GEOLOGY
On the southwest flank of the Sabine Uplift in southern Shelby County, Texas within the Washita-Fredericksburg group is the Goodland Formation, locally termed the Fredericksburg. This series of variably developed carbonates can range from marl/chalk to “true” limestone. The Fredericksburg in the subject area is overlain unconformably by the Eagleford Shale and conformably below by the Paluxy Sand. In this area the Fredericksburg “A” is truncated against the Sabine Uplift by the Lower Cretaceous Unconformity. While the Fredericksburg “A” thickens west and south of the Uplift to a gross thickness exceeding 150’, it is completely eroded away by the Unconformity within a margin extending, on average, only a few miles west of the state line. The formation wraps around the Uplift east and north into Louisiana effectively ringing the stable platform.

In the southeastern corner of Shelby County, Texas the Bridges Field sits on the southwest flank of the Uplift. Here, as well as northward toward the Joaquin and Huxley Fields and east to Zwolle, the Fredericksburg can be subdivided into three (3) distinct depositional cycles which we have called the “A”, “B” and “C”. Regionally, the upper two (2) members are found to be productive or indicate shows of hydrocarbons. The Fredericksburg “A” (Goodland Lime) is the best developed and most widely produced of the three (3) members. Log analysis of many area penetrations shows a strong consistency in overall response to that displayed in the type log.

The top of the “A” member is affected by the unconformity in several ways. The upper 10-15’ of the section appears to benefit from the development of secondary porosity and possibly permeability as a combined result of subareal exposure and subsequent groundwater movement. This band of elevated porosity in the range of 24-26% has been detected by both recent density/n and sonic logs. In the section unaffected by the Unconformity, the type log shows another 20-25’ df continuous porosity in excess of 20%.

The closest production from the Fredericksburg is in the Bridges Field in southern Shelby County. Discovered in the early 1950’s five wells were drilled and completed with reported cumulative production from unitized leases of over 50,000 bbls plus unreported gas. A letter from Milam Production Company to the Railroad Commission of Texas in May of 957 was a significant piece of information. In it, Milam Production Company describes a core recovered from the R.L. Milam No. 1 Pickering Lumber well. They reported Fredericksburg Lime from 3,690—3,725’ with good color and odor with little permeability. They then stated that the “. . .lime is vertically fractured throughout.” Electric logs from Bridges Field do not display an oil/water contact, indicating that the field limits have not been established. Bridges Field appears to be much larger than presently defined.

In March 2001, SDG Operating drilled the Trinidad-Bridges #1 as a vertical test. The well tested 55 BO, 12 MCF and 44 BW on a 12164 choke. From April 2001 to March 2002, the well reported production of 3,149 BO. In March 2002, the well was re-entered and drilled horizontally, using slim hole tools to approximately 1,400’. This initial downdip lateral tested 130 BO, 95 MCF and 90 BW on a 21164 choke. The well reportedly had several engineering problems and produced 2,847 BO in April 2002 and 1,590 BO in May 2002 before being shut-in. The well was replaced by the Trinidad-Bridges 2-H drilled by a new operator, Cornerstone Oil Trust. The Trinidad-Bridges 2-H was a new well twinning the original 1-H as an updip lateral. The well tested 184 BO, 190 BW on a 12164 choke. As permitted the well has a 2,000’ lateral. In July 2002, Cornerstone Oil Trust drilled the O.H. Polley 2-H approximately 1,000’ east of the Trinidad-Bridges 2-H at the closest approach. The Polley 2-H, as permitted, was a downdip lateral of approximately 2,500’. The well tested 142 BO and 95 BW on a 10/64th choke with flowing tubing pressure of 450 psi. The well has produced 34,217 BO and 112,281 MCF of gas from September 2002 through May 2004. Both the Bridges 2-H and the Policy 2-H were reportedly shut-in in January and February 2003 waiting replumbing the surface equipment, pipeline connections and compression into Marathon’s gas gathering system. Cornerstone began drilling the Polley 3-H in early June 2003 a mere 500—1,100’ east of the Polley 2-H. The well reportedly crossed a N-S trending fault and drilling was terminated after drilling only 200-300’ of the proposed lateral. In late June 2003, the Cornerstone Kraemer 1-H commenced drilling. The well reached TD in late July with a measured depth of 5,667’ and a true vertical depth of 3,560’. On August 5-6, 2003 the well was flow tested at 485 BOPD, 453 MCFGPD, and 165 BWPD on a 14/64ths choke with 690 psi flowing tubing pressure. Cumulative production through May 2004 was 23,593 BO and 116,083 MCF of gas.

The Richman Petroleum Massey 1-H was spudded approximately 1,500’ east of the Kraemer #1-H on January 27, 2004. As permitted with the RRC, the well was projected to have a 3,400’ downdip lateral. Based on data supplied by the Operator, the pilot hole encountered 10- 12’ of Fredericksburg “A” that gave up a 500 units of gas, 80% blue-white fluorescence, and a blue-white cut. Sidewall core recovery from the “A” was poor but the one recovered core was consistent with cores taken from other area wells. The Fredericksburg “B” section also had mudlog and sidewall core shows. The operator reported that on March 18, 2004 shortly after drilling out of the casing into the top of the Fredericksburg “A” , the well came in unexpectedly and was flowing at rates of up to 100 bbls an hour of oil and water with gas. In late April, work commenced to finish drilling the proposed lateral. A plot of the surveys shows the first lateral to be out of zone beneath the “A”. A sidetrack landed in the “B” section for approximately 500’ and was briefly tested as gas productive with a high water cut. The Operator subsequently abandoned the Fredericksburg laterals and came up the Austin Chalk where the mudlog indicated a 150 unit gas show. A short radius of- 200’ was made into the Chalk and is reported to be producing a 8-10 BOPD. The Marathon Hamill #1 was originally drilled in June 2002, targeting the James Lime. In late January to early February 2003, Marathon tested the Fredericksburg “A” section (see Marathon Completion Report). Based on results from the Cornerstone O.H. Polley 2-H (1 mile north) and very good mud log shows (560 unit gas kick) from the Hamill #1 and a cased hole log from the Hamill #1, testing the vertical section of the Fredericksburg “A” was a logical next step. After running a cement bond log, Marathon perforated the entire Fredericksburg “A” section, acidized with 3,000 gallons of 15% Fe acid, and began swabbing the well. The well began to have a blow of gas behind the swab runs and a trace of oil was recovered from the later runs. In reviewing the CBL from the Hamill #1 it would appear that the primary cement job across the Fredericksburg “A” was poor, especially at the interface between the base of the Eagleford Shale and the top of the Fredericksburg “A”. We have observed in our McGraw wells to the south that this contact washes out badly during drilling of James Lime wells. Furthermore, the cement across this part of the HamilI #1 would have been the “tail slurry” from cementing their 7” production casing down to the James Lime. We are of the opinion that Marathon got an inconclusive test due to poor cement. Daywork on the CG Operating, Inc. Gray 1-H commenced at 1:00 am on April 6, 2004. The well is located in the Richard Hailey Survey, A-1203, in Shelby County less than a quarter mile from the Shelby/Sabine County line. Drilled as an updip lateral, the well reached a total measured depth of 6,786’ (3,187.12’ vertical section including curve) at 1:00 am on May 4, 2004. Prior to drilling the lateral, CG drilled a pilot hole to the base of the Eagleford Shale, picked up a 60’ core barrel and attempted to cut a core of the entire Fredericksburg “A” section. A total of 54’ of core was cut with only the top 16-17’ recovered. The pilot hole was deepened to 4,106’ and the well was mudlogged (from the base of the Midway shale to TMD), open hole logged (quad-combo) and side wall cores were taken from the “A” and “B” sections of the Fredericksburg. The sidewall cores confirmed the exceptional porosity indicated by the logs in the “A” and displayed good oil and gas saturations with several cores containing 38° gravity free oil. A kick off plug was set and the lateral drilled out to its permitted length. Gas flares of 6- 8 feet were observed during the drilling of the lateral. Flares were intermittent initially but by the midway point were constant through the end of the horizontal leg. Based on a detailed plot of our lateral and the initial week of flow back numbers, the Gray 1-H appears to have an extensive open fracture system. CG is conducting an extended flow back period on the well. Initially, the well has flowed back water cut with gas at rates averaging 600 BWPD on a 48/64ths choke at 40 psi flowing tubing pressure.

Kerr 1-H Well Proposal

CG Operating, Inc. is proposing to drill the Kerr 1-H on acreage acquired from Marathon Oil Company within the D.Gonzales Survey, A-237 and the Wm. Kerr Survey, A-402 in Shelby County, Texas. The Kerr 1-H surface location is located approximately 4/l0ths of a mile north of FM 2261 on the east side of Sabine Forest Park Road 106. The well prognosis calls for a ±3,500’ updip lateral to be drilled NNE from the penetration point. We do not plan to drill a pilot hole, but will instead drill to a kick off point of ~2,430’, make our curve, land and cement casing, and then drill out the lateral. We will mudlog the well from the base of the Midway Shale to TMD. Based upon shows encountered prior to the KOP in the Saratoga and Annona, we may elect to run a set of logs and sidewall cores to evaluate possible opportunities in the Upper Cretaceous. The Kerr 1-H should reach the top of the Fredericksburg at approximately ±3,482’ based on our mapping. As proposed, the well would be, at penetration point, nearly 25’ high structurally to the updip end of the Gray 1-H lateral, 6,000’ east of the end of the Gray lateral along strike, and - 1000 north of the end of the Gray lateral. From the penetration point to the end of the proposed lateral we should begin with 38-40’ of the Fredericksburg “A” tapering to 24-26’ of the reservoir at TMD. The proposed lateral should extend up to and above the lowest known oil production as indicated by the completions in the Bridges Field northwest of the proposed bottom hole location. As evidenced by the Gray 1-H and the Richman Massey 1-H, we anticipate the Kerr 1-H to have a well developed fracture system combined with porosities ranging from 20-25%. Fluid flow rates from the Gray 1-H measured against the production from the existing horizontal wells in the Bridges Field suggest that the Fredericksburg “A” as a reservoir is capable of remarkable daily rates. A well positioned in the productive column could expect stable rates in excess of 200-400 BOPD and associated gas and water. CG anticipates putting these wells on pump to maintain production levels within the first year in addition to creating a saltwater disposal well to reduce lease operating costs.