Ann: Mahalo North pilot gas production exceeds 1.7 MMcfd, page-9

Regarding the $13.15 million loanto COI from Santos that was used by COI to acquire Australia Pacific LNG PtyLtd.’s (APLNG) 30% interest in the Mahalo Gas Project.

As I read things - Santos has asix-month option to acquire an additional 12.86% interest in Mahalo from COI atthe proportional acquisition value which from my reckoning has to be ‘done anddusted’ by the end of this year. Should this option be exercised - COI’sinterest in Mahalo will drop to 57.14% and the loan repayable to Santos will decreaseproportionally. At that point Santos will move up to a 42.86% interest inMahalo – leaving COI with 57.14% but still there will be an $8 million loanoutstanding to Santos.

Santos also has the right to buy50% of the other COI 100% owned Mahalo Blocks and equalise its stake in themain Mahalo Hub by a further 7.14% -- BUT as I understand it – so the good news– at a price to be hammered-out between both parties.

Here’s the downside – COI owesSantos £13.15 million and COI has limited fund availability.

However - as suggested in aprevious post – I’m as certain as I can be that our management team are workinghard to attract an alternative farm-in partner who has the funds and experienceto fast-track Mahalo North to development.

Here’s the upside - Mahalo Northlooks as if it is the most productive pilot production well ever sunk inQueensland now producing over 1.7 MMcfd - so anyone farming-in to Mahalo Northcould potentially fast track Mahalo North to production which in turn couldeasily bleed the gas from the Main Mahalo Block to Mahalo North.

Thus Santos has a dilemma – whatdo they do? Wait on the side-lines hoping that COI will run out of money - or –make a move now to either buy into all the Mahalo Blocks on a 50% basis at aprice to be agreed (other than the 12.86% pro-rata rate in the main MahaloBlock) – alternatively make a move to buy out COI in entirety?

One thing we do know is that gasis in short supply – not just in Australia but throughout the world and thesituation is not going to improve – so I would have thought that there must becandidates other than Santos who would love to jump into the frame on aJV/Farm-in basis to snaffle 50% of Mahalo North which has the highest everproducing pilot production well in Queensland. Likewise - those same guys mightalso be in the frame to buy COI out in entirety.

Let the games commence.

Good luck all…