activity report, page-3

Mickey,

I'll offer a few comments.

Firstly, secondly and thirdly, bad management. I think the more informed commentators on HC would all have done a better job of managing SGL than the past management have.

I invested in both AOE and QGC back in 2004 prior to them starting their rise only to shift some of my funds to SGL in 2005 to see it fall.

My view is:

A. The way I see AOE and QGC have performed so well is to:
- pick up raw coal seam acerage (which SGL also has) and which the market gives little Market value to in the company share price. They then explore/pilot this acerage to achieve reserves. The market value assigned to this acerage with reserves is far in excess of the cost to these companies to establish these reserve. Then then enter deals with third parties in projects where the third party provides the capital and they predominatly only provide acerage and reserves for the project. They consequently end up with a large equity position in a project for the effective cost of establishing the reserves.

- In contrast, SGL sold 50% of its acerage to AGL. Therefore, any project that is established it provides 50% of cost of establishing reserves plus 50% of the capital cost of development. Very much harder to leverage off essentially low market value acerage.

B. In my opinion, the trick to make an investment in a coal seam methane project is to generate a quick return from the gas produces from your wells compared to the cost of drilling and developing those wells. If you look at SGL reports you see that SGL has drilled 119 wells which produce an everage of 220 GJ per day. The revenue from this would be bearly able to cover the interest on the cost of drilling and developing of these wells if they had been funded by debt. The trick to make individual projects profitably is to generate a surplus over these costs. My understanding is that the in-seam wells, while they cost more to drill, save expenditure on surface development and produce much greater gas and revenue. For example, well EM38 was drilled in-seam in the last quarter and produced a maximum flow of 900 GJ per day. It is my understanding that these wells produce much greater revenue than their costs of production. AOE was using these well back in 2004. SGL only has a few in-seam wells and only drill 2 in the last quarter. They were very late to adopt the in-seam well.

In truth, I have often wondered if the board and management of SGL really consider themselves as working for AGL rather than SGL. For example, SGL stands to get a bonus of up to $50M for finding an additional 500PJ of P1 erves at Camden by 31 December 2008. They had over three years to achieve this. My understanding is that, based on the cost AOE established reserves at, they could have done so for less than the bonus. However, we have not had any reserve revision and I am now not hopefull of getting the full $50M.

However, I believe this arrangement with AJL is a life saver. It is my understanding that AJL are teh experts wrt in-seam drilling. I also expect the new MD of SGL will probably know how to manage a coal seam gas company. I am expecting significantly more drilling resources at SGL disposal, hopefully higher reserves by 31/12/2008 also and hopefully additional acquisitions of raw coal seam acerage so that SGL can excape the straight jacket of 50% of capital for all its projects.

I have never been more optimistic about SGLs future since this proposal has come to light.

Regards

SP