29 April 2016

QUARTERLY ACTIVITIES REPORT

To 31stMarch 2016

Blue Energy Limited (ASX: "BUL") is pleased to report on progress in March 2016 quarter activities across the proven and emerging basins in Queensland and the Northern Territory in which the Company's key gas and oil projects are located.

Key Points

• Blue Energy continuing discussions with gas buyers

• ACCC sees East Coast gas supply uncertainty

• Gas demand in Gladstone now twice southern states combined

• Arrow's Moranbah-Gladstone pipeline still in play

• Current cash position $4.8 million

Blue Energy Reserve Growth

Peta Joules

Despite both domestic and LNG export markets being in tight supply, Blue Energy has built a solid 2P & 3P reserves base, and has a large Contingent Resource Base from which to further grow reserves

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2009 2010 2011 2012 2013 2014 2015

3P Reserves 2P Reserve

Table 1: Blue Energy Reserves Growth chart

Table 2: Blue Energy Reserve and Resource Position (net to Blue)

Global Commodity prices

Global oil prices have staged a modest recovery over the last quarter, but with little change in the fundamental supply and demand equation (global supply is only about 1.5 million barrels per day over demand - out of a total supply volume of approximately 94 million barrels per day) The markets however are looking for anything that gives a pointer to a reduction in production volumes, whether it be the Doha meeting of OPEC producers to agree on a production freeze (at record production levels), a labour strike in the Kuwait oil fields reducing production levels, or lower inventories in the US. Meanwhile the number of North American oil production companies filing for bankruptcy continues to climb. Since January 2015 about 60 North American oil and gas companies have filed for bankruptcy, totalling some $19 billion in aggregate debt. Clearly therefore, should oil prices rebound to near economic production thresholds, it is unlikely that banks will be rushing to lend more money to production companies, given the carnage that has been wrought on lenders with the recent collapse in the oil price. A sudden rebound in production in the US, based on a positive price signal may therefore not be immediate. In addition, predicted annual growth in global oil demand of around 1.2 million barrels per day could see the supply-demand imbalance decline sooner than expected as US production levels are anticipated to reduce sharply over the coming 12 months, after already reducing by 650,000 barrels per day from the peak production level reached in June 2015.

Globally the Industry's annual CAPEX spend on a "business as usual" basis has been in the order of around $1 trillion. However, the free fall in the oil price has seen this reduced by a massive 60% to around $400 million, thus suggesting that there will be a significant break in the conveyor belt of development opportunities in the next several years.

It is also abundantly clear that Saudi Arabia is still acting to protect its market share not only from higher cost US producers, but also from a resurgent Iran which threatens Saudi's OPEC production quota, and with whom they are essentially at war with (via Iran's proxy) in Yemen. All of this now needs to be viewed with the strategic backdrop that Deputy Crown Prince bin Salman of Saudi Arabia would like to see the Kingdom's economy free of its oil dependence by 2020 and as such is looking to float 5% of Saudi Aramco.

East Coast Gas

The remaining two trains under construction in Gladstone (GLNG Train 2 and APLNG Train 2) both now have gas introduced into the respective liquefaction plants and are expected to begin shipping cargoes between July and December of this year. Once fully functional, this will bring the total gas demand in Gladstone to approximately 4,000 TJ/day representing approximately four times the daily gas demand of Adelaide, Sydney and Victoria combined. The level of gas demand currently observed in Gladstone is now fundamentally changing the east coast gas market dynamics (as observed by the ACCC - see paragraph below). The AEMO gas market bulletin board (http://www.gasbb.com.au/) gives daily information of gas flow in the major east coast gas infrastructure and shows how the direction of flow of the Moomba to Sydney Gas Pipeline is now INTO Moomba rather than Sydney, indicating therefore that gas for Gladstone is now being sourced from as far afield as the Otway Basin or Bass Strait. Similarly the net gas flow direction of the Moomba - Adelaide pipeline is also frequently INTO Moomba as well. Sydney's gas demand is now largely sourced from Victoria.

The fact that within 12 months of the commencement of LNG exports from Gladstone feed gas for the LNG trains is coming from Victoria shows how disruptive LNG in Gladstone has been to the east coast market, and does indicate that with at least another 20 years of contract obligations from Gladstone, the impact of timely sourcing of LNG feed gas needs to be fully understood in terms of developing new long term gas supply sources for domestic markets.

ACCC Inquiry report

The long awaited report by the ACCC on its East Coast Gas Market Inquiry was made public last week (22ndApril 2016) and its main points indicated the "Triple Whammy" to the east coast gas market of 1) the new LNG plants in Gladstone 2) global energy prices and 3) over regulation of the onshore oil and gas sector.

From an explorer's perspective, the findings highlighted the uncertainty of future gas supply for the east coast market, the requirement for extensive development of currently un-developed reserves and the depletion of existing conventional gas reserves in southern states used to meet the current demand, and the increasing development cost of those reserves. Superimposed upon this is the regulatory burden and various moratoria applied to exploration (via fracture stimulation bans) in Victoria, NSW and Tasmania, such that new gas discoveries may well only be made in South Australia, Northern Territory and Queensland, but even in these jurisdictions, the regulatory burden is becoming significant. These burdens continue to lengthen the exploration and development process, add to the cost of exploration and production, which ultimately translates to delays in bringing new gas to market and higher gas prices to consumers.

"While market conditions have been difficult, it is important that new supply comes online and that new opportunities are developed. Trading markets are developing and the Australian Energy Market Commission and the Australian Energy Market Operator are working towards further improvements in market design. More supply, new suppliers and an increased diversity of supply sources are crucial for the future competitiveness of, and pricing in, the gas market," ACCC Chairman Mr Rod Sims said.

The Report also finds that a gas reservation policy on the east coast would be counter-productive noting in its recommendation that "Gas reservation policies should not be introduced, given their likely detrimental effect on already uncertain supply."

Gas Supply ramifications

With the east coast future gas supply categorized as "uncertain" by the ACCC, and almost 90% of East Coast 2P reserves controlled by LNG Export Operators (each having 20+ year export contracts to honor), it is ironic that States with arguably the biggest need to secure domestic gas supply both for industrial, household and back up energy supply for burgeoning renewable energy capacity, are those States that seem opposed to facilitating discovery and development of their own indigenous onshore gas resources (with moratoria on gas exploration and development). Blue is well positioned in this respect, having already discovered nearly 4,000 PJ of gas resource in its existing permits, and with a significant proportion of that resource in a 3P + 2C category

With gas now being drawn toward the huge Gladstone demand centre in Qld, the supply of gas to those southern domestic markets may come at a high price in the absence of additional new gas supplies, as the oil price recovers and the corresponding net back LNG price escalates. The inconvenient facts are that in the political pursuit of a clean energy future for Australia, sufficient regulatory and political road blocks have been put in the path of new energy discoveries at a time when gas producers are now able to supply gas (in the form of LNG) to the rest of the world who value Australia's gas more than the Australian market does, and are prepared to enter into long term supply contracts at international prices to secure their long term energy needs as their developing economies transition away from coal.