QUARTERLY REPORT FOR THE PERIOD ENDING JUNE 30, 1998

EXPLORATION AND DEVELOPMENT

PAPUA NEW GUINEA
NEW CALEDONIA
USA
AUSTRALIA
EAST AFRICA AND MIDDLE EAST
KESTREL ENERGY, INC.

PAPUA NEW GUINEA

PPL 106 - Papuan Basin, Papua New Guinea
Victoria Petroleum Interest (Direct and Indirect) - 11.3%

Delineation of the prospects present in PPL 106 continued during the quarter.

The Menga structure complex is interpreted to have updip potential of up to 60 million barrels. The Muir Prospect, 20 kilometres to the southwest of the Ok-Tedi mine has been interpreted to have the potential to contain up to 180 million barrels of oil, if hydrocarbons are present.

Exploration work in PPL 106 during the quarter focussed on the Karuka Seismic Survey over the Tumuli Prospect. The results of the Karuka Seismic Survey indicate the Tumuli Prospect has a most likely case potential to contain 352 million barrels of oil up to a maximum of 882 million barrels of oil, if oil is present.

The Tumuli Prospect is a major target for drilling in the eastern portion of PPL 106 and is planned to be drilled in late November 1998. It is anticipated that Victoria Petroleum N.L. will have a free carried interest of the order of 4% through the drilling of Tumuli-1.

The PPL 106 Joint Venture consortium was granted PPL 202 in March 1998. The permit is immediately to the south of PPL 106 and covers an area of 4,147 square kilometres.

Exploration work in PPL 202 during the past quarter has focussed on a reinterpretation of the existing seismic data grid. This work has resulted in the delineation of the Champion Prospect, interpreted to have a mean recoverable potential of 385 million barrels of oil, if oil is present, in the target Paleocene sand horizon.

Interpretation of the seismic data also indicates that a portion of the much larger Stanley Prospect in the adjoining permit, PPL 157, may extend into PPL 202.

Should the Stanley prospect be drilled by Santos as the Operator for PPL 157 in October 1998, Victoria will have an effective free carried evaluation of that portion of the PPL 157 Stanley Prospect extending into PPL 202.

NEW CALEDONIA

PRA 436; New Caledonia
Victoria Petroleum N.L. Interest - 50%

Victoria Petroleum N.L., by paying 50% of the October 1995, 49 kilometre seismic program over the Gouaro Anticline, has the option to earn a 50% interest in PRA 436 by paying 50% of the cost of drilling a well in the fourth quarter of 1998.

The Gouaro Anticline is a surface anticline estimated from seismic interpretation of the 1995 Gouaro seismic data to have the most likely case potential to contain 592 billion cubic feet of gas or 295 million barrels of oil up to a maximum of 1.5 TCF or 1 billion barrels of oil, if hydrocarbons are present.

Cadart-1 is planned to be drilled to a depth of 1500 metres in October 1998, subject to farmout

A major ready market for gas of from 6 million cubic feet per day up to 55 million cubic feet per day at very attractive gas prices is available in the adjacent industrial and Nickel refining operations in New Caledonia.

U.S.A

Victoria Petroleum N.L. and Kestrel Energy, Inc. through their respective U.S. subsidiaries each have a 50% interest in the petroleum exploration assets of the San Joaquin Basin Project (SJBP) area, located in the central San Joaquin Basin, California, USA.

Victoria Petroleum N.L. holds a 26.5% interest in Kestrel Energy, Inc. a U.S. Nasdaq listed company.

The petroleum exploration assets in the SJBP area, consists of petroleum leasehold exploration properties in the San Joaquin Basin and a data base including approximately 25,000 kilometres of seismic and well data for 3,800 wells, both analog and digital over the SJBP area of 21,000 square kilometres.

Following the disappointing drilling results for the Sylvester and Dewey shallow gas seismic amplitude prospects, exploration has refocussed on a high potential, close to known production oil play. This work has resulted in the definition of the Cougar Prospect, a fractured shale play with the potential to contain recoverable reserves of up to 80 million barrels of oil, if oil is present. Subject to further evaluation, the Cougar Prospect is planned to be drilled in the first quarter of 1999, after farmout.

The Raven and Kingfisher Prospects have been further defined during the quarter to the drilling stage. The Raven Prospect is considered to have the potential to contain oil and gas reserves ranging from a mean of 6 million barrels of oil and 11 billion cubic feet of gas up to a maximum of 16 million barrels of oil and 29 billion cubic feet of gas, if oil and gas are present.

The Kingfisher Prospect is considered to have the potential to contain oil and gas reserves ranging from a mean of 3 million barrels of oil and 5 billion cubic feet of gas up to a maximum of 7 million barrels of oil and 13 billion cubic feet of gas, if oil and gas are present.

The Raven and Kingfisher prospects are planned to be drilled, subject to farmout, in the September / October 1998 period. After farmout, Victoria Petroleum N.L. plans to have a 20-25% interest in these prospects.

The Cougar, Raven and Kingfisher Prospects form part of a five well drilling program planned for the San Joaquin Basin Prospects in California, USA.

Victoria Petroleum N.L. considers it has acquired a significant core position in the San Joaquin Basin which is highly prospective for oil and gas with 11 billion barrels of oil and 10 trillion cubic feet of gas discovered to date. The United States Geological Survey has estimated that the San Joaquin Basin has the potential to contain an additional 1.2 billion barrels of recoverable oil.

Entry into the San Joaquin Basin Project provides Victoria Petroleum N.L. with an interest in an extensive geological and geophysical data base which provides a major opportunity to explore the San Joaquin Basin. Geophysical and geological interpretation of the extensive data base of seismic and well data indicates the presence of at least 30 prospects and leads defined to date by the latest seismic interpretation techniques.

Exploration success in the San Joaquin Basin Project drilling program has the potential to significantly increase Victoria Petroleum N.L.'s asset and reserves base as a result of the high percentage equity Victoria Petroleum N.L. has in the prospects being drilled and the potential size of the drilling targets selected.

AUSTRALIA

EP 359 covers an area of 1,954 square kilometres situated in the Carnarvon Basin predominantly onshore on the Cape Range Peninsula and partially offshore in the Exmouth Gulf.

Melanie-1 was drilled to a total depth of 1422 metres in July 1998, with a minor gas show observed in the target Birdrong Sandstone. A strong gas show was observed in an underlying thin Jurassic limestone stringer. The gas shows in Melanie-1 are encouraging for the future gas prospectivity of this area of EP 359. Evaluation of the future exploration potential of EP 359 will continue to determine future possible drilling locations in EP 359

Victoria Petroleum N.L. has a 10.5% direct and indirect interest in the predominantly offshore Carnarvon Basin Permit EP 325, following farmout to Petroz N.L.. EP 325 covers an area of 2,461 square kilometres in the Exmouth Sub-basin of the central Carnarvon Basin and contains the Rivoli Gas Field.

Exploration in EP 325 has focussed on the western area of EP 325 where several prospects and leads including White Opal, Cooper and Whalebone have been interpreted as present by the previous Operator, Mobil Exploration and Production Pty Ltd.

The White Opal Prospect, in the north western part of EP 325 is interpreted from seismic data to have the most likely case potential to contain up to 247 million barrels of oil or 880 million cubic feet of gas in the target Triassic sands, if hydrocarbons are present. An onshore drilling location for the Triassic White Opal Prospect has been defined, with the drilling of White Opal-1 to a depth of 2,900 metres planned for the first quarter of 1999, subject to environmental approval.

The 1 trillion cubic feet Macedon Gas Field, 22 kilometres to the north, the 20 billion cubic feet Rivoli Gas Field, 18 kilometres to the south and the Leatherback Triassic oil discovery, 22 kilometres to the north-east respectively of the White Opal Prospect are encouraging for the presence of further Triassic gas and oil fields in the area.

The company, through a farmout to Petroz N.L., will have a 10.5% direct and indirect near free-carried interest through the drilling of White Opal-1.

EP 41 covers an area of 794 square kilometres situated onshore and partially offshore in the Carnarvon Basin on the Cape Range Peninsula and Exmouth Gulf. The historically significant site of the first major oil flow in Australia, Rough Range-1, lies within EP 41 Part 3, adjacent to EP 41 Part 1.

The most recent exploration activity in EP 41 was the Rough Range East seismic survey carried out in mid 1995. Incorporation of this seismic survey into the existing seismic and geology data base of EP 41 indicates modest reserve size prospects are present on the Rough Range fault trend and its extension into the Exmouth Gulf. Further interpretation of the data is planned to determine future possible drilling locations in EP 41, Parts 1 and 2.

Victoria Petroleum N.L. is the Operator of the EP 41 Joint Venture.

Victoria Petroleum N.L. has a 6.9% direct and indirect interest in the Part 2 Sage Block and a direct and indirect 4.6 % interest in the remaining area of WA-254-P.

The permit comprises four non-contiguous graticular blocks covering 322 square kilometres on the southern extension of the Legendre trend which contains the Legendre and Talisman Oil Fields. Three prospects and six leads have been interpreted as present in the permit.

Exploration during the last quarter has focussed on the drilling of the Janus Prospect, and seismic definition of the Taurus Prospects and Sirius and Erebus leads.

The Sage Prospect in WA-254-P Part 2, lies 35 kilometres south of the 150 million barrel Wanaea Oil Field, and 4 kilometres to the north-east of the Saffron-1 oil and gas discovery in WA-1-P held by BHP / Woodside / Santos. The Sage Prospect is interpreted as a potential updip oil accumulation to the 9 metre interpreted residual oil column in Rosemary-1 and is interpreted to have the potential to contain within WA-254-P up to 27 million barrels of oil in target Cretaceous and Jurassic sands, if hydrocarbons are present. The Sage Prospect is considered mature for drilling.

Within WA-254-P Part 3, the Taurus Prospects has been interpreted from existing seismic data prior to the recently acquired 3D seismic as prospects worthy of additional seismic exploration.

The Taurus Prospect is interpreted from the existing seismic data to have the potential to contain up to 29 million barrels of oil in target Cretaceous sands, if hydrocarbons are present. A 3D seismic program was carried out in July 1997 to further define the Taurus Prospect and other prospects as possible future drilling targets in 1999.

Interpretation of the recently acquired 3D seismic survey by the Operator Apache Energy is in progress. The results of this interpretation will determine the 1999 drilling program for WA-254-P.

WA-261-P covering an area of 299 square kilometres is located immediately to the south and adjacent to the Apache Energy / Santos Limited Permit, WA-209-P containing the 45 million barrel Stag Oil Field. The Stag Oil Field commenced production in June 1998 with planned production of 25,000 barrels of oil per day.

Several leads and prospects with targets at the same producing horizon as the Stag Oil Field are seismically interpreted to be present in WA-261-P.

A 250 kilometre seismic survey carried out in February 1996 by Apache Energy and defined the Longhorn Prospect as a farmin drilling target by the WA-209-P Joint Venture of Apache Energy / Santos Limited / Globex. The WA-209-P Joint Venture farmin resulted in a 2.5% free-carried interest for Victoria Petroleum N.L. and a 2.5% free-carried interest for Kestrel Energy, Inc, through the drilling of Longhorn-1. While the well did not encounter hydrocarbons, positive encouragement was received for the future hydrocarbon prospectivity of WA-261-P. Further seismic analysis is planned for 1998 to redefine the nature and extent of the Longhorn Prospect to the north and north west of Longhorn-1.

Apache Energy is the Operator of the WA-261-P Joint Venture.

Following the experimental five kilometre seismic program carried out in June 1994, interpretation has shown that seismic has the potential to delineate the gas bearing sands of the Reids Dome Gas Field. A 25 kilometre seismic survey to extend the seismic coverage and to define additional shallow "gas sand" drilling locations was carried out in July 1995 and indicates the potential for a gas reserve of up to 20 billion cubic feet of gas, if gas is present.

A further two to three well program is planned for the fourth quarter 1998, subject to farmout.

The presence of the State Gas Pipeline to Gladstone has improved the access to market from this field. The Reids Dome Gas Field lies just 60 kilometres from the State Gas Pipeline and requires an indicated minimum of 10 billion cubic feet of gas to be economic.

Future exploration in ATP 465 will focus on delineating the gas potential of the Cherwondah Anticline in the deeper Permian sands of the Gyranda Formation, the potential of horizontal drilling to enhance gas production rates in the Triassic tight-gas Clematis sandstones and the coal-bed methane potential of the north-eastern area of the permit adjacent to the adjoining CRA Peat Gas Field.

The Yarrabend No.5 gas well remains suspended with the Joint Venture considering a completion and testing program in the near future.

McIver-1 was drilled in May 1996 to a total depth of 1405 metres to test the McIver Prospect situated on the Canaway Ridge. Excellent reservoirs were drilled in the target Hutton and Basal Jurassic Sandstones, but hydrocarbons were not encountered. Further evaluation of the remaining prospects and leads in the McIver Block is planned.

Victoria Petroleum N.L. is the Operator for the McIver Block.

Ueleven-1 was drilled in November 1997 to a total depth of 1189 metres. Excellent reservoirs were drilled in the target Hutton sandstone but hydrocarbons were not encountered. Further evaluation of the remaining prospects and leads in the Ueleven Block is planned.

Lakes Oil N.L. is to Operator for the Ueleven Block.

The permit contains the shut in Connolly Oil Field. Significant deeper gas potential is considered present in the deeper Triassic and Permian Sands and is currently being evaluated.

The ATP 589P Cooper/Eromanga Basin permit is adjacent to the MIM Petroleum permit containing the 9.4 million cubic feet per day Bunya-1 gas discovery and the OCA 4 million cubic feet per day Thylungra-1 gas and condensate discovery.

In late 1997, under the Icon Oil N.L. ATP 589P Farmin, Icon Oil drilled Springfield East-1, Regeleigh North-1 and Brightspot-1. The drilling resulted in a non commercial gas discovery at Springfield East-1 which flowed gas at a rate of 200,000 cubic feet per day from a Permian Sandstone.

Although the gas flow from Springfield East-1 was non commercial, this result is considered encouraging for the Permian gas potential of this area of ATP 589P.

Significant Jurassic oil potential has also been interpreted as present in ATP 589P in the Barcoo Junction area, based on the oil shows seen in the numerous wells drilled in the permit.

Barcoo Junction-2 was drilled in June 1996 to a total depth of 2620 metres to test the Barcoo Junction Prospect in the north-western area of ATP 589(1). Barcoo Junction-2 was prognosed prior to drilling as an updip test of the oil and gas shows observed in the Hutton and Basal Jurassic sands in Barcoo Junction-1, drilled in 1980.

Barcoo Junction-2 encountered good oil shows in the target Hutton and Basal Jurassic sandstones.

Further geological and geophysical evaluation of the well results of Barcoo Junction-2 to determine the significance of the oil strong shows encountered in the Hutton and Basal Jurassic sandstones, indicates Barcoo Junction-1 and Barcoo Junction-2 were drilled out of depth closure. The Barcoo Junction North Prospect has been interpreted to be updip of Barcoo Junction-1 with the potential to contain up to 39 million barrels of oil in the target Hutton and Basal Jurassic sandstones, if oil is present.

Subject to farmout, Barcoo Junction North-1 is planned to be drilled in the fourth quarter 1998.

The Moothandella-4 Westbourne Prospect has been seismically identified to have the potential to contain up to 20 million barrels of oil in interpreted Westbourne channel sands, if the sands and oil are present.

The Trinidad North Prospect situated on the northern portion of the Canaway Ridge, has been seismically interpreted to have the potential to contain up to 19 million barrels of oil in target Hutton and Basal Jurassic sandstones in an anticlinal structure, if oil is present.

Several other prospects and leads have also been identified in ATP 589P (1) including the Sedan Prospect to the north of Brightspot-1.

The continuing Jurassic oil and Permian gas discoveries in this area of the Cooper / Eromanga Basin confirm the strategic exploration value of the acreage position that Victoria Petroleum N.L. holds in this area of the Cooper / Eromanga Basin.

Victoria Petroleum NL is the Operator for the Barcoo Block of ATP 589P.

The primary targets in the permit are structural traps along the Merivale High trend which is the southern extension of the Merivale Fault system, along which the majority of the Denison Trough fields are located. Ten leads and prospects have been mapped along the Merivale High trend with potential reserves calculated at 84 million barrels, if hydrocarbons are present.

Interpretation of the existing seismic data in ATP 593P identified the Heather Downs and Heather Downs West Prospects, as Hutton/Precipice sandstone four-way dip-closed structures updip to the strong residual oil shows in the Hutton/Precipice sandstones in Don Juan-1 and in Flaneur-1, 25 kilometres to the north.

Heather Downs-1was drilled in July 1997 on the Heather Downs Prospect to a depth of 835 metres, with a residual oil show observed in a basal Birkhead sandstone. Significant updip potential is considered present, with the Heather Downs Prospect interpreted to still have the potential to contain up to 20 million barrels of oil, if oil is present.

An updip test of the Heather Downs Prospect is planned for late 1998, subject to farmout and rig availability.

Victoria Petroleum N.L. is the Operator for ATP 593P.

Victoria Petroleum N.L. was granted this permit and Operatorship on 30 November, 1994 and prior to farmout held a 60% interest in the whole permit. The permit is located on the western Surat Basin adjacent to several oil fields and includes the zero edge of the Boxvale Sandstone, the primary producing reservoir in the area. Several four-way dip closures are mapped and ready for drilling.

Tarmoola-1 encountered an excellent Boxvale Sandstone target reservoir section without any hydrocarbon shows and was plugged and abandoned.

Future exploration will focus on the definition of those structures in the permit most likely to have been sited on past oil migration pathways.

EPP 24 contains the Troas gas discovery which is interpreted to have up to several hundred billion cubic feet of gas in the Troas structure. Several other major structures remain untested in EPP 24. A data review of the hydrocarbon potential's of EPP 24 is currently in progress. A 314 kilometre seismic program was carried out in December 1997, and is currently being interpreted.

Victoria Petroleum N.L. considers the offshore Otway Basin to have all the parameters to be a future major oil and gas province.

Drilling of the McNicol Prospect was carried out in January 1997 with McNicol-1 drilled to a depth of 1,601 metres without encountering hydrocarbons in the target section. A 16 kilometre seismic survey was carried out in the first quarter of 1998 in the Mulcrest Prospect area.

The recent major gas discoveries by BHP in the adjacent offshore Otway Basin and the onshore Otway Basin by Cultus Resources N.L. are considered to have upgraded the hydrocarbon potential of the Otway Basin as a whole.

MIDDLE EAST

Victoria Petroleum N.L. has continued its evaluation of petroleum exploration and development opportunities in the Middle East to add to Victoria Petroleum N.L.'s international exploration profile. This activity is at an advanced stage, with the aim of Victoria Petroleum N.L. to secure areas in the near future which will be candidates for future farmout drilling activity.

KESTREL ENERGY, INC.

Victoria Petroleum N.L., through its wholly owned subsidiary Victoria International Petroleum N.L. holds 26.5% of the Common Stock of Kestrel Energy, Inc.

Kestrel Energy, Inc. is an active publicly listed NASDAQ US oil and gas production and exploration company, NASDAQ code "KEST".

For the quarter ending March 31, 1998, total estimated Kestrel and Victoria Exploration Inc. oil and gas production for the quarter was 16,000 barrels of oil-equivalent for an average estimated daily production of 175 barrels of oil equivalent per day.

Yours faithfully,

JOHN KOPCHEFF
MANAGING DIRECTOR
VICTORIA PETROLEUM N.L.

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