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Colombia

In June 2007, Pan Andean announced a strategic entry into Colombia.

Colombia is a proven world class hydrocarbons province, with excellent infrastructure and a modern operating environment. Over 9 billion barrels of oil and 21 TCF of gas have been discovered in world class basins. However, it is estimated that over 35 billion barrels of oil equivalent remain to be found. The country produces more than half a million barrels of oil per day, has an excellent oil and gas infrastructure and has been a net oil exporter since the mid 1980’s.

Impressive annual economic growth for the past few years, combined with significant reforms, and improvements in the security situation, now make the country one of the most attractive exploration and development plays in the region. Foreign investment is strong, particularly in natural resources, oil and gas legislation is modern and transparent, with royalties ranging from 5% to 25% depending on production volumes, and effective corporate income tax rate of around 35%.

Colombia is a highly competitive place in which good opportunities are hard to find. Therefore, a significant amount of resources have been dedicated to screening, technical work, and project evaluation since early 2007, in order to select as fast as possible the best fit for Pan Andean. Our focus has been in looking for high potential exploration opportunities in bypassed areas at shallow depth that can be accessed in non competitive bidding rounds by direct negotiation with the government. We have also been evaluating a number of exploration farm in and production redevelopment opportunities that could be material to Pan Andean.

To aid the Company’s progress towards identifying value enhancing projects Pan Andean partnered with AGN Exploration Petroleum Consultants, a highly respected Colombian firm that provides integrated E&P consulting services with over 30 years of local E&P experience. Our highly experienced local team is currently evaluating a number of potential projects, that could add considerable value to our portfolio.

Antorcha Block (Middle Magdalena Basin)

In November 2007 Pan Andean  signed an exploration and production contract on a 100% basis with the Agencia Nacional de Hydrocarburos (ANH), Colombia's resources management agency, to explore the 35,000 hectare Antorcha Block located in the prolific Middle Magdalena Basin in the centre of Colombia. The block covers an area of 350km2. The contract gives Pan Andean the right to explore over a period of 6 years and on success to develop and produce for 24 additional years. Royalties range from 5% to 25% depending on the volume of production. Pan Andean holds a 100% interest in the block.

The block is located up dip of existing oil producing fields; the Velasquez-Palagua field with more than 300 million barrels of oil reserves, and the Teca-Cocorna-Nare-Jazmin heavy oil field with more than 1,000 million barrels of oil in place. Preliminary geological and petrophysical studies and the most recent data acquisition suggest potential for moveable heavy oil at shallow depths of less than 2,000 feet.

Between 1 and 2 billion barrels of oil in place could exist on the block, of which 100 to 300 million barrels may be recoverable reserves, using parameters of nearby fields i.e. porosity 20% – 25%, oil saturation 60%, average net oil thickness of 100 – 200 feet, recovery factor of 10% - 15%. Expected crude quality could be in the range of 10° to 20° API, well within the economic processing capabilities of existing fiscal terms, technology and anticipated oil price.

During the first exploration phase, four major activities were carried out; surface geoloogical mapping, reprocessing of existing seismic, new seismic acquisition and seismic interpretation.

1. Surface Geological Mapping

A complete geological study of the area was done in order to identify the stratigraphy, main structural trends and document oil seeps. Recent alluvial deposits associated with the Magdalena River activity cover most of the area. Fault trends are documented in the Central Cordillera and some of them extend into the Antorcha area. The sedimentary cover dips very gently towards the east.

The Antorcha area is on trend with the Velasquez structure and exhibits a similar geologic setting which enhances the expected potential of the area. The absence of oil seeps along the contact between the sedimentary section and basement to the west suggest that some of the oil migrated from the south-east could be trapped in the area.

2. Reprocessing of Existing Seismic

Two seismic data acquisitions programmes were shot by Texaco in 1984 and 1991. The portion of these surveys that extended into the Antorcha Block were provided by the ANH,  covering 71.7km of 2D seismic in 7 lines. The data was reprocessed by an external contractor, improving the data quality considerably.

3. New Seismic Acquisition

Contractual commitments during Phase-I included the acquisition of 60km of 2D seismic. The 60km 2D programme was recorded in 5 dip lines and 1 strike line, providing a narrow grid in the area of interest. The cost was $1.4 million.

The data was processed by an external local company, showing good definition over the section of interest. Reflectors are continuous and well defined, permitting a good definition of the main events.

4. Seismic Interpretation

The 2D seismic is being interpreted using the Geographix software. Initial mapping of basement and the Miocene unconformity is underway to define the trap geometry. Basement is a well defined reflector cut by several normal faults, along the regional slope. Some of those faults show reactivation in Tertiary time affecting the overlaying sedimentary section. This relationship is encouraging because it has some similarities with the trapping mechanism in the Velasquez field. Truncation of the Tune Formation (pay section) by the Miocene unconformity takes place in the westernmost portion of the block. Tune formation is not cropping out in the block area, creating favourable conditions for a possible oil accumulation, when combined with the adequate fault geometry.

Pan Andean is planning to drill its first well by the first quarter of 2009, subject to rig availability and permitting. The Antorcha project has been developed quickly. fulfilling in six months the commitments for the first year of the contract (Phase-I). Current efforts are oriented toward the licensing of the drilling location and the planning of the first wildcat in the block.

The block is easily accessed by road from the city of Barranca-bermeja (70km) where oil processing facilities are available. The area is very close to pipelines with spare capacity capable of transporting oil to the Barranca-bermeja oil refinery and to the exporting port in the Caribbean.