QUARTERLY REPORT FOR THE PERIOD ENDING SEPTEMBER 30, 2001

HIGHLIGHTS FOR THE QUARTER

1. Successful drilling in August 2001 of 271 metre horizontal leg in Eagle Oil Field horizontal appraisal well in San Joaquin Basin, California with 91 metres of interpreted oil pay to be tested by coiled tubing re-entry in next six months.
2. Planned drilling in late 2001/early 2002 of the first development well on the Vallecitos Oil Field, California project area targeting 4 million barrels of oil, if oil is present.
3. Planned drilling in early 2002 of the Raven Prospect targeting multiple target oil and gas reserve of up to 74 million barrels of oil and 159 billion cubic feet of gas, if oil and gas is present.
4. Potential horizontal hydrocarbon drilling target in Upper Monterey Formation defined by August 2001 Kingfisher No. 1, San Joaquin Basin drilling with horizontal drilling planned for first quarter 2002.
5. Follow on drilling program in the San Joaquin Basin, California of up to three wells over next twelve months targeting potential reserves of up to 26 million barrels of oil and 200 billion cubic feet of gas, if oil and gas are present, subject to farmout and leasing.
6. High gas prices in San Joaquin Basin of around US$4 per thousand cubic feet (A$8 per thousand cubic feet) with oil prices of US$25/barrel (A$48/bbl) provide strong economic return potential for success in the Eagle and Kingfisher horizontal appraisal wells and the Vallecitos development wells and any subsequent oil and gas discovery in the forthcoming planned San Joaquin Basin drilling program
7. The continuing successful drilling with flows of gas to surface of the Pinelands #3 Coalbed Methane well in Surat Basin permit ATP 574P by farminee Queensland Gas Company Ltd in the quarter targeting potential Coalbed Methane reserves in ATP 574P of up to 650 billion cubic feet of gas.
8. Net oil and gas production for the year ending 30 June 2001 of 350 million cubic feet of gas and 18,688 barrels of oil equal to 211 barrels of oil equivalent per day, a 37% production increase over the previous period, with associated 107% revenue increase to A$4.3 million for 18.4%-owned Kestrel Energy, Inc., a US NASDAQ public company (Code: KEST)
9. Continuing gas production development activities in USA to increase gas production in the USA producing properties in Louisiana, Oklahoma and Wyoming, to increase June 30, 2001 proved reserves of 2.6 million barrels of oil equivalent with a future undiscounted net cash flow of A$54 million and nett present value of A$27 million at a discount rate of 10%
10. Planned participation in a drilling program of up to twelve wells in the next eight months
11. Cash on hand of A$4.4 million to fund planned drilling activities.

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