ANNUAL REPORT FOR EPC 1031

FROM APRIL 20, 2009 TO APRIL 19, 2010

Arrow Energy Limited

Arrow Energy Limited ACN 078 521 936 Level 19, AM-60, 42-60 Albert Street BRISBANE QLD 4000 GPO Box 5262, BRISBANE QLD 4001 Telephone: 61-7-3105 3400 Facsimile: 61-7-3105 3401 Email: [email protected]

CONTENTS

1.0 INTRODUCTION 1

1.1 Location & Infrastructure 1

1.2 Tenure Details 1

1.3 Exploration Summary 1

2.0 REGIONAL GEOLOGY 4

2.1 Paleozoic basement 4

2.2 Bowen Basin 5

2.3 Jurassic-Cretaceous basins 6

2.4 Surat Basin 7

2.5 Structure 10

3.0 PREVIOUS EXPLORATION 15

4.0 CURRENT PROGRAM 21

5.0 PLANNED EXPLORATION 22

6.0 REFERENCES 23

FIGURES

1 Sub-Block Details and Location Map

2 Regional Location

3 Regional Structure

4 Geology

5 Stratigraphy

6 WCM Stratigraphy

7 Depth to Top WCM

8 Macalister Seam – Net Coal Thickness

9 Juandah Seams – Net Coal Thickness

10 Taroom Seam – Net Coal Thickness

11 Bouguer Gravity Contours

1.0 INTRODUCTION

1.1 Location & Infrastructure

EPC 1031 is located within the Surat Basin approximately 300km West of Brisbane, 20km southwest of Dalby, close to major roads and rail links. The Moonie Highway passes through or adjacent to the Northernmost block of the permit. The EPC sits within ATP 683 and PL 198.

1.2 Tenure details

EPC 1031 was granted on the 20th of April 2006 for a term of 5 years; comprising 66 sub-blocks. After relinquishment in April 2010, the EPC currently comprises 33 sub- blocks (Figure 1).

1.3 Exploration summary

Arrow Energy has been carrying out CSG exploration drilling under petroleum ATP 683 since 2002; in addition to production drilling in PL 198 since 2004. It became apparent during this work that seams of Walloon coals up to 10m thick may be prospective for underground mining. The permit was acquired to evaluate this resource.

2.0 REGIONAL GEOLOGY

2.1 Paleozoic basement

South East Queensland consists of several fault bounded basement blocks and exotic terranes of late Paleozoic age, intruded by Permian and Triassic granitoid plutons and covered by Triassic to Jurassic and Tertiary intra-cratonic sedimentary basins (Figure 3). These rocks form part of the New England and Yarrol Orogens.

The present day New England Orogen extends for 1500 km from Newcastle to Bowen, and is bounded to the west by the Hunter-Mooki-Goondiwindi Fault System. This fault system is interrupted by the northeast striking Undulla Fault, and re- commences northwards as the Burunga Fault.

From the Cambrian, Eastern Australia was an active plate margin, although the present tectonic pattern dates principally from the Devonian. During early Devonian to Carboniferous times the region was dominated by a westward dipping subduction zone with a forearc basin (Tamworth and Yarrol Belts) bounded to the west by a volcanic arc (Connor-Auburn Arch) and to the east by an accretionary wedge (Coffs Harbour, Beenleigh and South D’Aguilar Blocks).

These accretionary wedges are sub-parallel to the present coast line and aligned approximately north-south. The Beenleigh, D’Aguilar and Coffs harbour blocks consist of deformed and metamorphosed turbidite sequences and minor deep sea floor basalt and chert of late Paleozoic age.

Cessation of subduction at the end of the Carboniferous was followed by orogenic deformation and accretion of exotic terranes during the Permian and Triassic. From the Permian to mid Triassic Eastern Australia was part of a convergent plate margin system related to the coalescence of the constituent parts of Gondwana.

The Gympie block accreted to the Yarrol Orogen in mid Triassic times, accompanied by initiation of the Ipswich Basin. The process of orogeny and accretion was accompanied by significant strike slip displacement, possibly of the order of hundreds of kilometers in the Permian-Carboniferous, and tens of kilometers in the Triassic.

Subduction ceased in the Late Carboniferous and re-commenced in the east from the Permian to Triassic, with Mesozoic basin development forming in a back arc setting. Mesozoic basins are en-echelon in arrangement, and formed as depressions genetically related to the twisting of the New England Orogen into two coupled oroclines (Texas Orocline and Coffs Harbour Orocline).

To the east of the present day Moonie Fault Paleozoic basement is represented by the late Carboniferous Camboon Andesite and Kuttung Volcanics, known collectively as the Kuttung Formation. This is in turn underlain by the metamorphosed Devonian Timbury Hills Formation. To the east are found the Neranleigh-Fernvale Beds. These strata have been assumed to be the same age in Arrow stratigraphy.

2.2 Bowen Basin (Permian-Triassic)

Tectonically, Eastern Australia evolved orogenically from a subduction to cratonic environment by the late Triassic. The earliest rocks of the Bowen-Gunnedah-Sydney Basin (referred to here as the Bowen Basin) are early Permian volcaniclastic marine sediments deposited in an extensional phase in the Denison Trough, Taroom Trough, Gympie Basin and Esk Trough. Subsidence was rapid in fault bounded grabens and half grabens, although sediments may have deposited under relatively shallow conditions.

Early Permian extension was terminated by compression of a late Permian orogeny, followed by intrusion during Triassic extension and a shift to non marine (alluvial and lacustrine) conditions.

Passive thermal subsidence commenced in the mid Permian marked by a widespread marine transgression. Sediment supply from the now inactive volcanic eastern margin decreased, and sedimentation was dominantly clastic with some carbonates.

In the late Permian a belt of fold-thrust mountains developed on the eastern margin. This mountain belt moved progressively westwards, incorporating the older foreland basin. Sedimentation changed diachronously from uniform sheets of marine sediment to syntectonic detritus marked by slumps, debris and turbidity flow deposits representative of an unstable shelf environment.

From the late Permian to mid Triassic the Bowen Basin subsided as a foreland basin (Hunter-Bowen event), while intra-cratonic basins to the west (such as the Galilee Basin) also subsided. On the east margin a resurgent volcanic arc developed, with volcanic sediment deposited to the west and south in alluvial fans. Volcanogenic clastic deposits formed the Baralaba Coal Measures within the Taroom Trough, late Permian age equivalents of the Rangal Coal Measures and Bandanna Formation to the north.

The main locus of deposition was the axial north-south oriented Taroom Trough, and the Denison Trough to the north of the ramp-like Comet Ridge. The basin was asymmetric, with greater sediment thickness on the mountainous eastern overthrust margin within the Taroom Trough, thinning markedly to the west.

The eastern volcanic arc supplied the bulk of sediment to the Bowen Basin, although periodic uplift of cratonic rocks to the west provided influxes of quartzose sediments. Alluvial and lacustrine deposits of the Rewan, Clematis and Moolayember Formations deposited in the early to mid Triassic over a very wide area, and the Rewan and Moolayember sequences can be traced through the Cecil Plains depression and as far east as the Esk Trough. Alluvial fan material within the Rewan Formation and quartzose sand sheets of the Clematis Group derived from uplift to the west.

Sediment flow was along a meridonial southward flowing drainage system which at times was swamped by a lake to form sealing units such as the Snake Creek Mudstone. Sediment flow was likely affected by eustatic changes, and at times supply outstripped the capacity of the basin and sediment flowed into the adjacent Galilee and Cooper Basins.

Towards the end of the Hunter-Bowen event in the mid to late Triassic, deformation was accompanied by westward thrusting and formation of high angle reverse faults by reactivation of earlier extensional faults. The resulting uplift brought about an end to deposition, although a late Triassic extension formed a number of small rift and half graben structures such as the Ipswich and Tarong Basins. Many of these basins contain significant coal seams interbedded with dominantly volcaniclastic rocks. They formed within mountainous terrain and often feature coarse alluvial and colluvial sediments.

The Cecil Plains Depression (also known as the Horrane Trough) is generally considered to belong to this last extensional phase. It could however on the basis of seismic interpretation be much older and possibly dates to the late Permian of the Bowen Basin. Similarities of age and lithology suggest the Cecil Plains Depression is likely to represent a downfaulted erosional remnant of the Bowen Basin proper rather than a geologically distinct structure.

2.3 Jurassic-Cretaceous Basins

Great Artesian Basin

A very large intra-cratonic basin complex known as the Great Artesian Basin developed over most of Eastern Australia from the latest Triassic/earliest Jurassic. The Basin formed by a process of passive thermal relaxation over a very large area, coincident with the opening of the Tasman/Coral Sea in the late Cretaceous.

The Great Artesian Basin comprises within Queensland the Surat and Eromanga Basins, and is syn-depositional with adjacent basins including the Mulgildie, Nambour, and Clarence-Moreton Basins. The divisions between basins are based in some cases on underlying structural features, such as the Nebine Ridge separating the Surat Basin from the Eromanga Basin to the west, and the Kumbarilla Ridge which has in recent years been said (on suspect grounds) to separate the Clarence- Moreton and Surat Basins. Basins such as the Nambour Basin and Mulgildie Basin are erosional remnants of a formerly continuous basin.

The entire basin complex represents a giant river and lake system that at one time drained to the east through the northern part of the Clarence-Moreton Basin, via a choke point termed the ‘Toowoomba Strait’. The Strait was formerly a broad synclinal valley which breached the barrier of the elevated Texas Block to the south and the

Yarraman Block to the north, before being filled by Miocene basalts and subsequently eroded to form the modern reversed topography.

A series of six fining upward cycles related to eustatic sea level change have been identified by past workers. Units form a thick layer cake stratigraphy that is only lightly deformed and can be traced over great distances across several basins. The earlier sequences are alluvial and lacustrine, although with the progressive inundation of Gondwana in the Cretaceous the rocks become marine in character.

2.4 Surat Basin

EPC 1031 is situated within the Surat Basin, a large intracratonic sag structure which extends over 43,000 km2 through southern Queensland into NSW. Only the late Jurassic Kumbarilla Beds with a veneer of Tertiary sediments are exposed in outcrop (Figure 4). The Surat Basin forms part of the Great Artesian Basin complex and unconformably overlies the Bowen Basin. The Surat Basin is flanked by the Nebine Ridge to the west and Toowoomba Strait to the east, and is stripped to the north where the Bowen Basin is exposed at surface. An axial syncline, the Mimosa Syncline contains the thickest sediments and appears to be at least in part syn- depositional. This syncline is superimposed on a deep seated crustal feature, the Taroom Trough.

The earliest sediments of the Surat Basin may be a latest Triassic lacustrine phase equivalent to the Raceview Formation of the Clarence Moreton Basin. These sediments are significantly more deformed than the overlying Jurassic rocks, however they post-date recognised Bowen Basin sequences. It has been suggested that this unit could represent a separate eustatic cycle.

As occurred during deposition of the earlier Bowen Basin, periodic uplift of cratonic rocks to the west supplied quartzose sand sheets which formed reservoir rock units such as the Precipice, Hutton, and Boxvale Sandstones (Figure 5). However, the dominant sediment supply was from volcanic highlands to the east.

Exon (1976) proposed six successive cycles of sedimentation within the Surat Basin with each cycle being a product of deposition in turn from braided streams, meandering streams and finally swamps, lakes and deltas. Each cyclothem commences with coarse sandstones at the base and fines upward to fine sandstone, siltstone and mudstone with some coal. Coals of the Walloon Sub Group developed towards the end of Exon’s second cycle. Later work (Exon and Burger, 1981) linked these cycles to changes in global sea level, while Jones and Patrick (1981) recognised two sub-cycles within the Walloon Sub Group.

Cycle 1

The earliest accepted Surat Basin unit is the Precipice Sandstone, which dates from the latest Triassic/early Jurassic, and forms an extensive thick braided sand sheet.

This is overlain by meander and swamp deposits of the Evergreen Formation, which together with the Precipice forms a single fining upwards eustatic cycle (Cycle 1). The Evergreen Shale often contains a basal sand unit and an intermediate sand member (Boxvale Sandstone) as well as an oolite horizon that can be correlated with a similar horizon in the age equivalent Marburg Formation in the adjacent Clarence Moreton Basin.

Cycle 2

Overlying Cycle 1 is the Hutton Sandstone which forms the basal section of cycle 2. Following an obsolete convention, the Hutton and Evergreen Formations are not differentiated in GSQ mapping south of Chinchilla. The fining upwards meander/back swamp phase of Cycle 2 is represented by the mid-Jurassic Walloon Coal Measures (Figure 6), which may be subdivided into an upper (Juandah) and lower (Taroom) coal sequence, separated by the erosive Tangalooma Sandstone. The Walloons are recessive and represented by a belt of alluvial cover.

The Taroom sequence contains often very thick seams up to 20m aggregate thickness, which have been further divided into 3 seams by some workers.

The Juandah sequence is divided up into the Argyle, Iona, Wambo, Macalister, and Kogan seams. Individual coal seams cannot be correlated with certainty for any distance, but seam packages can be traced over several tens or even hundreds of kilometers. Each seam represents a fining upwards cycle with a basal sand unit, and may incorporate smaller sub-cycles. This repetition of similar units can make correlation extremely difficult where a recognisable feature such as the Hutton or Tangalooma Sandstone is not logged within a bore.

The overall thickness of the Walloons is remarkably consistent, averaging 420-440 m thick, although individual seam packages can vary in thickness. To the south of Kogan the overlying Cretaceous Springbok Sandstone becomes erosive, progressively removing the Juandah seams. Generally complete sequences appear to exist within EPC 1031.

The Walloon coals were laid down in a highly seasonal polar climate, and are derived from higher plant material which deposited in back swamp environments in what appears to have been a giant meander system analogous to the modern River Ob in Siberia. The perhydrous nature of the coals and their structure and permeability has made them particularly suitable for gas formation and retention.

Cycle 3

The late Jurassic erosive Springbok Sandstone progressively removed the underlying Walloon sequence to the south. This forms the basal part of Cycle 3 and is overlain by labile sediments and minor coals of the Westbourne Formation.

Cycle 4-6

Cycle 4 comprises the late Jurassic to early Cretaceous Gubberamunda Sandstone, which formed in a braided to meander environment and is overlain by the fossil wood bearing Orallo Formation. The Orallo Formation contains thin high ash coals. Cycle 5 is early Cretaceous in age and consists of the Mooga Sandstone and Bungil Formation. The upper parts of the cycle reflect marine transgression from the east.

Cycle 6 is made up of the Wallumbilla Formation and reflects the regression of the Cretaceous sea with a sequence progressing from neritic to estaurine and fluvial.

Cycle 6 is the last sequence to be preserved and dates from the early Cretaceous. Compression with uplift and tilting of the Surat Basin to the south followed, with the opening of the Tasman/Coral Sea commencing some 10 Ma later.

2.6 Structure

Structure within the tenement is controlled by a dominant series of parallel north- south trending structures, with a secondary northwest fabric. The principal fold is the north-south trending Cecil Plains Anticline, which flanks the eastern side of the permit. This structure lies on the uplifted side of the Horrane Trough, which is bounded by the Horrane Fault.

Palyn. STAGE SURAT (BOWEN) BASIN CLARENCE-MORETON BASIN cycles Ma Exon's Denison Trough Roma Shelf Taroom Trough Eastern Surat/Esk Trough Tarong Basin Ipswich Basin NSW -100 Cenomanian APK6

APK5 -110 Albian APK4 Wallumbilla Formation Aptian -120 APK3 EARLY Barremian

CRETACEOUS Bungil Formation -130 APK2 Hauterivian Valanginian Grafton Formation Mooga Sandstone -140 Berriasian APK1 Orallo Formation Tithonian Gubberamunda Sandstone -150 Cycle 4 Cycle 5 Cycle 6

LATE Kimmeridgian Kangaroo Ck Sandstone APJ6 Westbourne Formation

Oxfordian Springbok Sandstone Maclean Sst 3 Cycle -160 APJ5 CREEK INJUNE Callovian GROUP Walloon Coal Measures -170 APJ4 Bathonian Transitional unit Hutton Sandstone Koukandowie Formation

MIDDLE Bajocian Heifer Ck Sst

-180 Aalenian Westgrove Ironstone Member oolite marker APJ3 Evergreen Shale Gatton Sandstone JURASSIC Toarcian -190 Boxvale Sand MaMa Ck Sst

Pliensbachian SUB GROUP MARBURG Basal Evergreen Sandstone ('56-4 Sand') Calamia Member Cycle 1 Cycle 2 EARLY APJ2 -200 Sinemurian Precipice Sandstone Ripley Road Sandstone APJ1 Hettangian Moonie '58-0' sand Helidon Sand APT5 -210 Rhaetian Raceview Fm equivalent Aberdare/LaytonsAberdare/LaytonsAberdare/Laytons Range RangeRange Comglomerate ComglomerateComglomerate

Blackstone Fm Norian Tarong Beds Tivoli Fm

-220 LATE APT4 Kholo

sub Gp COAL IPSWICH

Carnian MEASURES -230 Ladinian Moolayember Fm APT3 Neara Volcanics

TRIASSIC Snake Ck Mudstone Clematis/Showgrounds Sandstone Bryden Fm - Esk Beds -240 MIDDLE Anisian

APT2 Olenekian Rewan Formation Cabawin Fm 'Red Beds' GROUP VOLCANICS CHILLINGHAM NYMBOIDA CM

APT1 TOOGOOLAWAH

-250 EARLY Induan APP6 Tartarian Blackwater (Kianga, Bandanna Fm) APP5 Black Alley Shale Mantuan Productus Beds LATE Kazanian Peawaddy Fm -260 Catherine/Early Storms Sst Ingelara Freitag Fm Capitanian Cressbrook Ck - Aldebaran Back Ck Group APP4 Northbrook Beds Wordian Sandstone -270 MIDDLE Roadian Kungurian -280 APP3 Cattle Creek Fm Buffel Formation Artinskian

EARLY Reids Dome -290 Camboon Volcanics (Buaraba Mst-Marumba Beds) APP2 Sakmarian Beds

-300 APP1 Asselian Gzhelian Kasimovian

-310 APC4 Moscovian Bashkirian -320 PENNSYLVANIAN

APC3 Serpukhovian -330

APC2 Visean

-340 CARBONIFEROUS PERMIAN MISSISSIPPIAN -350 APC1 Tournaisian Timbury Hills Formation Roma Granite Kuttung Fm New England Orogen metasediments

FIG 5 STRATIGRAPHYFIG 5 STRATIGRAPHYSTRATI CLARENCE MORETON EROMANGA BASIN SURAT BASIN BASIN

KUMBARILLA BEDS

ADORI SANDSTONE SPRINGBOK SANDSTONE SPRINGBOK SANDSTONE

KOGAN SEAM

MACALISTER SEAM MIAD SANDSTONE

WAMBO SEAM

BIRKHEAD FORMATION

JUANDAH SEQUENCE IONA SEAM

ARGYLE SEAM

TANGALOOMA SANDSTONE TANGALOOMA SANDSTONE

A SEAM A SEAM B SEAM TAROOM SEAM B SEAM TAROOM SEAM C SEAM C SEAM D SEAM MID JURASSIC CALLOVIAN - BAJOCIAN (AALENIAN?) 161.2-171.8 Ma

EUROMBAH SANDSTONE EUROMBAH SANDSTONE UNDIFFERENTIATED TAROOM SEQUENCE

HUTTON SANDSTONE HUTTON SANDSTONE HEIFER CK SANDSTONE

FIG 6 WALLOON CM STATIGRAPHY

3.0 PREVIOUS EXPLORATION

Prior to Arrow Energy Limited acquiring the EPC, a number of coal bores were drilled by Marathon Petroleum between 1979 and1985 as part of the Macalister Steaming Coal Project. Marathon held the area under EPC’s 247, 248, 266, 280, 285, 383, and 413, before applying for an MDL, which is no longer current. These coal bores are wireline logged and are available in hard copy, although the logs are difficult to read due to the fugitive inks used in header and depth labelling.

Arrow has not drilled any exploration wells under the EPC, to date.

4.0 CURRENT PROGRAM

Part of EPC 1031 is within the Tipton CSG development and planned Longswamp development area (PL198 and PLA260). Arrow has drilled a total of 177 CSG wells within the EPC (but drilled pursuant to Arrow’s petroleum tenures), all of which were wireline logged (Figure 2).

From this data, previous Arrow exploration drilling in the area, and coal and petroleum open file reports, net Juandah coal thickness was calculated (Figure 9). Coal within the permit is likely to vary between 13 and 28m thick. The preponderance of finer grained material suggests a shallow lake.

The Taroom coals are more restricted, with up to 14m in the thickest area of the northern part of the EPC (Figure 10). There is significantly less net coal thickness in the southern part of the tenure, thinning in a pattern that suggests a crevasse splay deposit or a channel/levee.

Surface mining appears out of the question, as the top of the Walloons deepen from 120 to 275m southwest across the permit (Figure 7). Depth contours indicate possible block faulting near the northern part of the permit, around Tipton-18A.

Current underground mining methods require reasonably clean coal, at an absolute minimum 2m thick. Because of the expense involved in mining a deposit of steaming coal without updip access to the surface; in practical terms the minimum target is a 10m clean seam with good continuity over at least 10-20km2 (or greater). A 10m seam would contain about 14-15 Mt per km2. The thickest seam in this area is the top Macalister which, within the EPC, is generally less than 10m thick (Figure 8). The heavily split and banded nature of the coal and the frequent stone interbeds up to 1m thick present problems for mining. The top of this seam is usually a sandstone, but can also be a siltstone which creates roof problems. Bouguer gravity contours support the interpretation of block faulting (Figure 11), which would present further difficulties in conventional underground mining.

If this seam were to be exploited, the area of potential working seam >4m thick that is within the tenure is less than 36km2 (see Figure 8), somewhat limiting the potential resource size. There is potential to increase the area of >4m working seam by additional drilling in the southern part of the tenure.

5.0 PLANNED EXPLORATION

There is a deep core hole (~700m) planned in the Western part of EPC 1031 in the 2010-2011 reporting period, in order to meet Arrows tenure obligations. The hole will target the full Walloon Coal Measure sequence; with coal samples taken for Desorption and Isotherm Analysis. Drill-Stem Tests will also be conducted to gauge coal permeability. The objective of this well is to determine the minability of Walloon seams (specificially the Macalister) to the West of EPC 1031; the potential gas in place and permeability, to determine what potential exists for mining.

6.0 REFERENCES

EXON, N.F., 1976. Geology of the Surat Basin in Queensland. BMR Bulletin, 166.

EXON, N.F., 1980. The Stratigraphy of the Surat Basin, with special reference to coal deposits. Coal Geology, 1(3).

JONES, G.D., & PATRICK, R.B. 1981. Stratigraphy and coal exploration geology of the north-eastern Surat Basin. Coal Geology, 1(4).

SCOTT, S.G., ANDERSON, B., CROSDALE, P., DINGWALL, J., & LEBLANG, G. 2004. Revised Geology and Coal Seam Gas Characteristics of the Walloon Subgroup – Surat Basin Qld. In: Boult, P.J., Johns, D.R. and Lang, S.C. (Eds), Eastern Australasian Basins Symposium II, Petroleum Exploration Society of Australia, Special Publication, 345-355.

SWARBRICK, C.F.J. 1973. Stratigraphy and economic potential of the Injune Creek Group in the Surat Basin. Geological Survey of Queensland Report, 79.