644a0495d4032db8b5161e.pdf

015

CORPORATE DIRECTORY

Directors & Management

Dr David King - Non-executive Chairman

Peter Lansom - Managing Director

Paul Bilston - Executive Director

Ray Shorrocks - Non-executive Director

Chief Financial Officer Don Langdon Company Secretary

Stephen Rodgers

Auditors

BDO Audit (Qld) Pty Ltd 12 Creek Street

Brisbane QLD 4000

Solicitors

Piper Alderman

Level 36, Riverside Centre 123 Eagle St

Brisbane QLD 4000

Principal Registered Office

Level 4, Rowes Building 235 Edward Street

Brisbane QLD 4000

GPO Box 1944, Brisbane QLD 4001

Phone: (07) 3177 9970

Email: [email protected]

Bankers

National Australia Bank 308 - 322 Queen St

Brisbane QLD 4000

Share and Options Registry Computershare Investor Services Pty Limited 117 Victoria Street

West End QLD 4101

Phone: 1300 552 270

Stock Exchange

Australian Securities Exchange Home Branch: Brisbane

ASX Code

GLL

www.galilee-energy.com.au

CONTENTS

Chairman's letter 2

Managing Director's report 3

Corporate governance overview statement 18

Directors' report 19

Auditors' independence declaration 29

Financial report 30

Directors' declaration 64

Independent Auditor's report to the members 65

Shareholders information 67

Tenement interests 68

Galilee Energy Limited I Annual Report 2015 1

Dear Shareholder,

I am pleased to present to you the 2015 Annual Report for Galilee Energy Limited. Over the last

year we have seen significant turmoil in the oil and gas sector, as a result of a major, and sustained, drop in the price of oil. One of the consequences has been substantial reductions in the market valuations of many of our Australian Exploration and Production companies. I am pleased to say that despite this adverse market sentiment, your company has seen a solid share price performance compared to its peers. Pleasingly, and despite this environment, the Company has continued to implement its growth strategy, and make significant progress in each of the elements of our plan. I look forward to seeing the fruits of this work in the coming year.

A significant achievement during the last financial year was the acquisition at no cost, of AGL's 50% stake in ATP529P.

To now have 100% ownership of this strategic project is crucial for a company of our size. This enables full control of the timing and costs of our forward work programme as we move towards booking of the first reserves in the permit. The recent independent Resource booking by MHA shows the enormous potential of the Glenaras Gas Project, and demonstrates its potential to be a major new gas supply source into the gas-short Eastern Australia Gas market. The team has done a tremendous job in both negotiating this acquisition as well as moving forward so quickly to implement the R1 testing programme. To be on the ground conducting the workover programme within three weeks of the acquisition highlights the operational strength of the team. The testing of the R1 seam will progress during late 2015/early 2016 and I am very much looking forward to these results. Booking reserves in this project would provide a solid basis for a scale changing uplift in the value to our Company.

The second key component of our growth strategy is building a cash flow position in the US. During the last year we made a significant gas discovery at our Hoffer B1 well, which intersected over 40 ft of net gas pay in the Midcox secondary target. While wellbore conditions did not allow the well to be completed for production, aggregate flows of 6 MMscfd from these units demonstrate the future production potential of this play. We are excited to be about to drill the first development well in this play, Hoffer A1, scheduled for drilling in mid Q4 2015. A successful well here will be a strong first step in meeting our cashflow targets with multiple offsets expected.

The final component of our growth strategy is building our long term exploration portfolio, especially in areas where our in-house technical capabilities can clearly add value. We have made significant steps in this growth path with a recent permit application for a large scale CSG play in Southern Chile. This opportunity has the potential to be a multi-Tcf resource and is located in a country which is short of indigenous gas supply. The application is currently under negotiation with the Chilean Government. This project has the potential to be a major new source of growth for the company in the future. Given the current turmoil we continue to closely monitor the oil and gas sector for both corporate and asset based opportunities. The drop in commodity prices has seen many new opportunities on the market. We will continue to assess these on a project by project basis and ensure they fit within our growth plans while being conscious to conserve our strong cash position.

aras Gas

In summary, the Company has made good progress over the last 12 months. In the coming months we have two clear value creation catalysts, firstly with the testing of the R1 seam at the Glen

Project, and second the Hoffer A1 well in Lavaca County, Texas.

It is pleasing to see the recent improved interest in the Company's securities. I anticipate the active exploration programme now in front of us will continue to attract interest and support from both existing and new shareholders.

The progress we have made is a testament to the strong technical and corporate capabilities of our small in-house team, ably led by our MD Peter Lansom and executive director Paul Bilston. I would also like to thank shareholders for your ongoing support, and am confident we will enjoy further positive development of the Company over the next 12 months.

Yours Faithfully

2

David King Chairman

Galilee Energy Limited (Galilee) is a Brisbane based energy company continuing to develop and grow its exploration portfolio. This portfolio now includes a mixture of near term production focussed assets along with larger, early stage exploration interests and covers Australia, Chile and North America.

The 2014/15 year saw the Company build on the foundations established in the previous year in accordance with the strategy announced in April 2014. The company continues to deliver on its strategy and has made significant progress in every area as summarised below.

1

Maximise the value of the Glenaras Gas Project Demonstrate commercial gas flow, book reserves and optimise value for shareholders

2

Build a strong production base

Deliver value and upside in assets by utilising our expertise

3

Grow the exploration portfolio

Acquire low cost, early stage positions in frontier basins

[ 100% GLL following AGL acquisition

[ New resource assessment

[

Workover programme complete Production testing to commence mid October 2015

[ Hoffer gas discovery made in Texas [ First development well mid Q4 2015 [ Exciting prospects in Kansas 3D

seismic

[ CEOP submitted in Southern Chile

[ Multi Tcf CSG resource potential

Galilee Energy Limited I Annual Report 2015 3

Maximising the value of the foundation asset

GLANARAS GAS PROJECT - ATP 529P (Galilee 100%)

The Glenaras Gas Project is located in the western portion of the Galilee Basin within ATP 529P and is highly prospective for coal seam gas (CSG) with an independently certified 3C Contingent Resource of more than 5,300 PJ.

Advancing this project has been a core part of our strategy, and until recently the Company was disappointed it was unable to get sufficient traction with AGL Energy (50% JV partner and Operator) to carry out any further work on this asset.

The Company continued to work with AGL and were very pleased to announce on 4 June 2015 that AGL Energy Limited ('AGL') had agreed to transfer its 50% interest in ATP 529P to Galilee. This transaction was completed after the end of the financial year with an effective date of the transaction of 1 June 2015. The transaction had no upfront cost to Galilee. As part of the transaction AGL also contributed $590,000 to Galilee to support future operations at Glenaras.

Galilee believes this permit has the potential to become a material new source of gas supply for the east coast of Australia. As observed by a variety of market participants, the Company shares the view that the Eastern Australia gas supply market is structurally short with demand to more than triple with large scale LNG projects GLNG, APLNG and QCLNG all online in the coming months. This provides a significant opportunity for a new entrant to build a significant supply position.

2,500

2,000

1,500

1,000

500

2009

0

East Coast Aggregate Demand (PJ/a) Forecast Supply Gap (PJ)

1,000

800

600

400

200

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

0

Domestic QLD LNG

Source: Company presentations (Santos, AGL)

4

On 1 September 2015 (after year end) the Company announced a major upgrade of its coal seam gas Contingent Resource estimates at ATP 529P.

This upgrade was as a result of incorporating the step out drilling and pilot production testing completed in the permit since the previous 2011 SRK assessment. The 2015 Contingent Resource estimation completed by MHA Petroleum Consultants LLC (MHA) covers a significantly larger area than previously assessed. This upgrade includes data from eight step out exploration wells within the permit as well as the pilot and pressure monitoring data from the Glenaras Pilot production completed subsequent to the 2011 SRK Consulting Report.

MHA has attributed the increase in the Contingent Resources to Galilee's net equity interest (being 100%) in the Glenaras Gas Project using the deterministic method to prepare the estimates of the Contingent Resources as at 31 August 2015.

The updated ATP 529P 2015 Contingent Resource estimation increases Contingent Resources by 868% (2C) and 388% (3C).

Glenaras Gas Project Estimated Resources (PJ)

5,314

2011

2015

+387%

2,508

+868%

1,090

308 259

12

1C 2C 3C

* Refer ASX Announcements made 1 September 2015

Source: MHA Petroleum Consultants LLC (2015), SRK Consulting (2011)

The following table summarises the changes to the ATP 529P Contingent Resource.

Glenaras Gas Project	Units	2011 (SRK)	2015 (MHA)
Low estimate Contingent Resources (1C)	PJ	11.8	307.8
Best estimate Contingent Resources (2C)	PJ	258.9	2,507.5
High estimate Contingent Resources (3C)	PJ	1,089.9	5,314.1
Source: SRK Consulting (2011), MHA Petroleum Consultants LLC (2015)

Galilee Energy is not aware of any new information or data that materially affects the information included in the announcement of the 1st of September 2015 and that all of the material assumptions and technical parameters underpinning the estimates in the announcement continue to apply and have not materially changed.

Galilee Energy Limited I Annual Report 2015 5

Moving forward - converting Resource to Reserves.

The core focus of the company in the current year is to carry out the work required to convert a substantial portion of this Contingent Resource into Reserves. The key missing element to achieve this is the flowing commercial gas rates from the pilot.

The Galilee Basin, and ATP 529P in particular, has had significant historic exploration activity, which commenced in 1992. The result is an excellent geological database across the entire permit. That includes information on regional structure, coal thickness and CSG properties over the breadth of the permit.

A total of 12 coreholes, two 5-spot production pilots and four step-out production wells and over 700 km of seismic data have been acquired over the permit to date. The following table provides an average of the Betts Creek Coal properties across the core area within the permit.

Coal depth (m) Net coal (m)

Gas content (m3/t) Permeability (md)

Resource concentration (bcf/km2)

900 - 1000

19

5.3

45

5.2

Any successful CSG development requires three key parameters to be an economic success.

Resource Concentration -

this is a function of gas content and thickness. In contrast to most wells drilled in the Basin, the gas content in the coals within the Glenaras Gas Project is very good. Combined with net coals in excess of 20 metres thick, this provides excellent resource concentration across the permit area.

Productivity -

this is a function of thickness and permeability. The coals in ATP 529P appear to have excellent permeability with an average permeability from all tests in the permit of 45 md. Visual evaluation of core and history matching from pressure data at the Glenaras Pilot support this excellent permeability.

Pressure drawdown -

?

in order for any CSG project to work, the pressure in the coal must be reduced by dewatering the coal. This has not been achieved in the Glenaras Gas Project as a result of well design.

Poor well design has allowed connection to other higher permeability water bearing units. The net result being that the water produced to date has predominantly come from these sandstones, preventing pressure drawdown in the coals.

6

The previous pilot well designs have failed to achieve sufficient pressure drawdown in the coal. This is primarily due to the application of fracture stimulation. The induced fractures have grown into interbedded high productivity water bearing zones, as clearly observed in the Rodney Creek 8 pressure monitoring well at the Glenaras Pilot.

As a result the pilot production has been dominated by water production from these sandstone units, and not from the coals, which is required to draw down the pressure in the coal. Despite this, sustained gas production was achieved in all Rodney Creek pilot wells, with flow rates of up to 200 Mscfd from some of Glenaras wells during testing in 2011.

The strong well interference and communication has clearly demonstrated excellent permeability and support the company's view that these coals do not require fracture stimulation to be commercially successful.

R1 Test

The Glenaras Pilot includes five (5) vertical production wells and the supporting gas and water gathering infrastructure.

Galilee Energy Limited I Annual Report 2015 7

Coal

Permeability barrier (siltstone) Water Bearing Units

R1 In each of these wells the original completion only targeted the R2 - R7 seams.

The R1 seam was not completed due to concerns about fracture growth into the water bearing unit above the coal seam. Like most of the coals in the Galilee Basin, the R1 has permeability barriers above and below the coal, which are expected to isolate it from the surrounding formations.

As of the date of this report, the Company is well progressed on a workover programme of all the Glenaras wells to set a bridge plug above the R2 seam and perforate the R1 seam. These wells will then be placed on production with the expectation that this well design will enable water to be produced from the coal only. This in turn will reduce the pressure in the coal and should result in commercial quantities of gas from the coal for the first time.

R2 This proposed programme is low cost and a simple test

R3 that leverages the almost $100M spent on the permit to date. If successful the company expects to be able to

convert a significant portion of the Contingent Resource into Reserves.

R3

R5

R6 R7

8

Buildi

Th lev pr inv sel m pr

La

ng a production base

e second core part of our strategy is to

erage our existing cash position into a material oduction position by careful asset selection and estment in selected prospects. The Company ected three attractive prospects which were all odest investments with very good risk return ofiles.

vaca County - Texas Gulf Coast

Hoffer B1 Well (Galilee 35% WI, reducing to 28% after payout)

The Hoffer B1 well was spudded on 6 January 2015 and reached total depth (TD) at 14,150 ft (4,313m) measured depth on 12 March 2015.

A number of very significant shows were observed during drilling, both in the lower secondary targets, and also strong shows from sandstones developed

in the primary target. A total of thirteen significant shows were recorded at multiple levels in the well, in the depth range 11,230 ft (3,241m) to 14,150 ft

(4,313m).

Open hole logs were successfully run to a depth of 11,600 ft ahead of running a production liner. These logs identified a total net pay of 43 ft in the Middle Midcox sandstones, a secondary

target in the well. These logs also confirmed a potential 40 ft pay zone in the shallower Yegua Formation.

Following successful setting of a production liner at 12,700 ft, the well was drilled to a total depth (TD) of 14,150 ft.

Drilling of the deeper section required careful management to maintain hole stability as a result of both significant

gas influx and extremely high pressures.

Galilee Energy Limited I Annual Report 2015 9

Two attempts were made to run open hole logs, however it was not possible to get these to bottom. As a result, given the continued influx of gas and high pressures, the decision was made to run production casing to protect the well and log the well through casing.

Following the running and cementing of production casing, the Operator ran a cased hole logging suite. Processing and interpretation of these logs can allow for a qualitative evaluation of the potential productive zones in the well, but cannot directly quantify net pay.

The processing and interpretation of the logs was very encouraging and was strongly correlated to the shows identified during drilling, and the open hole log data where it was available.

The cased hole logging suite identified:

• Gross sandstone totalling approximately 30 ft in the Middle Midcox and Lower Wilcox. This is in addition to the 43 ft previously identified on open hole logs in the Middle Midcox.

• Gross sandstone totalling approximately 90 ft in the primary target.

Despite encountering extremely high pressures, strong gas shows, and even at times gas flows during drilling, the testing of the lower zones in the primary target was unsuccessful. It is unclear if the zones were damaged or not productive, and the evaluation was hampered by the lack of open hole logs. As a result the company elected to move progressively up to test the secondary targets.

Subsequent to year end on the 7 July 2015 the Company announced that in aggregate, the zones tested in the secondary targets of the Middle Midcox units flowed approximately 6 million standard cubic feet of gas per day (MMscfd), with demonstrated liquids content ranging as high as 50 barrels of condensate per million cubic feet of gas produced (bbls/MMscf).

The Operator recommended that further testing of the Hoffer B1 well in the Midcox interval be terminated due to the poor wellbore conditions. While strong flow rates were achieved from the interval, the condition on the casing cement is such that stable production was unlikely even if further remedial work was attempted.

The company is confident that the well results demonstrate a gas discovery in the Midcox zones. Future development wells in this area targeting the Midcox unit are able to be carried out under turnkey contracts and are expected to cost less than US$2.0M dry hole cost.

The first development well targeting the Midcox sands discovered in Hoffer B1 will be the Hoffer A1 well and is being planned for drilling in the fourth quarter 2015.

Galilee is participating on equal terms with the other Joint Venture partners for a 35% working interest (WI) (reducing to 28% after payout) in the Hoffer Prospect in Lavaca County, Texas.

Hoffer Extension Area (Galilee 37.5% WI)

Work has continued on the 3D seismic data set that covers the Hoffer extension area. This has seen continual refinement of a number of the prospects previously identified. The Joint Venture (JV) now has over 1,500 acres under lease covering a number of quality prospects.

10