ZOE.L Regulatory News (ZOE)

Highlands Natural Resources plc ('Highlands' or 'the Company')

Helios Two: Receipt of Competent Persons Report

Highlands Natural Resources, the London-listed natural resources company, is pleased to announce that following the engagement of Knowledge Reservoir LLC dba RPS ('RPS') to review its Helios Two helium and natural gas project in Montana, USA from both a geological and economic perspective, the results of that Competent Persons Report ('CPR') have now been received.

A copy of the CPR will be available on the Company's website shortly: www.highlandsnr.com and the Executive Summary from the CPR is set out below.

Executive Summary

On 19th May 2016, Knowledge Reservoir LLC dba RPS ('RPS') was engaged by Highlands Natural Resources Plc ('Highlands' or 'the Company') to provide a Competent Person's Report (the 'Report') on the resource potential of low saturation gas found in the Muddy Formation in southeast Montana, U.S.A (the Muddy Prospect).

The Muddy Prospect is located within the Northeastern part of the Powder Basin of southeast Montana and Wyoming which has been a prolific producer of hydrocarbons. Conventional exploration in the area has targeted and been developed in fields that exhibit normally expected hydrocarbon saturations with typical conventional flow characteristics. However, many wells were drilled into equivalent reservoirs across the area through time and were reported as finding low gas saturation in brines (high water saturation) which would bubble and/or ignite at the surface but were not thought to be commercially productive, and certainly not in comparison to the high gas saturation accumulations that were being discovered at the time. Consequently, the low gas saturation reservoirs were ignored and classified as water-wet.

However, two further developments have occurred since those times:

· The development of Helium gas in the area which now commands very high prices and is forecast to be increasingly short-supply;

· The advent of commercial "co-production" in other similar reservoirs which provide good analogues to support the belief that the high water saturation reservoirs in the Cretaceous of southeast Montana (and elsewhere in the local) could be a by-passed play.

The combination of these two factors in the Muddy Prospect area means that, if the concept can be proved via a pilot test program, a whole new economic play may open up.

The Muddy Formation is of Lower Cretaceous Aptian age and is time equivalent to the Viking/Bow Island formations of Alberta, Newcastle Formation of Manitoba and the J sandstones of Colorado. The sands were deposited in valleys cut during periods of low-stand into the underlying basinal Skull Creek shales and filled with estuarine / tidal delta sediments during the subsequent transgression. A key feature of the Muddy formation is a high clay and fine silt content contained within otherwise reasonably porous and permeable sands (hence the name). These clays (primarily Kaolinite and Illite) are thought to act as a resistivity suppressant resulting in low and unrepresentative water saturations when calculated using the conventional "Archie" type method. The true initial gas saturations are still very low when compared with less clay rich and conventional reservoirs but the production technique of "co-production" has now been documented in several analogue cases from Oklahoma, Japan and elsewhere, and, in one particular well (Jorgenson #1-R drilled into and tested the Virgelle Member of the Milk River Formation in Hill County, Montana), in close proximity to the area in 2002. Co-production is a production method whereby a well is produced by lifting (pumping) produced water with low gas saturations and as the reservoir pressure drops gas becomes more mobile and gradually increases in ratio (gas to water ratio), in some cases to the point where gas flows at good to excellent rates. This co-production methodology requires the production, handling and disposal of significant quantities of water (normally via re-injection) and the balance between disposal costs and revenue realization from a slow-buildup of the gas production profile may be uneconomic. However, low concentrations of Helium in the produced gas may well deliver significant net-back economics since the Helium price is currently more than $100/Mcf and predicted to increase as stored volumes are drawn down and demand increases. The Muddy sands have been shown to contain 0.36% Helium, from analysis of produced gas from a drill stem test of a wildcat well drilled by Pan American Petroleum Corporation in Section 23, Twp 5N Range 52E, Custer County, Montana in 1969.

This has the potential to change the economics even at low concentrations but it should be noted that the methane is not valueless if sufficient volume and hence revenue can be achieved to cover the water disposal costs.

RPS has reviewed data supplied by the Company and accessed the production database for all gas wells in Southeastern Alberta and Southwestern Saskatchewan, using Accumap, to look for other local analogues. RPS has found good evidence of Helium production and has a logical and coherent explanation for the Helium concentrations found as well as support for the fact that the sample in the area could well be representative over a wider area and maybe even pessimistic. Based on RPS' independent analyses and drawing on suitable analogue data, RPS has developed a model of the in-place volumes expected per acre, the Resource potential for the three Township area and a type well based on production characteristics from two key wells (Howard #17-1 and Jorgenson #1-R). RPS has estimated the Geologic Chance of Success for the prospect at 80%, with the primary identified risk being the risk of being able to mobilize and produce gas at commercial rates from the highly water saturated gas reservoirs.

A conceptual development plan for the full three Township area has been modelled for economics in excel and supplied to RPS. RPS has reviewed this model and updated the well production forecast based on an RPS derived type well production, and for capital and operating costs based on RPS estimates. This gives a simplistic but reasonable view of the potential Resource volumes of Methane and Helium and also an indicative success case value based on the Company's assumptions which have been reviewed and do not seem unreasonable and will be further demonstrated by the pilot program in terms of cost control etc. The table below summarizes our findings of gross and net attributable Prospective Resources for the three Township area of the Muddy Prospect and the following Report gives more detail on the work and assumptions behind the results.

Table 1.1 - Prospective Resources Summary for Muddy Prospect

Source: - RPS

Notes: "Gross" are the 100% Resources that are attributable to the licence whilst "Net Attributable" are those estimated to be attributable to Highland's 83.33% WI after royalties.

"Risk Factor" means the estimated chance or probability of discovering gas in sufficient quantity for it to be tested to the surface (also referred to as GPoS). It should be noted that a pilot test program to confirm that co-production is possible and the development of a 100 Section area is necessary to achieve the volume range quoted. The Chance of Development is specifically not included in the Risk Factor shown.

The unrisked P50 indicative success case valuation (NPV10), before income tax, calculated for the 100 Section development based on capital cost and operating cost estimates built up by RPS is US$341MM. This value does not represent any form of market value for the asset and requires several critical events to occur to be achieved including discovery, appraisal, capital expenditure and the successful negotiation of the third-party midstream service contract described in Section 7.2.2 of the Report.

This indicative success case valuation does not include specific economics for the Helium as it is not possible to estimate Capex and Opex requirements until the Helium percentage content has been confirmed as the scale of the processing and methodology for extraction will be critically dependent on this ratio. As noted above, however, Helium is in increasing demand and could be a significant upside to the existing success case based on the methane project alone.

**ENDS**

For further information, please visit www.highlandsnr.com, or contact: