Oil and gas currently account for more than half of global energy supply, and fossil fuels are expected to continue to be the main source for world energy well into the 20th century (Source: International Energy Agency). The rapid economic expansion in India and China has also caused many industry experts to predict increased strains on the ability of suppliers to meet growing demand, as well as sparking concerns about the surging energy consumption and CO2 emissions under existing policies. Rising prices have clearly demonstrated the unsustainability of continued reliance on limited fuel sources. According to the Worldwatch Institute, oil production is in decline in 33 of the 48 largest oil-producing countries (Source: Worldwatch Institute).

While petroleum has garnered the majority of attention due to rising oil and gasoline prices, natural gas has responded to market pressures as well. Since October of 2006, the U.S. natural gas wellhead price has risen more than 38% in just seven months, from $5.03/tcf to $6.98/tcf. What makes this price surge even more striking is the fact that natural gas prices have continued to climb heading into the summer months when demand tends to decline and prices typically regress.

It seems that this price climb could be just the beginning. Global consumption of natural gas is expected to increase more in absolute terms than that of any other primary energy source, almost doubling to 4,900 bcm in 2030. Demand for natural gas is projected to grow 2.8% annually through 2025, faster even than projected demand for oil. (Source: International Energy Agency). With such pressures on the market, it seems almost inevitable that natural gas will remain a strong prospect for the foreseeable future.

Projects
1. Saskatchewan Project (Special Exploration Permit EP3072)

The Permit
1259529 Alberta Limited, a wholly-owned subsidiary of Ethanoil and Gas Corp., presently holds the exclusive petroleum and natural gas exploration rights on 115,272 acres in central Saskatchewan, Canada. The lands are known as Special Exploratory Permit EP3072 ("EP3072"). By the terms of the Exploratory Permit, in order to retain the permit, Ethanoil and Gas has until August 15, 2008 to spend CDN $1,155,025.42 on direct exploratory work. These work commitments may include 2-D seismic surveys and must include a drilling program of at least one well during each of the two years. After spending the commitment amount the Company then has another three year window in which to better define its exploration areas. The Company may then convert these areas to a five year lease. This method allows smaller companies such as Ethanoil and Gas to spend its money on drilling and finding gas reserves rather than sinking large dollar amounts on land costs.

The Advantages
Special Exploratory Permit EP3072 is located in the Smeaton area of Saskatchewan, about 35 kilometres north east of Prince Albert. The lands are geologically located on the northern shore of the Cretaceous Western Inland Seaway ("KWIS") otherwise known as the Williston Basin. It has been known since the 1930's and perhaps earlier that natural gas existed at shallow depths in central to southern Saskatchewan. However, throughout the early history of oil and gas exploration in Western Canada, the goal was, and to a large degree remains, to discover and develop large reservoirs of oil and gas, usually at considerable depth. Until recent times, the value of gas was so low that even if gas "shows" were evident at shallow depths, the gas was ignored in the search for the more valuable "Deep Devonian" oil. These old exploratory wells were usually drilled with very heavy, bentonite-rich drilling mud that caused severe damage to the shallow gas zones within the wells and thus prevented assessment of shallow gas flow rates. The heavy mud effectively eliminated the porosity of the gas zones preventing the low pressure gas from flowing into the well. However, some drill stem testing of these shallow zones was done and that data remains in Saskatchewan's exploration archives and is available to Ethanoil.

These shallow gas zones have remained largely unexplored and unexploited until very recently. Operators are now interested in shallow gas for several reasons. Because of rising oil and gas prices due to worldwide increased energy consumption and declining conventional reserves, many operators are now considering the unconventional targets as either their primary focus, or as up-hole bail-out zones should conventional targets become uneconomic. Drilling for shallow gas can be far cheaper than conventional drilling. The depths are 300 to 600 metres through sandstones and shales. Lighter drilling equipment can be used and the holes can be drilled in a one or two days. Although the wells are low flow producers, as low as 40 Mcf/day, they tend to produce for long periods, decades in many cases. In addition, several wells per section of land can be drilled and put into production. With prices high and with several wells per section, currently as many as 8 wells per section, a project with a large land base can be very productive and economical.

The Prospects
Ethanoil And Gas proposes to immediately begin exploration of EP3072. In order to develop a sound drilling program the company plans to initiate a geological survey of the block. The geological survey may suggest that 2-D seismic surveys be completed to help develop a drilling program. The zones of interest to Ethanoil and Gas are, at least, the First and Second White Speckled Shale and Viking zones. They are Cretaceous in age, consisting sand, silt and shale.

Based on the geological literature and the published historical data in and about the company's Exploration Permit area, there may be as much as 2 billion cubic feet (2 BCF) of Original Gas in Place per section (square mile). With a 35% recovery factor, it is indicated that 0.7 BCF of gas could be recoverable per section (square mile). However, recent core data from the north eastern edge of the Williston Basin is indicating that 1.5 BCF of gas per section may be recoverable. If so, then the Ethanoil and Gas exploration properties, 180 sections, could contain between 126 and 270 BCF of recoverable gas. The Saskatchewan Government has adjusted the Royalty structure for the exploration of shallow gas. Based on the rates expected from these shallow zones, 'royalties' should be in the five to ten percent range, making economics for this kind of exploration and development very, very favorable.