UPDATE: Karoon, Petrobras Discovery May Be Smaller Than Hoped

Karoon Gas Australia Ltd. (KAR.AU) said Thursday that an appraisal well drilled offshore Brazil with Petroleo Brasileiro SA (PBR), or Petrobras, didn't find any oil, indicating that the pair's recent Maruja discovery could be smaller than hoped.

While the move is a slight setback for Karoon, a broker recommended investors weigh into its shares ahead of fresh exploration campaigns in South America and Australia set to kick off later this year.

Appraisal wells are drilled to test the horizontal continuity of oil and gas columns. Karoon and Petrobras's effort was made 4.6 kilometers north of their promising Maruja discovery in the Santos Basin.

Karoon, which owns 20% of the venture to Petrobras's 80%, said that while Maruja-2 encountered "excellent quality reservoir sands" and free water, the oil-water contact wasn't defined, meaning it was probably higher up and therefore closer to the original Maruja-1 discovery.

Further appraisal drilling, this time closer to Maruja-1 or in a different direction altogether, will be needed to estimate the actual shape and size of the field.

A number of appraisal wells are required to estimate the commercial viability of an oil discovery and earlier follow-up wells will often attempt to test the outer limits of a field.

An assessment of the remaining potential of the Maruja oil discovery will be made in the near future, Karoon said.

The Melbourne-based company's shares initially jumped on the results but edged back as investors digested their implications for the size of the field. They rebounded to close trading Thursday up 1.7%.

Earlier, Merrill Lynch had upgraded Karoon to a Buy recommendation, arguing that its shares have fallen too far following the failed Brazilian float, drilling delays in Australia and the death of 13% shareholder Ken Talbot last year.

"With acreage in some of the world's most prospective basins and a busy 2011, we think Karoon offers catalysts plus an attractive risk reward balance," Merrill Lynch analyst James Bullen said.

Lawmakers have forced Karoon and its Australian joint venture partner ConocoPhillips (COP) to submit more detailed safety information before they can resume their drilling campaign offshore northeastern Australia.

The crack down on explorers comes in the wake of the Montara oil spill nearby and calamitous events in the Gulf of Mexico.

"Australia is facing a growing fuels imbalance and offshore drilling is necessary to minimize import reliance," Bullen said.

"The government acknowledges this fact and the recent decision not to revoke PTTEP's operating licence despite the Montara spill suggest they are remaining pragmatic."

-By Ross Kelly, Dow Jones Newswires; 61-2-8272-4692; Ross.Kelly@dowjones.com

Karoon Gas Australia (PK) (USOTC:KRNGY)
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