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Quest Petroleum To Drill South Sumatra Oil And Gas Well With BPMIGAS Approval

Quest Petroleum (ASX: QPN) is drawing closer to its highly anticipated spudding of its first well in its South Sumatra drilling program with Indonesian upstream regulator BPMIGAS signalling that drilling will begin in the current quarter.

In an article released by BPMIGAS, the regulator's Head of Public and Institutional Relations Affairs for Southern Sumatera Area Bambang Suprianto said that Quest subsidiary PrabuEnergy, will drill the Kayumanis-1 in the fourth quarter of 2011.

Way Kanan Regent Bustami Zainudin di Lampung added the local government and community will provide full support to the exploration activities.

Quest had late last month said it was finalising negotiations with rig operators and that execution of a drilling contract is expected after the drilling approval is received, which in light of the comments from BPMIGAS appear to be imminent.

Kayumanis-1 targets up to 340 billion cubic feet of gas and is one of 16 leads identified that could host total gas potential of up to 6 trillion cubic feet of gas or 300 million barrels of oil.

The well site is located about 10 kilometres south of Baradatu town in Way Kanan Regency, Lampung Province, on well drained, elevated land adjacent to a paved asphalt road that will expedite the start of drilling.

It targets the Baturaja and Talang Akar formations, both of which are prolific oil and gas reservoir formations throughout South Sumatra.

Following Kayumanis-1, , two further wells are planned in the initial drilling program.

Ranau Production Sharing Contract

The Ranau PSC is located in South Sumatra, which contains 189 oil and gas fields with total reserves of about 12 billion barrels of oil equivalent.

Notable operators in South Sumatra include ConocoPhillips, which operates the Corridor Block and South Jambi 'B' PSCs, and Santos (ASX: STO) with the Ogan Komering I and Ogan Komering II coal seam gas licences.

Data from a 225 kilometre gravity survey and 247 kilometres of 2D seismic have allowed Quest to identify four new and very lightly explored sub-Basins that contain up to 3 kilometres of sediment that are believed to be same oil and gas source rocks and reservoir rocks as those in the prolific South Sumatra Basin.

The 16 leads are located within these basins, with three in the Jaya sub-Basin prioritised for drilling.

In addition, exploration in the surrounding areas has already proven that a hydrocarbon system exists in the area, which is close to existing infrastructure.

Fellow Australian NuEnergy Gas (ASX: NGY) has recently estimated that its South and Central Sumatra production sharing contracts held shale gas-in-place of 6.1Tcf.

This is in addition to the certified coal seam gas resource of 7.8Tcf of in-place and 4.2Tcf of prospective gas resources within its South Sumatra contracts.

Its coal seam gas drilling has also intersected between 3 metres and 20 metres of coal seams with de-watering of the pilot well expected to start this month.

Sumatra

Sumatra is the sixth largest island in the world and has had a successful oil and gas industry since 1885 when Indonesia's first successful oil well was drilled in North Sumatra, creating the Royal Dutch Shell group.

Since then, more than 400 fields have been discovered containing more than 45 billion barrels of oil equivalent and Sumatra currently produces oil for consumption in domestic and international markets and gas for domestic markets in Sumatra and West Java, and to international markets in Singapore by pipeline, and North Asia through liquefied natural gas export.

In South Sumatra, the oil and gas industry is dominated by Indonesian state oil company Pertamina and smaller local companies.

This provides an opportunity for Quest to create value by bringing industry leading ideas and technologies to explore for and produce oil and gas in South Sumatra.

Analysis

With approval from BPMIGAS imminent, Quest offers investors who understand the risk/return potential of oil and gas investments significant upside potential before the onset of exploration and spudding of its first well, which is expected to provide a lift in valuation.

Further, and potentially greater, upside will come from a discovery in the Ranau PSC, where the proximity to existing infrastructure allows for quick commercialisation of any discoveries.

Gas will find a ready market for both local and foreign power generation, the latter through exports to West Java and Singapore, while oil can be commercialised through facilities located within 50 kilometres of Ranau.

This is enhanced by Quest's attractive 62% revenue split for both oil and gas in the Ranau PSC, which is more favourable than the fiscal terms Santos secured.

A conservative Kayumanis discovery in line with Quest's base case estimates would see an IRR of 69.2% and an NPV of US$191 million.

This is very heady given the current market valuation of Quest sitting at $12.3 million and demonstrates the risk/reward equation is very promising indeed.

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