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Reserves

Since 1993, the independent engineering firm of McDaniel & Associates Consultants Ltd. ("McDaniel") has evaluated 100 percent of Zargon's reserves. Zargon's reserve estimates have been calculated in accordance with National Instrument 51-101 Standards of Disclosure ("NI 51-101") and formal disclosure of Zargon's reserves, as required by NI 51-101, will be included in Zargon's Annual Information Form for the year ended December 31, 2010, which will be filed on SEDAR. Under NI 51-101, proved reserve estimates are defined as having a 90 percent probability that actual reserves recovered over time will equal or exceed proved reserve estimates. Probable reserves are defined under NI 51-101 so that there are equal (50 percent) probabilities that the actual reserves to be recovered will be less than, or greater than, the proved and probable reserves estimate. Significant highlights from the 2010 reserves evaluation are as follows:

Company Reserves(1)

At December 31, 2010 Oil and Liquids
(mmbbl)		 Natural Gas
(bcf)		 Equivalents(2)
(mmboe)
Proved producing 14.03 37.35 20.26
Proved non-producing 0.42 6.72 1.54
Proved undeveloped 0.70 0.19 0.73
Total Proved 15.15 44.26 22.53
Probable additional producing 4.78 12.78 6.91
Probable additional non-producing and undeveloped 1.37 9.49 2.95
Total Proved and Probable 21.30 66.53 32.39
Proved producing reserve life index, years(3) 7.1 4.4 6.0
Proved reserve life index, years(3) 7.6 5.2 6.6
Proved and probable reserve life index, years(3) 10.7 7.8 9.5
  1. Corporate working interest reserves before royalties, boe (6:1), based on the February 16, 2011, McDaniel reserves estimates based on forecast prices and costs as of January 1, 2011.
  2. Boes may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf:1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.
  3. Calculated based on the amount for the relevant reserves category divided by production for the fourth quarter of 2010 annualized for an entire year.

The vast majority of Zargon's booked reserves are currently producing and do not require significant future development capital. In the McDaniel report, proved and probable producing reserves represent 84 percent (2009 – 87 percent) of Zargon's total proved and probable reserves, while proved producing reserves account for 90 percent (2009 – 94 percent) of total proved reserves. McDaniel forecasts $20.29 million of net future (forecast prices) capital costs (excluding future Alberta drilling credits) to deliver the total proved reserve estimate. Zargon's probable reserves include provision for further oil pool development drilling activity in addition to incremental waterflood recoveries on producing oil properties and improved gas recoveries for currently producing natural gas wells. McDaniel forecasts $32.58 million of net future (forecast prices) capital costs (excluding future Alberta drilling credits) to deliver the total proved and probable reserves estimate.

The McDaniel reserves assessment does not include: the Little Bow ASP Project, Taber South waterflood implementations, Hamilton Lake oil exploitation, and the majority of our Williston Basin exploitation or waterflood modification opportunities.

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