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Technical Report

On the

Nebraska Position

Denver - Julesburg (DJ) Basin

United States

Prepared for

BlackStar Petroleum September 2012

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TECHNICAL REPORT ON THE NEBRASKA POSITION DENVER-JULESBURG (DJ) BASIN

UNITED STATES

TABLE OF CONTENTS

Summary ...................................................................................................................................1

Technical and Commercial Evaluation ....................................................................................6

Conventional D & J Sand Reservoirs ...................................................................................7

New Field Discoveries..........................................................................................................7

Redevelopment of Old Fields ...............................................................................................7

Unconventional D Sand Resource Play ...............................................................................9

Niobrara ...............................................................................................................................12

Geologic & Petrophysical Characteristics ...........................................................................12

Engineering and Type Well Performance ...........................................................................16

Codell ...................................................................................................................................21

Permian (Wolfcamp) ............................................................................................................21

Pennsylvanian (Des Moines) ..............................................................................................23

Potential Reserves/Resources & Unrisked Net Present Value ............................................25

MHA Disclosure and Statement of Risk ................................................................................28

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LIST OF FIGURES

Figure 1: BlackStar NE Land Position (by Lease Group) ............................................................1

Figure 2: Niobrara Activity Map with Peak Resistivity Contours ..................................................2

Figure 3: Stratigraphic Column with Conventional and Horizontal Targets .................................4

Figure 4: Discovery Date by Field for D & J Sands, Banner County, NE ....................................5

Figure 5: D (gold) & (blue) Fields in Kidney Area ........................................................................7

Figure 6: Type logs for D and J Sand in Kidney Area .................................................................8

Figure 7: PV10 vs EUR for Minimum D & J Sand Wells ............................................................9

Figure 8: Close up of Log Map "Tight" D Sand .........................................................................10

Figure 9: "Tight" D Sands on BlackStar Lands in 4 Townships .................................................11

Figure 10: Late Cretaceous Interior Seaway, Niobrara Deposition ...........................................12

Figure 11: Type Well Comparison ............................................................................................13

Figure 12: Morrill County Paleo High ........................................................................................14

Figure 13: Smagala, 1984 -- Log Derived Ro, Showing Banner County Anomaly ....................15

Figure 14: Niobrara Type Well PV10 vs Variable Completed Well Costs ..................................19

Figure 15: Niobrara Type Well ROR vs Variable Completed Well Costs ..................................19

Figure 16: Permian Age Producing Fields Are Red ..................................................................22

Figure 17: IIer Olsen Log, Resistivity is Yellow and Density Porosity is Purple ..........................23

LIST OF TABLES

Table 1: Comparison of Banner County, NE and Weld County, CO Parameters ......................17

Table 2: Kidney Economics -- Original Version ........................................................................18

Table 3: Adjusted Niobrara Productivity Comparison ...............................................................20

Table 4: Potential Reserves, Contingent and Prospective Resources ......................................25

Table 5: Unrisked Net Present Value .......................................................................................26

Table 6: Probability of Success ................................................................................................27

Table 7: Risked Potential Reserves, Contingent and Prospective Resources ..........................27

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MHA Petroleum Consultants LLC

TECHNICAL REPORT ON THE NEBRASKA POSITION DENVER-JULESBURG (DJ) BASIN

UNITED STATES

Summary

BlackStar Petroleum has requested that MHA Petroleum Consultants, Inc prepare a technical report on the on the Nebraska Position (Figure 1) it has recently acquired in the Banner and Kimball County, Nebraska portion of the Denver-Julesburg (DJ) Basin, USA. BlackStar entered into a Purchase and Sale Agreement with the Vectra/STA group in June and closed on the deal August 15, 2012. The project is called the Kidney due to the shape of the resistivity anomaly that defines the area prospective for Niobrara production. The red line on Figure 1 is the 16 Ohm-meter deep resistivity for the B chalk bench of the Niobrara Formation that is productive in the Wattenberg field in Colorado, the Silo field in Wyoming and expanding out from both of those historically productive areas.

Figure 1: BlackStar NE Land Position (by Lease Group)

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The project encompasses a nine township area of high resistivity in the Niobrara “B” Chalk indicating locally mature source rocks and good hydrocarbon saturations. Most of the leases have over three years left on a five year primary term plus an optional five year extension. The BlackStar Nebraska Project represents a unique entry opportunity into the horizontal Niobrara play -- combining strong technical attributes, a significant lease position, largely operated drill spacing units, and excellent lease terms.

Beginning in December 2009 when EOG brought on the Jake well in the Hereford area in Northern Colorado just south of the Wyoming boarder for 1,500 BOPD from a fracture stimulated horizontal leg in the Niobrara Formation, the DJ Basin and surrounding basins in the Rocky Mountains have seen increased and accelerated activity in the Niobrara play. These recent discoveries have focused significant industry activity on the horizontal exploitation of the Niobrara Formation in the Central and Northern portions of the DJ Basin as well as the southern portion of the Powder River Basin. Numerous industry competitors have amassed large acreage positions and have planned, or are already involved in, significant activity in the Southern Wyoming and Northern Colorado regions of the DJ Basin – adjacent to, and technically similar to the BlackStar Banner County Prospect. A summary map of industry activity is shown along with contours of peak Niobrara resistivity on Figure 2.

Figure 2: Niobrara Activity Map with Peak Resistivity Contours

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Specific industry activity in the vicinity of the STA Banner County Project includes: EOG Resources controlling 400,000 acres in the play and having drilled 6 wells in the Hereford Area just south of the Silo Field, all exhibiting IP’s in excess of 500 BOPD; St Mary Exploration controlling 25,000 acres also in the vicinity of the Silo Field and reporting early results from their Atlas #1 well (Section 19 T 15N R 65W) as flowing 800 BOPD; Chesapeake Resources is actively drilling in the Southern Powder River Basin in Converse County, Wyoming where their Spillman Draw Deep well IP’d at 650 BOPD and produced 38,000 BO in its first 120 days on line. Other analogous activity includes Noble Energy controlling 800,000 acres throughout the north central DJ Basin and publishing average horizontal well results and expectations in the Wattenberg Field of 585 BOPD IP and 298 MMBOE EUR.

Fairways Exploration and Production is also active in the Niobrara play in Nebraska, Colorado and Wyoming with over 300,000 net acres already leased. They are pursuing a number of conventional and unconventional targets including the Cretaceous Niobrara Formation. They have licensed 300 linear miles of newly reprocessed 2D seismic data in the Niobrara and have undertaken an extensive geological and petrophysical evaluation of the area. They are currently acquiring over 150 square miles of proprietary 3D.

In late 2011Fairways drilled a vertical well to the J sand in section 1 of T16N R57W and cored the Niobrara. They also acquired 25 sq.mi. of 3D around that well and on July 12, 2012, spud a second well in section 1, the Beacon1-3-1 well which is reportedly a horizontal in the Niobrara. This well is classified as confidential and no data is available to the public at this time. BlackStar has a 960 acre lease 1 ½ miles to the southeast of the Beacon well.

The Niobrara play was the initial catalyst for putting together this acreage position. However, continued study of the area has revealed multiple additional opportunities having conventional and unconventional reserve potential (Figure 3).

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Figure 3: Stratigraphic Column with Conventional and Horizontal Targets

The previous exploitation of hydrocarbons in the Kidney area started in the early 1950’s with the drilling Cretaceous D and J sands that produced oil having API gravities in the mid-30’s. These sands are about 800 feet below the Niobrara. Based on data from the Nebraska Oil and Gas Commission, the D and J Sands in Banner County have produced a total of 81 million stock tank barrels of oil (MMSTB) and 22 billion cubic feet of associated natural gas, the majority of which has been produced within the Banner County Resistivity anomaly.

Nearly 80 percent of the D and J sand fields were discovered in the 1950’s and 1960’s (Figure 4). These sands may offer additional potential as well, especially with the use of 3D seismic to identify geologic features. As a result of these fields being developed largely in the ‘pre-technology’ era (before widespread use of porosity logs in the mid-1960’s), there is a relativley small amount of modern open hole log data available in the Kidney area, only limited 2D seismic data and no publicly available 3D data. The area had many D and J sand discoveries in the 1950’s that tested oil on drill stem tests (DST’s) and were stimulated with 8,000 to 10,000 pounds of sand in a then “state of the industry” sand/oil fracture treatment. Frequently, these discovery wells would exhibit initial production (IP) rates in the 10 -100 BOPD range, produce only about 1,000 to 14,000 BO over periods of between two (2) months and two (2) years and then get plugged. It is believed that with modern completion and stimulation technology, combined with the current higher oil price environment, these fields would be

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commercial opportunities. Many of these wells were never offset and there are many potential locations to exploit with modern fracturing technology and also with horizontal wells.

Figure 4: Discovery Date by Field for D & J Sands, Banner County, NE

Much of the Kidney area is sparsely drilled and 3D seismic could lead to additional discoveries of conventional fields analogous to those that in the aggregate have produced over 80 MMSTB of oil to date. While the size of these additional field discoveries may be smaller than those historically developed the average (mean) field size of these conventional D and/or J Sand reservoirs is 654 thousand stock tank barrels of oil (MSTB).

Many of the fields were plugged out over 40 years ago and were originally drilled on 40 acre spacing. Re-entering old fields and drilling geologically advantaged locations (especially with the help of 3D seismic data) is another opportunity in fields where the cumulative water-oil-ratio (WOR) is less than one (1). These fields are also expected to benefit from a re-engineered waterflood that incorporates an improved geologic description and integration of historical completion practices in conjunction with an analysis of the prior production and injection performance.

The Codell sand is at the base of the Niobrara section and is a major producer in the giant Wattenberg field outside of Denver. For many years the completions in the Wattenberg field consisted of a vertical well that was fracture stimulated in the Codell sand and Niobrara Chalk.

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The Codell went undetected for years because it is a very fine grained, silty, clay filled tight sand without much indication from the SP or Resistivity curves on electric logs that there might be hydrocarbons present. With the advent of Density logs to measure porosity in the late 1960’s, people began to notice areas of the Codell with 10% to 14% porosity and started to attempt completions in it. The Codell turned out to be a big part of the Wattenberg field and its production limits continue to be expanded by both vertical and recently horizontal wells with fracture stimulation. The Codell in the Kidney area has not been tested to our knowledge, but there are density logs with porosity values up to 20%. The Codell sand needs to be studied further and also to be cored and tested in within the Kidney.

There is also significant production to the south of the Kidney in Kimball County from the Permian age Wykert sandstone and from the Pennsylvanian aged carbonates which also produce 60 miles to the north of the Kidney in Sioux County. The Pennsylvanian carbonate play is becoming known as the Desmoinesian play and is touted to be similar to the Bakken play in North Dakota.

Southwestern Energy of the Fayetteville shale play moved into the Colorado portion of the DJ basin this year and has put together over 290,000 net acres in eastern Colorado outside of the Niobrara play. Their target is the Permian and Pennsylvanian and to date, specifically the Marmaton Formation of Desmoinesian age. They have drilled two wells and just announce a third in an area 65 miles from the nearest production in the Marmaton. They drilled in an area of almost no deep well control and drilled a 2,000 foot horizontal at a true vertical depth of 8,550 feet. In mid-July the well began flowback and only 24% of flowback had been recovered when oil production began. The highest 24 hour producing rate at that time was 65 BOPD, 40 MCFPD and 740 BWPD on pump. This is prior to recovery of 76% of the completion fluid and a pretty good start for a project no one conceived until now.

There are only 4 wells in Banner County that penetrate this interval. The Exxon well, Iler Olsen #1 in section 8, T19N R55W was drilled in 1984 to nearly 8,000 feet and the logs show 3 very porous carbonates that were not tested because they have low resistivity. The well was drilled with very heavy 13.1 lbs/gal drilling mud to control a salt section above it in the Permian. The resistivity log looks invaded by the mud and could possibly be by passed pay. This is another opportunity that 3D seismic could help find the structurally best place to drill.

Technical and Commercial Evaluation

The Kidney Project consists of multiple horizons and reservoir types, ranging from conventional reservoirs first developed in the 1950’s to unconventional reservoirs representing resource plays that are being actively developed in states adjacent to Nebraska. The following discussion addresses this development and redevelopment potential beginning with the Cretaceous D and J sands and then describes the additional opportunities from shallowest (Niobrara) to deepest (Des Moines).

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Conventional D & J Sand Reservoirs

New Field Discoveries

New field discoveries in the D and J Sands are possible and become less risky with the addition of 3D seismic. As indicated above, over 80 MMSTB have been produced from Banner County to-date with approximately 8 MMSTB coming from lands now held by BlackStar. While the average (mean) field size is about 654 MSTB, some of the BlackStar acreage positions are on trend with fields that have estimated ultimate recoveries (EUR’s) around 1.9 MMSTB including the Harrisburg field which has produced 6.4 MMSTB.

The eastern half of BlackStar’s lands have had very little exploration on them and it is likely that 3D seismic and integrated sub surface geology can find 4 P50 size fields (140MBO) and 1 mean size field (654 MBO) on BlackStar lands for a Probable reserves case total of 1.214 MMBO to the 100% and 886.2 MBO to the 73% working interest. The Possible reserves case would be the discovery of 3 additional mean size fields or an additional 1.962 MMBO to the 100% and 1.432 MMBO to BlackStar’s WI and a total 3P case of 3.176 MMBO to the 100% WI and 2.318 MMBO to the 73% WI. There are numerous examples of new D and J sand fields that have been discovered within the last 10 years in analogous DJ Basin areas of Nebraska, Colorado and Wyoming.

Redevelopment of Old Fields

A considerable number of opportunities may be available in or adjacent to old fields, particularly those fields developed in the ‘pre-technology’ era (discussed in the Summary section above). These opportunities include infill and step out drilling accompanied in many cases by water flooding or re-engineering a prior waterflood. The D and J sand conventional completions in fields (Figure 5) that have been abandoned or nearly abandoned represents another type of opportunity in the Kidney area.

Figure 5: D (gold) & (blue) Fields in Kidney Area

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The costs to drill and complete conventional wells in the D & J sands are low due to the relatively shallow depths between 5,500 to 6,500 feet within the Kidney area. Dry hole costs are in the $200,000 range with completed well costs of approximately $600,000 depending on the type of logs run and additional costs for coring or testing the well. Typical D and J producing sand are shown in Figure 6.

Figure 6: Type logs for D and J Sand in Kidney Area

MHA has run cases for minimum well economics to see what range of costs and IP/EUR would be needed to make this project type economic. Using a $90/bbl oil price, $4 gas price and operating costs of $5,000/month we looked at IP’s of 25, 50 and 75 BOPD with EUR’s of 25, 50 and 75 MBO with typical D & J sand declines and Capex of $688M(black), $550M(Blue) and $413M(Red) shown graphically on Figure 7.

The Probable reserve case is to drill 30 wells in old fields with expectations for the P50 EUR of 40 MBO/well. This would result in the recovery of 1.2 MMBO or 876 MSTB to BlackStar’s 73% working interest. The Possible reserve case is an additional 30 wells with the same results for recovery of 1.2 MMBO or 876 MSTB to BlackStar’s 73% working interest for a total 3P reserve case of 2.4 MMBO or 1.752 MMBO to BlackStar’s 73% WI.

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Figure 7: PV10 vs EUR for Minimum D & J Sand Wells

Unconventional D Sand Resource Play

MHA have recently began studying the “tight” D and J sand potential and have made progress in the D Sand in the Western part of the BlackStar lands in T18N & T19N R55W & R56W. The D sand here appears to be channel sands with large extent and approximately 10 feet of thickness. It has a characteristic log shape with generally good SP and high resistivity kicks and has a good amount of core and DST data.

The DST recoveries in the very good “sweet spots” is gas, oil and some mud, in the “tight” areas the recoveries are gas in the pipe, maybe a little oil or oil cut mud and generally just mud. There is little indication of water unless there were packer leaks or other problems. A portion of this area can be seen on Figure 8 which is a map showing the D sand log, tests, the pink wells are D producers, the green wells are J producers and the yellow highlight areas show the sand side of the channels which coalesce to cover most of T18N R56W.

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Figure 8: Close up of Log Map "Tight" D Sand

Figure 9 is a map of the “tight” D sands in yellow and BlackStar lands in red for the 4 Townships where the D is currently being studied. As can be seen on the map in Figure 6, the area to the northeast of these 4 Townships has only been lightly explored.

There are about a dozen fields that produce from “Sweet Spots” within the “Tight” D sand area shown in yellow of Figure 9. Some wells within the “sweet spots” have EUR’s of over 100 MSTB of oil while wells in the “Tight “areas generally produced from 2 months to several years have EUR’s of between 1 MSTB and 20 MSTB. Wells in the “Tight” area were primarily drilled in the mid 1950’s to early 1960’s and were stimulated with 8,000 to 10,000 pound sand/oil fracture treatments resulting in IP’s from 10 to over 100 BOPD.

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Figure 9: "Tight" D Sands on BlackStar Lands in 4 Townships

It is possible that much of this area could develop into a D Sand “resource play” where modern fracture technology in vertical wells or in combination with horizontal drilling could make production from these D sands economic. There are 14,388 acres of BlackStar lands that have the Tight D sands on them.

Assuming 20% are ‘Sweet Spots” and 80% are “Tight” divides the lands into 2,878 acres and 11,510 acres respectively. For the Sweet Spots we assume 14% porosity, 65% oil saturation, 10 feet of net sand and a formation volume factor of 1.2 RB/STB. The resulting OOIP beneath the BlackStar acreage is 16.93 MMSTB. Assuming 9% porosity, 50% oil saturation, 5 feet of net

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sand and a 1.2 RB/STB formation volume factor for the Tight D sand results in 16.74 MMSTB of OOIP on BlackStar acreage for a total OOIP of 33.67 MMSTB on the BlackStar lands.

Additional technical work is required to fully quantify and better understand this opportunity however, work done to date suggests unrisked Contingent Resources of 5%, 7.5% and 10% of the OOIP for the 1C, 2C and 3C cases respectively. The total 3C Contingent resource is 3.367 MMBO to the 100% and 2.458 MMBO to BlackStar’s WI. D sand oil production to date on the BlackStar lands is probably around 10% of the OOIP, which leaves a substantial D sand target to pursue.

Niobrara

Geologic & Petrophysical Characteristics

The Niobrara Formation was deposited in a deep water, Late Cretaceous, interior seaway environment. This seaway, covering the majority of the west-central United States, is depicted in Figure 10, as it existed approximately 85 Million Years ago.

Figure 10: Late Cretaceous Interior Seaway, Niobrara Deposition

Figure 3 illustrates the similar deep water marine depositional environment that existed in Late Cretaceous time in the Southern Powder River Basin, the Northern DJ Silo Field Area, the

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Central DJ Wattenbeg Field Area, and the Banner County Niobrara Project Area. In the northern DJ Basin, the Niobrara is 300’ thick and composed of chalks, marls, and shales (Longman et al, 2005). The chalks are widespread “blanket” deposits and are prolific oil and gas reservoirs. The shales and marls are organic rich, having TOC values in excess of 3% in the Banner County Niobrara Project (Landon et al 2001). The kerogen in the shales and marls is thermally mature, making them excellent source rocks. Three distinct benches exist across these referenced areas, with the highly targeted “B Bench” being the primary target in the BlackStar Banner County Project Area with the “C” Bench a possible secondary target. Figure 11 compares a type well from the Silo Field to a type well in the Banner County Project Area.

Figure 11: Type Well Comparison

The thermal maturity and oil generating capabilities of the Niobrara Formation has been well documented in geologic literature. Organic rich beds in the Niobrara have total organic contents (TOC) which range from 0.4 to 8.0% with an average 4.3% of Type II Kerogen. Several authors have published the potential limits of Niobrara oil generation in the DJ Basin and the Banner County Niobrara Project is consistently within the limits of thermal maturity.

The oldest significant oil production from the Niobrara in the DJ Basin is the Silo Field (1981) in Laramie County, Wyoming which has produced 10 million barrels of oil and over 8 BCF of gas from vertical and non-stimulated horizontal wells drilled in the 1980’s. The localized thermal maturity, and temperature gradient anomaly is analogous to that in the Wattenberg field and

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related to NE trending paleostructures crossing the DJ Basin creating focal points for deep, hot, migrating fluids. The Banner County Project and the Silo field both lie above the documented “Morrill County Paleo High” Figure 12.

The BlackStar Project area was heavily drilled for the deeper Cretaceous "D" and "J" Sands in the 1950's into the 1960's. Technology at the time had not been developed to drill horizontal oil plays and the Niobrara was not considered a viable objective at the time, much like the Bakken during the same period. Consequently, operators did not have a geologist on location until after the Niobrara had been drilled through (Bill Sydow, director of Nebraska Oil and Gas Commission, personal communication). However, there is an excellent show in a township adjacent to the Kidney Project in NE NE Section 30-17N-56W. The No. 3-A Olsen was originally drilled in 1957 and completed for 100 BOPD in the "J" Sand. In 1987 the well was re-entered by E.P. Operating (Ensearch Exploration). Ensearch milled a window in the 5 1/2" for 2 short horizontal legs in the Niobrara, 157' and 188' in length. The horizontals were drilled with air and had good sample shows throughout. Ensearch did not pursue the area when the well did not flow free oil similar to early Silo wells.

Peak resistivity is the key log indication of prospectivity in the horizontal Niobrara play. Smagala et al correlated Vitrinite Reflectance (Ro) with deep resistivity and established a 16 ohm resistivity measurement as correlative with an Ro of 0.5 for the onset of oil generation. Figure 13 shows the Ro contours taken from the Smagala et al paper, with additional control added from numerous data points in the BlackStar Banner Acreage Area showing a 16 ohm

Weimer, 1982

STA Banner

County

EOG

HEREFORD

AREA

Figure 12: Morrill County Paleo High

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resistivity cutoff. An area-wide resistivity map is shown on Figure 2 along with horizontal Niobrara activity.

Matrix storage in the cleaner chalk intervals is also an important aspect of the play. SP logs in the STA Banner County Project Area indicate cleaner chalky intervals that will provide good matrix storage for the Niobrara oil generated in the adjacent shales and marls. Porosity in the Niobrara interval decreases predictably with depth (Landon et al 2000, Smagala 1984). In the BlackStar Banner County Project Area Density porosity in the “B” Chalk ranges from 14% to 18% and averages 16%. This compares with an average of 10% density porosity in Silo Field near Cheyenne and the Hereford Field Area (EOG “Jake” well, IP reported 1500 BOPD) in Weld County, Colorado. Greater porosity means greater matrix storage capacity for oil in the BlackStar Banner County Project Area.

Peak resistivity is the key log indication of prospectivity in the horizontal Niobrara play. Smagala et al correlated Vitrinite Reflectance (Ro) with deep resistivity and established a 16

Figure 13: Smagala, 1984 -- Log Derived Ro, Showing Banner County Anomaly

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ohm resistivity measurement as correlative with an Ro of 0.5 for the onset of oil generation. Exhibit 7 shows the Ro contours taken from the Smagala et al paper, with additional control added from numerous data points in the Bayswater/STA Banner Acreage Area showing a 16 ohm resistivity cutoff. An area-wide resistivity map is shown on Exhibit 8 along with horizontal Niobrara activity. Although the absolute measured peak resistivities in the Bayswater/STA Banner County Project Area are less than those in the EOG Hereford area (20 – 30 Ohms in Banner County –versus- 40 – 60 Ohms in the Hereford development area), when the significantly higher porosities are considered in the Banner County Project, calculated water saturations are very similar. The average density porosity in the Banner County Project is 18% and average resistivity is 22 ohms. Silo Field and the better areas in Hereford average 12% density porosity and 45 ohms resistivity. Using the Archie Equation and assuming the same M, N, and Rw values, the water saturations for the Banner County Project and the Silo/Hereford areas are both in the 25 – 30% range. Or, alternatively, due to an 18% porosity, a 22 Ohm resisitivity in the Banner County Project would be equivalent to a 50 ohm resistivity in the Hereford Area where porosities are 12% (assuming similar RW, similar water saturation, and using Archie’s equation with m = 2.0). Consistent with increasing porosity in the STA Banner County Project Area, it is reasonable to assume a correlative increase in permeability as well. Evidence of this increased permeability may be indicated by the caliper tool on well logs showing a mudcake buildup over the Niobrara “B” Bench in the Banner County Resistivity Island. Natural fracturing observed on well logs in the Silo Filed is also evident in the Banner County Area. The implications of increased permeability on potential well performance are discussed below.

The Niobrara “C” Bench also exhibits increased resistivity inside of the Banner County Resistivity Island which is typical of other areas in the DJ Basin which produce from the “B” Bench and may offer additional potential. The Cretaceous D and J Sands, lying 800 feet below the Niobrara, have also proven the be prolific oil reservoirs in the DJ Basin and in Banner County, according the Nebraska Oil and Gas Commission, these sands have produced a total of 81 million barrels of oil and 22 billion cubic feet of associated natural gas, the majority of which has been produced from below the Banner County Resistivity Island. These sands may offer additional potential as well, especially with the use of 3D seismic to identify geologic features.

Engineering and Type Well Performance

Engineering calculations extrapolating the published performance of Niobrara horizontal type wells from the Hereford and Wattenberg Areas (Noble, EOG, PDC investor relation presentations) to the STA Banner County Area was performed by MHA Petroleum Consultants. This forecast of Banner County Horizontal Niobrara production use as an analog the Niobrara results in Colorado (Weld County) and Wyoming (Laramie County). Operators in these areas have been reporting on the results of horizontal Niobrara wells, and comparing them to the productivities of vertical wells that have exclusively targeted the Niobrara Formation.

Using this information, pseudo-steady state analytical calculations were performed to calculate the effective permeability to oil of the Niobrara, using values of net thickness, porosity, and water saturation derived from area operators and exhibits available from state regulatory commissions. Similar calculations were performed using Joshi’s equation for flow into a

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horizontal well, again, calibrating the calculated flow rate to actual Niobrara horizontal well results. The early horizontal Niobrara wells had reported lateral lengths between and 3800 and 5200 feet. MHA used an effective lateral length of 4000 feet for its calculations.

Having calibrated the vertical and horizontal well Niobrara productivities from actual results where the Niobrara is being developed, MHA then used these same analytical calculations to determine the likely performance of a horizontal well in the Kidney prospect area of Banner County, Nebraska. The main parameters that vary in these calculations are initial pressure (as a function of depth), net thickness, porosity, and by inference, permeability. The comparison can be seen in Table 1.

Parameter Weld Co. Banner Co.

Depth, feet 7,100 5,300

Initial reservoir pressure, psia 3,550 2,650

Net thickness, feet 60 30

Effective permeability, md 0.23 0.39

Note: this effective permeability includes effect of natural fractures;

matrix perm less than 100 microdarcies

Porosity, % 10.0% 17.0%

Water Saturation % 25.0% 25.0%

OOIP per 640 acres, MMSTB 14.23 12.10

OOIP per 640 acres, MMBOE 16.60 14.11

_______________

Initial FVF, RB/STB 1.57 1.57

GOR, scf/STB 1000 1000

API gravity, degrees 40 40

Reservoir temperature, °F 159 134

Table 1: Comparison of Banner County, NE and Weld County, CO Parameters

As indicated, the effective permeability to oil in the Bayswater/STA Banner County Prospect was adjusted upward by about 10 percent compared to the permeability in Weld County. This increase is believed to be a minimum expectation given the higher porosity and shallower burial (less overburden pressure) of the Kidney Prospect Niobrara compared to that in Weld County. Based on these analytical calculations, a horizontal well in the Kidney Prospect having a lateral

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length of 4000 feet should have an initial stabilized rate of 352 BOPD, compared to a similarly calculated rate in Weld County of 525 BOPD.

Using these results, MHA constructed three profiles having different initial rates and estimated ultimate recovery. Each forecast uses a hyperbolic decline (with a ‘b’ of 1.4) to a terminal decline rate of 8%. The initial rates vary from 200 BOPD to 500 BOPD, with a base case of 350 bopd, and reflect a range of expected results based on geologic input concerning the degree of natural fracturing, in the context of the analytical calculations described earlier. The EURs vary from 200 MSTB to 300 MSTB, which reflect recovery of between 6.0 and 10.0 percent of OOIP on 160 acre spacing. The Banner county type well exhibits highly attractive economics.

MHA considered Niobrara results in Colorado (Weld County) and Wyoming (Laramie County). Productivities of vertical wells to horizontal wells were compared in Weld County based on information from area operators. Analytical calculations used reported values for net thickness, porosity and water saturation and fluid properties were derived from correlations. An effective lateral length of 4,000 feet was used although well lengths varied from 3,800 to 5,200 feet. The calibration process involved tuning effective permeability and completion efficiency (skin factor).

The results for Weld County were an initial stabilized rate for a vertical well of 53 BOPD and for a horizontal well, 525 BOPD (612 BOEPD). The calculations were adjusted for Banner County conditions of depth, net thickness and reservoir pressure. Effective permeability in Banner County is estimated to be ~ 10% greater than Weld County due to higher porosity and shallower burial depth. The results for Banner County were an initial stabilized rate for a horizontal well of 240 BOPD (280 BOEPD) and 33 BOPD for a vertical well.

MHA’s original type well economics for the Horizontal Niobrara included 3 cases with a high, most likely and low as shown in Table 2.

Table 2: Kidney Economics -- Original Version

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The present value discounted at 10% (PV10) for these cases run with drilling/completion costs at $2MM, $3.5MM and $5MM all provide acceptable numbers as shown in Figure 14. Figure 15 shows the ROR vs the completed well costs and even at the $5MM completion cost and 200 BOPD IP with 200 MBO reserves has a positive rate of return of 39% and an 81% ROR with costs of $3.5MM.

Figure 14: Niobrara Type Well PV10 vs Variable Completed Well Costs

Figure 15: Niobrara Type Well ROR vs Variable Completed Well Costs

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MHA has since evaluated the impact on forecasts assuming that the Niobrara in Banner County will exhibits a pressure gradient of 0.3 psi/foot, consistent with the D and J sands below the Niobrara (there is considerable D & J sand pressure data from DSTs). So if the Niobrara in the Banner County Kidney is not over pressured like the Weld County area, the rates for a vertical well would be 18 BOPD and for a horizontal well would be 195 BOPD. The calculation spreadsheet with lower pressure and higher temperature gradient is shown in Table 3.

Table 3: Adjusted Niobrara Productivity Comparison

In 1987, Enserch Exploration re-entered an abandoned J sand producer in section 30 of T17N R56W and attempted two short laterals (157’ N75E & 188’ S41W) in the Niobrara formation. Both laterals had good sample shows but no fluid entry into the wellbore was detected as was often the case in the development of the Silo field so the well was abandoned. However, at the bottom of the first lateral’s sample log was written, “Pressure too high for PVC pipe – working tool pressure drops to normal when pulled into casing”. This is not a lot of data, but would indicate that the pressure in the short lateral leg in the Niobrara had higher than normal pressure. However, until pressure data is collected from the Niobrara Formation in our area MHA believes that it has bracketed the expectations of a vertical and horizontal Niobrara well in the Kidney area.

Weld county Banner

Depth, feet 7,100 5,300

Initial Pressure gradient, psi/ft 0.50 0.30

Initial reservoir pressure, psia 3,550 1,590

reservoir temperature 159 160

Flowing BHP, psia 500 250

Vertical well rate, BOPD 53 18

Horizontal well rate, BOPD 525 195

Vertical well rate, BOEPD 62 22

Horizontal well rate, BOEPD 612 228

average porosity, fraction 0.10 0.17

average water saturation, fraction 0.25 0.25

GOR, scf/STB 1000 1000

OOIP per section, MMB 14.23 14.39

MMBOE per section 16.60 16.79

OOIP per 320 7.12 7.19

MMBOE per 320 acres 8.30 8.39

recovery factor (oil & gas) 0.05 0.05

EUR per 320, MB 0.356 0.360

EUR per 320, MBOE 0.415 0.420

API gravity 40 40

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Using an IP of 200 BOPD for a horizontal Niobrara well and with typical Niobrara declines would result in an estimated ultimate recovery of 200 MSTB. Table 1 calculates OOIP by section and also per 320 acres and uses a 5% recovery factor to calculate EUR. Assuming one well per 320 acres with a 5% recovery would result in an EUR per well of 360 MSTB. BlackStar controls 35,000 acres which is approximately 55 sections or 110 – 320 acre locations which could recover between 200 – 360 MBO per location. That represents 22 MMSTB – 39.6 MMSTB on their lands.

MHA developed an unrisked Low, Best and High case for Prospective Resources in the Niobrara. The Low case assumes 25% of the BlackStar lands will recover 200 MBO/well or 5.4 MMBO/100% WI and 3.924 MMBO/73% WI. The Best case assumes 250 MBO/well for 50% of the lands or 13.75 MMBO/100% WI and 10.04 MMBO/73% WI. The High case assumes 300 MBO/well for 75% of the lands or 24.6 MMBO/100% WI and 17.96 MMBO/73% WI.

Codell

Other possible reservoirs within the Kidney area that are difficult to quantify at this time are the Codell sand which lies at the base of the Niobrara. The Codell is productive in and around the Wattenberg field in Colorado and elsewhere in the Colorado and Wyoming parts of the DJ Basin. It has not been tested to MHA knowledge in Nebraska. The Codell will be evaluated during BlackStar’s exploitation of the Kidney lands. The Codell sand is at the base of the Niobrara section and is a major producer in the giant Wattenberg field outside of Denver. For many years the completions in the Wattenberg field consisted of a vertical well that was fracture stimulated in the Codell sand and Niobrara Chalk. However, the Codell went undetected for years because it is a very fine grained, silty, clay filled tight sand without much indication from the SP or Resistivity curves on electric logs that there might be hydrocarbons present. With the advent of Density logs to measure porosity in the late 1960’s, people began to notice areas of the Codell with 10% to 14% porosity and started to attempt completions in it. The Codell turned out to be a big part of the Wattenberg field and it’s production limits continue to be expanded by both vertical and recently horizontal wells with fracture stimulation. The Codell in the Kidney area has not been tested to our knowledge, but there are density logs with porosity values up to 20%. The Codell needs to be studied further and cored and tested in within the Kidney.

MHA developed an unrisked Low, Best and High case for Prospective Resources in the Codell. The Low case assumes 10% of the BlackStar lands will recover 30 MBO/well on 40 acre spacing (88 wells) or 2.64 MMBO/100% WI and 1.93 MMBO/73% WI. The Best case assumes 25% of the lands will recover 30 MBO/well on 40 acre spacing (220 wells) or 6.6 MMBO/100% WI and 4.82 MMBO/73% WI. The High case assumes 25% of the lands will recover 30 MBO/well on 40 acre spacing (438 wells) 13.14 MMBO/100% WI and 9.59 MMBO/73% WI.

Permian (Wolfcamp)

There is also significant production to the south of the Kidney in Kimball County from the Permian age Wykert sandstone and from the Pennsylvanian aged carbonates which also produce 60 miles to the north of the Kidney in Sioux County. The Pennsylvanian carbonate play is becoming known as the Desmoinesian play and is touted to be similar to the Bakken play in North Dakota.The Permian section produces from the Wykert Sandstone and the Admire group Dolomites at depths around 8,500 feet approximately 15 miles south of the Kidney leases (Figure 16).

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Figure 16: Permian Age Producing Fields Are Red

The large field seen in red on Figure 16 is the Kleinholz Field and has produced over 6.7 MMBO to date. Only four deep tests have been drilled in the vicinity of the Banner County block.

The Exxon well, Iler Olsen #1 in section 8, T19N R55W was drilled in 1984 to nearly 8,000 feet and the logs show 3 very porous carbonates (Figure 17) that were not tested because they have low resistivity. The well was drilled with very heavy 13.1 lbs/gal drilling mud to control a salt section above it in the Permian. The resistivity log looks invaded by the mud and could possibly be by passed pay. This is another opportunity that 3D seismic could help find the structurally best place to drill.

MHA developed an unrisked Low, Best and High case for Prospective Resources in the Permian. The Low case assumes a discovery 25% the size of the Klienholtz Field or 1.675 MMBO/100% WI and 1.22 MMBO/73% WI. The Best case assumes a discovery 50% the size of the Klienholtz Field or 3.35 MMBO/100% WI and 2.445 MMBO/73% WI. The High case assumes a discovery the size of the Klienholtz Field or 6.7 MMBO/100% WI and 4.89 MMBO/73% WI.

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Figure 17: IIer Olsen Log, Resistivity is Yellow and Density Porosity is Purple

Pennsylvanian (Des Moines)

The Desmoinesian resource play is currently being developed 100 miles to the south of the Kidney area by Southwestern Energy and their first horizontal well, the Ewertz Farms 1-58 #1-26 is currently testing oil from a 2,000 foot lateral at 8,550 feet. This well is 65 miles northwest of any current production from this interval. Approximately 36 miles to the north of the Kidney, the Desmoinesian shales have produced over 200 MBO from older vertical wells and significant leasing activity has been going on there in Sioux County, Nebraska for the last several years. Fidelity E & P has drilled a confidential well, the Sioux Ranch 22-11 in T25N R 56W. Highly resistive Desmoinesian hot shales with high TOC values support source rock geochemistry in Sioux County that is very similar to the Bakken Shales, giving the potential for up to 23 MMBOOIP per section (square mile). This play is evolving and BlackStar will monitor the progress and collect the necessary data to enter the play as it becomes understood.

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Southwestern Energy of the Fayetteville shale play moved into the Colorado portion of the DJ basin this year and has put together over 290,000 net acres in eastern Colorado outside of the Niobrara play. Their target is the Permian and Pennsylvanian and to date, specifically the Marmaton Formation of Desmoinesian age. They have drilled two wells and just announce a third in an area 65 miles from the nearest production in the Marmaton. They drilled in an area of almost no deep well control and drilled a 2,000 foot horizontal at a true vertical depth of 8,550 feet. In mid-July the well began flowback and only 24% of flowback had been recovered when oil production began. The highest 24 hour producing rate at that time was 65 BOPD, 40 MCFPD and 740 BWPD on pump. This is prior to recovery of 76% of the completion fluid and a pretty good start for a project no one conceived until now.

MHA developed an unrisked Low, Best and High case for Prospective Resources in the Desmoinesian. The Low case assumes 25% of the BlackStar lands will recover 288 MBO/well on 640 acre spacing (14 wells) or 4.032 MMBO/100% WI and 2.94 MMBO/73% WI. The Best case assumes 1/3rd of the lands will recover 288 MBO/well on 320 acre spacing (37 wells) or 10.656 MMBO/100% WI and 7.78 MMBO/73% WI. The High case assumes 2/3rds of the lands will recover 288 MBO/well on 320 acre spacing (73 wells) 21.024 MMBO/100% WI and 15.35 MMBO/73% WI.

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Potential Reserves/Resources & Unrisked Net Present Value

Based on the work performed for this Technical Study, the Potential Reserves and Resources for the BlackStar 73% working interest in the Nebraska Position are summarized in Table 4.

Oil - Reserves (MBBL)

100% WI 73% WI

Operator

Conventional

D & J Sands

Proved

Proved

&

Probable

Proved,

Probable

&

Possible

Proved

Proved

&

Probable

Proved,

Probable

&

Possible

New Fields 0 1,214 3,176 0 886 2,318 BlackStar

Redevelopment 0 1,200 2,400 0 876 1,752 BlackStar

Total 0 2,414 5,576 0 1,762 4,070

Oil - Contingent Resources (MBBL)

100% WI 73% WI Risk

Factor Operator

1C 2C 3C 1C 2C 3C

Unconventional

D sands 1,684 2,525 3,367 1,229 1,843 2,458 39.2% BlackStar

Total 1,684 2,525 3,367 1,229 1,843 2,458

Oil - Prospective Resources (MBBL)

100% WI 73% WI Risk

Factor Operator

Low Best High Low Best High

Niobrara 5,400 13,750 24,600 3,924 1,004 1,796 19% BlackStar

Codell 2,640 6,600 13,140 1,930 4,820 9,590 19% BlackStar

Permian 1,675 3,350 6,700 1,220 2,445 4,890 10.7% BlackStar

Desmoinesian 4,032 10,656 21,024 2,940 7,780 15,350 2.1% BlackStar

Total 13,747 34,356 65,464 10,014 16,049 31,626

Table 4: Potential Reserves, Contingent and Prospective Resources

The methodologies used to derive these reserves and contingent/prospective resources have been explained earlier in this report. The Probable and Possible reserves are believed to be reasonable but they have not been assigned to specific areas and with specific project economics on the BlackStar acreage as would normally be done for a certified reserve report. Table 5 presents the unrisked net present value for each opportunity by the various reserve and resource categories to the 8/8ths (100%) working interest. The table also summarizes the basis for the low, best and high categories and associated economic value. The estimate of economic value has been derived based on individal ‘type well’ economics , and have generally considered the ‘worst case’ outcome; in other words, the highest CAPEX and lowest EUR that are expected for a successful efforts well. The results of these economics are expressed as a net present value discounted at 10 percent (PV10) divided by the net oil reserves. All cases except the Niobrara were run with a working interest of 100 percent and a net revenue interest of 81 percent.

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Table 5: Unrisked Net Present Value

Opportunity Reserve Category

Conventional D & J Low Best High Low Best High EUR,

MSTB PV10, M$

NRI used for

economics

CAPEX,

$M

PV10/net

barrel,

$/bbl

New Fields Reserves, 2P & 3P 0 1,214 3,176 0 33,722 88,222 40 900 0.81 688 27.78

per 11/15/11 pptx; Banner Co.

Np=80.5 MMSTB from 123 fields, mean

field size 654 MB, P50 size 140 MB ;

P50 well EUR 40 MB

2P= 4 x 140 MB & 1 x 654; 3P adds 3 x 654 MB

Redevelopment Reserves, 2P & 3P 0 1,200 2,400 0 15,407 30,815 25 260 0.81 688 12.84

includes infill & edge wells w/o water

injection, re-engineering of existing

waterfloods (conformance

improvement, modification of

producer/injector locations, etc.)

2P=30 wells x 40 MB; 3P adds 30 wells x 40

MB

Niobrara Prospective Resources 5,400 13,750 24,600 108,000 275,000 492,000 200 3200 0.8 5000 20.00range of EURs derived from Figure 14

of Technical Report

Low=200 MB/well x 25% of BlackStar acreage

'works' (27 wells); Best = 250 MB/well x 50%

of BlackStar acreage (55 wells); High = 300

MSTB/well x 75% (82 wells)

Unconventional D Contingent Resources 1,684 2,525 3,367 46,778 70,139 93,528 40 900 0.81 688 27.78

14,388 acres on BlackStar acreage;

assume 20% 'sweet' and 80% 'tite';

'sweet' uses 14% phi, 35% Sw, 10 ft net

sd, FVF 1.2 RB/STB, OOIP=16.93

MMSTB; 'tite' uses 9% phi, 50% Sw, 5

ft net h, FVF 1.2, N=16.74 MMSTB;

EUR ~ 7.5% of 'sweet' + 'tite' OOIP

33.67 MMSTB

Low = 5% of OOIP; Best= 7.5% OOIP;

High=10% of OOIP

Codell Prospective Resources 2,640 6,600 13,140 54,321 135,802 270,370 30 500 0.81 688 20.58

using economics for 'D&J Sands

Minimum Well'; OOIP estimated using

30 MSTB EUR/40 acres as 7.5%

recovery (so OOIP for High case is

35000 ac x 50% x 10,000/ac=175

MMSTB)

Low=10% of Blackstar acreage 'works' for

Codell on 40 ac spacing (88 wells) and 30

MB/well; Best 25% of acreage works (~220

wells) at 30 MB/well; High = 50% of acreage

works (~438 wells) at 30 MB/well

Permian Prospective Resources 1,675 3,350 6,700 34,170 68,340 136,680 NA NA NA NA 20.40

Kleinholz field cumulative production =

3.35 MMSTB; No economics run, use

average of conventional reservoirs

(27.78+12.84+20.58 = 20.40)

Low=discovery representing 1/4 Kleinholz;

Best= 1/2 Kleinholz; High is equal to Kleinholz

field

Desmoinesian Prospective Resources 4,032 10,656 21,024 115,762 305,943 603,618 215 5000 0.81 4500 28.71

Based on Desmoinesian type well

economics, assuming 23 MMSTB/640

acres, 2.5% recovery and development

on 320's with Horizontal wells at 288

MSTB/well

Low=25% of Blackstar acreage 'works' for

Desmoinesian on 640 ac spacing (14 wells)

and 288 MB/well; Best 1/3rd of acreage

works on 320 ac spacing (37 wells) 288

MBO/well; High = 2/3 rds of acreage works

(73wells) at 320 ac spacing, 288 MBO/well)

15,431 39,295 74,407 359,031 904,354 1,715,233Total

Comments Basis for Low, Best, High

Reserves to 8/8ths WI, MSTB Unrisked Value of Reserves, $M Unit Value basis

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The Niobrara cases had been run at 80% prior to the close of the deal and were used here as is. There were no economic cases available for the Permian opportunity, so an average PV10/net barrel value derived from three conventional well cases was used. This method is not intended to rigorously convey the unrisked net present value of specific projects or the aggregate fair market value of the opportunity; it is simply a metric to understand the potential value of reserves and resources ‘in the ground’

Probability of success was derived for the Contingent and Prospective Resource cases and is shown in Table 6. The POS ranges from 2.1% for the Desmoinesian play as it is in the early stages to a high of 39.2% for the Unconventional D Sand play as there is ample control and known production from 1950’s vintage stimulation that should be economic with current oil prices and completion technologies.

Table 6: Probability of Success

As an extension to the valuation method used above, MHA has estimated the risked value of the reserves and resources by multiplying the unrisked value times the POS. For purposes of this estimate, a POS of 50 percent is applied to the 2P reserves cases. In addition to using the 2P reserves cases, the ‘2C’ and ‘Best’ estimates are used for the Contingent and Prospective resources, respectively. As indicated in Table 7 the Total risked value to the 100% WI is $144,260,000 and the total risked value of the 73% WI is $105,310,000.


Source

Rock

Trap

Integrity

Reservoir

Adequacy

Regional

Migration Paths

New Fields Reserves, 2P & 3P N/A

Redevelopment Reserves, 2P & 3P N/A

Niobrara Prospective Resources 0.9 0.65 0.55 0.7 0.85 19.1%

Unconventional D Contingent Resources 0.9 0.8 0.8 0.8 0.85 39.2%

Codell Prospective Resources 0.9 0.65 0.55 0.7 0.85 19.1%

Permian Prospective Resources 0.9 0.4 0.7 0.5 0.85 10.7%

Desmoinesian Prospective Resources 0.9 0.3 0.3 0.3 0.85 2.1%

Probability

of SuccessConventional D & J

For Prospective Resources

Chance of Discovery Chance of Technical

& Commercial

Success


Reserves

to 8/8ths

WI, MSTB

Unrisked

Value of

Reserves,

$M(100%) POS

Risked

Value of

Reserves,

M$(100%)

Risked

Value of

Reserves,

M$(73%)

Conventional D & J Best Best Best Best

New Fields Reserves, 2P & 3P 1,214 33,722 0.5 16,861 12,309

Redevelopment Reserves, 2P & 3P 1,200 15,407 0.5 7,704 5,624

Niobrara Prospective Resources 13,750 275,000 0.191 52,525 38,343

Unconventional D Contingent Resources 2,525 70,139 0.392 27,494 20,071

Codell Prospective Resources 6,600 135,802 0.191 25,938 18,935

Permian Prospective Resources 3,350 68,340 0.107 7,312 5,338

Desmoinesian Prospective Resources 10,656 305,943 0.021 6,425 4,690

39,295 904,354 144,260 105,310Total

Table 7: Risked Potential Reserves, Contingent and Prospective Resources

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MHA Disclosure and Statement of Risk

The accuracy of reserve and economic evaluations is always subject to uncertainty. The magnitude of this uncertainty is generally proportional to the quantity and quality of data available for analysis. As a well matures and new information becomes available, revisions may be required which may either increase or decrease the previous reserve assignments. Sometimes these revisions may result not only in a significant change to the reserves and value assigned to a property, but also may impact the total company reserve and economic status. The reserves and forecasts contained in this report were based upon a technical analysis of the available data using accepted engineering principles. However, they must be accepted with the understanding that further information and future reservoir performance subsequent to the date of the estimate may justify their revision. It is MHA’s opinion that the estimated reserves and other reserve and resource information as specified in this report are reasonable, and have been prepared in accordance with generally accepted petroleum engineering and evaluation principles. Notwithstanding the aforementioned opinion, MHA makes no warranties concerning the data and interpretations of such data. In no event shall MHA be liable for any special or consequential damages arising from BlackStar’s use of MHA’s interpretation, reports, or services produced as a result of its work for BlackStar.

Elgin Energy has an ownership position in both MHA Petroleum Consultants LLC and Bayswater Exploration & Production, LLC. MHA and Bayswater are separate companies which have different but overlapping owners. Bayswater owns the 27% of the Nebraska Project not owned by BlackStar Petroleum and is working on a Joint Operating Agreement with BlackStar. Kevin Beacom, the principal MHA investigator for BlackStar on this project has over 30 years of geoscience and engineering experience in the Rocky mountain area and throughout the US and Internationally. Mr. Beacom, through his employment with MHA, has a very small interest in Bayswater E & P.

However, neither the employment to do this work, nor the compensation, is contingent on Mr. Beacom’s or MHA’s estimates of reserves and resources for the properties in this report.

This report was prepared for the exclusive use of BlackStar and will not be released by MHA to any other parties without BlackStar’s written permission. The data and work papers used in the preparation of this report are available for examination by authorized parties in our offices.

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