Swan Hills Complex - Light Oil Resource Play

The Swan Hills reef complex is located in north central Alberta, approximately 200 kilometres northwest of Edmonton. The main portion of Swan Hills was discovered and developed through vertical drilling in the 1950's and 1960's. The reef complex is over 50 miles long covering over 24 townships of land and is recognized as having a very large accumulation of 40° API light sweet oil-in-place. The main portion of the reef has undergone extensive waterflood operations and in many of its pools has recovered over 40 percent of the oil-in-place. Because the Swan Hills pools hold such large volumes of original-oil-in-place, each percentage point increase in the overall recovery factor represents significant incremental production and reserves at low geological risk. The large original-oil-in-place and reservoir characteristics make this area a candidate for future development under a CO₂ flood.

Swan Hills - The Land

Arcan entered the Swan Hills play back in 2005 through the acquisition of the Deer Mountain Unit #2. Recognizing the potential of the play, Arcan started accumulating additional interests and in 2007, built new facilities to handle a large production base and implemented a waterflood in the Unit. This was followed by a large land purchase and farm-in during 2008. Rising oil prices since 2005 have helped solidify the economics in this area; however, the key change came with the successful application of horizontal drilling and multi-stage fracture technology.  Arcan's land base extends over 40 kilometres along the Swan Hills reef trend. Arcan is utilizing the 70 pre-existing vertical well bores as well as a new 3D seismic program shot in the first quarter of 2011, to delineate its continued horizontal drilling activity.

Swan Hills - The Reserves and Economics

Offsetting units with over 50 years of production history have recovered more than 35 percent of their estimated original oil-in-place, and are believed capable of 45 percent ultimate recovery under vertical well development and waterflood. These units have significant further upside potential from the application of multi-stage horizontal fracturing and possible future CO2 injection schemes. In 2010, horizontal drilling and capital expenditures were focused in the Unit where reserves had already been recorded on a vertical drilling basis. Drilling new horizontal wells in the Unit was not as effective in adding reserves as drilling outside of the Unit; however, they did significantly modify the production profile in the Unit and were in proximity to owned infrastructure and waterflood operations. The results from the waterflood and ten (8.1 net) wells in the Unit combined with proving the horizontal multi stage technology in the five (4.8 net) wells outside of the Unit, translated into significant value growth outside of the Unit in 2010. Operations for 2011 focused more heavily on the central portion of Arcan's land block in the Ethel area with a total of 32 wells being drilled across these lands.  In 2012, Arcan will continue to prove up reserves across its land as it continues to develop the Ethel area as well as drilling several wells across its undeveloped land base in Virginia Hills and South Swan Hills.  By focusing drilling in these relatively undeveloped areas, Arcan anticipates strength in future reserve additions.

Swan Hills Complex Highlights 7 billion barrels OOIP from the Beaverhill Lake formation Developed in the 1960s Over 21 townships (50 miles) 40 + year Reserve Life Index on vertical wells Up to 40% recoveries under water flood CO2 pilot development underway recoveries could exceed 60%   Arcan Highlights Arcan OOIP up to 700 million boe Large proven horizontal light oil resource play Enhance Oil Recovery potential of 40% to 60% 400+ horizontal wells to drill 176 gross section — 171 net sections

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Deer Mountain Unit#2

Arcan owns an 81% interest in the Deer Mountain Unit #2. Initial production from the Unit commenced in 1964 and it was unitized in 1984. Recovery from the Unit is low compared to offsetting pools in the field because of a historic lack of drilling and water injection. To date, Arcan has drilled 19 horizontal wells on the Unit. At Dec 31, 2010 the Unit which makes up 5% of Arcan's landbase comprised 40% of Arcan's value and reserves, highlighting the value that can be achieved when combining waterflood with Horizontal, multi-stage fracture wells. As well, Arcan constructed a new oil battery in 2006 and 2007 which is capable of processing 8,000 barrels of fluid per day. On the Unit, Arcan has no government production restrictions, has new centralized water injection facilities and is permitted to inject over fracture pressure.

In December 2009, Arcan drilled its first horizontal multi-stage frac well in the Deer Mountain Unit. This well was placed on production in February 2010 and now produces over 350 boe/d under waterflood. Success on the first well set up a very large inventory for development of horizontal wells on the 171 net sections of land that Arcan has interests in the area. In 2011, Arcan drilled an additional six (4.9 net) wells within the unit. To date, Arcan's Deer Mountain Unit #2 has recovered less than 10% of the oil in place. Successful horizontal development would accelerate production and could increase recoveries up to 40%+. Arcan plans to utilize its new battery and water injection facilities to maximize continued development and value of the majority of its lands.

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Morse River Unit #1

The Morse River Unit has been under development, predominantly through vertical wells, since 1966. In December 2010, Arcan drilled and completed the first horizontal well in the Unit. The well clearly demonstrated the huge upside that remains in Morse River Unit #1. Arcan has recently acquired the working interest of the other participants in the Unit and now owns 100% of the Unit interest.

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Ethel

The majority of activity seen in 2011 took place in the Ethel area in Twp 67 Rng 8W5. Arcan drilled 26 wells (100% WI) in and around the Ethel field which served to not only add significant production and reserves, but to also further delineate the nature of the reservoir across these lands and ultimately reducing risk. Arcan commenced the implementation of its first EOR (Enhanced Oil Recovery) scheme in the Beaverhill Lake A Pool in December of 2011 with the conversion of an existing vertical producer to an injector that offsets multiple horizontal producers. Arcan will drill three new horizontal injectors in Q1 2012 that will add further support the pool and expects to see response by the end of 2012. Up to 20 additional producers will be drilled in the Ethel area in 2012. By the end of Q1 2012, Arcan will have in place its 16km main gathering system stretching from the south end of Deer Mountain Unit #2 through to the south end of the Ethel field. This gathering system includes oil, gas, and water injection lines that will ultimately reduce downtime and eliminate trucking costs from the Ethel field.

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South Swan Hills

In 2011, Arcan proceeded with a number of surveys across its South Swan Hills lands in preparation for a number of drills across these lands that are scheduled for 2012. Preliminary indications, both from existing verticals and recompleted horizontal, are very positive. Competitor activity in this area is growing, adding to the excitement here.

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Virginia Hills

Arcan owns a total of 10 net sections in Virginia Hills field, west of its main land fairway, just offsetting the Virginia Hills and Freeman Units. In January 2012, Arcan spudded its first well on these lands and expects to see results by the end February. Competitor activity has been very revealing with some very good results to date.