Karoon Gas Australia Ltd. (KAR.AU) said Tuesday that poor test results from the Poseidon-2 appraisal well in its joint venture with ConocoPhillips (COP) are more likely related to technical problems in the testing procedure, rather than an indication of the well's potential to generate decent gas flows.

Karoon's comments could hearten investors stricken by a 24% plunge in the company's shares last Thursday, caused by a company drilling report that said initial testing results at Poseidon-2 were "inconclusive."

The company confirmed that the well's operator ConocoPhillips will make a second attempt to evaluate potential gas flow rates from the same well through further testing.

Strong gas flows from Poseidon-2 would back Karoon's claims that it and ConocoPhillips could be sitting on a massive gas bounty offshore northwestern Australia, big enough to underpin the development of a standalone liquefied natural gas facility.

The recent volatility in Karoon's share price, however, shows the jury's still out on the company, with some investors skeptical of its prospects and others confident that it is drilling in the right place with the right partner.

"The scorecard's mixed at this point," said an energy analyst from a local investment bank, who asked to remain unnamed.

It could take about another two weeks until new testing results for Poseidon-2 are released to the market.

"It is likely that it is a technical problem and we're running a second test to examine the possibilities," Karoon Company Secretary Scott Hosking said.

Karoon shares rose 4.3% to A$8.07 on Tuesday, having rallied earlier in the day after the company released a statement that said analysis of the first test indicated a likelihood that "no connection between the well bore and the reservoir was achieved."

The failure of the well bore to connect to the reservoir during testing could have been caused by a number of technical issues, such as junk material getting in the way, and it is likely that ConocoPhillips will be attempting to clean the well before it performs another test.

Hosking reiterated that Poseidon-2 intersected the same three gas columns in the Plover geological formation encountered in the successful Poseidon-1 well, and that early stage analysis, like logging-while-drilling data, indicated the presence of hydrocarbons in Poseidon-2.

The well's success, however, will largely depend on the flow rates it may or may not be able to achieve through further testing, he said.

In its statement Tuesday, Karoon said that early-stage permeability data from a core cut from one of the three sand intervals struck by Poseidon-2 "indicates that the reservoir should flow gas."

It also said that Poseidon-2 is just one of a "multi-well appraisal program" and that a bad result is not necessarily the end of the road for the joint venture.

Its next move will be to spud the Kronos-1 exploration well, which it said will occur when testing is completed on Poseidon-2. It then plans to drill another well, Lion-1.

It will then have to hand over its current drilling rig and is currently analyzing rig alternatives for any further drilling.

Initial results from Poseidon-1 released earlier this year indicated that it had struck a 200-meter gas column, sending Karoon's shares flying. Technical issues, however, forced Poseidon-1 to be plugged before more extensive testing data could be obtained.

The campaign's second well, Kontiki-1, didn't find much and was written off as a miss.

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