Epsilon Energy Limited: Operating Areas: USA: Unconventional / Appalachian Basin

Epsilon is focused on unconventional shale gas plays covering the Marcellus, Lower Huron and Rhinestreet in the Appalachian basin.

In the United States, the Corporation is developing its Marcellus shale acreage in Pennsylvania and New York and is producing natural gas in New York from the Trenton-Black River formation, both of which are in the Appalachian basin. The Marcellus shale stretches from southern New York through western Pennsylvania into eastern Ohio and across West Virginia, where the Corporation has approximately 83,500 gross (36,500 net) leasehold acres, including approximately 43,500 gross (27,500 net) leasehold acres in highly prospective areas within Pennsylvania and New York. In New York, where the Corporation holds an interest in approximately 31,834 gross (15,548 net) acres, the Corporation’s acreage is prospective for natural gas production in both the Marcellus shale, (shallow unconventional natural gas play) and the Trenton-Black River formation (deep conventional natural gas play).

Industry publications, such as the January 2009 issue of the Oil & Gas Investor, continue to be very bullish on the Marcellus Shale, including recently published estimates of an average of 3.30 Bcf of gross reserves per well, average finding and development costs of $1.42/Mcfe and average internal rates of return of 86% based on average capital costs of $2,500 per mineral acre and average drilling costs of $3.75 million per well. The Corporation has significantly lower acquisition capital costs than the aforementioned averages.

As of November 30, 2009, the Corporation had acquired approximately 11,500 gross (11,500 net) leasehold acres in Pennsylvania where the Corporation is operator, holds a 100% working interest. The Corporation is focusing its current development efforts in the Marcellus shale on its Highway 706 project in northeastern Pennsylvania. To date, the Corporation has drilled eight wells in Highway 706, all of which are in various stages of development. Production results to date have performed within management expectations. The Corporation has finalized an extension of its gathering system to its compressor site in order to bring on three additional wells. The compression facilities on location have a current capacity of up to approximately 12.6 Mmcf/d and the Corporation expects to have the ability to increase its compression capacity as warranted in order to handle increased production as more wells come online.

In New York, the Corporation is primarily focused on exploration of the prolific Trenton-Black River formation, a conventional gas reservoir target within its Empire project. The Corporation’s acreage position covers approximately 32,000 gross (16,000 net) leasehold acres as of June 2009. The Corporation’s New York leasehold acreage is also prospective for the Marcellus shale.

The Corporation continues to evaluate potential exploration, development and production opportunities in the Marcellus shale, including but not limited to, participating in competitor wells, developing its existing leasehold acreage and/or entering in joint ventures with other companies.
During 2008, the Corporation participated in drilling one non-operated well (.03 net) in the Marcellus shale, which had a favorable production test and is currently shut in waiting on production infrastructure. Based on the positive test results from that well, the Corporation has commenced the early stages of forming a large Marcellus shale project, including staking well locations, planning infrastructure and seeking regulatory approvals. Marcellus shale drilling permits utilizing larger hydro-fractures are currently on hold pending completion of a Supplemental Generic Environmental Impact Statement by the New York Department of Environmental Conservation. See “Commitments and Contingencies – New York – Trenton-Black River Well Units”.

The Bailey’s Mill project is located in Belmont and Monroe counties and consists of approximately 40,155 gross (8,840 net) leasehold acres, in which the Corporation holds a 25% non-operated working interest. Due to its current focus on the Marcellus shale in Pennsylvania and New York, the Corporation does not anticipate allocating a significant amount of funds to continue participating in drilling future wells on its Bailey’s Mill project.

Epsilon Energy Shale Drilling Animation

A brief animation of Epsilon's drilling process and a summary of Epsilon Energy's properties in the Appalachian basin follows:

Unconventional Gas - Appalachian Shale Gas