Capitalising
on the
changing
energy
environment

Blue Energy will continue to pursue value creation opportunities for shareholders through organic growth within its existing exploration assets, together with exploring opportunities to expand that asset base
into higher margin markets.

The forecast domestic gas price environment in Queensland has changed dramatically in the last
12 months with 3 LNG export plants in Queensland achieving final investment decision. The announcement by Santos that it will be selling Cooper Basin gas to the Santos-led Gladstone LNG Joint Venture will very likely result in the re-pricing of domestic gas to around the LNG net back pricing, estimated at $6 - 7/GJ. Whilst the short-term domestic gas price remains challenging with the ramp gas volumes for major LNG export plants in Queensland, the longer term now looks very promising.

The present coal seam gas environment, dominated by the large domestic and international gas and LNG producers, requires the small explorers to have an alternative commercialisation strategy, independent of the LNG export market. This is particularly relevant in the short-term as the supply of gas to the LNG export market by small producers may not be required for several years, as the much touted consolidation of some of the larger Gladstone LNG projects has not occurred given the high likelihood that there will now be four LNG projects in Gladstone. Given the current 2P reserve estimates, several of these LNG export projects may not have sufficient current reserves and will require additional gas reserves to satisfy their projects' gas requirements. As such, small explorers who are able to build meaningful reserves in strategically located acreage (in the next 1 Ð 3 years) will become attractive sources of gas/reserves for the larger LNG players.

Blue Energy cannot however rely on the larger LNG players, and has in place a strategy to mitigate this risk, which is fundamental to delivering the full value of Blue Energy's evolving gas resource. Accordingly, management is looking to develop creative markets for its resource where possible. Small-scale LNG projects for the transportation sector is one such potential market. In addition, Blue Energy is working with several players in the Moranbah / Nebo (ATP814P) region to explore options to satisfy the ever expanding energy requirements of the region.

Blue Energy has maintained a large exploration acreage portfolio across a widespread area of Queensland.
The acreage covers 4 separate sedimentary basins,
each with different infrastructure capacity.
Blue Energy holds all but one of these permits 100%
and is operator across all permits.

Accordingly, the location of each of these assets presents its own specific commercialisation opportunities and challenges. The strategic alliances Blue Energy has with Stanwell, KOGAS and others are key to achieving commercial outcomes for each of the assets.

Blue Energy's domestic gas strategy is linked to the Gas Development Alliance Agreement with Stanwell Corporation in its southern permits. The Stanwell alliance provides the opportunity to utilise gas discovered from the southern permits (ATP's 854, 817 and 896P) in power generation opportunities in south east Queensland.
The prospectivity of these southern permits has the potential to provide gas in a suitable quantity for moderate generation projects.

The northern permits (ATP813 and 814P) are expected to deliver larger quantities of gas reserves that would potentially be more suited to the supply of export LNG projects in Gladstone as well as regional energy requirements. Success in these permits and Blue Energy's strategic alliance with Korean Gas Corporation (KOGAS) and others is fundamental to Blue Energy's ambition to supply gas to the export LNG industry. It was expected that export LNG gas supply contracts would offer better net back pricing to the gas producer than domestic gas contracts, however given the changes in the domestic gas pricing outlook during 2011, the supply of domestic gas in a region not directly connected to the south east Queensland gas market could deliver excellent gas prices.

In addition to these two commercialisation options, an emerging third option is that of small-scale domestic LNG production for the transport sector or remote power generation. This concept is one of diesel substitution,and hence could provide an attractive margin in those cases where on road or mine haulage fleets can be converted from diesel to gas engines, or where current remote diesel-fired power generation is marginally economic due to high diesel costs. The potential for a price on carbon dioxide emissions will only strengthen the viability and focus of projects that substitute high cost, high emission fuels with lower cost, lower emission gas.