Icon Energy Limited Annual Report 2016

REVIEW OF OPERATIONS continued 10 ICON ENERGY ANNUAL REPORT 2016 PEP 170 (PEP 172 AND 173 PENDING), GIPPSLAND BASIN, VICTORIA Following its review of the Parliamentary Inquiry into Unconventional Gas in Victoria, the Victorian Government announced on 30 August 2016 a permanent ban on the exploration and development of all onshore unconventional gas in Victoria, including hydraulic fracturing (“fracking”) and coal seam gas. The Victorian Government will also legislate to extend the current moratorium on the exploration and development of conventional onshore gas until 30 June 2020. QUEENSLAND CALL FOR TENDERS FOR AUTHORITIES TO PROSPECT 2015 Icon applied for two additional tenures offered by the Queensland Government in the Cooper Basin as part of the 2015 Acreage Release. Tenure bids are normally assessed within 3 months of the closing date. The 2015 tenure process closed in October 2015 and, as of September 2016, no announcement has been made by DNRM. OIL AND GAS PRICES Oil Prices Following the Global Financial Crisis, oil prices rose in late 2009 and consolidated over the following years in the range of US$80 to US$100 per barrel. Then the 2014 oil price collapse saw oil prices drop dramatically, reaching a low of US$26 per barrel in January 2016. Since then, oil prices have slowly increased and appear, for the time being, to have stabilised in the US$40 to US$50 per barrel range. REVIEW OF OPERATIONS It is impossible to predict precisely what will happen over the next few years, but the general consensus is that prices are expected to slowly rise into the US$50 to US$60 per barrel range as the gap between supply and demand decreases. Over the next few years, the combination of slowly declining production, which is almost 5% per year, slowly increasing demand and a reduction in new field discoveries in the last couple of years, should see prices stabilise and become less volatile. Such a price environment would provide the platform and level of confidence needed to encourage renewed investment in exploration. Gas Prices Natural gas is a major fuel source which is used widely across the Australian economy from power stations for electricity generation to industrial manufacturing as well as domestically for heating and cooking in homes. However, unlike electricity, there is not a national wholesale market for gas. The majority of gas is traded bilaterally via long term contracts. Gas producers sell to the big gas purchasers like energy retailers and large industrial users. The gas is transported by pipelines that connect the gas fields to the large gas consumers. Pipeline operators sell capacity in their gas pipelines which transmit the gas at high pressure over long distances. Gas distribution companies deliver gas locally through lower pressure systems. There is currently great concern amongst gas customers about the available gas supply in the eastern states markets as LNG ramps up in Gladstone for the export market. As a result, there is a fear that supply is being squeezed, resulting in increasing domestic wholesale gas prices and calls for domestic gas reservation. There are numerous gas discoveries which have been located but cannot be developed because of poor political decisions in Victoria and NSW where bans on exploration have been extended. Icon is one such gas explorer that has been prevented from developing several promising areas to meet the gas supply demands of the future. Icon has the expertise to bring gas to market given the right conditions in the market place along with the political support for the industry. Export LNG gas prices are mostly linked to the oil prices on long term contracts. There is pressure to de-link future gas contracts from an oil price based formula. Icon’s China contract will be subject to review once conditions precedent have been met. One of the conditions is that commercial gas must be certified with 2TCF of 2P proven reserves.