METGASCO LTD — Call Transcript 2005

Nov 15, 2005

Aegis Corporate

Metgasco Limited

ASX	MEL
Bloomberg	MEL AU
Reuters	MEL AX

3rd November 2005

Sector: Enerav

The following is a transcript of an interview conducted by an Aegis analyst. For more on Metgasco Ltd (MEL) see our blue book series at http:www.aer.com.au or go to the Metgasco website at www.metgasco.com.au

Aedis Analyst

If we could begin by looking at Metgasco's strategy. The company has been listed on the ASX for less than two years and it's sole focus at the moment is Coal Seam Gas, You've described Coal Seam Gas in the northern NSW area as having the attraction of being one of the last energy market 'gaps' on the east coast of Australia. Could you expand on this concept of a gap in the energy market and how the Walloon Coal Measures were identified as being a suitable target?

Metgasco MD - David Johnson

Sure. If you get a map of Australia and you look at the east coast and on that map you plot the configuration of pipe lines and electricity transmission lines, you'll find that there's no gas that's supplied via pipe line to a reticulation base anywhere between Newcastle and the Gold Coast. You'll find that that's probably one of the last maior urban areas on the east coast of Australia that is yet to have gas delivered to customers, either industrial or residential, and the reason for that is primarily historical.

You are dealing with State based regulatory regimes and also there has been just a lack of accessible gas in the area. There is electrical power in the area but it comes over quite large haulage distances, either from the top of the Hunter or through the QIC interconnect through Tenterfield. So it's an area that has no gas supply and it has constrained electrical power supply.

We had a study done during the course of our prospectus by ACIL Tasman, who recognised an immediate demand of up to 500 megawatts of power in the area which we operate. Now that's a very, very significant size market and normally you would have found that there would have been a large number of people who would have jumped in to try and fill that market except for the fact that there's been no access to energy in that area up until now.

The real opportunity for us is to fill that market and we think we can do that by tapping gas out of the Walloon Coal Measures.

Aegis Analyst

Looking at the Walloon Coal Measures, how were they identified as being a suitable target for your operations?

Metoasco MD - David Johnson

I identified the Walloon Coal Measures back in 1997 and at that time most of the Walloons were open acreage in the Surat Basin all the way through the Clarence-Moreton Basin. I spent a bit of time, in fact quite a bit of time, looking at the Walloon Coal Measures in that period and that included looking at coal mines up in the Surat Basin such as at Wilkie Creek, understanding the geology of the Walloon Coal Measures as they occurred in the Surat, and as they were known to occur in the Clarence-Moreton Basin. At that stage we settled on the Walloon Coal Measures in the Clarence-Moreton Basin as opposed to the Surat Basin for a number of reasons.

First of all we didn't think that the gas contents of the Walloon Coal Measures in the Surat Basin were high enough and at that stage the Powder River was really only just coming into it's own. Since that time of course, companies like Queensland Gas and Arrow [Energy] have demonstrated that they can produce gas out of the Walloons and Surat.

But the Clarence-Moreton had a special attraction for us for a number of reasons. First of all, there's a change in the rank of the Walloon Coal Measures between the Surat and the Clarence-Moreton probably due to the different tectonic history that the Walloons have been through, and the Clarence-Moreton, as opposed to Surat.

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It would appear that the gas contents in the Walloon Coal Measures in the Clarence-Moreton Basin are probably about five times higher than they are in the Surat Basin. Our generally accepted gas contents in the Clarence-Moreton are about twenty cubic metres per tonne on a dry ash free basis whereas in the Surat Basin they're probably looking at around four to five cubic metres per tonne. And we thought that from a technical perspective, all other things being equal $-$ of course they're not $-$ all other things being equal. that it offered the opportunity for us to lower our unit costs in terms of gas production.

The other significant factor then was that the Clarence-Moreton Basin for a number of reasons, but particularly market based reasons, gave us a sense that there was a better opportunity in that area in terms of being able to find a market for any gas we could produce.

Aegis Analyst

You just mentioned Queensland Gas Company and Arrow Energy previously, two companies also working in the energy sector in that northern New South Wales/ southern Queensland region but targeting different basin locations. Are there any other factors differentiating Metgasco from those two companies?

Metgasco MD - David Johnson

Yes there are. I guess the most significant difference is that if you look at a geological plan of the Walloon Coal Measures in the Clarence-Moreton Basin extending up to the Surat Basin, you'll find that most of the areas north of us from just south of the border through to just across the Queensland border, the Walloons are by and large very shallow probably less than 300 metres. It's our view that it's probably going to be slightly more difficult to produce gas out of the coal from those depths simply because they have either oxidised or they don't have formation pressures to hold sufficient quantities of gas.

The other thing is that outside of the area we're active in, and particularly north of us, you'll find that there are substantial areas of state forest and national park, which inhibit access, and it also begins getting quite rugged, which increases your operating costs. So there are some quite significant barriers to entry between where we are active where other companies are active in the southern part of

Surat and the very northern edge of the Clarence-Moreton in Queensland.

Aegis Analyst

Having just touched upon some of the operational cost factors. Metgasco recently raised \$3 million for additional drilling and working capital and there's another \$1 million to be raised in November. Given the company has been listed for less than two years it is possible that some investors may be concerned that you need over 25% of the capital raisings for general working requirements, such a short time after listing. Could you expand upon the working capital requirements and do you anticipate the need for further capital raisings?

Metgasco MD - David Johnson

I come out of a hard rock background. I spent most of my time in mineral exploration up until when I first became involved in Coal Seam Methane exploration. The rule of thumb in hard rock exploration was that you ought to be spending at least 35% of your budget on drilling. It was metres drilled that really counted in the end.

I think the focus for us is that we've probably spent about, and I'll have to check this figure, probably about 70% of our capital on drilling and associated drilling expenses. So in fact our general working capital as a proportion of total capital is quite small and I quess the imperative for us when we floated was that we'd raise money on the basis that we were going to go to a drilling program, and that's exactly what we've done. We did that knowing that drilling costs and personnel costs, raw materials costs, have all increased pretty dramatically in the last year but nonetheless we've taken that risk and we've spent the money on drilling.

That additional funding that we've raised recently is to undertake further drilling and I would think that for a small company like ours where we are spending about 70% of our spend on drilling and associated drilling costs, that that's a very pointed way of using shareholders capital.

Aegis Analyst

And any anticipated need for further raisings in the next few years?

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NE KANC

Metgasco MD - David Johnson

Look, it all depends on our activities in the next 12 months or so. The money that we've recently raised is to fund another drilling program where we hope that we'll be able to begin booking reserves. Now, if we can do that, it means we suddenly have a number of other financing mechanisms available to us. Again, coming out of a hard rock background, I'm very, very conscious of how small companies can issue a lot of paper and find themselves awash in scrip. But again, if you look at say a peer comparison between ourselves and some of the other CSM companies around, I think you'll see that we probably have the smallest amount of contributed public equity out of any of our listed peers.

Aegis Analyst

Moving on to look at some of the potential in these areas, we talked earlier about the gas contents in the Walloon. Since issuing the original prospectus in December '04, the gas content of PEL16 which was originally listed at just over 1.0 trillion cubic feet, has risen to between 3.8 to 4.8 trillion cubic feet, and this only relates to the portion of the tenement that has seismic or drill hole information available. Although reserve calculations are still under way, have any extrapolations been made that would infer what the total resource might reach?

Metgasco MD - David Johnson

No, not at this stage. It's pretty clear that we're sitting on a fairly substantial resource. We have enough information about the presence, the thickness, the extent, the gas contents of the Walloon Coal Measures in the area of PEL16. Just in a very raw form, that amount of gas is enough to last to meet New South Wales gas demand for some decades. So there is obviously a very, very substantial amount of gas in the ground. The issue for us is now to be able to extract it on a commercial basis, and that's really the focus of our efforts.

Aegis Analyst

Looking at the pilot program, the de-watering is under way, could you give us an update on the current status of the program and what gas flow rates you have encountered so far?

Metgasco MD - David Johnson

We have five wells currently on test. We're producing gas and water from each of those wells. The purpose of the trial program was to try and get an understanding of the reservoir and to try and develop a method that would allow us to optimally produce. For reasons of commercial in confidence. I probably wouldn't want to give your our gas flow rates at this stage, but I would tell you that the gas flow rates are consistent with our understanding of the reservoir and our completion method that was used in the holes we recently drilled.

Aegis Analyst

You just touched upon optimisation of the productivity. The recent quarterly report has mentioned horizontal drilling, you use that method for improving productivity. Could you describe the cost and methodologies involved with this strategy and where the anticipated henefits would he?

Metgasco MD - David Johnson

When we originally started off the pilot program, this is by the way the first pilot program in the Walloon Coal Measures in the Clarence Moreton basin, and there were a large number of unknowns, we originally designed the wells to resemble the Walloons in the Surat Basin and they were drilled and completed on that basis. Based on the information we have available to date, it is clear that there are some substantial differences. Primarily, those differences relate to gas contents such as I mentioned earlier and also permeabilities. It is clear that our permeabilities are lower than that in the Surat and for us to optimally develop our production, we have to go to horizontal drilling. It looks as though the Walloon Coal Measures have a very, very close resemblance to the coal measures in the Arkoma basin, the Hartshorne coals in the Arkoma basin in Okalahoma.

Companies like El Paso and Williams are now drilling horizontal into the Hartshorne coals and those horizontal drillings are producing rates of around three quarters of a million a day.

Aegis Analyst

Moving on to consider the commercial opportunities of the Walloon Coal Measures, Metgasco has begun detailed design work on the first of two power projects

NE KANS

based upon an agreement with Country Energy and a Heads of Agreement with the Northern Co-op Meat Company. Could you describe the opportunities available with these two agreements and if further customers are being sought at this point?

Metgasco MD - David Johnson

The fact that we're in one of the last energy gaps on the east coast of Australia, is very significant because it means that we have an ability to sell virtually every gigajoule of gas that we can produce. The issue for us is that because there exists no pipeline, the quickest and most effective way of generating cash is to become a self supporting company, is to build, own, operate power stations to deliver power into the local grid. To that end, we have an agreement with Country Energy to sell power on somewhere between, I'd call it roughly around 20 megawatts at this stage depending on finalisation of network configuration studies.

We also have a Heads of Agreement with the Northern Meats Cooperative Company Limited for a combined cycle unit for approximately 15 megawatts. If we can achieve that it means that we can look forward to becoming a cash flow positive company and that limits any further equity dilution or more specifically, it aggregates value to existing equity holders. So that is really our focus. We are well down the road in terms of our front end engineering and design on the approximate 20 megawatts power project for feeding into South Casino substation. We would hope that, subject to having reserves declared in the next two quarters, that we will be able to then accelerate our developments on that.

Aegis Analyst

One final question. Given that you are working towards a cash flow positive basis with this project, looking to

the future, do you anticipate diversifying your project base or you are content to remain focused within this specific area?

Metgasco MD - David Johnson

Look, we think the area has got enough space for somewhere between 300 and 500 wells. Now, if we assume that we were producing, say, 300,000 cubic feet a well over a period of time, that could mean that we might be able to deliver as much as 90 million cubic feet a day which is, you can imagine, a fairly substantial amount of gas. It's about 32 petajoules a year. That, by any standards, is fairly significant. So the question for us is how do we sensibly manage the development of the resource that we think we have available. That poses an enormous number of issues. Do we own and operate our own rigs or do we have some sort of long term contracting basis. How do we extensively develop our acreage given the interest of stakeholders such as landowners and the local community. There are all of those sorts of things that we have to deal with.

So, given that we think that there are that number of wells that can be drilled in that area, we're quite comfortable just working our patch at the moment. The other interesting point is that there has never been a conventional well drilled in the area of PEL16 and the Clarence-Moreton, I think, is generally regarded as an under-explored basin. We're doing some seismic reinterpretation at the moment of some of the conventional potential in the area and I think we're beginning to get quite excited about that. Not only do we have the Walloon Coal Measures to evaluate probably over a prolonged period of time. We have, what I think, is some very prospective ground for conventional, not just gas, but oil and gas in the area that we're active in.

END OF INTERVIEW

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