METGASCO LTD — Interim / Quarterly Report 2012

Apr 29, 2012

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ASX / MEDIA RELEASE ASX Code: MEL 30 April 2012

QUARTERLY ACTIVITIES REPORT THIRD QUARTER ENDED 31 MARCH 2012

The first quarter of 2012 saw field activity focussed on maintenance and existing operations while government approval restrictions are in place and new regulations are being canvassed. Metgasco took advantage of this period to prepare for its drilling program and advance geological and environmental studies.

Specific highlights of the 3Q were:

• preparations are well underway to allow the proposed core well and lateral well program to commence mid year;

• the environmental submission for the first phase of the gas supply to Richmond Dairies is close to completion and for submission to government;

• new water studies provide additional confidence in regards to environmental security;

• considerable time was spent with community consultation and preparing input to the NSW Government’s proposed new regulations;

• Metgasco made significant progress with studies of the potential for compressed natural gas and micro-LNG to satisfy Northern Rivers energy demands; and

• it has become increasingly evident to government and business groups that NSW consumers face a tightening of gas supplies in coming years and that sensible and timely development of the State’s CSG resources is essential.

Review of Exploration and Development Activities

Conventional Exploration and Appraisal Program

The planned seismic program was delayed again due to unusually wet weather which has made ground conditions too difficult for heavy equipment. As a result, the drilling of the proposed Rosella-E01 well to test the Greater Mackellar structure has been rescheduled from mid to late 2012. It is hoped that weather conditions will allow the seismic data to be acquired in May or June.

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Regional geological studies are underway to address the prospectivity of the conventional targets in the licence areas and to elucidate the character of the shallow overburden rocks. Studies included a review of sandstone intervals such as the Ripley Road, Gatton and Heifer Creek which are targets for conventional exploration in the Clarence-Moreton Basin. Microscopic investigation of core and cutting samples from selected wells confirms that reservoir quality varies as a function of the original rock composition and the changes undergone by the sandstone during the history of burial. The analysis provides information to assess the reservoir potential of areas under consideration for future exploration drilling, including a test of the Greater Mackellar structure (the proposed Rosella E01 well).

The strata overlying the Walloon Coal Measures is also the subject of desktop studies to further characterise the geological and hydrological properties of the overburden rocks. This work is designed to better understand the hydrocarbon sealing properties and inferred aquifer capability of stratigraphic units found in the subsurface above the deeper coal seams that are currently the target of gas exploration drilling and testing.

As part of a larger exercise examining the optimal development of the Kingfisher conventional gas discovery, Integrated Petroleum Technologies based in Lakewood, Colorado, completed a review of the optimal completion of the Upper Gatton Formation. This work is now being used to create a conceptual development plan which will better define and support conventional exploration and appraisal efforts.

Proposed Kangaroo Creek Sandstone Test in MSC06

Metgasco proposes to test two zones in the basal Kangaroo Creek Sandstone of the South Casino 6 (MSC06) well. These zones can be correlated with intervals of possible gas saturation in adjacent wells. The objective of the test is to establish the presence of moveable gas.

Certified Reserves

The Company recognises the following gas reserves and resources in its tenement areas.

Independently certified gas reserves – Petajoules (PJ)All reserves are 100% owned by Metgasco	Independently certified gas reserves – Petajoules (PJ)All reserves are 100% owned by Metgasco	Independently certified gas reserves – Petajoules (PJ)All reserves are 100% owned by Metgasco	Independently certified gas reserves – Petajoules (PJ)All reserves are 100% owned by Metgasco
Reserve Category	PEL 13	PEL 16	Total
1P (Proven)		2.7	2.7
2P (Proven + Probable)	31	397	428
3P (Proven + Probable + Possible)	303	2,239	2,542
2C Contingent Resource	1,334	1,177	2,511

The estimates of gas reserves have been prepared by Mr Tim Hower, and staff under his supervision, of MHA Petroleum Consultants (Denver). Mr Hower is chairman of MHA and has over 25 years of petroleum engineering experience and is a qualified person as defined under the ASX listing rule 5.11. Reserves have been developed within the guidelines of the SPE. MHA has consented to the use of this information.

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2011/2012 drilling program

Preparations for the 2012 drilling program are well advanced. The drilling program consists of 3 core wells, 2 to 3 lateral pilot production wells and the conventional well, Rosella-E01. All long lead items have been delivered.

The contract for the drilling of the lateral pilot production wells is currently being finalised and negotiations for rigs for the remainder of the program are continuing.

The drilling program is expected to commence in late May or June, subject to receiving final government approvals for the drilling activity and for the installation of new holding ponds.

Water handling studies

Metgasco continues to evaluate a range of different approaches to handling produced water so that it has a range of acceptable options for future developments.

As part of Metgasco’s ongoing environmental program, Metgasco commenced a series of bioassay tests of produced water using selected freshwater species.

On the recommendation of its consultants, Metgasco engaged Aquatic Bioassay and Consulting Laboratories in California to conduct the initial tests on produced water from the Company’s lead producing well, Corella P11. Aquatic Bioassay and Consulting has been a leader in California for toxicity testing and aquatic biological monitoring for over 30 years. The laboratory is fully equipped to perform all marine and freshwater acute or chronic toxicity tests for point and non-point source National Pollutant Discharge Elimination System (NPDES) permits, harbor dredging operations, stormwater programs, hazardous waste materials and the State of California’s Sediment Quality Objectives (SQOs).

All tests are certified by the State of California Environmental Laboratory.

Both chronic and acute bioassays were conducted for each test species. In addition, two test conditions were run: one with 100 percent produced water; and one with 50 percent produced water. The tests confirmed that the undiluted water (100% produced water) is not toxic but some freshwater aquatic species are sensitive to the salinity. The aquatic bioassay tests indicate that no adverse effects due to salinity would be expected on freshwater aquatic species from the CSG produced water at a dilution of 50 percent. This is a positive result, indicating that with appropriate treatment, even simple dilution, produced water can be managed safely.

Review of Commercial Developments

Gas commercialisation strategy

Metgasco has reviewed its commercialisation options and remains focussed on:

• (1) initially developing a local industrial market in the Northern Rivers region from pilot wells; and

• (2) followed by high volume gas sales from production wells for domestic consumption and LNG export.

Market intelligence suggests that there will be tightening supplies of domestic gas in a few years time due to LNG exports on the east coast. NSW gas consumers and power

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generators will be keen to see the State’s own gas supply maximised, particularly in these tight conditions. The demand for Metgasco’s gas production is expected to be high, and prices are expected to be attractive.

Metgasco is actively evaluating two options to supply gas to businesses in Northern NSW; compressed natural gas and micro LNG. Gas production has the potential to signficantly displace highly priced imported LPG and diesel fuels currently used by companies such as Richmond Dairies. Discussions are well advanced with other customers in the region and a marketing study revealed strong demand in the region. Replacement of LPG and diesel in industrial applications will offer material savings to industry, whilst yielding better than LNG prices for Metgasco. Many local businesses are concerned with rising energy costs - their continued viability in the region may depend on a competitive gas supply.

To optimise its economic opportunities, Metgasco is also evaluating alternatives to its Richmond Valley Power Station (RVPS) while it waits on award of its production licence application (it already has Part 3A approval). These alternatives might be more attractive to both Metgasco and the local community. From an environmental perspective gas is an attractive fuel for power generation and other applications. It also supports peak electrical power load demands more effectively than other sources of energy.

Longer term sales are expected to be delivered via the Lions Way Pipeline to the existing national pipeline grid near Ipswich. Discussions are progressing well with a short list of customers for sales of 30-90PJ pa for up to 15-20 years.

Metgasco intends to secure more gas contracts through the remainder of the year.

Review of Corporate Developments

Community and Government Engagement

While the community consultation process is ongoing, the NSW Government has clearly signalled to the market the importance of appraising and developing the State’s identified gas resources to provide an indigenous gas supply. In a recent submission to the Commonwealth Government’s Draft Energy White Paper (April 2012), the NSW Government acknowledged that:

“further delay in gas developments in NSW will contribute to a supply shortfall as early as 2014 and could have a direct impact on State’s consumers, through gas supply challenges and higher energy costs.”

The NSW Government had earlier made the following comment in its submission to the NSW Upper House inquiry:

“The NSW Government believes that balanced co-existence of mining (including CSG) and agriculture is not only possible, it is essential. Increased use of natural gas, including CSG, to meet an increasing proportion of future energy needs is a key component of the strategy to restart economic growth in NSW, minimise rising energy costs and the effects of climate change and facilitate the transition to a lower carbon economy”.

The NSW Government fulfilled commitments taken to the 2011 election by releasing in March a number of draft policies which should remove impediments to the planned appraisal and development of the State’s gas resources. The most significant of these included the

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Strategic Regional Land Use Policy (SRLUP), Aquifer Interference Policy and Code of Conduct for the NSW Industry. The Government is also expected to release a report from the NSW Chief Scientist, supporting the appraisal and development of CSG resources with a review of drilling and fraccing standards.

The Upper Hunter and North West NSW Regions were the first areas to be examined under the SRLUP process, with Central West, Southern Highlands, Murrumbidgee, Alpine and West to be assessed in the future. While the Northern Rivers region has not been officially scheduled to be assessed, the NSW Government has committed to assessing all of the state under this process by 2015. For areas that have not been assessed, like the Northern Rivers, an agricultural impact statement will need to be submitted as part of the development process.

In the Government’s desire to create community confidence in the development of CSG through the introduction of more legislation, Metgasco is concerned that insufficient acknowledgement has been given to the regulatory and review processes that licensees must already comply with. It would be better to refine the existing processes, streamlining the administration, rather than to apply the new processes. Metgasco will be responding to the Government’s draft policies by recognising the need for a strong and effective regulatory regime, while arguing against any new rules that are unnecessary, redundant or could delay CSG development without making a material improvement in safety or environmental protection.

Metgasco continues to spend a considerable amount of its resources consulting with the Northern Rivers community, including meetings with farmers, community leaders and small business owners.

Cash Position

The Company ended the quarter with a cash position of $15.0 million.

Shareholder Base

At 31 March Metgasco had 337,414,140 shares on issue and 6,595,213 options outstanding.

Outlook - Planned Forward Work Program Next Quarter

It is expected that the NSW Government’s regulatory review will be completed by mid year and that the Government will re-affirm its desire to see the State’s CSG resources fully appraised and developed with the objective of securing more competitive gas supplies for consumers.

Metgasco’s focus over the next quarter will be to:

• complete government approvals processes, allowing its core and lateral well program to commence;

• submit its environmental assessment for the pipelines and production / appraisal licences required for the Richmond Dairies gas supply;

• complete the seismic program, facilitating the drilling of its conventional exploration prospect;

• further market development, both local and interstate / export LNG;

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• continued discussions with potential farmin partners; and

• provide input to the NSW Government’s new regulations to ensure that regulations are effective and support the industry.

Background on Metgasco

www.metgasco.com.au

Metgasco has a 100% interest in PEL 16, 13 and 426 in the Clarence Moreton Basin in NSW where we operate the largest acreage position in the basin. Metgasco currently has 2P gas reserves of 428 Petajoules and 3P gas reserves of 2,542 Petajoules. We are exploring for conventional and unconventional gas. Metgasco is currently progressing its gas commercialisation agenda which includes gas and electricity supply to NSW and gas supply to Queensland. With gas in place resources likely to exceed the domestic markets requirements and sufficient to supply export scale projects, Metgasco is currently investigating LNG project development options.

For further information contact:	Address
Peter Henderson Sean HooperManaging Director Chief Financial Officer	Level 9, 77 Pacific HighwayNorth Sydney NSW 2060Tel: +61 2 9923 9100
	Fax:+61 2 9923 9199

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