Ann: Boreas-1 Progress Report No 14 , page-3

Hi Big Dee

Other KAR posters have pointed out that it's a very costly exercise to spend the last month getting ready to flow test rather than to get on with the next well. There must be a good reason for this.

We know that COP has stated recently that they expect to conclude sales contracts next year for LNG from their soon-to-be-expanded Darwin LNG plant, using the JV's gas. Maybe the sales process can be speeded up if potential customers see good gas flows in a week or so???

There's probably not the buzz with gas for LNG that occurred a couple of years ago because the perception now may be that there will be a lot of gas around in five years and the Japanese recently told our Minister Ferguson that they want LNG prices linked to gas prices, perhaps Henry Hub prices, rather than oil as in the past. So maybe there won't be the same profit expectation from gas that there was.

If we look a little closer at the future LNG market, however, we can see that the supply to meet very strong growth in LNG demand won't be as strong as may be imagined. East African gas discoveries are huge, but experts familiar with the LNG business recently noted that it's very difficult to get a new plant established in Mozambique or Kenya and costs will be (surprisingly)high. I don't think there will be any LNG plant operating in East Africa before 2020.

The other potential supplier is US. One Gulf Coast port is being approved to export LNG instead of importing it and Alaska is asking to export small volumes instead of sending it to the Nth American market. But these two prospects are very small beer on the world scene. IMO it will be many years before the US can add significant LNG export capacity. And can you imagine the screams from US industry who are now developing a competive manufacturing advantage from their cheap gas? Major LNG exports in future will deprive them of that advantage - no more cheap gas - so LNG exports won't come easy. And if they do get to export in six or seven years, the Henry Hub price will rise anyway, so our LNG export prices will rise with the price linkage.

So to answer your question, it's my guess that the Boreas announcement will confirm great gas flows and the market will accept that there will be a profitable long term demand for the JV's gas. Most likely we still won't have turned our P50 reerves of 7 TCT to a P90 reserve - ask the experts on that. But we are getting there.

Can't see a repeat of $11 for KAR based only on a good gas result, but you may recall that I've been forecasting $12 by the end of this year, assuming we strike oil in Brazil. The delay in our drilling, now to early Nov, has put my timing off a month or so, although if the Canario well next door comes in strongly it won't matter, IMO. Canario's TD is around 3200 m, so they should get a result by the end of November and the JV on our side of the line is likely to be granted a majority of the total field. Nice - maybe $4 a share to KAR simply from success of this well and the resultant desrisking of our leases, at no cost to us.

Like the Demons, we will have a few years yet to climb to the top of the (Aust O&G) ladder. I'm confident at least KAR will get there.