General Information

Substantial certified reserves and resource in place

Apex is strongly positioned amongst the ASX listed CSG players with Australian assets who have achieved Reserve/ Resource Certification:

Figure 1: Apex Assets

Of the numerous ASX listed CSG companies who have made public statements regarding the possible Gas in Place (GIP) contained within their areas, many have yet to achieve independent certification.

Apex's Reserve Resources Certification was produced on 4th February 2008 by MHA Petroleum Consultants Inc of Denver Colorado USA. MHA is an internationally recognised organization qualified to provide independent expert reports for the Petroleum Industry. Its client list includes many of the major International Oil & Gas companies. In Australia its clients include Origin Energy, Santos Ltd, Arrow, Metgasco, CS Energy, Sunshine Gas and Beach Petroleum.

The 2P & 3P certification is based solely on the upper coal seams and a surface area of only 100 square kilometres of the total Bulli Seam subcrop (total Apex areas covered = 500 km2) located in the northern portion of the Illawarra leases.

The Contingent Resources include the lesser confirmed lower seams and additional surface area in the Illawarra (Eastern leases), plus all of the Burragorang (Western leases).

The map below shows the proximity of the Apex assets to Sydney.

The MHA review covered a stringent evaluation of a comprehensive set of data and reports provided by Apex, which have been obtained from a wide number of sources including:

• Coal mining exploration and production records from the region which has occurred for over 120 years
• Multiple gas wells drilled since 1947
• In excess of 2,000 coal core holes, including gas contents where available from gas flow rates from in seam gas removal for coal mining
• Information from government agencies
• Numerous independent technical reports and mine records
• Apex's own drilling results

As a result, Apex is extremely confident that its current certified reserves are highly reliable. It should be noted that many of the recent acquisitions in the Australian CSG industry has predominately involved companies which have had their reserves and resources independently certified.

The table below provides a summary of Reserves and Resources Tenements held by Apex Energy (Illawarra and Burragorang Leases):

Summary of Reserves & Resources Tenements held by Apex Energy NL

Illawarra & Burragorang Leases

(Source: MHA Petroleum Consultants Inc)

1. Bcf is equal to one billion cubic feet of gas
2. Conversion factor from Bcf to PJ was 1.05

Significance of the Darkes Forest#1 pilot well

Apex has previously drilled a successful pilot well,Darkes Forest #1.This well was drilled to a depth of 472 m on 11 February 2004 into the Darkes Forest abandoned mine. The well was tested in February 2004 and again in March 2007. Each test gave maximum flow rates of circa 1,200-1,600 mcf per day.

Plan of Extensive Abandoned Mine Workings at Darkes Forest and Coalcliff Mines Showing the Location of Darkes Forest #1 Well

Between the testing dates there was a significant increase in the volume of gas recorded in the abandoned mine. This information has confirmed earlier observations that the abandoned mines are part of an active system. This active system is thought to be supplying the abandoned mines with gas from the Bulli down to the Wongawilli Coal Seams and from microbial activity which is creating a new and additional source of biogenic gas.

Production testing results indicate that the Darkes Forest #1 well could comfortably flow at a rate of 400gj per day with an ongoing replenishment rate of 300gj per day.

The ongoing replenishment comes from the active system adjacent to and below the abandoned mines, currently containing certified reserves as detailed in the MHA report of 04/02/08:

Apex Asset Resource/Reserve Summary

In summary, the gas contained within the system is draining towards, and ultimately into, the large void space areas of the abandoned mines, a process demonstrated below:

Gas Migration Process

The methane gas is known to migrate from the Wongawilli Seam as floor heave and underground stress redistribution caused by extensive coal mining has fractured the rocks in-between the main Bulli Coal Seam and the Wongawilli Coal Seam. This allows for gas migration into the goafs/abandoned mines. This phenomenon is known to exist in the Southern Coalfields and in the British Coalfields.

Testing results from the Darkes Forest #1 well and two core holes EM3 and EM5 has highlighted the gas content would appear to contain a biogenic component, which is probably caused by a relatively late geological event. The significance is that it appears to have increased the permeability of the coals within the region. Work undertaken by the CSIRO and presented at the ‘Significance of Microbial Gas in CSM Reservoirs' workshop of June 2007 would appear to support this view.

Additionally, speaking at the 2008 APPEA Conference in Perth, CSIRO's Dr Mohinudeen Faiz said research performed in the Sydney Basin shows that microbial activity can significantly increase the levels of methane in coal seam 'sweet spots'.

The vastly improved technical understanding of both the Apex areas and drilling methods since 2004 have highlighted a large number of high priority targets similar to, if not superior to, the Darkes Forest #1 well location.

Apex is confident that the success achieved at Darkes Forest #1 will be repeated across a wider area of the leases, providing a number of early stage commercial production scenarios as well as providing data to support an upgrade to the current reserves/resource position.

Gas storage/early production capability from goafs and abandoned mines

A goaf can be a combination of voids and converged or collapsed strata which remain after coal is extracted from an underground mine. Figure 8 below shows an area of the abandoned Darkes Forest Mine which sits within PEL 444. The Darkes Forest# 1 well was drilled into an area of goaf within this mine.

In many areas the voids or goafs left by removal of coal contain large quantities of methane gas. These form a valuable source of commercial methane. They also provide a potentially large gas storage mechanism in that gas may be collected from wells in an area and stored for on demand delivery in peak demand periods. This is an extremely valuable asset on the doorstep of Sydney, the largest population consumption centre.

The plan below shows roadways (tunnels) and, shaded in grey, the goafs.

Plan of Abandoned Mine Workings at Darkes Forest Mine

Goaf areas can vary greatly in size according to the mining method and it is widely recognised that goafs form localised de-stressed areas which aid the flow of gas (permeability) through the coal. The goafs form extensive gas containers/storage from which the gas can be readily extracted. During gas extraction, the gas is continuously replenished from the surrounding coal system and strata.

The Darkes Forest#1 (DF1) well was drilled into the abandoned Darkes Forest mine in February 2004. Within the DF1 void space 2 petajoules (PJ) of gas is contained (at normal atmospheric temperature and pressure), which would continuously self-replenish at a rate of 300gj per day during production. A detailed evaluation has highlighted that the Darkes Forest abandoned mine is one of the smaller abandoned mines contained within the Apex PEL areas.

The de-stressing of the strata surrounding a goaf also allows gas from surrounding coal seams to enter the goaf. Apex's tenures contain extensive abandoned mine workings and goaf areas in which gas has accumulated. Wells drilled directly into these gas accumulations allow the gas to readily flow to the surface through a combination of natural buoyancy and artificial flow stimulation.

A comprehensive evaluation of the Apex areas supported by extensive mapping of the abandoned mines over several years by Earth Resources Pty Ltd has provided a detailed understanding of these workings and helped pinpoint future well locations. The scale of the opportunity is substantial, with extensive goaf and abandoned mine workings across all Apex areas.

Potential also exists to utilize these goafs and abandoned mine workings as storage areas for imported gas from other sources.

The possibility of utilizing the void space for C02 sequestration has yet to be evaluated.

Overview of the Goaf Systems

• A goaf is that which remains after the coal has been extracted from an underground mine
• The goaf may be a standing void, or a void that has filled with collapsed or converged strata
• Goaf system areas can vary greatly in size according to their mining method
• Goaf systems in Apex areas provide extensive contact with lower coal seams down to and including the Wongawilli seam
• These goafs and associated fractured strata (i.e. goaf systems) fill up with gas, predominantly comprised of commercial methane
• The methane gas is known to migrate from other coal seams as a result of strata relaxation and stress redistribution
• Goafs form localised de-stressed areas which aid the flow of gas and form extensive gas containers/storage from which gas can be extracted
• During gas extraction, goaf system gas is replenished from the surrounding coal system and strata
• Within 238 square kilometres of Apex's coal mining leases in the Illawarra and Burragorang regions, areas totalling 195 square kilometres have been mined for coal. These coal mines are now abandoned and sealed up.
• Underground mining creates extensive goafs within the abandoned workings. This has led to the development of significant areas of strata relaxation above and below the main mined Bulli seam.
• The subsequent redistribution of stress and resultant relaxation of strata above and below the mining horizon creates localised high permeability in and around the goafs. Three key zones have been identified, Zone A, Zone B and Zone C (as outlined in the graphic alongside). A gas borehole drilled into Zone A will induce gas flow from Zone C towards Zone A and then to an active borehole. See diagram below.
• A series of goafs exist within Apex's areas. The extent and density of these goafs provide an opportunity to extract gas from multiple seams over extended areas depending upon goaf system characteristics.
• The stress release modelling (Gas Release Model or GRM) conducted by Lunagas Pty Ltd demonstrates that goaf system contact to and including the Wongawilli Seams (circa 70 metres) exists. The GRM also suggests some contact as far as the American Creek Seam.

Zone A - Zone A is the most relaxed strata zone. The Zone A permeability is high, free gas prevails in the zone and is readily available to a gas drainage system. Zone A contains free gas within voids and fissures, gas adsorbed onto coal surfaces and gas that is chemically bonded within the coal zones.

Zone B - Zone B is less relaxed than Zone A. Gas will readily flow from Zone B to Zone A if flow is induced by a gas drainage borehole used to extract gas from the goaf system. Zone B contains free gas within voids and fissures, gas adsorbed onto coal surfaces and gas that is chemically bonded within the coal zones.

Zone C - Vertical stress in Zone C exceeds 5 MPa and is greater than that in Zones A and B. Permeability will vary depending on distance from Zone B. The pressure difference

Proposed drill program Illawarra Licences (Eastern Areas Only)

The exhaustive permitting process in identifying the geological locations of the wells through to dealing with local landowners, aboriginal communities, mine operators, water authorities and the myriad of NSW government regulators is now close to completion. This has been a costly exercise in terms of both time and financial measures and has without doubt been a frustrating process.

The first stage of the program tests the goafs, the reserves down to the Wongawilli and confirms the contingent resource below the Wongawilli Coal Seam:

• 1st drilling program of 3 core holes (mainly in the southern section below Darkes Forest #1) with a further 2 options in the northern sector should they be required and following on from the May 2008 DMT survey
• The DMT survey showed that the total coal seam sequence could be as thick as 39.4m well up from the intersections made in EM3 & 5 in 2005 by Apex . Hole AI16 is located to specifically test this interpretation
• As the goafs cover a substantial portion of the Illawarra area of Bulli subcrop most of the core holes will be drilled through goafs
• It is proposed to pre-collar the 2 and possibly 4 core holes that will drilled below the goafs
• All of the goafs drilled as a part of the pre-collar procedure will be pressure & volume tested to determine suitability or if remedial engineering work has to be undertaken if the testing results are found to be sub-standard
• In all a total of 5 goaf wells are to be drilled on the first round and those that are not used for coring will be deepened using a larger diameter bit to allow the flow testing of the entire seam section
• A successful outcome of the core/goaf drilling combination would allow for the development of semi portable 15mW turbine power stations situated over the goafs
• Portable LNG containerised plants may be similarly located over the goafs

15 initial drill sites have been selected and these form an integral part of the part 3A authority from the NSW Department of Planning.

In addition to the above, and to assess the reserves suitable for early development (Figure 9 below), a further 5 exploratory open hole wells are to be drilled. These sites are among the 18 sites already submitted to the Department of Planning for approval.

Figure 9: Reserves Suitable for Early Development

This program on both areas is designed to bring forward the contingent resource status of the coals seams below the Balgownie up to a reserve rating. With a 3P rating available on some of the vertical coal section i.e. Bulli to Wongawilli then the role of this focussed program is to bring as much of the Illawarra area up to 2P.
 

Flow Testing of the total Illawarra Coal Section and Production Unit - Stage 2

To aid in this reserve upgrade the 5 drill stem tested wells will be further assessed and one selected to form the cornerstone well for an initial 5 spot production test regime. Given that the area in question is about 100 sq km then this testing regime should be adequate to determine the necessary commercial outcomes. The process will be:

• Drill 5 wells as open hole completion on Illawarra and subject to intensive tests with DST's
• Drill a pilot production unit
• Drill and test the Burragorang Goafs. This is in part compliance of Exploration Licence regulations after a second Part 3A has been applied for and granted

Resources to be Upgraded to Reserve Status

Apex's Current MHA certified gas reserves/resources were calculated using a conservative mean average of 8.35 scm/tonne. Recent geological interpretation of data, supported by data from the NSW government covering the Sydney Basin, suggests that the gas content could be as high as 18 scm/tonne. A focus of the drilling programme is to confirm this higher figure, in which case a significant upgrade to the certified reserves/resources will be recommended.

A recent Digital Magnetotelluric Technology (DMT) survey was completed in 2008 across a wide area of the Apex leases and data interpretation is ongoing by Digital Magnetotelluric Technologies, Inc http://www.dmttechnologies.com a subsidiary of Southport Exploration, Inc of Oklahoma USA. Findings from the DMT survey have indicated the potential for the total coal seam thickness in the area to be as high as 39.4 metres. All current Reserve/ Resource calculations have been based on an average seam thickness of only 22 metres and a high priority of the drilling program is to confirm the findings of the DMT survey.

Further confirmation of the biogenic nature of the gas and a clear understanding of the organic content is an additional objective of the drilling and test program.

Agreements for gas exploration in place with local coal operators

• Metropolitan Colliery - Waste mine gas and coal bed methane. Area of agreement (58km2)
  • CCL703
  • CCL379
• Burragorang Valley Coal Pty Ltd - Area of agreement (36km2)
  • CCL740
  • CCL740 is situated within the boundaries of PEL454 in the Burragorang region. 
• Huntley Heritage - Area of agreement (19km2)
  • CCL700

CCL700 is situated within 10 kilometres of Tru Energy 400 MW combined cycle Talawarra gas power station http://www.truenergy.com.au/Production/Tallawarra/Index.xhtml and this provides a significant gas marketing opportunity in relation to the Apex gas tenures. Plans have already been approved for a second 400mw combined cycle gas power station, further enhancing the future value of the Apex areas.

Further agreement opportunities exist in the areas adjacent to PEL 444 and 442.

Apex understands that its neighbours are coal mine operators and that gas exploitation/ exploration is not their core business. By demonstrating our expertise and understanding of the areas Apex is confident that it can enter into further JV's with these operators. These will add significant net acreage positions to our existing leases and ultimately increase our reserves/resources.

With the imminent implementation of a Carbon Emissions Trading Scheme more pressure will be placed on coal mining operators to effectively deal with their emissions. Working with gas management experts would seem the logical choice, an area where Apex has been focussing during discussions.

Asset value/growth areas

The first order estimate of gas in place (GIP) is 2,529PJ of methane for the Apex Energy tenements covering the Illawarra Formation, Southern Coal Fields of the Sydney Basin. Scope for significantly increasing the GIP and quickly converting through to reserve status exists.

Apex's certified reserve status is currently:

Figure 13: Apex Assets

The preliminary 18 well pilot drilling program is designed to convert a significant proportion of the contingent resource to reserve status.

Existing certified reserves are based on a conservative mean average of 8.35 scm/tonne. Recent geological interpretation of data has suggested that this figure could be significantly higher, in which case an upgrade to the certified reserves/resources will be recommended. As stated in Section 2.4 above, a primary objective of the drilling program is to confirm this higher figure.

Existing certified reserves are based on a total coal seam thickness of 22 metres. Current observations, supported by the recently completed Digital Magnetotelluric Technology (DMT) survey, suggest the potential for the total coal seam thickness in the area to be as high as 39.4 metres. The upcoming drilling program will provide fact-based evidence which could possibly lead to an upgrade in the reserves/resources.

There are a number of factors which indicate the potential need to review the Apex reserves:

• Existing 2P & 3P reserves do not include the lower seams, known to contain approximately 75% of the available coal seam gas
• The existing 2P & 3P reserves exclude the western leases and a large portion of the eastern leases held by Apex. A future drilling program on these areas is likely to obtain data to warrant a further significant increase in the certified reserves
• The recent JV with Huntley Heritage is not included in any reserves and additional similar arrangements will add significantly to the overall reserves/resource
• Current drilling methods and technology continue to improve as has recently been demonstrated by Molopo and Sydney Gas who have recently successfully drilled a number of surface to in seam (SIS) multi-laterals. In addition to having the ability to access the gas rich lower seams, the new drilling technology is likely to unlock much of the potential value in these areas
• Native bacterial activity as being assessed by the CSIRO and others highlight likely future solutions to enhance/increase production/reserves

Location (Sydney City Gate)

The Bulli and Burragorang Projects of Apex Energy NL present an opportunity to enter the best market areas for CSG gas in Australia with minimal additional infrastructure required when compared to many of the isolated projects in the remainder of Australia.

By any definition this area with this market strength could be considered a CBD style development as the CSG resource lies within the largest Australian market.

The 2007 Owen Inquiry into NSW electricity supply [14] concluded:

NSW requires the equivalent of a new 300MW gas-fired combined-cycle power station each year to keep pace with the state's electricity growth. By 2020, NSW gas demand is estimated to be in the range 220PJ p.a. and 300PJ p.a., an increase of up to 100% over present demand.

The Sydney and region gas consumption is currently around 130PJ p.a., with 96% of this being supplied through two key pipelines from interstate supply. The Eastern Gas Pipeline, owned by Jemina (formerly Alinta), draws gas predominantly from Bass Straight in offshore Victoria and delivers around 62PJ p.a. into NSW.

The Moomba to Sydney Pipeline delivers predominantly Cooper Basin gas from South Australia - and Cooper Basin gas production is declining. The only additional gas supply to the Sydney Regional System is from the AGL Energy operated gas process facility at Rosalind Park near Camden. The facility draws local CSG through the AGL/Sydney Gas Camden JV and produces around 5PJ p.a. The nameplate capacity of the process facility is currently 15PJ p.a.

The Apex Burragorang (western) PEL 454 boundary is approximately 26 kilometres from the AGL Camden gas facility and an opportunity may exist to deliver substantial quantities of gas to that AGL facility which is already connected to the Sydney Hub.

The Eastern Gas Pipeline from Victoria passes at the southern boundary of the Apex PEL442 near Port Kembla. There is also a spur line which supplies Wollongong and Port Kembla with gas supply. An opportunity would exist to deliver locally sourced gas from the Apex areas into these pipelines after appropriate processing to bring the run of well gas to pipeline quality. There would be considerable capacity into these pipelines.

Tallawarra Power Station

(http://www.truenergy.com.au/Production/Tallawarra/Index.xhtml)owned by TRUenergy, the Australian subsidiary of Hong Kong listed China Light and Power) is located on the foreshore of Lake Illawarra immediately south of Port Kembla and immediately adjacent to the southern boundary of Apex PEL 442. Tallawarra is a 400MW shoulder producer of electricity through a Combined Cycle Gas Turbine. As a shoulder producer TRU anticipates consuming some 14PJ p.a. This is supplied totally via the Eastern Pipeline from Victoria exposing them to single source and outage risks. In addition, TRUenergy is working towards a second 400MW Tallawarra B which would be adjacent to the current facilities. Gas from the Apex areas immediately in the locale of the power stations could be gathered and delivered, and gas from Apex more northern properties could be piped through a trunk line of 35 kilometres from the Darkes Forest gas gathering node directly to the Tallawarra power station. Apex has held discussions with TRUenergy and these will continue.

Sydney Basin coal seams

The geological region known as the Southern Sydney Basin is extensively underlain by Permian coal measures which have been mined for over 120 years. This longevity of mining activity provides extensive knowledge and data about the coals and gas content, certainly in the upper mined seams.

It is widely accepted that the Sydney Basin hosts a substantial Gas in Place resource [6].

Characteristics of the Basin are:

• Total Gas In Place for the basin is in the order of 65TCF with Methane the predominate gas present
• In situ gas contents ranges from 8 - 18 m3/tonne
• Coal permeability varies from 25 milli Darcys (mD) to <3 mD
• Coal Seam thickness up to 50m
• Gas composition generally >95% CH4
• Evidence suggests that the coal seams become gassier as depth increases
• Due to the low water content, de-watering of conventional non goaf wells could take approximately only three months

The Apex areas are positioned on the shoulders of the Sydney Basin which has the potential to host some of the highest rating CSG per sq km of any basin in the world. Independent certified reserves are now becoming available, with large increases expected in the near future. Being positioned on the shoulders is seen as a major advantage in terms of increased permeability and also lower water content, which could be expected in the lower regions of the basin.

The diagrams below show, respectively, a Stratagraphic Cross-Sections of the Sydney Basin from Bulli to Burragorang and Coal Stratigraphy of the Sydney Basin.

Stratagraphic Cross-Section of the Sydney Basin from Bulli to Burragorang

Coal Stratigraphy of the Sydney Basin

A detailed review of the Sydney Gas (ASX:SGL) wells drilled over the past few years, combined with a detailed geological study of the Basin, leaves Apex feeling very confident with regards to the current and future value of the assets. The most recent Surface to In-Seam wells completed by Sydney Gas had continued success, the best well producing 606gj per day. As Sydney Gas pointed out recently in their AGM Report:

The question remains: with all the money invested in the company over the past decade, why has Sydney Gas not delivered a better result? The answer is that, until earlier this year, Sydney Gas has been under resourced in terms of technology, capital and, in particular, people.

Having addressed these issues, drilling results now appear to be significantly improving. The recent acquisition of Sydney Gas by AGL appears to be indicative of the confidence one of Australia's largest energy companies has in the future of the Basin.

History has demonstrated that in most unconventional plays a number of factors ultimately lead to the transition from discovery through to commercial exploitation. These include:

• Advances in technology (lateral/SIS drilling)
• Understanding of the correct completion techniques
• Market factors i.e. energy/gas price increases (LNG etc)
• Introduction of future technology (CSIRO/others work with Native Bacteria)

Given the size and the location of the resource it is only a matter of time until all or any of these factors come into play, at which point significant additional value will be unlocked.

Apex also has the additional benefit that a significant portion of its areas are underlain with extensive mine workings. The strata de stressing caused by this has been proven to enhance the permeability and flow of gas. Success has already been achieved with the Darkes Forest#1 well, assisting Apex in securing a strong certified reserve position. A continuation of this success is forecast following the upcoming drilling program.