ImageAnnual Report

QUARTERLY REPORT FOR THE PERIOD ENDING 30 June 2007

EXPLORATION ACTIVITY

AUSTRALIA
USA

Exploration Activity

Cooper Basin, South Australia / Queensland
  1. Operator of ten well exploration program planned over next twelve months in South Australian and Queensland Cooper Basin where Victoria Petroleum (VPE) holds major gross and net acreage exploration area with average 30% interest in 14 permits.
  2. Wirraway and Growler oil discoveries providing further confirmation of a possible significant "Jurassic oil fairway" in western portion of PEL 104 and PEL 111. The Western Margin Oil Project covers up to 1,200 square kms with potential with further exploration success to contain a resource of up to 100 million barrels of oil in place. VPE is the project operator. (VPE - 40%).
  3. Commencement of 5 well exploration and development drilling program starting in August through to November 2008 surrounding the Wirraway and Growler Oil Fields to look for additional oil fields in this part of the western Jurassic Oil trend.
  4. Tigershark, Tigercat and Warhawk are the three exploration wells planned to be drilled with Tigershark adjacent and to the west of the Wirraway-1 oil discovery, targeting a potential recoverable oil resource of up to 5 million barrels. (VPE - 40%).
  5. Some 32 prospects and leads have been mapped in the Western Margin Oil Project with seven drillable prospects identified with unrisked P10 recoverable resource of 21 million barrels of oil in the Birkhead formation, if oil is present. (VPE - 40%).
  6. Farmout to Odin Energy N.L. (Odin) whereby Odin can by drilling two Permian wells in the Tempest Permian Farmout Block of PEL 104, earn up to a 75% interest. VPE will be free carried for a 20% interest through the first well Fokker-1, planned to be drilled in the latter half of 2008.
  7. First up exploration drilling success in southwest Queensland Cooper Basin permit ATP 752P by Santos (operator) at Cuisinier-1, the first oil exploration well of a 7 well drilling and seismic exploration program with total estimated expenditure of $18.5 million. Cuisinier-1, has been cased and suspended as a future oil producer. Cuisinier-1 is planned to be connected to the Santos operated Cook Oil Field, 6 kms to the east in late 3rd quarter 2008. (VPE - 15%)
  8. Farmout to Odin Energy N.L. (Odin) whereby Odin can earn up to a 75% interest in the PEL 104 Tempest Farmout Block by drilling two Permian wells. VPE will be carried for a 20% interest through the first Odin farmin well Fokker-1.
  9. In South Australian Cooper Basin permit PEL 115, Vicpet is currently in farmin discussions with interested parties with the aim, if a farmin is concluded, to provide VPE with a free carried 25% interest through drilling of up to 5 wells, commencing in the fourth quarter of 2008. (VPE - 100%).
Surat Basin Coal Seam Gas Interests, Queensland
  1. The potential gross Coal Seam Gas (CSG) resource in four permits in Surat Basin, Queensland could be as high as 2 trillion cubic feet with potential net resource to Vicpet in excess of 500 billion cubic feet of recoverable gas.
  2. The first three exploration wells of the Don Juan CSG Joint Venture located north of the town of Roma, have been cased as future pilot wells by operator Bow Energy with initial pump tests planned for the coming quarter. The first well, Taringa South-1 flowed methane gas to surface at a rate of 370,000 cubic feet per day. Drilling of three wells in the Don Juan CSG area recommenced in June 2008 with Carnarvon-1 flowing gas to surface. (VPE - 45%).
  3. Bow Energy N.L. as operator plans to drill up to a further 6 CSG wells by the end third quarter 2008 with the aim of proving by end 2008/ early 2009 an initial certifiable gross recoverable CSG reserve of up to 200 billion cubic feet of gas. (VPE - 45%).
  4. The Don Juan CSG Project is immediately adjacent to the Sunshine Gas Lacerta CSG Project, which has a reported CSG reserve of up to 1.1 trillion cubic feet of gas (3P).
  5. In Petroleum Lease 171, following the success of the initial two coal seam gas core holes drilled in early 2008, by operator Roma Petroleum N.L., a further drilling program to assess the coal seam gas resources in Petroleum Lease 171 is being planned for 4th quarter 2008. (VPE - 20%)
  6. Up to six CSG wells are planned to be drilled in 2008 in ATP 574P, operated by Queensland Gas Company. The aim of this drilling is to prove up an initial certifiable gross recoverable CSG reserve of up to 50 billion cubic feet by the end of 2008. The CSG coals in the permit are interpreted to have a potential CSG resource in place of up to 1 trillion cubic feet of gas. (VPE - 30%).
USA
  1. Expressions of interest have been received from industry parties in the purchase of the oil and gas assets of VPE USA Inc.

Development and Production Activity - Australia

  1. Total gross oil production from the Australian operations over the quarter estimated at 123,443 barrels of oil at an average production rate of 1,357 barrels of oil per day (bopd). Net VPE oil production for the quarter was 15,108 barrels of oil at an average production rate of 166 bopd.
  2. During the quarter estimated oil and gas net cash flow was $1.46 million on gross oil and gas sales of $2.33 million.
  3. The Mirage and Ventura oil fields in PEL 115, South Australian Cooper Basin, produced during the quarter an estimated 9,358 barrels of oil at an average combined gross rate of 103 bopd, with net production to VPE of 41 bopd. (VPE - 40%).
  4. The Growler Oil Field in PEL 104/PRL15, South Australian Cooper Basin, produced from the Growler-1 and Growler -2 wells during the quarter an estimated 16,229 barrels of oil at an average combined gross rate of 178 bopd, with net production to VPE of 71 bopd. A further two development wells are to be drilled on the Growler Oil Field commencing mid August 2008, with the aim to increase field gross production to rates of up to 400 bopd by end 2008. (VPE - 40%).
  5. With the Growler Oil Field now on stream, at the end of the quarter, gross oil production for VPE's Cooper Basin oil fields was 300 bopd, with 120 bopd net to VPE, against a background of a Tapis oil price for Mirage/Growler crude oil of around US$120/bbl.
  6. The Jingemia Oil Field in the North Perth Basin produced during the quarter 97,456 barrels of oil at an average gross rate of 1,071 bopd, with VPE net of 54 bopd. (VPE - 5%)
  7. Total Texas Gulf Coast gross production of approximately 3 million cubic feet per day equivalent from the Flour Bluff Gas Field onshore Gulf Coast, and the Margarita Gas Project wells. (VPE 12.5 - 20%).
  8. It is anticipated that by the end of calendar 2008 that with successful development drilling from existing oil discoveries in the Cooper Basin of South Australia and Queensland, the current and planned future Victoria Petroleum net oil and gas production will generate net cash flow estimated at up to $5 million for the year.

Other Assets

  1. Continuing recognition of undervalued future potential of VPE's Queensland CSG and Cooper Basin assets by Queensland Gas Company Limited with the increase in QGC's holding in VPE to 19.24% through a 15% placement to QGC. The placement proceeds provide additional funds to VPE for an accelerated coal seam gas drilling and development program in VPE's Surat Basin CSG interests. Odin Energy Limited hold a 15.3% interest in VPE.
  2. Offers from Australian and USA industry parties have been invited for the purchase of Victoria Petroleum USA Inc., the wholly owned US subsidiary of VPE. Strong industry interest has been received with the anticipated sale to take place in August 2008. Proceeds from the sale will be used for ongoing development drilling in VPE's Cooper Basin and Queensland CSG interests.
  3. Victoria Petroleum N.L. has a 7.24% interest in Greenearth Energy Limited (ASX code: GER), an active geothermal exploration company. Greenearth Energy holds three promising geothermal exploration licenses in Victoria immediately adjacent to power generating infrastructure and the major electricity markets of Melbourne and Geelong. Two of these geothermal exploration licences, GEL 12 and 13 are adjacent to and containing the Trifon-2 well that has flowed steam and hot water at 90 degrees C from the relatively shallow depth of 2,200 metres.
  4. Cash and current investments as at 30 June 2008 to fund planned VPE exploration and development drilling activities, as follows:
Cash at bank and on deposit : $17,768,155
Current investments in listed companies valued at market :$1,537,401
Total :$19,305,556

Yours faithfully,

JOHN KOPCHEFF
MANAGING DIRECTOR
VICTORIA PETROLEUM N.L.

For information on Kestrel Energy, Inc. U.S. drilling and development activities visit the Kestrel Energy, Inc. website at www.kestrelenergy.com

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