MANAGING
DIRECTORS
REPORT

It has been a challenging 12 months with volatility in world equity markets and debt-laden economies impacting investment sentiment. Nevertheless, several of the world class CSG to LNG projects in Queensland have progressed significantly in this economic setting. This has bolstered confidence that the new export LNG sector in Queensland will proceed and provide both unprecedented growth in gas demand and the development of a strong long term energy industry that will bring significant benefits to the state. Ramp up of activity on these CSG to LNG projects has also generated significant public interest in the broader CSG industry.

The extensive and extreme weather events experienced across areas of Queensland in January 2011 resulted in prolonged delays in accessing our primary focus areas (ATP814P), as well as to the majority of Blue Energy's other permit areas. Most other Operators also experienced similar issues. Consequently, the completion and production testing program at Monslatt has been impacted.

As a result, Blue Energy is not as far advanced as we had hoped with respect to the reserve growth process that the Company has embarked upon.

Notwithstanding these setbacks, Blue Energy has made significant progress from this time last year. We have more than doubled our Contingent Resource base to 2,590 PJ (recoverable 3C). With significant resources identified in two separate basins, we also established our maiden reserves of 39PJ 3P in ATP814P and identified a potentially significant new play in the Maryborough Basin.

The challenge for Blue Energy in the coming twelve months is to execute our strategy and lay the foundation for reserve growth to our vision of 3,000. PJ of 3P reserves by year end 2014.

The strategy that Blue Energy will employ to achieve this vision will be to utilise a low cost evaluation program in our high graded permits in combination with information from adjacent acreage to aggressively convert resources to reserves.

Consequently, we will continue to focus activity in ATP814P for reserve growth, but also look at increasing the resource base in the Galilee Basin and leverage competitor activity to de-risk the expenditure in the permit. The other area that is developing into a potentially significant play is the recognition and development of a shale gas play in the Maryborough Basin. The potential volumes resulting from exploration success in developing this play could be significant. We still await the regulator to award the Maryborough permits.

ATP814P

Monslatt Block

Since March 2010 when Blue Energy received an initial resource estimate from Netherland, Sewell and Associates (NSAI), the resource estimate has nearly doubled.

We have also recorded our maiden reserve booking through a data sharing agreement with NSAI and several other Coal Seam Gas Operators. The Sapphire Block in the western part of ATP814P is directly adjacent to the Moranbah Gas Project operated by Arrow Energy. NSAI has identified a modest 39PJ of 3P reserves associated with the Rangal and Fort Cooper Coal Measures in the south eastern part of the Block, in close proximity to Arrow Energy's pilot production wells in ATP1033P.

ATP81PP Bowen Basin	3P Reserves Recoverable	3C Contingent Resource Recoverable
Sapphire Block	39PJ	284PJ
Monslatt Block		1,295PJ
Central Block		457PJ
Total ATP814P Resource Base	39PJ	2,036PJ

The initial activity by Blue Energy in the Monslatt Block identified a new resource area, and since that time the bulk of the activity has been directed to this eastern Block. To date, we have drilled 5 pilot wells in the Monslatt Block which has given good coverage across the Block and, with successful dewatering, will add significant reserves.

Additional Pilot wells were drilled in September this year to expand the resource base and provide more points from which to convert resources to reserves. The Monslatt 9 combination core production pilot well was drilled in the southern part of the Monslatt Block at a location designed to test the southern extent of the Moranbah Coal Measures. It will be put on production test in the coming weeks and commence the dewatering process.

The Sapphire 4 combination core production pilot well is being drilled in the southern part of the Sapphire Block as a follow up test of the reserves in the Rangal and Fort Cooper Coal Measures together with a test of the deeper potential of the Moranbah Coal Measure sequence.

The gas potential in Monslatt in carbonaceous shales was initially identified by NSAI and Blue Energy. The Monslatt 9 well is designed to further evaluate this play, which could be significant.

To date, the pilot production operations have provided confirmation that the central part of the Block (around the Monslatt 4 and 7 area) has high gas saturations in the P seam, however as with all new exploration areas, time is required to gain an understanding of the structural geometry and production characteristics of the coals, and for the development of appropriate completion and production methodologies. Gas production has commenced in Monslatt 7 and flow rates are expected to increase as dewatering continues.

ATP813P - drilling program undertaken

Following completion of the initial core well program in ATP813P, a dataset was sent to NSAI for assessment. As expected, NSAI identified considerable Contingent Resources together with a large Prospective Resource in parts of the permit. Further coring will be required to expand the resource base areas in between the existing wells and for the selection of an appropriate pilot production test well location.

Permit/Basin/Block	Contingent Resources Recoverable	Prospective Resource Recoverable
ATP813P Ð Galilee Basin	554PJ	1,143PJ
Total Resource Base	554PJ	1,143PJ

Given the location of the Galilee Basin and general lack of gas infrastructure, the establishment of reserves in the permit is likely to require both a significant resource base, together with an above average (current) gas price. Demonstration of sustained gas flow rates have not been achieved anywhere in the basin as yet, however, competitor activity is likely to deliver these results in the medium term.

Maryborough Basin

The Maryborough Basin has been under-explored for hydrocarbons. Early efforts date back to 1953, but there has been only sporadic exploration since that time. Previous drilling targeted conventional gas resources, and was successful in identifying the presence of a hydrocarbon system, but at the time of drilling, the volumes discovered were deemed to be uneconomic.

Blue Energy is currently farming-in to ATP613P and two application areas, ATP674A and ATP733A, and is Operator of the permits. Following completion of the farm-in work program, Blue Energy will have a 75% working interest in the permits.

We have negotiated Native Title Agreements to facilitate award of the application areas in the Maryborough Basin and following grant of these areas, the Blue Energy Joint Venture will have a dominant position in the basin. The shale gas play in the Maryborough Basin is presently unquantified, with the recognition of a mature, organic-rich marine shale sequence that has given indications of gas content in early exploration wells.

The Maryborough Basin is strategically located for the potential supply of gas to both the South East Queensland domestic market and the developing export LNG market in Gladstone, which is approximately 150km to the north.

In summary, Blue Energy will continue to focus on ATP 814P, 813P and the Maryborough Basin area to deliver resource and reserve growth based on the potential of these areas, I am confident that Blue Energy will deliver on its vision to establish 3,000PJ of 3P Reserves in the year ending 2014.

John Phillips
Chief Executive Officer and Managing Director