in importance. Two plays, Upper Pennsylvanian and Lower Permian Slope and Basinal Sandstone and Strawn Group Shallow-Marine Carbonate, account for 39 percent of the 2.2 Tcf additional production.