Natural gas is used in the Netherlands for cooking, for heating houses, in industry and for power generation. Approximately 50% of Dutch daily energy needs are provided by natural gas. Natural gas is by far the cleanest fossil fuel.

The Groningen field is one of the largest in the world and has become a strategic deposit in managing the future energy needs of the country. When the Groningen field was discovered in 1959 there were high expectations for expansion of nuclear energy. It was expected that by the year 2000 nuclear energy would be cheaper than fossil fuels. The policy in the early 1960s was therefore to produce the Groningen field quickly and deplete its resources over 30 to 35 years, believing that natural gas would not be needed with nuclear energy development.

Public resistance to nuclear development and the oil crisis in the seventies changed all that. The Dutch government created a policy in 1974 to stimulate the development of smaller fields onshore and offshore. The small fields policy is directed at preserving the gas reserves of the Groningen field and reducing Dutch dependence on foreign energy supplies.

Vermilion Oil & Gas Netherlands BV ("VOGN") is a subsidiary of the Canadian company Vermilion Energy Trust ("Vermilion"). Vermilion produces oil and gas in Canada, Australia, in France and, since May 2004, in the Netherlands. VOGN’s head office is located in the province of Fryslân (Friesland) in the town of Harlingen.

a. Production

Production licenses for the extraction of natural gas, previously known as concessions, were acquired by Vermilion in 2004. These production license areas are dispersed over the North of The Netherlands in the provinces, Friesland and Noord-Holland. Vermilion produces gas in the province of Noord-Holland from the production license area Slootdorp, in Friesland from the Leeuwarden, Oosterend, Gorredijk and Steenwijk concessions, and from the production license Zuidwal in the Dutch Waddenzee.

Vermilion has been actively developing it’s assets in the Netherlands since 2004. Development funds have been spent to:

b. Exploration

Vermilion is now ready to assess the hidden value of these concessions. Several potential natural gas production prospects were identified when the concessions were acquired in 2004. Our plan is explore those opportunities in the coming years. The prospects Vermilion intends to drill and develop fall into the Dutch national small fields category.

These exploration prospects were identified by means of seismic surveys. Seismic analysis involves the use of sound waves projected into the ground and reflected from the layers of rock back to the surface. Seismic surveys locate possible sources of natural gas. An exploratory drilling operation is required to prove the presence of natural gas and to determine if it is economic to produce.

The first step is to find a suitable location for drilling operations. This location should be as close as possible to the expected subsurface target. If additional wells are needed later to fully develop the resource, the location should allow for additional drilling to minimize both cost and the impact to the surroundings. Proper planning should allow for small scale or even temporary expansions to the existing location later, if required.

Vermilion is planning to undertake four to six exploratory drilling operations the coming year.

c. Drilling

Natural gas is present at depths of some 1 to 4 km. A drilling rig (vertical drilling construction) is used to facilitate drilling at these depths. The first step in a drilling operation is the construction of the drilling location. These locations are normally fenced and partially paved to protect the public and to prevent leaks into the soil. Great attention is given to the collection, separation and transportation of substances used in the drilling operations. Additional measures are taken to avoid odor-disturbance outside the drilling location.

Building a drilling location requires the movement of material and equipment. In each instance a traffic plan is prepared and approved with local authorities to ensure safety. The traffic plan may include temporary road adjustments, restricted trucking hours, and special speed limits for construction vehicles. These measures also help to control traffic noise.

A drilling rig is around 30 meters high and will be visible during drilling operations. Drilling takes place over 24 hour operations until the target formation is reached. That may take from one to three months to complete. For safety-reasons artificial lighting is obligatory. Wherever possible, disturbance by lighting will be avoided.

If gas natural gas is found, a test has to be conducted to determine the volume of gas and its properties. This requires a short period of flow and flaring of the gas. Testing activities may last several days. Vermilion will plan the testing for periods when the impact on the surroundings can be minimized.

The drilling operation is a temporary activity. After the well has been drilled the drilling rig is removed. From that moment the well is equipped at surface with a series of valves. This stack of valves (commonly known as a Christmas tree) is approximately two meters high.

If no economical recoverable gas is found and no other use for the well is identified, the location is dismantled and restored to its original state. If economic recoverable gas is present, the site will be converted into a production location.

After the removal of the drilling rig a production installation is built which normally contains equipment to separate and store small amounts of liquid products and meters to quantify the amount of gas produced before it is delivered into a pipeline. The produced gas is then transported by an underground gas transportation pipeline system to VOGN’s own gas treatment facilities in Garijp or Harlingen. The gas is conditioned for sale at this facility and then delivered to the operator of the national gas distribution system, Gasunie. Gasunie then delivers the gas into the Dutch natural gas grid where it is finally delivered to customers.

A producing natural gas field lasts 10 to 30 years. During the production phase more wells might be needed, requiring additional drilling operations. Currently Vermilion has 40 gas production locations in the provinces within its production license areas. The number of gas production wells per location varies between 1 and 3. In total, some 60 wells are being managed by Vermilion.

If the drilling is un-successful, or production has come to an end, the location is dismantled and restored in cooperation with the legal owner. Nothing is left behind.

a. Protection of people and the environment

Protection of people and the environment is of great importance to Vermilion. Our concern is not only for our employees, but also for our neighbors and the public in general. All of our production activities are executed in a safe and environmentally friendly manner. Our facilities and work processes meet the highest technical requirements and safety standards.

The Dutch Ministry of Economic Affairs and its agency, Staatstoezicht op de Mijnen (SodM), approve and monitor our production and development activities.

b. Sustainability

It is Vermilion’s objective to produce natural gas in the Netherlands in a sustainable and responsible manner. This objective is in alignment with the policy of the Dutch Government to maintain the deliverability of natural gas from its reserves during the transition period towards other, more sustainable, energy sources.

The land under the Netherlands is moving. Some ground movement is natural. In the Netherlands there are 2 types of earth movement caused by human activities: subsidence and earth tremors.

Drilling natural gas wells does not cause subsidence; however subsidence may occur during the production phase of natural gas. During production, the pressure in the reservoir is reduced and the formation compacts. The pressure in the small spaces in the rock containing gas diminishes slowly while the weight of the ground above the gas reservoir, the overburden, remains constant. The weight of the overburden causes the reservoir rock to compress. The amount of subsidence is typically small, in the order of a few centimeters, and occurs little by little over a long period of time.

Subsidence can also occur due to other human activities like the reclamation of land from the sea or lowering the ground water level.

The so called winningsplan includes an analysis and forecast of subsidence for every gas field. Actual subsidence is determined by measurement of the ground level over time. Production plans may be modified if indicated by the actual progress of subsidence.

Generally, subsidence due to gas production activities occurs little by little but sometimes it occurs rapidly. This can occur if the rock in the overburden has been sticking on the edges of fractures and suddenly settles into place. In the Netherlands this can lead to light earth tremors. All earthquakes in the Netherlands are registered by the KNMI (Royal Dutch Meteorological Institute). Since the start of gas producing activities in the 1970's no earth tremors have taken place above the gas fields VOGN now owns.

Recent measurements show that the subsidence above Vermilion’s gas field between Harlingen and Franeker occurs at a greater speed than expected. At present it is unclear what causes this higher rate of subsidence. The gas field concerned is unique because it is the only chalk reservoir onshore in Europe. This means that there is less data available on which to make forecasts of the expected subsidence.

Vermilion has chosen to stop the gas production from this field and expects to know more about the subsidence by mid year 2009. An application to resume production will be submitted if it is supported by the new measurements and analyses.

All other formations from which VOGN produces natural gas in the Netherlands consist of sandstone or carbonates. Historically the actual subsidence of these formations has remained within the forecasts made in the winningsplans. The new natural gas exploration prospects are sandstone or carbonate formations.

Preparations for these drilling operations have already begun. The preparatory activities include the different environmental and security studies mentioned in this document as well as informing the various public agencies and the inhabitants near the proposed drilling locations.

If you have any questions we will be glad to answer them. You can reach us by telephone or e-mail, or by post at:

Vermilion Oil & Gas Netherlands B.V.
Manfred Steffens, HSE Coordinator
Zuidwalweg 2, 8861 NV Harlingen
Tel. 0517 493 333
msteffens@vermilionenergy.com

If you have any comments or complaints related to Vermilion’s existing or proposed activities, contact Vermilion Oil & Gas Netherlands B.V at the address or email noted above. We welcome your feedback and will try to address your correspondence in a reasonable time frame.

If individuals believe that there has been damage to land or buildings caused by Vermilion’s operations, they should contact Vermilion by any of the means noted above.