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.