MBA Petroleum Consultants Pty Ltd A Company of AWT International ABN: 85 139 445 319 27 Douglas Street MILTON QLD 4064 Australia Ph: +61 7 3505 4500 Fax: +61 7 3367 3820 ______________________________________________________________________________ 20th March 2012 The Directors Armour Energy Limited Level 5, 60 Edward Street Brisbane Queensland, 4000 Dear Sirs, Independent Expert’s Report for Armour Energy Limited 1. Introduction Pursuant to your request, MBA Petroleum Consultants Pty Ltd (MBA) has prepared an Independent Expert‟s Report for inclusion in the replacement prospectus to be dated on or about 20 March 2012 for the initial public offering (IPO) of shares in Armour energy Limited (Armour) on the ASX. MBA has conducted the following: a) Reviewed the exploration permits held by Armour and detail the work commitments; b) Discussed the application permits made by Armour in the Northern Territory (NT) and Queensland (Qld); c) Provided a summary of the regional setting and petroleum system in the McArthur Basin in the NT and the Northern Lawn Hill Platform in Qld; d) Described and commented on the current and planned exploration activities of Armour, and e) Provided a Prospective Resource assessment for the conventional and unconventional plays in EP 171 and EP 176 in the NT. 1 Table of Contents 1. Introduction ................................................................................................................................................1 List of Figures .................................................................................................................................................3 2. Permits and Applications for Permits Held by Armour ..............................................................................4 3. Summary ....................................................................................................................................................4 4. McARTHUR BASIN ......................................................................................................................................7 4.1 Regional Geology ..................................................................................................................................7 4.2 Previous Exploration ............................................................................................................................8 4.3 Petroleum System ...............................................................................................................................9 4.3.1 Hydrocarbon Charge .....................................................................................................................9 4.3.2 Conventional Reservoirs ............................................................................................................. 10 4.3.3 Seals ............................................................................................................................................ 10 4.3.4 Conventional Leads .................................................................................................................... 10 4.4 Armour’s Northern Territory Permits............................................................................................... 11 4.4.1 EP 171 ......................................................................................................................................... 11 4.4.2 EP 176 ......................................................................................................................................... 13 4.5 Prospective Resource Estimation EP 171 and EP 176 ....................................................................... 14 5 Recent NT Applications ............................................................................................................................ 16 5.2 Overview ........................................................................................................................................... 16 5.2 Exploration History ............................................................................................................................ 17 5.2.1 Applications EP (A) 193, 196, western EP (A) 190 and northern EP (A) 191 ............................. 17 5.2.2 Applications EP (A) 173, 174, 190, 193, 194 and northern EP (A) 192 ...................................... 17 5.2.3 Applications EP (A), 177 178, 179 and southern 191 ................................................................. 18 5.2.4 Applications EP (A) 192, 195, 172 and eastern 179 ................................................................... 18 5.3 Permit Summary ................................................................................................................................ 19 6. South Nicholson Fault Zone / Northern Lawn Hill Platform (ATPA 1087P) ............................................ 19 6.1 Regional Geology ............................................................................................................................... 19 6.2 Previous Exploration ......................................................................................................................... 20 6.3 Hydrocarbon System ......................................................................................................................... 20 6.4 ATPA 1087P ....................................................................................................................................... 21 6.5 Prospective Resource Estimation ATPA 1087P ................................................................................ 21 7 Statements ............................................................................................................................................... 22 7.1 Limitations ......................................................................................................................................... 22 7.2 Sources of Information ...................................................................................................................... 22 7.3 Declaration ........................................................................................................................................ 22 2 7.4 Qualifications of the Authors ............................................................................................................ 23 8 References ............................................................................................................................................ 24 9 Glossary and Definitions ........................................................................................................................... 25 List of Figures Figure 1 Exploration Permits and Applications .................................................................................... 28 Figure 2 Structure and Location McArthur Basin................................................................................. 29 Figure 3 Stratigraphic Table McArthur Basin ....................................................................................... 30 Figure 4 McArthur Basin Prospect, Well and Seismic Location Map ............................................... 31 Figure 5 Cross Section of McArthur Basin ........................................................................................... 32 Figure 6 Barney Creek Formation Unconventional Play Map ........................................................... 33 Figure 7 EP 171 Location and Infrastructure Map............................................................................... 34 Figure 8 EP 176 Location and Infrastructure Map............................................................................... 35 Figure 9 ATPA 1087P Location and Infrastructure Map ..................................................................... 36 Figure 10 Stratigraphic Table of the McNamara Group, Northern Lawn Hill Platform .................. 37 Figure 11 Geologic cross section of the Lawn Supersequence ........................................................ 38 3 2. Permits and Applications for Permits Held by Armour A listing of the two permits awarded to Armour and the fourteen applications made by Armour is included in Table 1 and their locations are shown in Figure 1. Armour is the operator of both awarded permits and will be operator for all the permits that are under application. Armour is the sole participant in both permits and all applications listed. Armour has secured exclusive rights over 13 EPAs located in the Northern Territory and is also the preferred tenderer for one ATPA in Queensland. Table 1 Summary Table of Assets Licence Grant Licence Area Asset Status Comments Date (Approx, km2) EP 171 Permit 29th June 2011 3,472.7 GRANTED EP 176 Permit 29th June 2011 8,031.7 GRANTED EPA172 Application 7,067.5 Exclusive Rights EPA173 Application 2,917.5 Exclusive Rights EPA174 Application 4,339.9 Exclusive Rights EPA177 Application 15,938.8 Exclusive Rights EPA178 Application 15,689 Exclusive Rights EPA179 Application 16,108 Exclusive Rights EPA190 Application 12,820.7 Exclusive Rights EPA191 Application 15,245.7 Exclusive Rights EPA192 Application 9,487.2 Exclusive Rights EPA193 Application 1,348 Exclusive Rights EPA194 Application 2,341.7 Exclusive Rights EPA195 Application 3,317.2 Exclusive Rights EPA196 Application 741.9 Exclusive Rights ATPA Application 7,138.1 Preferred Tenderer 1087P The permit applications for EP 171 and 176 were the first to progress through Native Title negotiations to completed agreements and are for a 5 year term. Considerable work has been carried out on the two applications over this period including compliance issues and cultural heritage clearance. Similar work is now being conducted for the latest round of applications. 3. Summary Armour has established a portfolio of two granted petroleum permits and thirteen EPAs (petroleum permit applications) in the north east corner of the Northern Territory (NT) and ATPA 1087P petroleum permit application in Queensland (QLD) (Figure 1 and Table 1). Armour holds a 100% interest in all of its granted permits and permit applications. The permits and permit applications are all abutting each other and effectively lock up the region around the two granted permits EP 171 and 176 located in the Batten Fault Zone of the McArthur Basin and extend further to the south and east covering an area of 126,006km2. These areas include a proven hydrocarbon system and a range of conventional and unconventional hydrocarbon play types. The Batten Trough, which covers less than 15% of the area of all permits, has a mean Prospective Resource of 18.8TCF of gas and 1985MMbbls of associated liquids. Additional conventional and unconventional plays in the application areas are currently being mapped in 4 the areas surrounding the Batten Fault Zone and in the adjacent Georgina and South Nicholson Basin. Armour‟s acreage lies close to existing pipeline infrastructure which is connected to local mining markets and export markets through Darwin. There are a number of identified opportunities to supply regional mines with gas following successful exploration and appraisal activities, and utilising existing infrastructure. Armour has secured exclusive rights over thirteen EPA‟s in the Northern Territory, regulated by the NT Department of Resources - Minerals and Energy, and is also the preferred tenderer for one ATPA in Queensland, regulated by the QLD Department of Mines and Energy. The exploration permits include the:  McArthur Basin, NT – two granted permits 11,504.4km2, and  McArthur, Georgina and South Nicholson Basins, NT – thirteen applications totalling 107,363.1km2 in area; and  Northern Lawn Hill Platform, Qld – preferred tenderer - one permit application being 7,138.1km2 in area The Northern Territory applications remain significantly underexplored for both conventional oil and gas and unconventional Shale Gas assets. Previous exploration and resource development within the NT has identified reserves of oil and gas to the south within the Amadeus Basin, also an ancient marine basin, and to the west in the Precambrian aged Beetaloo Basin. The Precambrian aged Beetaloo Basin to the west of Armour‟s acreage is currently being explored by Falcon Oil & Gas Australia, which has reported a Prospective Resource within the Beetaloo Basin of 18 billion barrels of oil and 63TCF of gas over a 30,000 km2 Shale Gas play in the Kyalla Shale and Velkerri Shale. The Hess Corporation recently farmed into this acreage for a 62.5% stake. Within the McArthur Basin, there are numerous oil and gas indications in wells, and the existence of favourable source rock and hydrocarbon trapping mechanisms have been identified. One mineral well blew out and flared gas demonstrating the existence of an active petroleum system. In addition numerous mineral wells have also been drilled in the area providing important stratigraphic and lithological information for the geological interpretation of plays and resource estimates. Prospective Resources for the Batten Fault Zone area of the McArthur Basin and the Lawn Supersequence of the Lawn Hill Formation have been determined by MBA under separate cover and a summary of this work is included as part of this report. For these purposes, Prospective Resources are defined based on the Society of Petroleum Engineers Petroleum Resources Management System (SPE PRMS) 2007 guidelines. Under this classification they are currently undiscovered and as such carry significant exploration risk. The unconventional Barney Creek Shale Gas play has a potential for a mean Prospective Resource of 18.6 TCF of gas and 1962MMbbls of associated liquids within EP 171 and EP 176. Of this there is potentially 11.3 TCF of gas and 1258MMbbl of associated liquids in EP 171 and 7.3TCF and 703MMbbl of associated liquids in EP 176 (Table 2). The unconventional Lawn Hill Supersequence of the Lawn Hill Formation in ATPA 1087P, Queensland, has a potential for a mean Prospective Resource of 22.5 TCF of gas and 242.4 MMbbls of associated liquids. 5 The Prospective Resource assessed for the eight conventional leads range from between 6.2BCF and 62BCF of gas and 0.1MMbbls and 7.4MMbbls of associated liquids, from the smallest to the largest lead. The identified conventional leads have a combined potential for a mean Prospective Resource of 209BCF of gas and 23.6MMbbls of associated liquids within EP 171 and EP 176 (Table 2), with 187BCF and 21MMbbl of associated liquids in Permit EP 171 and 22BCF of gas and 2.6MMbbl of associated liquids in EP 176. (Table 2). There are no petroleum resources attributed currently to the areas of the McArthur Basin outside the Batten Fault Zone or to the adjacent Georgina Basin, or Carpentaria Basin. However, work is underway to describe several additional unconventional plays in these areas. Table 2: Prospective Resource Estimate Summary for Permits EP 171, EP 176 and ATPA 1087P The volumes calculated for the Barney Creek Formation underlie a surface area of approximately 2,710km2. The Prospective Resource is expressed as a P50 average of 4.8 billion cubic feet of gas per square kilometre (BCF/km2) and 0.44 million barrels of liquids (oil 6 equivalent). These estimates are comparable to the North American plays and fall within the midrange of observed data on key geological parameters for selected North American analogues. Armour has outlined a 2D seismic program of approximately 65 kilometres in EP 171 to be acquired in early 2012. It will be a part of the 165km seismic acquisition programme planned for 2012 and 2013. The seismic will be used to high grade leads to prospect status and provide additional information on the distribution of the Barney Creek Formation Shale Gas play. An aggressive exploration programme has been designed for EP 171 and 176 for the 2012 and 2013 calendar years. Armour has budgeted approximately A$ 30 million dollars to be spent on drilling up to 12 wells, acquiring 165km of 2D seismic data, potential field data and providing an integrated interpretation to refine exploration and drilling targets. The wells will target conventional dolomite and sandstone reservoirs, and will have the dual objective of testing the Shale Gas potential. The wells have been designed to test for hydrocarbons in the most cost efficient manner by drilling with air and the programme has maximized the chances of intersecting high gas flow rates from fractures by drilling high angle laterals as appraisal wells. Cores will also be taken from selected wells. 4. McARTHUR BASIN 4.1 Regional Geology The McArthur Basin covers an area of approximately 180,000km2 in a north-northeast trend from the Queensland-Northern Territory border. It overlies the eastern edge of the North Australian Craton (Figure 2). The McArthur Basin is divided geographically and tectonically into the southern and northern McArthur Basin, bisected by the east-west trending Urapunga Fault Zone. The permits lie in the southern McArthur Basin (Rawlings, 2004). The majority of the current basin evolution models (promote extensional tectonics Plumb 1979, Etheridge and Wall 1994, Rogers 1996). In these models specific fault orientations acted as normal or growth structures and others acted as accommodation or transfer structures during the various stages of the McArthur Basin formation (Rawlings, 1999). The southern McArthur Basin contains middle Proterozoic flat lying to gently folded sedimentary rocks (Jackson et al, 1988). These are approximately 12km thick and have been deposited in a shallow to deep water environment that was dominated by the north-trending half grabens of the Batten Fault Zone (Pegum, D.M, 1997) (Figure 2). The structure of the Batten Trough is dominated by the Batten Fault Zone, an intensely faulted north trending zone 50km wide, through the eastern part of the Basin (Jackson et al, 1988). In this area of the southern McArthur Basin, the Batten Fault Zone is flanked by the Bauhinia Shelf to the west and Wearyan Shelf to the east. The fault zones are characterised by an increase in deformation, faulting and steepness of dips, when compared to the adjacent shelves (Rawlings, 2002). The Batten Fault Zone contains an increased thickness of preserved sedimentary section (10-12 km) compared with the marginal shelves (4-5 km). Thickening of units within the Batten Fault Zone is interpreted to be constrained to specific sedimentary intervals deposited within intracontinental „rift‟ structures (Plumb and Wellman, 1987). Thickness changes appear to be greatest in the McArthur Group, which is estimated to thicken to 4000m in the Batten Fault Zone (Rawlings, 2004). 7 Adjacent to the margin of the Batten Fault Zone is the Glyde Sub-basin, a fault-bounded depocentre. Within the Glyde sub-basin a very thick sequence of below-wave-base carbonaceous siltstone of the Barney Creek Formation was deposited and is regarded as the main hydrocarbon source rock, (Davidson et al, 1993). The primary conventional reservoirs are shown on Figure 3 and include the Coxco Dolomite. The primary source rock, seal and Shale Gas play is the Barney Creek Formation. 4.2 Previous Exploration Numerous geological studies have been carried out by exploration and mining companies in the in and around the Armour permits, with numerous wells intersecting the Barney Creek Formation, including: - Carpentaria Exploration Co. Pty Ltd was active in the McArthur Basin from 1955, carrying out detailed mapping in the Batten Fault Zone. - AO Australia Pty Ltd mapped and drilled the Barney Creek Formation in the area northwest of the Batten Fault Zone between 1976 and 1980. - Shell Company of Australia Limited, Metals Division, drilled and analysed bedrock samples on the northern extension of the Batten Fault Zone in the late 1970s and early 1980s. - Amoco Minerals Australia and CRA Exploration undertook base-metal exploration west of the Emu Fault zone drilling numerous wells up to 1000m deep during the 1970‟s and 1980‟s. - BHP minerals undertook a comprehensive shallow drilling campaign in the Batten region during the 1980‟s. Amoco International commenced a petroleum exploration program with stratigraphic studies, geophysical surveys and drilling in 1981 and 1982. The 1981 field program was intended to identify, describe and sample potential source and reservoir rock horizons and to gain insights into stratigraphy and structure of the southern McArthur Basin. The majority of the wells were drilled to a maximum depth of 60 metres. The 1982 drilling program consisted of eight stratigraphic coreholes of between 200-600m depth, four of which are within Armour‟s permits (Figure 4). A summary of these wells are as follows:  82-5: drilled the Lynott Formation of the Upper McArthur Group to a Total Depth (TD) of 455m to test its source-rock and reservoir potential.  82-6: intersected the Looking Glass Formation, the Stretton Sandstone, the Yalco Formation and the Donnegan Member of the Upper McArthur Group to its programmed depth of 300 metres.  82-7: was drilled to 494 metres depth in the Abner Range area to retest a previous BMR mineral well (Bauhinia Downs 4) which encountered bitumen in the Looking Glass Formation of the Upper McArthur Group. 82-7 tested the source and reservoir potential of the upper McArthur Group.  82-8: was drilled to test the source-rock potential of the Velkerri and Corcoran Formations and the reservoir potential of the Bessie Creek Sandstone of the Roper Group. The well was abandoned at 221 metres due to drilling problems. These wells were designed as shallow stratigraphic tests and none intersected the Barney Creek Formation or the Coxco Dolomite of the Lower McArthur Group. The largest seismic survey within Armour‟s permits was conducted in October-November 2002 by Geoscience Australia. 130km of 2D was acquired. This included the regional traverse lines 8 02GA-BT1 and 02GA-BT2 through the southern McArthur Basin and the Batten Fault Zone (Rawlings, 2004) (Figure 4). In 1992 M.I.M. Petroleum Exploration Pty. Ltd. acquired 33km of 2D mini-sosie seismic over the Kilgour and Kilgour South structures, however providing limited data, due to poor seismic quality. During 1979 and 1980 the Amoco Minerals and the Kennecott Exploration (Australia) Joint Venture drilled 9 shallow wells (Glyde River (GR) 1-9) of 200 to 1000 metres depth in the Glyde region, searching for silver-lead-zinc mineralisation within the Barney Creek Formation. A subsequent joint venture between Amoco and Shell during 1981 and 1982 drilled two more wells to 700 and 470 metres depth in the Glyde region (GR10 and GR11). Ten of these eleven wells unequivocally intersected Barney Creek Formation sediments. A gas flow was encountered whilst air-drilling the Coxco Dolomite in the Glyde River-9 (GR9) well. This flow subsequently ignited. 4.3 Petroleum System Thick potential petroleum source rocks exist in the McArthur Basin. Three formations with significant organic-rich intervals have been identified in the McArthur Group. These include the Barney Creek, Yalco and Lynott Formations (Figure 3). The organic-rich intervals of the Barney Creek Formation are considered to be high-quality marine source rocks in terms of TOC, kerogen type and hydrocarbon yield (Crick et al. 1988). It has been seen that the Barney Creek Formation is early oil mature and even wet gas mature at, or close to surface in some areas. This is a result of deeper depth of burial in the past and un-roofing by erosion resulting in the mature rocks being at the surface today. 4.3.1 Hydrocarbon Charge An active petroleum system is evident in the southern McArthur Basin. The Barney Creek Formation is considered to be the primary source rock. It is an ancient formation, interpreted to be marine. The organic rich shale within the formation has an average TOC of 2% considered to be adequate for a source rock. The majority of the formation has been or is within the thermal maturity window for hydrocarbon generation. Several hydrocarbon shows of both live oil and gas have been observed within and surrounding Armour permit areas (Figure 4). These hydrocarbon shows are included in Table 3: Table 3 Hydrocarbon Shows Petroleum Well Formation Hydrocarbon Show 82-5 Lynott Oil Fluorescence 82-6 Yalco Oil Fluorescence 82-7 Yalco Oil Fluorescence Mineral Wells GR 3 Barney Creek Live oil GR 9 Barney Creek Live oil GR 9 Coxco Dolomite Gas flow (flared) and live oil These shows demonstrate previously active hydrocarbon generation and migration, combined with preservation of hydrocarbon traps demonstrated by the Glyde River-9 well. 9 4.3.2 Conventional Reservoirs Within the conventional leads, the Coxco Dolomite is considered by Armour to be the most prospective conventional reservoir within EP 171 and 176. This initial assessment is based on live gas and oil shows in the GR9 well and the Coxco Dolomite being overlain by the Barney Creek Formation. The Coxco Dolomite has good reservoir potential due to the likelihood of secondary vuggy porosity development and karstification (Jackson et al. 1988). Other potential reservoirs have been identified in siliciclastic and carbonate formations. Good reservoir potential exists in the Balbirini Dolomite, Looking Glass Formation, Stretton Sandstone, Yalco Formation, Barney Creek Formation, and in the Reward, Coxco, and Teena Dolomites (Amoco, 1982). 4.3.3 Seals The Barney Creek Formation is extensive and up to 400m thick. Data from the GR 9 well proved it to be an effective top seal to the gas pool encountered in that well. It is expected to form a good seal both laterally and across faults. This formation will form the main seal for the conventional traps to be targeted by Armour. Other suitable seal lithologies overlying the reservoir formations are evident in the McArthur Group. Regional seals of the McArthur Group include potential seals of the Caranbirini Member of the Lynott Formation, the Barney Creek Formation and quite possibly others. Evaporites of the Balbirini Dolomite of the Nathan Group have potential to seal the upper sandstones of the McArthur Group. 4.3.4 Conventional Leads There are eight leads (Figures 7 and 8) recognised in EP 171 and EP 176 with areal extents of between 4 and 24km2. Prospective Resource calculations made are summarised in Section 9. Four of these eight leads have been identified by petroleum and minerals explorers in EP 171 and EP 176 using surface geology maps. The Abner, Kilgour, and Kilgour South leads are structural closures and the Glyde River Trend is a fault closed trap. A geologic cross section transects the Kilgour and Abner anticlines (Figure 5). Armour has defined four new four-way dip closed leads on surface geology mapping. These are Cow Lagoon East and Cow Lagoon West, both located northwest of Caranbirini, and Dunganminnie East and Dunganminnie West, both located to the southwest of Abner Range (Figures 7 and 8). Armour intends to acquire new seismic in late 2011 or early 2012 over some of the leads to more accurately predict the drilling location of the target structures. The conventional plays will form the main initial targets for drilling, which is planned for 2012 and 2013. 4.3.5 Unconventional Shale Gas Plays Shale Gas is trapped in fine-grained rocks where the gas is stored by adsorption onto the organic-rich components as well as within micro-pores. Rock types included in this definition of Shale Gas plays are organic-rich shales, mudrocks, siltstone, limestones, dolomites and very fine-grained sandstones. Some Shale Gas plays have vast fracture patterns that can store significant amounts of free gas and act as a migration conduit for production of gas from the reservoir to the wellbore. These can all be considered as source rocks. Usually, a Shale Gas reservoir is a hydrocarbon source rock that has been subjected to temperatures above 150 °C. 10