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Underground Energy, Inc.

March 2010

News for ASPHALTEA neighbors

Underground Energy, Inc., on behalf of the land owner, has made application to Santa Barbara County for a special land use permit to conduct exploration drilling and production of heavy oil on a lease we call Asphaltea in central Santa Barbara County. As a nearby resident to our proposed oil exploration and production project, we would like to inform you of the proposed project, its location, schedule, and our efforts to address any impacts the project may have on our neighbors. We request an opportunity to meet with you, listen to your concerns about the project, and answer any questions.

What’s Happening:

Underground Energy, an energy company based on the central coast of California, is working to help meet America’s energy needs through the exploitation of stranded oil reserves with innovative technologies and environmentally sensitive projects. The company and our consultants form a unique team of professionals with engineering and management experience in oil and gas exploration and production, land and resource conservation, and environmental compliance.

Underground Energy is committed to be an industry leader applying advanced technologies in the development of environmentally responsible projects, raising the standard of practice for oil exploration and development. Our business and projects will invest in our local communities and contribute to their economic vitality through quality jobs, utilization of local contractors and services and payment of taxes.

Who We Are:

The company and our employees also have a history of giving back to the local community through various charitable and non-profit endeavors.

The Underground Energy Corporate Staff

Description of Proposed Project:

Project Location:

The Asphaltea lease is located in the hills, 9 miles north of Los Olivos and 9 miles northeast of Los Alamos, CA in Santa Barbara County in a remote location that cannot be viewed from any roads or buildings.

The entrance to the site is off of Foxen Canyon Road about 300 feet northwest of the intersection of Foxen Canyon Road and Alisos Canyon Road. The site is located approximately 4 miles from this entrance, accessed by an existing access road.

Underground Energy leased the oil and gas mineral rights because of the previous oil production history, identification of potential oil-bearing geologic features, proximity to existing infrastructure, and the opportunity to minimize impact to the environment by utilizing the existing access roads and drill pads on the property.

Underground Energy proposes a two phase oil exploration and production project on an existing pre-disturbed site that was previously explored and drilled by Union Oil Company in 1946. The Asphaltea lease property was the site of oil production by the Alcatraz Mining Company in the late 1800’s and by Union Oil in the late 1950’s. It is identified as an abandoned Asphaltum Mine on USGS topographic maps.

The project is divided into two phases, exploration (Phase 1) and production (Phase 2). The objective of Phase 1 is to test the commercial viability of heavy oil production from the Monterey formation using up to four conventionally drilled oil wells. If Phase 1 has favorable results, Underground Energy intends to proceed with Phase 2, involving directional drilling a maximum of 26 oil wells, a water injection well, and construction of associated

Surface depiction of Asphaltea compact wells and facilities

oil production facilities, all on a compact site. The Phase 2 consolidated well production facility will only be implemented if commercial viability of oil recovery is confirmed in Phase 1.

The primary access to the proposed project entrance road from US 101 is Alisos Canyon Road to Foxen Canyon Road. Alternative access to the project entrance from the north or south is Foxen Canyon Road.

Traffic to the project site will vary during the project’s duration depending on the drilling, construction and production activity. In the beginning production phases, oil will be trucked from the site to facilities in Ventura or San Luis Obispo counties. When the quantity of oil production reaches an appropriate economic milestone, Underground Energy intends to construct a pipeline connection to the nearby All American Oil Pipeline, which will eliminate the need for trucking oil to market. We have forecasted the oil production to increase gradually beginning at one oil truck every third day up to a maximum after several years where 8 or 9 oil trucks per day could be utilized until the pipeline is constructed. In addition to the oil trucks, pickups and service trucks will access the site on a daily basis depending on drilling and construction activity. We expect these vehicle trips will not exceed 10 vehicles per day during the drilling and development phases and will drop to 2 or 3 vehicle trips per day for the duration of production operations.

The estimated vehicle trips and related emissions have been analyzed and are under the allowable thresholds regulated by the Air Pollution Control District.

The 4 mile access road to the project site from Foxen Canyon Road will be improved to provide safe access to the site. The access road improvement plan was designed to minimize environmental impact to trees, streams and vegetation and has been approved by the Santa Barbara County Fire Department.

Access Roads and Transportation

Project Schedule:

Contact Info:

Please feel free to contact us with any questions or concerns you may have about our proposed project or the permit application with Santa Barbara County. We invite you to visit our website and seek your input to our project planning process. Please contact Kim Wolfe, our Land and Regulatory Affairs Manager with any questions or concerns:

Kim Wolfe, Land and Regulatory Affairs Manager

805-455-1333 cell

805-202-2060x21 office

Kim.Wolfe@ugenergy.com

Website: www.ugenergy.com

The planning for the oil exploration and development project started in the spring of 2008. In the past two years a combined team of engineers, geologists, certified biologists, wildlife specialists, historical and archeological specialists, air quality specialists, and other professionals have been working with us to design an optimum technical project that includes consideration of visual disturbance, noise, agricultural impacts, air quality, biological resources, historic and cultural resources, energy use, fire protection, transportation and water resources. We submitted our application to Santa Barbara County Planning and Development for an Oil and Gas Exploration and Development Plan in September, 2009. The permit application and the County’s Initial Study of the environmental impacts under the California Environmental Quality Act (CEQA) will be presented at a public hearing with the Planning and Development Commission in the near future.

The development schedule for the exploration and testing phase (Phase 1) is dependent upon final approval of the permit application by the County.

Phase 2 development work will commence after Phase 1 only if the exploration phase confirms an economically viable project.