EXHIBIT 99.2
[LETTERHEAD OF ENCAL ENERGY LTD.]
Calgary, Alberta, Canada.
May 22, 1998.
Re: Stress Field Detector Technology
This report presents a synopsis of Encal Energy Ltd's involvement and experience
with Stress Field Detector (SFD) technology and Pinnacle Oil International Inc.,
as at May 22, 1998. The information, observations, and results contained
herein, while believed to be accurate at this time, are subject to change as
more SFD information, data, and interpretations become available.
This document was prepared as an internal document for the use of Encal Energy
Ltd. and is not an independent report, evaluation or review.
This document was written by individuals who are unfamiliar with the principles
of SFD operation and the underlying design physics of the SFD instrument and do
not have any knowledge or understanding regarding how SFD technology works.
This document states only the observations of such individuals made under
non-controlled conditions. As a result thereof, this document should not be
considered or relied upon by any person as report, endorsement, evaluation,
confirmation, opinion or approval of SFD Technology.
This document does not express any conclusion or opinion regarding SFD
Technology, its use, interpretation or value and none should be implied hereby.
LAND AGREEMENTS
On December 13, 1996, Encal Energy Ltd. ("Encal") and Pinnacle Oil International
Inc. ("Pinnacle") entered into their first joint venture agreement. The purpose
of this original agreement was to field test the stress field detector (SFD)
technology. The basic terms were:
. Pinnacle to survey using ground-based SFD technology on specific Encal
lands within the Swalwell area of southern Alberta.
. Encal agreed to provide seismic data over SFD anomalies that Pinnacle had
identified.
. If Encal elected to drill an SFD anomaly, Pinnacle would have the right to
back in at well casing point to acquire and assume 5% of Encal's interest
in the respective well.
On February 19, 1997, Encal and Pinnacle signed a new exploration joint venture
agreement for the purpose of exploring large tracts of undeveloped lands. The
basic terms were:
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. Exploration areas (pre-selected regions that Encal and Pinnacle would
jointly explore) were to be up to 384 square miles in size.
. Pinnacle was to provide SFD technology, SFD prospects and interpretations
while Encal was to provide the standard expertise of a conventional oil and
gas exploration and production company.
. Pinnacle's participation rights were increased from the prior agreement to
a maximum of 30% of Encal's interest or, as an alternative, Pinnacle could
elect to receive a gross overriding royalty.
. Pinnacle would use their SFD technology for Encal in British Columbia, and
Alberta.
. Although Pinnacle was entitled to obtain two other joint venture partners
in Canada, Encal was granted exclusivity in British Columbia.
During the summer of 1997, Pinnacle modified the SFD data acquisition system
from ground-based to air-based capability and incorporated a Global Positioning
System (GPS). In recognition of these substantial improvements by Pinnacle to
data acquisition, all previous agreements were superseded by the current
agreement dated September 15, 1997. The major enhancements contained within the
September 15, 1997 agreement are:
. Maximum size of the exploration areas has been increased to 2400 square
miles.
. The collection of SFD data is no longer restricted to the three western
Canadian provinces. Encal may request that Pinnacle collect SFD data
worldwide.
. Encal has been granted 50% of Pinnacle's worldwide SFD data acquisition and
interpretation time whenever Encal's SFD prospect inventory is below 18
qualified prospects, during the tree year term of the agreement.
. Pinnacle's participation rights in the drilling of SFD-generated prospects
have been increased to a maximum of 45% of Encal's interest, or as an
alternative Pinnacle may elect to receive a gross overriding royalty.
. Encal continues to retain exclusivity of Pinnacle's SFD data acquisition
activities in British Columbia for the term of the agreement.
SFD DATA OWNERSHIP & VIEWING
All SFD signal data remains the sole property of Pinnacle. Encal has view-only
rights for the SFD signal data, and only when Mr. Liszicasz of Pinnacle
personally supervises the viewing. Encal is not entitled to receive or retain
any form of SFD signal data. Pinnacle provides Encal with written reports and
maps documenting the location of SFD anomalies. Encal is allowed to retain
these reports and maps in its own files for use under the joint venture
agreement.
SFD DATA ACQUISITION
In December of 1996, while using a ground based data acquisition system,
Pinnacle acquired several hundred miles of SFD data in the Swalwell area of
Southern Alberta in accordance with the December 13, 1996 agreement. Encal
personnel were not present during the recording of these data. After
interpretation by Pinnacle, the data was shown to Encal staff with the location
of SFD anomalies marked on topographic maps.
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Pinnacle conducted the first airborne SFD data acquisition for Encal on August
2/nd/, 1997, near Grande Prairie, Alberta. Between August and October 1997,
approximately 8300 miles of airborne SFD data was acquired by Pinnacle for Encal
during 22 flights throughout Alberta and British Columbia. An Encal geologist
was present on the aircraft and witnessed the recording of SFD signal data for
most of these flights.
SFD DATA INTERPRETATION
The interpretation of all SFD data is performed by Pinnacle. Mr. Liszicasz
examines the SFD data on several computers and decides which of the
characteristics of the SFD signal are anomalous ("SFD anomaly"). Encal personnel
have been present for the interpretation and may assist Mr. Liszicasz by
providing the geological input needed to calibrate the SFD signals.
Mr. Liszicasz reports numerous types of SFD anomalies. In the process of
qualifying these anomalies, he will describe the shape, size, strength and
significance of each. Based on these descriptions, Mr. Liszicasz provides Encal
with an interpretation of the potential size and commercial viability of any
undrilled SFD anomalies.
According to Pinnacle, an SFD anomaly must be surveyed and interpreted on at
least three separate flights before it can be confirmed and described as a
qualified SFD anomaly.
OBSERVATIONS MADE DURING SFD SURVEYING
Encal geologists made the following observations during the acquisition of
airborne SFD data:
. The SFD device is mounted on a motion stabilization platform inside the
aircraft and is usually not touched during surveying.
. The SFD output is converted to a digital signal and saved to computer disc
during surveying.
. The SFD output is also displayed on a laptop computer screen in real time
during surveying.
. The SFD device is not directly connected to anything on the outside of the
airplane.
. The SFD surveys are normally conducted at altitudes ranging from 400 to
1000 feet above ground.
. SFD survey lines are generally more than 50 miles long and the turns at the
ends of lines are kept very gradual.
. In may instances during SFD surveying, Mr. Liszicasz predicted, from the
real time SFD output, the imminent crossing of existing oil or gas pools
before the pools were actually encountered.
POST SFD SURVEY OBSERVATIONS
Encal geologists have made the following observations concerning SFD output and
interpretation:
. Pinnacle processes the SFD data and displays it on computer screens in
graphical format with time on the X axis and the SFD signal displayed on
the Y axis.
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. The characteristics of the SFD output can be very different from one survey
to the next and can even change within individual surveys. According to
Pinnacle these differences are due to different "modes of operation" of the
SFD tool.
. The SFD data recorded during turbulence or turning of the aircraft is
generally unreliable.
. Numerous geologic faults, major stratigraphic changes and known oil and
gas pools have SFD anomalies associated with them.
. Larger oil and gas pools have more obvious SFD anomalies associated with
them than smaller oil and gas pools.
. SFD anomalies obtained over gas fields appear different than those obtained
over oil fields.
. Man-made electromagnetic conductors such as power lines, pipelines,
railroads or well casings generally do not correlate with SFD anomalies.
. Some SFD anomalies appear to coincide with rivers, but not all rivers have
an associated SFD anomaly.
. Pinnacle's confidence in the interpretation of the SFD signal and ranking
of SFD anomalies improves when the signal has been calibrated to nearby oil
and gas pools and known geologic features.
. The azimuth of the flight line, in relation to the orientation of the
subsurface feature surveyed, influences the characteristics of the SFD
anomalies to the point where, in extreme cases, no SFD anomalies are
detected.
. By examining the SFD signal over a known oil or gas field, Mr. Liszicasz
could, in many cases, predict the location of the more productive wells
within that field.
RESULTS
SFD Anomalies over Oil and Gas Fields
- -------------------------------------
Encal designed a series of SFD flights for the purpose of evaluating the
response of the SFD tool to existing oil and gas pools. The following
statistics reflect preliminary interpretations that Pinnacle provided for nine
SFD flights conducted over Central Alberta during August 1997.
. A total of 1992 "pool crossings" were tabulated from the 9 test flights. A
"pool crossing" occurs when a flight line passes within 500 meters of a
producing well or group of wells in the same known pool. Pool designations
were provided by the Alberta Energy Utilities Board (AEUB).
. 129 of the 192 pool crossings were interpreted by Pinnacle.
. SFD anomalies were identified by Pinnacle on 67% of the 129 interpreted
pool crossings.
. 23 pools had more than one flight crossing. Pinnacle's interpretations of
these multiple crossings were consistent 75% of the time.
. The AEUB Pool Reserve Data was reviewed for 64 separate pools on which
Pinnacle has provided Encal with SFD interpretation. Analysis of this data
showed that larger reserve pools are more likely to have an SFD anomaly
associated with them than smaller reserve pools. SFD anomalies are
associated with 91% of pools with more than 5 million barrels or 50 BCF in-
place and 63% of pools with less than 5 million barrels or 50 BCF in-place.
Seismic Evaluation of SFD Anomalies
- -----------------------------------
To date, Encal staff have acquired, reviewed and completed the interpretation of
seismic data for the purpose of evaluating 9 different undrilled SFD anomalies.
For 8 of these 9 SFD anomalies, the location of changes in seismic amplitude or
time structure correspond to the geographic location of the SFD anomalies. For 1
of the SFD anomalies, no seismic anomaly was mapped, however Mr. Liszicasz also
classified this SFD anomaly as being weak. It should be noted that the
occurrence of a seismic amplitude or time structure anomaly does not necessarily
confirm or imply the presence of commercial hydrocarbons in the subsurface.
Well Predictions
- ----------------
During the late summer of 1997, Encal drilled and evaluated three wells over
which Pinnacle had conducted airborne SFD surveys. All three wells were located
in Alberta and were selected for drilling by Encal's technical staff based on
conventional geological and geophysical data and interpretations. These wells
were selected for drilling prior to any SFD surveys being conducted. Pinnacle's
predictions regarding the outcome of these three wells were verbally
communicated by Pinnacle to Encal prior to each well reaching its primary target
objective.
These three wells, Pinnacle's outcome predictions, and the drilling results
were:
1) Encal #1 West Central Alberta was drilled between August 24 and September 15,
1997, to 2978 m in the Devonian Beaverhill Lake Formation. This well was
targeting a seismically defined Leduc Formation pinnacle reef buildup, and
was expected to discover light conventional crude within this interval. SFD
survey data was acquired over the location on five separate, valid flights
flown between August 02 - 22, 1997. Pinnacle's well outcome prediction was
that "no reef buildup or economic hydrocarbons would be encountered in this
well". The well results confirm this prediction. A Leduc reef buildup was not
found, and no other potentially commercially hydrocarbon zones were
identified from borehole information. No drillstem or production testing was
performed on this well and the well was declared dry and abandoned.
2) Encal #2 West Central Alberta was drilled between August 26 and September 27,
1997, to 3375 m in the Devonian Winterburn Formation. This well was targeting
a seismically defined Wabamun stratigraphic porosity development, and was
expected to discover natural gas within this porosity interval. SFD survey
data was acquired over the location on three separate valid flights flown
between August 19 - 23, 1997. Pinnacle's well outcome prediction was that
"the Wabamun interval would be dry, but that a shallower zone would produce
hydrocarbons at a gross rate not exceeding 2 million cubic feet per day". The
well results confirm this prediction in that the well failed to encounter any
significant porosity development within the Wabamun Formation, and the lower
portion of this wellbore was declared dry and abandoned. However, the well
did encounter a significant hydrocarbon show in the Cardium Formation at an
approximate drilling depth of 1925 m. This zone was subsequently completed,
frac'd, and production tested to yield conventional light oil at an initial
rate of 75 barrels per day. During December 1997, the well produced clean oil
a gross average rate of 30 barrels per day and flared gas at approximately
5
80Mcf/d. No other zones in this well are considered capable of commercial
hydrocarbon production.
3) Encal #3 West Central Alberta was drilled between September 11 and September
27, 1997, to 1965 m in the Lea Park Formation. This well was targeting a
basal Belly River Formation sandstone reservoir, and was expected to discover
natural gas within this interval. SFD survey data was acquired over the
location on two separate, valid flights flown on September 20, 1997.
Pinnacle's well outcome prediction was that "this well would not be a
commercially viable new hydrocarbon discovery". The well results confirm this
prediction. The basal Belly River sand was not well developed and therefore
did not warrant completion or testing. However, the well did encounter a
well-developed upper Belly River sand. This sand was perforated, but produced
only water on production tests. Therefore, the Belly River interval was
declared non-commercial and the well has been suspended. No other zones in
this well are considered capable of commercial hydrocarbon production.
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