Underground Energy Corporation provided an operational update including initial production test results on its Chamberlin 3-2 and Chamberlin 2-2 wells and details of a resource evaluation report conducted by Netherland, Sewell and Associates Inc. Through seismic and drilling programs at the Zaca Field Extension Project, Underground has significantly expanded the potential of this project and this is reflected in the NSAI report, summarized below. The company has also produced initial oil from the Chamberlin 3-2 well, validating the Company's discovery of a deeper Monterey sub-thrust formation. Initial testing indicates that this oil is of a lighter gravity than the ultra-heavy oil produced at the existing Zaca oil field and with a water disposal solution, UGE will have the ability to complete testing and move this well into production.

In addition, the company has moved its Chamberlin 2-2 well at Zaca into production. Underground has also optimized its Gabriel 1-35 well at Burrel to an increased average production rate, since July 27, 2012, of approximately 70 barrels per day of light gravity oil, providing a source of cash flow for the company. The company acquired the Zaca Field Extension Project in Fall 2011 for its potential to support a number of relatively low-cost, low-risk wells stepping out from the existing Zaca Field, where 61 wells drilled by other industry participants have produced in excess of 32 million barrels of oil to date (with cumulative production in excess of 500,000 barrels per well).

Since purchasing this asset, UGE has acquired and processed more than 50 miles of seismic data and has now drilled three wells, one of which was also re-drilled. Through this process, the Company has: identified and validated the discovery of a deeper Monterey play in the newly discovered Chamberlin East Fault Block; validated the potential for a number of wells in the shallower Monterey play at the field; and identified the potential for in excess of 100 wells across those structures mapped to date. Underground has increased its initial acreage from 6,200 net acres to approximately 9,923 net acres at Zaca.

The Zaca Field Extension Project surrounds the existing Zaca oil field and a large portion of the acreage is within the State's designated boundary for the Zaca oil field. The Company now has 13 permitted well locations at its Zaca Field Extension Project, of which four have been drilled, with a further 10 locations moving through the permit process. Subject to raising additional capital, Underground will have the ability to implement a water disposal well leading to greatly reduced water disposal costs.

The Company commenced its 2012 drilling program in February and is in the process of validating the commercial potential of multi zone production at Zaca. The Chamberlin 2-2 well has validated the commercial potential of the shallower Monterey zone stepping out from the existing Zaca field and expect the Chamberlin 3-2 well to fully validate the commercial potential of the deeper Monterey sub-thrust zone. The Chamberlin 3-2 well reached a total depth of 7,685 feet and validated the discovery of the Chamberlin East Fault Block with approximately 1,200 feet of oil-saturated Monterey shale in this deeper zone.

The Company completed the Chamberlin 3-2 well with a pre-perforated liner set from 6,685 feet to 5,292 feet and subsequently began pumping the well. While high water cut is relatively common in Monterey heavy oil wells, the Company did not anticipate the significant amount of water encountered in this new block. The original down-hole pump installed in the Chamberlin 3-2 well was too small to effectively deal with the amount of fluid in the well bore, which resulted in too much back pressure on the formation to allow the oil to flow and a loss of required heat.

Despite this, the well did produce some amounts of movable oil and large amounts of heavy oil were observed on the well's tubing and rods. A cement plug was subsequently placed at the bottom of the well to try to slow the flow of water, with only limited success. A higher capacity pump to handle larger than expected amounts of fluid was thereafter installed and a series of initial production tests conducted.

The first production test showed oil cut in the fluid at an average of 4% in a 10 hour production test. The gravity of the oil produced in this test was higher than the 8 degree API found at the nearby Zaca field. Subsequent tests at different flow rates and pressures have yielded an average oil cut of approximately 1%.

The 4% oil cut is consistent with some of the most productive Monterey wells in the Santa Maria Basin. During the initial ten hour production test, the well pumped at daily rates of approximately 1,100 barrels of fluid, including 42 barrels of oil per day. With the ability to increase fluid production from the current down-hole pump to up to 3,500 barrels per day, the potential exists to increase the amount of oil produced at this level of oil cut.

In addition, the fluid level and pressure remains high in the well bore at 802 PSI. As pumping is increased and the fluid level and pressure fall, the Company believes that additional oil-filled fractures should begin to flow. However, in order to increase fluid production and to reach steady state production on such wells, it is typically necessary to produce the well for several weeks.

Additionally, initial production tests are not necessarily indicative of long-term performance or ultimate recovery.