Arsenal Energy Inc. (AEI-TSX)
Interview with:
Michael S. Vandale, Chairman, President and CEO
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and Information on their
development and sale of oil and natural gas in specific international marketplaces with holdings in Canada, the United States and Egypt.

 

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Although Arsenal Energy has experienced rapid growth in North America, they could have exponential growth in Egypt as they begin drilling in 2006

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Energy
Oil & Gas
(AEI-TSX)

Arsenal Energy Inc.

Suite 1800, 505 3rd Street, SW
Calgary
AB Canada T2P 3E6

Phone: 403-262-4854


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Michael S. Vandale
Chairman, President and CEO

Interview conducted by:
Lynn Fosse, Senior Editor
CEOCFOinterviews.com
October 20 2005

BIO:
Michael Vandale – President & CEO - Chairman of Directors

A veteran of the oil industry, Michael Vandale has had a long list of successful oil and gas ventures. He was President of Sundance Resources Inc. listed on the TSX Venture Exchange and was a director of its successor company, True Energy Inc. listed on the Toronto Stock Exchange until the fall of 2002 when he started Arsenal Energy Inc. From 1997 to 1999, Mr. Vandale was a director and major shareholder of Mutual Fund Direct Inc. until it was sold to Altamira Investment Services Inc. From 1992 to 1996, Mr. Vandale was President of Midwestern Energy Company Limited. Mr. Vandale has more than 20 years experience in upstream oil and gas exploration and midstream operations in Canada, the United States and South America.

Company Profile:
ARSENAL ENERGY INC.
Arsenal Energy Inc. is an aggressive junior energy company focused on the economic exploration, acquisition, development and sale of oil and natural gas in specific international marketplaces.

Arsenal’s senior management team and board of directors are steadfast in their resolve not to “follow the pack”, and thereby continue to generate true value for their shareholders. Their philosophy combines a base level of long term oil and gas reserves matched with significant, world-class exploration impact prospects in order to meet rapid growth objectives.

Arsenal Energy Inc. currently has holdings in Canada, the United States and Egypt with its corporate headquarters in Calgary, Alberta, Canada.

CEOCFO: Mr. Vandale, please tell us what your vision was when you started in 2002 and where you are today?
Mr. Vandale: “I think that we have grown four-fold since last year.  Currently Canada is a little different than the U.S., with the emergence of energy trusts. It is a convenient way for a defined start-up company to evolve or eventually sell in a four-year period through entrance and exit strategy. I think that the oil business is really in a unique situation in Canada, where people actually start businesses and sell them off in four years. During that period, we have grown into the United States and in particular North Dakota. We have a good production base there. In Canada, we’ve picked-up another company called Quadra Resources Corporation (CNQ-QDRA.U) and it has shown a tremendous amount of up side potential in the 7.5 million acre concession we hold with TransGlobe Energy Corporation of Calgary, which is listed on the AMEX, symbol TGA and Toronto exchange, symbol TGL. I think that we are going to a far greater horizon in the near future.”

CEOCFO: So you decided not to follow the pack?
Mr. Vandale: “That’s really what we did. In these incidences with junior oil companies in Canada, you see a push to build domestic production with the sole purpose of selling out or converting to an energy trust. When we realized that we had a really good and solid production base that we could grow domestically, in the Canada and the U.S., we were ready to acquire a high impact world-class exploration prospect with the Egypt concession. I think that we are quite a bit different than what is available to the investor for small cap oils in the market.”

CEOCFO: Do investors realize the difference?
Mr. Vandale: “We are just starting to get the story out now. We’ve built slowly and now all of a sudden I think that we’ve really got our momentum. People are starting to respond to us now. We are listed on the Toronto exchange under the ticker AEI and we have a lot of information on our website, which is www.arsenalenergy.com.”

CEOCFO: Tell us about Northern Alberta?
Mr. Vandale:Northern Alberta on the Peace River Arch is growth area for us. Light oil is hard to target, but the quality there is pretty close to WTI (West Texas Intermediate). We brought it in at a swab rate of about 390 barrels a day, the second has just been completed, and we brought that in at about a rate of 300 barrels a day. We are doing well with the first two and a third one is being drilled with a fourth one ready to go by the end of October."

CEOCFO: How does that mesh with what you are doing in Egypt?
Mr. Vandale: “I guess that it really doesn’t. We’ve decided to have three core areas, North Dakota in the U.S., Canada through Saskatchewan and Alberta and then Egypt is a stand alone by itself. We’ve picked up a concession, which we call the Nuqra Concession that is on the east side of the Nile river in the Komombo Rift Basin. Rift Basins traditionally hold between a billion to ten billion barrels in reserves and this particular basin is widely unexplored. Only five holes were drilled previously by Repsol into this tremendously large area. The basin is about twice the size of Switzerland, and all of the wells had oil or oil shows. We have gone ahead with our partner and reprocessed about 4,000 kilometers of seismic and we are currently shooting another thousand kilometers. We have a number of targets already picked, with calculated potential reserves and then in any of these particular areas probably somewhere between 50 to 100 million barrels per target. We’ve got about 8 of those features so far and if people want to see how we picked them and calculated them, they can go to our website.”

CEOCFO: Why was that not looked at previously?
Mr. Vandale: “There are a number of reasons. Repsol, the Spanish company was in there before us in 1998 and there were some problems; number one being the price of oil back then, which was around $14.00. They also ran into a number of problems with their statics on the geophysics. We’ve resolved those and put a whole new picture together and I think the 5 wells that were drilled by Repsol, all of which had oil staining or oil in them combined with the reprocessed seismic data, enabled us to put together a much clearer picture of the puzzle. I think further to that, with any large company such as Repsol, there are other areas of interest for them. For one reason or another, be it political or otherwise, they decided to pull out, which was lucky for us I might add.”

CEOCFO: Please tell us about the financial picture at Arsenal Energy today.
Mr. Vandale: “We really started out with the directors essentially putting a little bit of the money into the company and we ended up purchasing deals using stock of the company as pretty much a down payment. The people that we bought properties from believed in us and took stock. We would take the cash flow and use it to drill further locations and enhance the production in the properties. At this point-in-time we really haven’t done a tremendous amount; we are just in the final stages of closing a $9 million financing at $1.60 right now in Canada. We just had an evaluation done this past June and a lot has gone on since then. We’ve had an evaluation at a 10% net present value of about $95 million Canadian for the company. We’ve certainly exceeded that now through our drilling in north central Alberta, but in terms of money put in against what we’ve been able to accomplish, it’s been a tremendous rate of return.”

CEOCFO: Tell us about the drilling; how do you accomplish being market driven yet market sensitive?
Mr. Vandale: “When we started the company, we wanted to find the cheapest multiples that we could possibly find for buying the production with outside potential for drilling. Given that, we looked out on the eastern side of the Williston basin in North Dakota for heavier oil than we had in Saskatchewan. The goal was to get some production base at really cheap multiples and start drilling from there so we could enhance what we would term our ‘recycle ratio’, where we could add reserves very cheaply. In Northern Alberta, we are going after light oil again in order to balance off our heavy oil production. The key in Northern Alberta is that we get longer term reserves. As we do that, we are providing stability for the shareholder while creating huge potential through exploration overseas. That is where the investor will see the very positive rate of return. It’s been a deliberate and careful strategy.”

CEOCFO: Do you need to add to your management team as you change your focus?
Mr. Vandale: “Yes. I think that any company that is growing needs to take on more people as you go. Fortunately for us in Egypt right now we are partners with TransGlobe Energy Corporation and their head of exploration is a person by the name of Ed Bell. He is highly respected and was instrumental in finding a tremendous amount of oil in Yemin for Nexen, to the tune of about of a billion barrels. Likely, we have been able to ride their coat tails at this time, but further to that as a company ourselves we are planning to acquire at least two more senior personnel as we are growing rapidly.”

CEOCFO: What’s ahead and what are the challenges?
Mr. Vandale: “This year we will go past 2,000 barrels per day in production with what we have in Canada and the U.S.  We have approximately 100 drilling locations, so we have enough capacity for the next couple of years in order to increase reserves. Given that, we expect to reach 4,000 barrels per day by the end of 2006. This does not include what we are doing in Egypt. We think we’ll be able to have another leap again because we will have cash flow in hand. Egypt is going to be the big one for us, because we are drilling three wells there with our partners in 2006. That will be the real key. Although we’ve experienced rapid growth domestically, it could be exponential growth with Egypt.”

CEOCFO: Is working with partners part of your overall strategy?
Mr. Vandale: “We don’t mind partners, but we like to operate wherever possible. In Canada and the United States, we operate 95% of our production and we try to take very large percentages, 50% or greater has been the route that we have chosen and we will continue on that basis. I think internationally, depending on the situation, we will take partners, but anytime we can go it alone we will.”

CEOCFO: What are your thoughts on the cyclicality of the industry?
Mr. Vandale: “It’s funny, I was at my cottage in northern Saskatchewan and lighting a fire using newspapers to start it, I came across one from May of 1998, talking about oil being $14.15 and that we’ve got more oil than we’ll ever need. Seven short years later we are in a bit of a crisis now with the rise in demand, so that we are pretty much running neck-and-neck with supply and demand. I don’t see us falling off a lot. We’ve done our engineering and our reserves are evaluated at $52.00 U.S. per barrel, which is about $10.00 cheaper from where you see it right now. The evaluation, which I mentioned earlier of $95 million at a 10% net present value was calculated on $52.00 U.S. oil. I guess the biggest question is what will happen in Asia, because that seems to be the area that’s driving the increase in demand. There are other geopolitical considerations such as concern over security, but summing it up, those are the two key things and I don’t think we’ll see oil fall below $52.00 per barrel.”

CEOCFO: Please, sum up for potential investors; why should they be interested and what should they know about Arsenal Energy that doesn’t jump off the page when one first looks?
Mr. Vandale: “The easiest way to put it is that a few days ago we had an article written about us titled, ‘Safety + Upside = Arsenal’ and I couldn’t put it any better. We have great domestic production and it is growing; we’ve been a bit on the fast track now that we’ve got our momentum. We also have a big upside potential in the Komombo Rift Basin in Egypt, where there will be drilling next year. We’ve likened this play to the Gulf of the Suez, which has about a series of 50 to 100 million barrel pools, within about 9.6 billion barrels recoverable. Drilling is going to tell the whole tale, but that’s what the investor has to look for; constant steady growth plus a lot of upside.”


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“This year we will go past 2,000 barrels per day in production with what we have in Canada and the U.S.  We have approximately 100 drilling locations, so we have enough capacity for the next couple of years in order to increase reserves. Given that, we expect to reach 4,000 barrels per day by the end of 2006. This does not include what we are doing in Egypt. We think we’ll be able to have another leap again because we will have cash flow in hand. Egypt is going to be the big one for us, because we are drilling three wells there with our partners in 2006. That will be the real key. Although we’ve experienced rapid growth domestically, it could be exponential growth with Egypt.” - Michael S. Vandale

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