CVN 2.63% 18.5¢ carnarvon energy limited

Chairmans' Address

  1. 653 Posts.

    HOMEX - Perth

    On behalf of the Board of Directors of Carnarvon Petroleum I welcome
    you to this Annual General Meeting of the Company.

    The past year has seen significant strides forward by the Company and
    I would like to take the opportunity of summarising our recent
    achievements. These included:

    1. The SW1A Joint Venture completed the Phase 1 development program
    at the Wichian Buri Oil Field in Central Thailand in which all three
    northern wells discovered oil. These discoveries resulted in an
    increase in Proved and Probable Reserves from 2.6 million barrels of
    oil to over 23 million barrels of remaining recoverable oil. This is
    a near tenfold increase in oil reserves in less than two years.

    2. The Company and its Joint Venture partner committed to the Phase 2
    development program. Planning of the program included detailed
    assessments of geological, engineering and drilling data leading to
    the selection of optimal well locations, and the procurement of an
    experienced drilling contractor and the required materials. This
    planning, together with the implementation of procedures which
    instilled strict measures of operational and cost control, delivered
    outstanding drilling success;

    3. The Company and its Joint Venture partner secured limited recourse
    funding for the Phase 2 development from Gemini Oil & Gas Limited, an
    internationally respected oil and gas financier who invested US$2
    million in exchange for future royalty payments. The commitment of
    this funding by Gemini provided an independent confirmation of the
    potential for the Oil Field; and

    4. The Company completed a significant capital raising in very
    difficult market conditions which has to date delivered all
    participants a 50% increase on this investment.

    Since the end of the financial year, the Company and its Joint
    Venture partner have carried out the significant Phase 2 development
    program at the Wichian Buri Oil Field. This development program
    consisted of drilling three new appraisal wells in Production Licence
    1 and hydraulically fracturing two existing production wells that
    were previously drilled as part of Phase 1. The three new wells were
    designed from the outset to enable long-term optimum levels of
    production in the event oil was discovered.

    The drilling of the three new Phase 2 wells, WB-N4, -N5 and -N6, was
    an operational success with drilling and casing of the three wells
    performed within eight days and without incident. Most importantly
    for Carnarvon and its shareholders, all three wells found the
    targeted F Sandstone reservoir as oil bearing.

    In addition, two other oil bearing reservoirs, the E and G
    Sandstones, were discovered. Preliminary results from these new wells
    indicate that the quality of the sands is better than anything
    previously seen in the Wichian Buri Oil Field. The successful
    drilling of WB-N5 also confirmed oil in a new fault block in
    Production Licence 2. The three new wells have extended the known
    presence of oil in the northern portion of the Wichian Buri Oil
    Field. No boundary is as yet evident to the north.

    The Company, with its Joint Venture partner, has in the past 18
    months now drilled six wells that have all discovered oil. This is an
    exceptional result by industry norms.

    The results of the hydraulic fracturing of wells WB-N2 and -N3,
    whilst not meeting expectations, has delivered a sustained 50%
    increase in production to about 60 BOPD. Initial production rates
    when the two fracced wells were brought back on stream indicated
    production rate potential in excess of 200 BOPD but oil output during
    the following weeks was erratic. The flow rate has now stabilised.
    The fracs enabled the Joint Venture partners to better understand the
    reservoir behaviour and characteristics in the area surrounding these
    northern wells. The payback period for this investment is less than a

    Testing of the three new wells is now under way. The Company's
    Managing Director & CEO, Ken Tregonning, was in Thailand last week
    when the initial natural flow and production tests were performed.
    Two of the three wells flowed oil naturally to the surface. The other
    well is expected to flow oil to surface when pumped.

    Pressure gauges have just been placed in the WB-N4 well to measure
    the pressure response of the reservoir under both natural and pumped
    flowing conditions. The results of these pressure measurements,
    together with accurate surface flow rate data, will enable the
    reservoir parameters to be determined. In addition the tests will
    assist with optimising the operation of the jet pump equipment. These
    tests will be repeated for WB-N6 and -N5.

    WB-N6 is in the process of being brought into production using a jet
    pump, a tried and proved method of pumping oil in fields similar to
    Wichian Buri. WB-N4 will follow and thereafter WB-N5. The Joint
    Venture partners will jointly provide flow rate information once
    reliable and sustained production data has been obtained under both
    natural and pumping conditions.

    It should be noted that only the F Sandstone reservoir has been
    perforated in these three wells and current production is solely from
    this reservoir. The Joint Venture partners will need to production
    test the F Sandstone reservoir for an extended period of time to
    determine its reservoir and production parameters. It is important to
    understand these parameters properly in order to plan for the next
    stage of development.

    The E and G Sandstone reservoirs will be perforated and tested within
    the next few months. Incremental oil production from these new
    sandstone reservoirs will not be subject to the royalty impost.

    Once all the sands have been tested and are in production, reserves
    for the Wichian Buri Oil Field will be recalculated, but it is fair
    to say that a further significant increase in reserve estimates is
    anticipated. We expect to release these estimates in the first
    quarter of calendar year 2003.

    Subject to successful production rates being achieved from the three
    new wells, the Joint Venture partners will turn their attention to
    the Phase 3 development program which will target the prospective
    Huai Phai prospect to the west, as well as continue drilling the
    northern structure of the Wichian Buri Oil Field. The Operator and
    the Company have initiated discussions to use the same drilling
    contractor for the Phase 3 development program following on from the
    successful Phase 2 operations.

    You may also be aware that since the end of the financial year the
    Joint Venture has been awarded the long-awaited second production
    licence, PL2, as well as Exploration Block L44/43, which completely
    surrounds the Wichian Bun Oil Field and encompasses a significant
    portion of the Phetchabun Basin of which the Wichian Buri Oil Field
    forms part. The Huai Phai prospect is in PL2.

    Whilst we are encouraged by the recent success at Wichian Buri, the
    Company recognises that there are significant risks associated with
    any oil and gas development project. However, we do have a management
    team with the technical expertise to mitigate the geological and
    operational risks.

    The Company's development plans are behind the schedule we set
    ourselves twelve months ago. This was in part due to the limited
    availability of drilling equipment that met the specifications for
    the more extensive and technically demanding program undertaken,
    specifically drilling multiple large bore wells from a single
    location capable of higher levels of production. In addition, the
    Company and its Joint Venture partner needed to secure sufficient
    funding to finance the more extensive Phase 2 Development Program.
    However, the time has been used to great effect by allowing us to
    increase our understanding of the Wichian Buri Oil Field and put in
    place guidelines and procedures for field operations that have set
    the scene for the success of Phase 2.

    Your Company will soon know whether it has made the transition to a
    successful oil producer. The next few weeks are vital to achieving
    our primary objective of a self-sustaining profitable company
    enjoying strong cash flows from a quality asset.

    My fellow Directors and I thank you for your continuing support as we
    look forward to delivering results which we are confident will
    increase shareholder wealth.
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