latest research note from merril lynch

Issue date 19th Jan 2010 - Summary.

1st Failure likely due to connectivity not reservoir

Preliminary data obtained from permeability testing of the core samples indicate that the reservoir should flow gas. This supports the thesis that the initial well
test failed due to connectivity issues (mechanical issues have also not been ruled out at this stage). The observed connectivity issues could have been caused by
well bore damage and/or the development of an impermeable layer around the wellbore collectively known as skin.

Clarifying the role of Poseidon-2

P2 was designed to confirm the gas-water contact in Poseidon plus test the extent, presence and quality of reservoirs down-dip from P1 (P2 is ~6km SW of P1) to assist in quantifying resource size. Given this is part of a multi-well appraisal campaign, P2 does not make or break the commerciality of the discovery, but it could impact the assessment of potential reserves (P90 3Tcf,
P50 7Tcf & P10 15Tcf). On a completely un-risked basis we value Poseidon at A$17.7ps to A$34.8ps predicated on a 7Tcf to 15Tcf resource respectively (for more detail on risked valuation see Karoon Gas Australia Ltd, 15 January 2010).

Forward plan

Conoco, as operator, will now commence remediation operations to try and reduce the skin before re-testing the well. We highlight that this remediation may
not work and that a positive well test is far from guaranteed. To be clear, this would not immediately rule out the shallower reservoir horizons across Poseidon-
1 and Kronos-1 from yielding commercial flow rates. Post testing of the deeper Plover sands they will then test the Montara sands, which are not currently
included in the reserve estimates provided by KAR.
Kronos-1 brought forward Kronos -1 will now be drilled before Lion-1. Kronos-1 is located some 20km from
P1 in a near crestal position and is designed to confirm the southern accumulation of Poseidon.

In line with our stated methodology we will only re-assess our risked valuation of Poseidon when more data becomes available. We believe definitive test results
from the Plover B sand will be available next week.