FULL ANNUAL REPORT

Website

http://www.nido.com.au

Operations Review

Pages
| 8-9 | 10-11 |

Page 8-9

Development: Galoc – North West Palawan Basin, Philippines

Nido holds a 22.279% working interest in the Galoc oil field development.

2007 saw a frenetic work pace at Galoc and, as a consequence, substantial progress on the oil field development. Highlights for the year were:

Fabrication of the process equipment, well casing and tubulars, completed in Indonesia.
Fabrication of the mooring base completed in Singapore.
Refurbishment of the subsea trees and fabrication of the subsea controls completed in Perth, Western Australia.
Successful completion of the pilot hole including the recovery of 38 metres of core, the acquisition of a full suite of logs and five fluid samples.
Better than expected results from the preliminary analysis of the well data.
Successful drilling of Galoc 3 and 4 horizontal development wells.

Background

The first phase of the Galoc development involves the drilling and completion of two subsea horizontal wells connected via a seabed flow line and riser system to a Floating, Production, Storage and Offtake (FPSO) vessel. Nido predicts these horizontal wells to be highly productive, with each initially capable of producing up to 15,000 bopd. In order to maximise oil recovery over the life of the field, the total field production rate will likely be controlled to an initial production plateau of approximately 17,500 bopd for 12 to 24 months.

Field data gathered during the drilling and initial production will represent an important appraisal activity leading to a better understanding of the field and the upside reserves potential. The development design has the flexibility to tieback additional wells to the FPSO in the event of an increase in estimated recoverable volumes.

Galoc has certified 2P (proven+probable) gross reserves of 23.5 million barrels, as verified by Gaffney Cline and Associates (GCA) in 2006.

Galoc Reserves Table

Progress

The Operator, Galoc Production Company W.L.L. (GPC), has coordinated an extensive array of project work in Australia, the UK, Indonesia, Singapore, Malaysia and the Philippines.

The conversion of the tanker ‘Rubicon Intrepid’ commenced in late 2006 and continued throughout 2007 in both Singapore and Malaysia. This work has included the installation of the helideck, process equipment, flares and other production and control equipment. This conversion work is scheduled for conclusion in February 2008.

All necessary equipment and consumables were mobilised to locations as diverse as Batangas in the Philippines, Labuan in Malaysia and Singapore. In addition, the Operator’s well construction team mobilised to Singapore in preparation for the drilling campaign.

The drill ship ‘Energy Searcher’ came on hire to the project on 24 September 2007 and arrived on location in early October 2007.

Drilling Programme Successfully Completed

Drilling of the Galoc pilot hole and the Galoc 3 and 4 horizontal development wells commenced on 7 October 2007 using the drillship ‘Energy Searcher’. The drilling programme for the Galoc wells was undertaken using a ‘batch’ programme. The top hole sections for both development wells were drilled followed by the pilot hole to gather fluid samples and minimise formation top uncertainty on the Galoc 3 location before drilling the remainder of the horizontal production wells.

By the end of 2007, Galoc 4 had been drilled to total depth (TD) and all casings and liners were installed, whilst Galoc 3 reached 3,206 metres along hole. Shortly after year end, the drilling of Galoc 3 was concluded, with the drilling programme comprising the pilot hole and production wells Galoc 3 and 4 reaching a combined total depth of 11,346 metres.

During the drilling programme, several delays were experienced due mainly to the passage of three typhoons through the Philippines, and certain mechanical and operational issues.

Excellent Pilot Hole Results

The pilot hole achieved all of its data gathering objectives. The results of the analysis of the data combining the log and pressure data with the recovered core were used to optimise the placement of Galoc 3 in the southern portion of the field.

Some 37.8 metres of reservoir rock core was cut and recovered to surface. The recovered core is in excellent condition and Nido personnel have examined the core first hand, reporting that:

The core confirmed the presence of oil in the reservoir via its fluorescence under UV light.
There is a greater proportion of productive reservoir to non-productive reservoir rock (i.e. net to gross) than was originally expected in the pilot well area.
Reservoir average porosity is estimated to be within the predevelopment study range of 13-19%.

A full suite of wireline logs was acquired and the results from the petrophysical analysis of these logs have been very encouraging. So far:

The logs have confirmed that the well intersected the top of the reservoir at 2,180 metres below sea level which was within one metre of the predevelopment prognosis.
The logs have been calibrated against the actual reservoir rock from the core and an excellent correlation has been achieved.
The reservoir pressures obtained during modular dynamic testing (MDT) logging indicate an oil column at the pilot well location that is as anticipated in predevelopment studies.

Five reservoir fluid samples were extracted directly from the formation under strictly controlled conditions using the MDT tool. The samples have been sent to Schlumberger laboratories to be analysed. Water samples were also collected and will be tested to assist in calibrating the logs.

Page 10-11

Exploration

Philippines: North West Palawan Basin

In September 2007, Nido commenced the largest seismic campaign in the Company’s history, acquiring over 5,000 line km of 2D and 846 sq. km. of 3D seismic across SC 54, SC 58 and SC 63. The rationale for such a large programme was based on the encouraging subsurface results delivered by the 2006 seismic programmes over SC 54 (Abukay 3D) and SC 58 (Talusi 2D). In addition to this, Nido increased the momentum of its exploration operations by electing to bring forward its seismic acquisition commitments in SC 63 into the 2007 campaign.

Due to the size of the 2007 seismic programme, two seismic vessels, the MV ‘Pacific Titan’ and MV ‘Pacific Sword’ contracted from CGGVeritas, were used for the 120-day operation. At year end, the seismic programme was approximately 75% complete and was ultimately completed by the end of January 2008.

In tandem with the seismic operations, Nido completed preliminary subsurface interpretations of the 2006 Abukay 3D and Talusi 2D seismic surveys and undertook a detailed review of the shallow water area of SC 54 outside of the Abukay 3D area.

This work delineated a preliminary portfolio of around 100 leads within a range of play fairways including the proven Nido Limestone reef play (the same play type as that contained within the Nido and Matinloc fields in SC 14) and the deep water Late Miocene Turbidite play (the same play type as that contained within the Galoc field in SC 14) developed in the western sector of SC 54 and across SC 58.

Importantly, Nido also elected to enter Sub-Phase 3 of SC 54 which commits Nido to the drilling of an exploration well by February 2009, representing the first opportunity for Nido to test the potential of its exploration portfolio.

SC 54 – Nido 60% (Operator), Yilgarn (subsidiary of Kairiki Energy Limited) 40%

Nido carried out the following key exploration activities in SC 54:

Interpretation of the 2006 Abukay 3D seismic data, including a review of the shallow water potential of the permit, and the development of a preliminary but comprehensive Prospect and Lead portfolio. This work was ongoing at the end of the year and will incorporate the 2007 seismic data from which a final Prospect and Lead portfolio will be completed by mid-2008.
Acquisition of a further 165 sq. km. 3D seismic (Abukay Part II) over the western sector of the permit to cover the potential extension of the Late Miocene ‘Princesa’ Turbidite play fairway near adjacent SC 58. The new seismic will be merged with the 2006 Abukay 3D data to enable a better subsurface evaluation of the play type.
Acquisition of 504 km of new 2D seismic over the south-western sector of SC 54. This survey was acquired as part of the ‘Kiaw’ seismic survey using the MV ‘Pacific Titan’ seismic vessel which also acquired seismic data in SC 58. The objective of this survey was to evaluate the potentialdevelopment of the Nido Limestone reef play across this lightly explored sector of the permit.
Maturation of the Coron North lead to a technically mature prospect and a candidate for drilling as the Sub Phase 3 commitment well in the fourth quarter of 2008 (subject to rig availability).

In addition to seismic operations in 2007, Nido also took some significant strategic steps forward in the exploration of the area. Firstly, in August, Nido and joint venture partner Yilgarn elected to enter Sub-Phase 3 of the seven-year exploration term which contains a one well exploration drilling obligation.

Secondly, in the third quarter of 2007, Nido and Yilgarn applied to the Philippine Department of Energy (DOE) to extend the eastern boundary of SC 54 to include the Signal Head oil discovery into SC 54 and a number of undrilled Nido Pinnacle reefs by the relinquishment of an equivalent area in the south-east of the contract. After year end, Nido announced the DOE’s modification to the boundaries of SC 54 to include the Signal Head oil discovery and other exploration potential.

SC 58 – Nido 50% (Operator), PNOC 50%

Nido’s key exploration activities in SC 58 during 2007 were:

Preliminary seismic interpretation of the regional Talusi 2D seismic survey and delineation of an extensive deepwater Prospect and Lead portfolio with water depths ranging between 500 – 1,500 m.
Acquisition of 661 sq. km. of 3D seismic over four prospective areas high-graded by the Talusi 2D seismic. The four 3D areas are aimed at rapidly developing a high-graded portfolio of potential drilling candidates by late 2008.
In tandem with the 3D seismic programme, Nido also acquired 1,928 km of new 2D seismic over potentially prospective trends high-graded by the Talusi seismic survey.

The DOE’s grant of a 12-month extension to Sub-Phase 3 of SC 58, which carries a one well commitment, provided Nido and joint venture partner PNOC Exploration Corporation additional time to fully evaluate the large amount of seismic data acquired in the permit in 2007 and further mature the Prospect and Lead portfolio. Sub-Phase 3 will now commence in January 2009 and will run for 18 months.

SC 63 – Nido 50%, PNOC 50% (Operator)

SC 63 is currently in Sub-Phase 1 of its seven year exploration term and is at an early phase of its exploration activity. Sub-Phase 1 ends in November 2008.

Activities in 2007 comprised the acquisition of a 3,285 km 2D seismic survey (East Sabina) which was acquired as a broadly spaced reconnaissance grid aimed at delineating prospective trends which can be high-graded for further seismic detailing in subsequent Sub-Phases.

In the south of the permit, a 2 x 2 km grid was acquired around the Aboabo-1 well which was drilled in 1980 and flowed gas at reported rates of 50MMscfgd. The joint venture’s strategy is to fast-track the seismic interpretation of the Aboabo area to fully understand the significance of the reported gas flow.

Production: Nido and Matinloc – North West Palawan Basin, Philippines

The Company holds interests of 22.486% and 28.283% in the Nido and Matinloc oilfields, respectively. These assets are considered non-core in Nido’s portfolio of assets.

Gross oil production from Nido and Matinloc for 2007 was 182,848 barrels (average 501 barrels per day). This compares with gross oil production during 2006 of 181,669 barrels (average 498 barrels per day). Production remained flat year-on-year, which is still positive given that late-life fields, such as these, generally decline over time.

The monthly rate of crude oil offtake from the Nido and Matinloc fields fluctuated considerably during the year due to downtime caused by reservoir management requirements, typhoon activity, shipping related delays and oil refinery maintenance. Nonetheless, fifteen liftings of Nido and Matinloc crude oil were made during 2007 as compared with eight in 2006.

United Kingdom – Asset Divestment

On 16 January 2007, the Company completed a transaction resulting in the conversion of its United Kingdom assets into 8,985,577 shares in oil and gas exploration company Encore Oil plc. Following an escrow period of six months, the Company decided to monetise its investment in Encore Oil plc,thus realising a 366% return on its original investment in the United Kingdom. This decision enabled the Company to focus on accelerating the growingopportunities afforded by its core asset base in the Philippines particularly, its exploration portfolio.

Table of Contents