Gulf Shores Resources Set To Drill "World Class" Oil Target

Marc Davis - Managing Editor
July/August, 2003

Gulf Shores Resources (TSX.V: GUL) is a Canadian petroleum exploration and development company that is focused on a balance between international projects with world-class potential and small, low-risk projects that generate near-term cash flow.

The main focus of Gulf Shores (www.gulfshoresresources.com) at this time is a "company maker" project in Colombia. It involves an extremely prospective oil exploration concession that sits at the heart of a prodigious Colombian oil basin - one that continues to produce new world-class discoveries. Of equal significance, Colombia now has a politically stable environment and a government that supports foreign investment. This scenario has set the stage for Gulf Shores and other intrepid North American oil & gas companies that are spurring on the accelerated growth of the nation's emerging oil industry.

However, the company's savvy and seasoned management team is committed to leveraging such opportunities while also minimizing risk exposure. Therefore, the company has teamed up with a private Texan oil company named Gulfsands Petroleum Colombia and another Canadian junior in a joint venture partnership. The senior partner, Gulfsands holds an 85% interest in the exploration of a 75,000-acre concession known as the Alborada Block. Meanwhile, Gulf Shores owns 10% of the remaining 15% interest in the project.

Located in the Upper Magdalena Valley, this concession is immediately south of and contiguous to (adjoining) the Guando Oil Field. This oil field discovery that was made as recently as 2002 has proven recoverable reserves exceeding 130 million barrels. Not only is this Colombia's most significant oil find within the last decade but it is located a mere 50 miles from Colombia's oil-hungry industrial capital, Bogata.

Furthermore, the Alborada Block is both adjacent and contiguous to the Espinal Oil Fields, which are only three miles to the west of the property. This is where some 12,000 barrels of oil are currently produced daily into the Upper Magdalena Valley pipeline system. Moreover, the close proximity of this pipeline to the Alborada Block promises to greatly enhance the economic viability of any discovery - large or small -- on the joint venture partnership's concession.

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The Alborada Block is located in an area that has generated significant volumes of oil. This is evidenced by the nearby accumulations in the Espinal Oil Fields (three miles west of Alborada) and the Guando Oil Field (12 miles to the northeast). It is particularly noteworthy that the pay zones in both of these "headline grabbing" discoveries are in the Monserrate Formation. (A formation refers to a layer of rock that often acts as a reservoir for oil & gas). This is the same geological strata -- located at a depth of about 2,500 feet -- that hosts the joint venture partnership's best drill targets. Moreover, the Monserrate Formation overlies the renowned high volume Villeta Formation, which encompasses the source rock from which oil migrates upwards.

The partnership has also identified another key prospect. A large anomaly in the Caballos Formation (located at approximately 6,000 feet) that underlies both the Monseratte and Villeta formations will also be explored during the upcoming drill program. It is synonymous with production from an oil field that is situated approximately 25 miles away from the Alborada Block.

Oil generated by shales and limestones (optimum oil-producing conditions) in the Villeta Formation in this part of Colombia has sourced some 2.6 billion barrels of oil reserves and 2.7 trillion cubic feet of natural gas reserves discovered up to 1990. Since then, there have been other significant oil discoveries (as previously mentioned). These recently discovered fields (that also include the Guaduas Field) hold an estimated 450 million to 800 million barrels of additional oil reserves. Clearly, the Magdalena Basin is not a mature hydrocarbon province but one which still exhibits considerable untapped potential.

Hence, the initial focus of the ongoing exploration program -- which received governmental drilling approval in early July 2003 -- has involved the processing and interpretation of new 2-D seismic data. The seismic data (which measures the acoustic refraction of oil-detecting sound waves beneath the ground) covers 50 miles of the concession (its northern half). It consists of five dip lines and a strike line that measure the angle and direction of tilting formations. This invaluable seismic data, along with a number of other corroborative geological exploration techniques, has led to the identification of two distinct oil reservoir targets. These geologically prospective rock formations are triple plunging structures that are closed-in on the fourth side by a major thrust fault trap. Additionally, the presence of oil in portions of the Alborada Block has been confirmed by the presence of two oil seeps - fissures in the rock formation where small amounts of oil has been transported to the surface. In fact, these oil seeps are consistent with the reservoir model for the block.

According to management's volumetric forecasts for the Alborada Property, three economic scenarios have been developed for reserve cases of 50 million barrels of oil (MMBO), 200 MMBO and 500 MMBO. The minimum case of 50 MMBO generates a net present value (NPV) at a 10% discount rate of US $95 million after Colombian taxes. Meanwhile, the 200 MMBO case translates into a net present value at a 10% discount rate of US $255 million after tax. The 500 MMBO case shows a net present value at a 10% discount rate of US $540 million after tax. These scenarios represent prospective NPVs for Gulf Shores, alone, of US $9.5 million, US $25.5 million and US $54 million, respectively. All cases assume unescalated oil prices of US $20 over the life of the project.

By way of background information, it may surprise some readers to learn that oil exports constitute Colombia's highest revenue-producing legal commodity. Even though Colombia presently only ranks as seventh in annual production among Latin American nations, it hosts some of the largest untapped petroleum reserves in the Western Hemisphere. This insight is attributed to the RAND Corporation -- a California-based independent non-profit research institute.

Meanwhile, Gulf Shores is poised to be among the few enterprising oil & gas exploration companies to capitalize on this timely scenario. The efforts of such companies are even being supported by the Colombian government. It launched a major initiative two years ago to encourage exploration activity with the stated mandate of developing 2.8 billion barrels of new reserves by 2010. This commitment involves initiatives to encourage foreign investment, to accelerate the licensing process and to implement reforms to decrease government royalties.

Among the foreign oil & gas companies that operate in Colombia are renowned North American stalwarts Chevron-Texaco, Gulfsands, Nexen Inc. (formerly Canadian Occidental Petroleum Inc.), Encana Corporation (formerly Alberta Energy) and Talisman Energy Inc., to name a few. Much of Colombia's crude oil is shipped to the United States, thereby further reinforcing the growing presence of North American oil & gas companies, large and small, in this resource-rich developing nation.

Elsewhere, Gulf Shores owns a 5% working interest in a producing gas well in Lavaca County, Texas. A reactivated past-producing well, the Baass #1 well is now producing 160,000 cubic feet of gas per day with the flow rate continually improving as the well cleans up. Indeed, the prospects for this well are very good. It produced up to 1.3 billion cubic feet of gas with condensate between 1966 and 1974 from the Wilcox Formation without the benefit of fracture stimulation. Consequently, geophysical logs indicate that there are five additional gas-bearing sands in the Wilcox formation that were never put into production. They include one that tested 400,000 cubic feet of gas per day with no water problems and without any stimulation. Modern fracture stimulation techniques can result in up to a five-fold increase in production. Moreover, the acreage in which Gulf Sands can accommodate at least one future step-out well.

The company's board of directors is comprised of professionals who collectively represent over fifty years of experience in petroleum exploration and development. They include President and CEO Michael Turko, a well-regarded petroleum geologist with over two decades of experience in the oil & gas business. He is also the president of several successful private energy companies. Among the company's other key directors is George Langdon, Ph.D. An accomplished Calgary-based petroleum geologist, Mr. Langdon's credits include serving in the late 90s as Geological Consultant, Newfoundland Business Unit, Mobil Oil Canada Properties.

With regards to Gulf Shores' near-term prospects, SmallCapMedia believes that the company's stock is currently undervalued. Furthermore, with only about 17 million shares outstanding, the stock is tightly held but still has a healthy float of about 6 million shares. With many of these shares controlled by insiders, the stock is therefore poised for a significant news-driven breakout. In recent months, the share price has established a clear upwardly trending pattern (approaching 52-week highs). And the promise of an imminent drill program (for which Gulf Shores has already fulfilled its financial commitment) should continue to fuel the stock's trajectory. Meanwhile, the advent of a major oil discovery in the fall offers investors considerable "home run" potential.

To contact Gulf Shores for more information, call
Gerald Otterman at 1-(866)-292-2601
or e-mail him at gulfshores@insigniacorp.com