Background

The American Energy Group, Ltd. (OTC: AEGG) has been principally engaged in the business of acquisition, exploration and development of oil and gas properties since 1995 when its wholly owned subsidiary, Hycarbex-American Energy, Inc., acquired an exploration license for the Jacobabad (2768-4) Block in the Sindh Province of the Middle Indus Basin of Pakistan, approximately 230 miles northeast of the port city of Karachi.

American Energy's assets at that time included both North American and Pakistan development properties. Original exploration efforts on the Jacobabad Block indicated the presence of commercially viable natural gas in the area, but a commercial well was not achieved. In 2001, Hycarbex successfully negotiated the acquisition of a new exploration license on the Yasin (2768-7) Block which contains much of the original acreage comprising the original license.

On June 28, 2002, involuntary bankruptcy proceedings were initiated against American Energy in the Southern District of Texas, which were converted to Chapter 11 debtor-in-possession proceedings in December 2002. In the first quarter of 2003, American Energy’s primary secured lender obtained the approval of the Bankruptcy Court to foreclose all of the Texas-based oil and gas leases except the leases in Galveston County, Texas. At the time, the status of the Pakistan Yasin exploration license was also in jeopardy despite its high potential, due to the financial and continuous drilling requirements imposed under the terms of the license by the Pakistan Government.
In November 2003, after American Energy management concluded negotiations with several interested prospective purchasers, American Energy reached an agreement with Hydro Tur (Energy) Ltd. to sell to Hydro Tur all of American Energy’s interest in its subsidiary, Hycarbex-American Energy, Inc., with the approval of the Bankruptcy Court. Hydro Tur (Energy) Ltd. was selected as the purchaser due to its strong financial background, its commitment to implement a multiple well development of the Yasin concession and its willingness to assign to American Energy an 18% gross royalty on oil and gas production, which is an extraordinarily high royalty by industry standards.

American Energy emerged from bankruptcy in early 2004 with new management, virtually debt-free, and with its outstanding common stock reduced to almost one third of its pre-bankruptcy level. The restructured, leaner American Energy emerged from bankruptcy focused upon acquiring and developing new oil and gas-based projects through prudent management of its two (2) assets, an 18% royalty in the Yasin Block (2768-7) license in Pakistan and the Galveston County, Texas leases, both of which assets management believes will generate the necessary resources to exploit these opportunities.

Pakistan Opportunities

The Pakistan Yasin (2768-7) Block concession represents what the Company believes through several years of geologic and geophysical data studies to be a remarkable area, potentially containing several trillion cubic feet of marketable natural gas yet to be discovered.

Early Drilling Efforts on Concession Acreage:

In the 1950's Burmah Oil Company (predecessor to PPL, Ltd.) drilled two wells on concession acreage to just over 5,800 feet, each of which indicated gas and oil. In the 1970's Amoco Oil drilled a 15,000 feet well which also demonstrated gas and oil. The seismic database acquired in 1995 with the original Jacobabad concession was extremely limited, consisting of only a few old Amoco vibroseis lines. In 1997, Hycarbex shot 262 km of new 2-D date and acquired the P9222 2-D line running north-south, just outside the eastern boundary of the concession and this data was processed. The remaining Amoco vibroseis data and all the remaining ODGC 2-D lines (approximately 600 km) were not processed when acquired. American Energy originally drilled four exploratory wells on the Jacobabad concession. The first well was drilled in 1998 to a depth sufficient to test the primary producing zone in the region. This well found natural gas in several zones and a drill stem test confirmed the presence of high-quality gas before operations were suspended. At the time, equipment available on the well site was inadequate to deal with downhole problems. The Company believes that this well could be redrilled. The second well, drilled in a different portion of the concession, encountered mechanical problems and did not reach sufficient depth to test any targeted formations. The third well encountered large quantities of hydrogen sulfide and carbon dioxide, which appeared to be confined to a relatively small area around the wellbore. In July 2000, approximately 40km of new seismic was shot and processed, but the acreage comprising the concession was so vast that early drillsite selection still involved some degree of speculation. In 2001, American Energy drilled its fourth well which likewise indicated natural gas in the Sui Main and upper Chiltan formations, but did not result in a commercial completion.

Additional Indicia of Yasin Concession Potential:

In addition to the gas shows which occurred during the drilling of the original seven wells, including the American Energy Jacobabad wells, and the critical data generated by investment of over thirty million dollars in drilling and technical analysis, American Energy’s management has obtained other credible indicia of substantial gas reserves within the current Yasin Block acreage. These sources have indicated at least fifteen (15) areas to date which are recommended for drilling, and include the following:

Martin Petroleum and Associates, a recognized engineering firm specializing in technical and economic evaluation of oil and gas properties with considerable experience in Pakistan evaluations, conducted an evaluation of the Jacobabad concession in 1998. Martin Engineering assigned gross Probable (unrisked) gas reserves of 5.2 TCF (trillion cubic feet) and an additional 2.2 TCF of Possible reserves to the structure encompassing a portion of the concession. These figures were estimates based upon geologic analysis and ultimately must be verified by further scientific data and drilling.

Neighboring wells drilled by other companies near concession acreage have become successful producers of gas, providing further evidence that commercial discoveries can be drilled on the Yasin concession itself. Block 22 directly adjacent and east of the Yasin Block has had three commercial discoveries: the Hamza X-1 well in 1998 tested gas at 8.0 MMCFD (million cubic feet per day), the Hasan X-1 tested 13.4 MMSCFD from a separate structure, and the Sadiq X-1 tested 12.4 MMSCFD. Finally, the Hassan #1 well to the southeast was completed as a producing gas well in the Sui Main Limestone formation in December, 2000. During calendar 2004, the Hassan No. 1 well produced an average of 14 million cubic feet of gas per day. The operator of the Hasssan No. 1 Well recently commenced the Hassan No. 2 Well less than one (1) mile from the Hassan No. 1 Well in January of 2005.

Large gas reserves exist in other producing fields surrounding the Yasin concession. The Sui field, approximately 40 miles to the northeast contains 9.6 TCF of recoverable gas. The Uch field just over 10 miles from the concession contains 3.3 TCF; and the Mari field, approximately 75 miles to the east is estimated to contain reserves of 6.3 TCF.

Finally, the efforts by Hycarbex to substantially expand the seismic database in 2004 resulted in approximately 135 km (85 miles) of additional seismic being shot on the concession. This seismic raw data has been processed with the old seismic data using current techniques and has been analyzed by highly experienced geophysicists. The results have not only verified geologic structures with high likelihood of gas productivity, but have also delineated drillsite locations which are likely to enhance drilling success.

Other Factors Favoring Pakistan Exploration Opportunities

Exploration and production opportunities in Pakistan are particularly attractive for the following reasons:

Success rates for exploration wells in areas surrounding the Yasin concession, and Pakistan in general, are significantly higher than industry averages.

Domestic demand for natural gas greatly exceeds supply in Pakistan, and is expected to continue to do so for the foreseeable future. Energy Information Administration (EIA) reports, and Pakistani sources confirm, that future commercial discoveries will have a ready market at favorable pricing.

The Yasin concession has ready access to pipeline infrastructure. The 12-inch Quetta gas line runs NW-SE through the concession and connects to the 20-inch Sui-Karachi gas line. The Karachi-Muzaffargarh oil line also runs through the southern portion of the concession. The capital costs and time delays inherent in connecting to gas pipelines will not affect the Yasin concession.

The Government of Pakistan has proven to be an invaluable ally on the war against global terrorism. U.S. President George W. Bush lauded President Musharraf’s leadership in these difficult times in his speech on June 24, 2003, during Pakistan President Musharraf’s visit to Camp David.

The current administration is committed to furthering foreign investment in Pakistan. The United States-Pakistan Trade and Investment Framework Agreement signed in June, 2003 has been highly successful, resulting in Pakistan imports from the United States totaling $843 Million for 2003, and Pakistan exports to the United States totaling $2.5 Billion for 2003. The Joint Council began work on a Bilateral Investment Treaty in September, 2004.

Natural resources often provide a developing country with a significant portion of their hard currency reserves and therefore contribute to economic development in a material fashion. The new administration has demonstrated a strong commitment to economic development and is working cooperatively with the oil and gas industry to further this agenda. These cooperative efforts will accelerate foreign investment in Pakistan, accelerate the development of additional oil and gas reserves, and reduce dependency upon imported sources of energy.

In addition to the above factors, to date, the Company’s Pakistan relationships have been extremely favorable which may provide other in-country investment opportunities for the Company.

DOMESTIC U.S. OPPORTUNITIES

In 1997, American Energy purchased the interests of Luck Petroleum Corporation from Luck’s bankruptcy trustee in two oil and gas leases in Galveston County, Texas. The leases are situated in an area which is productive in multiple zones or horizons and the leases themselves have produced commercial quantities of oil and gas from both shallow and mid-range zones. In 1986, Luck Petroleum Corporation assigned these mid-range zones to Smith Energy, reserving for itself an “after-payout” 15% back-in working interest. Luck Petroleum Corporation also limited the depths assigned to Smith Energy, thereby resulting in depths generally greater than 10,000 feet being reserved to Luck Petroleum Corporation. The Company succeeded to the interests of Luck Petroleum Corporation as a result of the 1997 purchase from the bankruptcy trustee. With regard to the mid-range zones, once “payout” has occurred, as defined in the 1986 conveyance by Luck Petroleum Corporation to Smith Energy, the Company is entitled to receive 15% of the monthly working interest production from the existing Smith Energy wells on the leases. The Company has initiated a lawsuit against Smith Energy to establish these rights based upon the belief that payout has occurred.

The Smith Energy lawsuit does not pertain to the deep zones under the leases which were acquired from Luck Petroleum Corporation. Based upon Company research, these zones have development potential. Company management is exploring the various opportunities to realize value from these deep rights, including potential sale. The best course for these assets has not been determined, but the leases are held in force by third party production and, therefore, do not require development of these rights by a certain date. Management believes that both research and future negotiations will proceed toward a development path which best suits Company goals and cash flow positions.

FORWARD PLANS

The focus of American Energy’s present activities is the successful management of its Pakistan royalty on the Yasin exploration license, successful development or sale of its Galveston County, Texas assets, the search for other international and domestic acquisition and development projects which provide the opportunity to add to share value and net income.

With regard to Pakistan in-country opportunities, experts view Pakistan as a country with realistic potential for the discovery of large oil and gas reserves. Easily perceived as containing far less oil and gas potential than the Arabian Peninsula countries, Pakistan has never received the extensive exploration efforts required to fully explore the vast and numerous structures warranting such attention. However, in recent years, a significant number of well known international oil and gas operators have moved into Pakistan, and their efforts have met with a high degree of success. A number of new commercial discoveries have been announced in recent years. Boosting investors’ confidence is geological data which suggest nearly identical structures with those of the Arabian Peninsula. Of the comparatively few exploration undertakings an above-average number have succeeded and support the position that Pakistan truly does represent a very opportune country in which to focus exploration efforts.

As part of our plans for growth, and concurrent with third party Yasin Block exploration activities, Management will be investigating other upstream oil and gas opportunities that fit the Company’s investment criteria emphasizing enhancement to share value and increase of net income. At this time, during a period of high energy prices, such highly prospective opportunities are more likely to be found in remote international locations. These often underdeveloped countries dictate a heightened awareness of responsibility with respect to indigenous peoples and cultures.

American Energy is committed to not only meet, but to exceed where practical, industry norms in the area of contribution to the welfare of those peoples living in vicinity of Company operations. Management is of the strong opinion that maintaining the highest level of corporate citizenship is not detrimental to profitability. Such efforts often generate additional opportunities that would not otherwise have been made available, and ultimately improve the fiscal performance of the Company. Management believes that a free market guided by responsible corporate conduct can contribute to alleviating dangerous pressures from religious or ethnic conflict. Working in an emerging market situation thus constitutes not only risk, but offers a unique opportunity for participation in the development of countries representing the emerging markets. By highlighting the unique aspects of emerging market situations, American Energy hopes to attract a group of elite investors, who not only expect above average returns on their investment, but demand the highest possible standard of corporate responsibility.