Missouri Deerfield Project

MegaWest Energy USA has completed the acquisition of all of the issued and outstanding membership units of Deerfield Energy LLC.

The Deerfield Missouri project includes a 100 percent interest in approximately 8,300 undeveloped acres of oil and gas leases in Vernon County, Missouri.  The Company’s existing land position will support multiple projects in the Deerfield Project area, and the company is in the final stages of construction to launch a demonstration project which be referred to as the Marmaton River Project - Phase I.

MegaWest’s experienced team of enhanced oil recovery specialists have completed a detailed technical review of the Warner reservoir, including numerical reservoir simulation, and have updated the Company’s geological model with information obtained from recent drilling operations.  A steam-flood with thirteen inverted 7-spot patterns on a total area of 10 acres has been chosen as the production method for this initial development.  This steam-flood process has proven very successful on numerous projects with similar types of deposits throughout Canada and the USA. 

Construction has been initiated on the Marmaton River Project with the completion of commissioning and start-up of Phase I expected in Q1 of 2008.  A 50 million BTU/hr steam generator will be installed along with production treating vessels and tanks.  As part of the project implementation, MegaWest is drilling and completing 42 production wells, 13 injection wells, 1-2 source water wells, and 1-2 water disposal wells. The total estimated capital expenditure to construct and commission the facility and wells is US$ 3.3 million.

MegaWest expects to recover up to 45% of the oil in place on the Marmaton River Project.  This project is expected to produce up to 100,000 bbls of oil over an 18-24 month period.  The average production rate over this period is forecast to be 220 barrels of oil per day (“bopd”) with a peak rate of 400 bopd achieved after 12 months of operation.  The produced oil will be sold at the plant gate to a local refinery and is expected to receive over 80% of the WTI posted price.

Fifteen exploration wells have been drilled by MegaWest to date at its Deerfield Project. The objectives of this drilling program were to further define the commercial prospectivity of the Upper Warner sand formation, to analyze the secondary Blue Jacket sand formation, and to validate the Roubidoux formation as a source water zone.  All these formations are found at expected depths. Initial results show that the Upper Warner formation has an average reservoir porosity of 20%, average net pay of 30 feet, and average oil saturation exceeding 60%, resulting in approximately 28,000 barrels of oil in place per acre. These initial drilling results confirm MegaWest’s geological model and provide further confirmation of the Project’s significant potential for commercial production.

Historic Information:

MegaWest USA acquired 100% working interest in the development agreements in respect of the Deerfield Prospect subject to a 20% royalty and all of the issued and outstanding shares of Deerfield Kansas for consideration of US$800,000 and 4,750,000 restricted common shares of the Company. At closing, MegaWest paid US$500,000 of the purchase price to the sellers. Pursuant to the escrow agreement the shares and cash will be released on a pro-rata basis based on either the modification of certain development agreements into oil and gas leases or until 4,000 acres of replacement acreage have been leased. As of December 28, 2007, all escrow conditions were met and escrowed considerations have been paid out.

The presence of heavy oil deposits within various sandstone layers of Pennsylvanian age that occur from the surface to depths of up to 600 feet in Vernon County, Missouri has been known since the early 900’s. Surface outcrops provided material used as grease for wagon wheels by the early settlers.

This oil ranges in appearance from a brown, viscous liquid to a nearly solid, black, tar-like material with API gravity ranging from 10° - 24°. Viscosity at reservoir temperature and depth is estimated to be 750 cp. An assay of a sample of the produced oil indicates that the oil is very similar to Maya crude, but with significantly lower sulphur content.

There are two Pennsylvanian sandstone formations of interest, being the Bluejacket and the Warner. The Bluejacket tends to be more discontinuous, but is known to be productive by primary recovery in the area. It will be tested where encountered. The Warner sand is the primary target reservoir to be developed by MegaWest Energy.

All existing well logs within its area of interest along the western side of Vernon County have recently been digitized. This review of the historical log data shows Upper Warner sand thicknesses exceeding 40 feet are present over approximately 40,000 acres. There are indications that up to 50 feet of heavy oil sand are present on portions of Deerfield leases. The depth to the top of the Warner Sandstone in this area varies between 100 - 300 feet with the bulk of the fairway at an overburden depth of 170 - 220 feet.

Earlier reports prepared by the Missouri and Kansas Geological Surveys for the U.S. Department of Energy based on the results of core drilling in Barton and Vernon Counties in Missouri and Bourbon, Crawford, and Cherokee Counties in Kansas indicate a total measured plus speculative resource estimate of 512 million barrels in the Bluejacket plus nearly 1.4 billion barrels in the Upper and Lower Warner sandstones in Missouri. An additional 225 million barrels were identified in the combined units in Kansas. These numbers are indicative only and are not compliant with the guidelines of NI 51-101.

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