Underground Energy announces agreement to acquire 44,172 acres (33,037 net) of oil and gas leases in the Santa Maria / San Joaquin basins of California and provides operational update at Asphaltea

SANTA BARBARA, CA, Nov. 1, 2011 /PRNewswire/ - Underground Energy Corp. ("Underground", "UGE" or the "Company") (TSX VENTURE: UGE) today announced that through its wholly-owned subsidiary, Underground Energy, Inc., it has entered into a purchase and sale agreement to acquire 44,172 gross acres (33,037 net) of oil and gas leases in California for total consideration of US$5.5 million comprising $4.6 million in cash and $0.9 million in assumed liabilities.  Underground will satisfy the cash component of the purchase price with its available cash on hand. The assets acquired include three producing wells (two oil wells and one gas well, with total production of approximately 60 boepd), a number of drill ready locations and multiple exploitation and exploration prospects in two trends in the Santa Maria Basin and four trends in the San Joaquin Basin. In line with the Company's aggregation strategy, the acquired lands are primarily prospective for Monterey and other analogous oil-prone shale plays. Closing of the transaction is subject only to the completion of final due diligence by the Company and is expected to occur on or about November 15, 2011. Upon closing, Underground will become the operator at each of the acquired properties.

"This agreement allows us to dramatically increase our land position in California from 7,314 net acres previously to 40,350 net acres post acquisition while providing us with assets that can be evaluated through a flexible capital expenditure program," said Michael Kobler, President and CEO of Underground. "It allows us to efficiently access an array of complementary assets, including lower risk, drill-ready sites that are in close proximity to our existing properties in the Santa Maria Basin. It also moves us in a meaningful way into the San Joaquin Basin, where close to 20 billion barrels of recoverable oil have historically been discovered and more than 1.5 billion barrels of oil have been produced from the Monterey and other shale formations. The acquisition allows us to maintain our strategic focus on the Monterey shale (post acquisition the Company will hold 27,380 net acres prospective for oil in the Monterey shale), while also providing exposure to analogous shale plays and conventional sandstone plays where we can leverage advanced exploration and production techniques as well as the wealth of California-specific experience from our technical team."

Santa Maria Basin Assets

The Santa Maria Basin assets are comprised of the Zaca Field Extension and adjacent exploratory prospects and the Santa Rita Prospects. Through the acquisition, Underground is gaining an 80% working interest and operatorship in these areas with the Monterey shale being the primary target.

The Zaca Field Extension is comprised of 7,750 acres (6,200 net) and includes the eastern extension of the Zaca oil field which has historically produced more than 32 million barrels of oil and is an analogous oil field to the Company's Asphaltea project. The Zaca Field Extension includes one producing well (15-20 bopd) and Management of UGE estimates that there is the potential for an additional 20 to 30 drilling locations on this extension. The Company has also identified additional structures on the leased lands utilizing 2D seismic.  These structures, which are adjacent to the Zaca Field Extension, are also prospective for oil and gas in the Monterey shale.

The 61 vertical wells previously drilled into the western part of the Zaca field have produced in excess of 500,000 barrels of oil per well on average.  Typical initial oil production rates for the historical vertical wells were in excess of 200 bopd with the most productive wells having initial production rates over 700 bopd. In addition, the last 18 vertical wells, which were infill wells drilled in the 1970's through the 1990's, had average initial production rates in excess of 70 bopd and produced in excess of 375,000 barrels of oil per well. Management of UGE believes that internal sealing cross faults within the field extension have the potential to result in near virgin reservoir pressure which would provide the potential for wells with initial production rates and ultimate recoveries comparable to the historical averages of the existing Zaca field.

The Company intends to reprocess existing 2D seismic on the Zaca assets in advance of drilling its initial step-out extension well late in the fourth quarter of 2011 or early in the first quarter of 2012 and the Company will also look to increase production from the existing well through stimulation work.

Management's best estimate is that the Zaca Field extension contains 6.1 million barrels of proved and probable reserves and an additional 4.75 million barrels of possible reserves net to Underground. In addition, Management's best estimate is that the identified adjacent exploration prospects could hold 12.2 million barrels of additional prospective resources net to Underground. GLJ Petroleum Consultants, the Company's independent qualified reserves evaluator, has been engaged to evaluate reserves and prospective resources in the Zaca Field Extension and it is anticipated that this report will be completed in early December 2011.

The nearby Santa Rita Prospects comprise 1,218 acres (974 net) and are on trend with the Lompoc field which has produced more than 50 million barrels of oil. The Company intends to conduct additional geological and geophysical evaluation at Santa Rita prior to applying for drilling permits.

Notes:

1. Prospective resources are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from undiscovered accumulations by application of future development projects. Prospective resources have both an associated chance of discovery and a chance of development.  There is no certainty that any portion of the prospective resources will be discovered and, if discovered, there is no certainty that it will be commercially viable to produce any portion of those resources.  Prospective resources are undiscovered resources that indicate exploration opportunities and development potential in the event a commercial discovery is made and should not be construed as reserves or contingent (discovered) resources.  Prospective resources in this press release are reported on an unrisked, company interest basis.
2. The reserve and resource estimates in respect of the prospective resources for the Zaca Field for Underground were prepared on October 27, 2011 with an effective date of November 1, 2011 and prepared in accordance with COGE Handbook and National Instrument 51-101 - Standards of Disclosure for Oil and Gas Activities ("NI 51-101") by a member of management of Underground who is a "qualified reserves evaluator" as defined under NI 51-101.
3. The "best estimate" is considered to be the best estimate of the quantity that will actually be recovered.  In terms of prospective resources, it is equally likely that the actual quantities recovered will be greater or less than the best estimate. In terms of discovered reserves, the "best estimate" is the combination of the proved plus probable reserves. If probabilistic methods are used, there should be at least a 50 percent probability that the quantity actually recovered will equal or exceed the best estimate.
4. The significant positive factors that are relevant to the management's estimate of the reserves and prospective resources include production in close proximity to the assets and oil and gas shows in wells drilled in close proximity to the assets.  A significant negative factor that is relevant to management's estimate of prospective resources is that seismic attribute mapping in the areas can be indicative but not certain in identifying resources.
5. Possible reserves are those additional reserves that are less certain to be recovered than probable reserves.  There is a 10% probability that the quantities actually recovered will equal or exceed the sum of proved plus probable plus possible reserves.
6. The estimates of reserves and resources for individual properties may not reflect the same confidence level as estimates of reserves and resources for all properties, due to the effects of aggregation.

San Joaquin Basin Assets

The San Joaquin Basin assets are comprised of the Buttonwillow Deep Test and the Foxtrotter Trend Area of Mutual Interest ("AMI") in Kern County, the Burrel Redevelopment Project in Fresno County, and the Challenger Gas Trend AMI in Madera and Merced Counties.

Underground is obtaining an 80% working interest in 1,625 acres (1,300 net) prospective for oil and gas in the Monterey and McClure shales and other conventional reservoirs under the Buttonwillow gas field.  The Buttonwillow Deep Prospect lies within the previously announced Occidental Petroleum ("Oxy")/Venoco Inc. ("Venoco") 500 square mile 3D seismic shoot and Underground will receive data from this shoot across its prospect. Venoco has permitted a deep well to test a prospect on an adjacent lease which will be closely monitored before drilling is planned on Underground's acreage.

Underground will assume a 65% working interest in the Foxtrotter Trend AMI comprising 4,393 acres (2,855 net) that includes shallow Monterey diatomite and deeper oil-prone shale prospects. The Foxtrotter Trend AMI lies within the boundaries of a 3D seismic survey being acquired by Oxy and the Company will be entitled to the data over its leases.  The Company intends to interpret both existing and new seismic data prior to permitting and future drilling.

The Burrel Redevelopment Project consists of 10,245 acres (8,196 net) and one producing oil well (30-40 bopd). The Company will look to increase this production through additional stimulation work on this existing well. Underground also intends to interpret existing 2D seismic in preparation for future drilling. The project has multiple oil targets including Kreyenhagen and Monterey type shales and conventional sandstones.

Underground will also assume a 70.49% working interest in the Challenger Gas Trend AMI which represents 18,400 acres (12,970 net) and includes one producing natural gas well (60 mcf/d). The key targets at Challenger are the Blewitt and Zilch sands, the Temblor/Vaqueros sands, as well as the Kreyenhagen and Moreno shales. A gas gathering system has been built by a third party to transport gas produced from the area to the PG&E gas transmission system.  The remaining $0.9 million pipeline commitment will be assumed by Underground as part of this transaction. Given its focus on oil exploration and production, Underground will assess how best to exploit the gas assets going forward.

"We believe this acquisition is fully in line with our stated strategy of aggregating quality assets in our core areas of focus," said Bruce Berwager, Chief Operating Officer of Underground. "Our team has leveraged its California-focused expertise and relationships to provide us with critical mass in the Santa Maria Basin, while launching us in a significant way into the San Joaquin Basin. The assets provide us with production, proved reserves, a number of drill ready targets and a pipeline of quality exploratory prospects and leads primarily focused on Monterey and analogous oil-prone shales."

Operational Update at Asphaltea

Following the completion of an initial 2D seismic shoot in early July, and based on the quality of the data initially received using newly available techniques, the Company elected to expand the shoot to maximize the extent and quality of the data and potentially eliminate the need for a separate 3D shoot in 2012. The expanded shoot was completed in late July and has provided the Company with seismic coverage over the majority of its key prospects.

Fairfield Nodal is currently processing the seismic data and it is expected that processing will be completed by mid-November.  Once the seismic data has been processed, the Company will complete an integrated geophysical and geological interpretation of the data in order to select the bottom-hole location for the initial wells and to precisely target its initial appraisal well. Drilling will commence once the seismic data has been fully interpreted. Although the Company has a drilling rig scheduled in December 2011, it is likely that drilling will not commence at Asphaltea until Q1 2012.

The objective of the Company's first Asphaltea well will be to evaluate the rock properties and potential commercial productivity of the Monterey formation as well as to potentially evaluate prospective deeper geological horizons. Information gained from this first vertical well will be key to fully understanding how best to exploit the pay, and in particular, whether it is best to use deviated or horizontal wells.

"By employing the latest seismic techniques, we have been able to obtain seismic coverage over 95% of our prospects at a fraction of the cost and with none of the permitting and implementation challenges associated with a traditional 3D seismic shoot," said Bruce Berwager, Chief Operating Officer of Underground. "We believe that the expanded shoot will provide us with better, more detailed information that we can use to target the final site for the first appraisal well at Asphaltea and potentially eliminate the need to conduct an additional costly and time consuming 3D shoot in 2012. We intend to utilize this new seismic technology going forward believing we can use it to quickly and efficiently de-risk additional assets, saving time and capital in the overall exploration and development of our portfolio of opportunities."

About Underground Energy Corporation

Underground is focused on identifying, acquiring rights to, exploring for, developing and producing oil reserves from shale formations in North America using the latest exploration and recovery techniques and technologies. Underground focuses on identifying and acquiring sizable land positions and prospects in historically prolific but under-explored shale formations as well as in emerging shale plays that, in both instances, hold large volumes of prospective resources. Underground currently holds mineral rights on approximately 83,086 net acres of highly prospective lands in California and Nevada with an initial focus on the Monterey shale in California. Underground is listed on the TSX Venture Exchange under the ticker symbol "UGE". For more information on Underground, including a copy of the Company's latest corporate presentation, please visit www.ugenergy.com. Underground's regulatory filings are available under the Company's profile at www.sedar.com.

Cautionary Statements

Historical production data for both Zaca and Lompoc is based upon a report titled "California Monterey Reservoir Study Project", prepared by Spivak, Mannon, Brigham, Surdam, Coombs, and Sageev and dated September 11, 1985 and the records of the California Division of Oil and Gas and Geothermal Resources obtained by the Company on August 24, 2011.

Statements in this press release contain forward-looking information and forward-looking statements within the meaning of applicable securities laws (collectively, "forward-looking information").  Forward-looking information is frequently characterized by words such as "plan", "expect", "project", "intend", "believe", "anticipate", "estimate" and other similar words, or statements that certain events or conditions "may" or "will" occur.  In particular, forward-looking information in this press release includes, without limitation, statements with respect to: (i) the closing and closing date of the Company's proposed acquisition of oil and gas leases in California; (ii) the Company's planned seismic operations to be conducted on such oil and gas leases; and (iii) the prospectivity of such oil and gas leases for oil and gas and the anticipated drilling, completion and production results therefrom.  Readers are cautioned that assumptions used in the preparation of forward-looking information may prove to be incorrect. 

Although we believe that the expectations and assumptions reflected in the forward-looking information are reasonable, there can be no assurance that such expectations or assumptions will prove to be correct. In particular, assumptions have been made that: (i) Underground will be able to obtain equipment and regulatory approvals in a timely manner to carry out exploration and development activities; (ii) Underground will have sufficient financial resources with which to conduct its planned capital expenditures; and (iii) the current tax and regulatory regime will remain substantially unchanged. Certain or all of the forgoing assumptions may prove to be untrue.

Forward-looking information is based on the opinions and estimates of management at the date the statements are made, and is subject to a variety of risks and uncertainties and other factors (many of which are beyond the control of Underground) that could cause actual events or results to differ materially from those anticipated in the forward-looking information.  Some of the risks and other factors could cause results to differ materially from those expressed in the forward-looking information include, but are not limited to: operational risks in exploration, development and production; delays or changes in plans; competition for and/or inability to retain drilling rigs and other services; competition for, among other things, capital, acquisitions of reserves, undeveloped lands, skilled personnel and supplies; risks associated to the uncertainty of reserve and resource estimates; governmental regulation of the oil and gas industry, including environmental regulation; geological, technical, drilling and processing  problems and other difficulties in producing reserves; the uncertainty of estimates and projections of production, costs and expenses; unanticipated operating events or performance which can reduce production or cause production to be shut in or delayed; incorrect assessments of the value of acquisitions; the need to obtain required approvals from regulatory authorities; stock market volatility; volatility in market prices for oil and  natural gas; liabilities inherent in oil and natural gas operations; access to capital; and other factors.  Readers are cautioned that this list of risk factors should not be construed as exhaustive. 

The forward-looking information contained in this news release is expressly qualified by this cautionary statement.  Underground does not undertake any obligation to update or revise any forward-looking statements to conform such information to actual results or to changes in our expectations except as otherwise required by applicable securities legislation.  Readers are cautioned not to place undue reliance on forward-looking information.

BOEs may be misleading, particularly if used in isolation. A BOE conversion ratio of 6 Mcf: 1 bbl has been used and is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

Neither the TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.

SOURCE Underground Energy Corporation

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