Hanging Woman Project

1.1 Geological Overview

The Hanging Woman Project is located in the Powder River Basin (PRB), which covers over 60,000km2 of northeast Wyoming and southeast Montana. The PRB contains up to 5,200m thickness of Cretaceous and Tertiary sediment (Refer to Figure 1).

The Palaeocene Fort Union Formation in the PRB contains one of the largest deposits of coal in the world. This formation is also the largest single source of coal in the US (~40% of US coal production) and the location of two of the largest coal mines in the world. These coals are a proven prolific source of coal bed methane. The CBM industry began in the PRB in 1989 and has grown rapidly. In 2009, 558MMcf/day of gas was produced, making it the 3rd largest gas-producing field in the USA. Along with this large and growing production base the US Geological Survey estimates that only 4Tcf of the >25Tcf gas resource in the PRB has been extracted. This upside potential exists in coals that are already producing and coals that are yet to be developed.

Coals in the PRB are generally sub-bituminous, thick (up to 40m seams) and naturally mico-fractured with usually no artificial fracturing (“fraccing”) required for CBM production. These coal seams are generally shallow and are geologically simple. These attributes mean that the CBM can be developed with low-cost vertical wells and simple completions.

Figure 1: Powder River Basin Location Map

Historically CBM wells in the PRB have produced formation water of sufficient quality to allow it to be released into the natural drainage system. More recently operators have been producing water into unlined pits where the water evaporates or returns to the water table. Other operators are alternately reinjecting water back into the natural aquifers.

The 16 producing wells in the 35-well Hanging Woman Project are currently directing water into surface pits where the water re-enters the ground water system or evaporates. Future water disposal is expected to be a combination of similar processes and/or re-injection into shallow aquifers.

1.2 Hanging Woman Project

As at November 2011, the Hanging Woman Project comprises 13,280 net acres, located in Sheridan County, Wyoming, USA. There are 14 coal seams mapped over the Project area, ranging in thickness up to 11m with a stacked average thickness of 39m. These coals range in depth from 150m to 900m. 35 CBM wells have been drilled in the project, with accompanying roads and water handling facilities installed.

Figure 2: CBM Tenement Map

The Company’s initial development focus for the Hanging Woman Project is the Roberts Coal, which averages 8.2m in thickness at an average depth of 800m over the Project area.

The 16 wells that have been completed for production have been dewatering for over 2.5 years and are at the point that desorption of gas is occurring and is showing at the wellhead. Cady will conduct further drilling within the Hanging Woman Project area with the objective of further dewatering the Roberts Coal and expanding the resources.

The Independent Technical Report prepared by Robert A. King, P.E. in October 2011 details a total resource base of 95Bcf of which 50Bcf is in the Proven plus Probable (2P) reserves category and 65Bcf is in the Proven plus Probable plus Possible (3P) reserves category. Commercial gas flows will allow 2P reserves to be booked as 1P. Drilling, coring and land acquisition is expected to result in the addition of further 2P and 3P reserves. As further reserves are added, this will add significant value to the Project.

1.3 Infrastructure and Services

Wyoming has a 125+ year history of conventional oil and gas production and 20+ year old CBM industry. Over this time the State has developed extensive infrastructure including pipelines, gas processing, and compression for gathering and transmission to markets. It also has a well-developed service industry providing operational and technical services at globally competitive prices. There is currently ready access to drilling rigs and equipment for the development of the project.

Until the end of 2009, prices for Wyoming’s gas suffered from a shortage of pipeline infrastructure resulting in a lack of access to the more lucrative gas markets in the north-east and western USA. This changed from late 2009 with the commissioning of the Regional Express Pipeline in November 2009, the Bison Pipeline (which began operations in January 2011) and the Ruby Pipeline (which began operations in July 2011), which now allow transportation of Wyoming gas to these more lucrative markets. An effect of these changes has been a significant increase to the net price achievable for Wyoming gas relative to the prevailing gas price in the US.

Near the Hanging Woman Project there is existing pipeline infrastructure with the capacity to transport the gas production of over 50MMcf/day. There is a 12” high-pressure pipeline within 2km of the Project; Cady anticipates installing an 8” high-pressure pipeline from the Hanging Woman Project to connect with this line. There are also nearby compression and dehydration facilities with spare capacity available to support the Project.

Figure 3: Hanging Woman Project Area: Pipeline Infrastructure

This local infrastructure has the capacity to support rapid and low cost access to the US natural gas market.