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Karoon Finds Oil Offshore Brazil, Shares Jump

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SYDNEY - Karoon Gas Australia Ltd. has made its second significant oil discovery offshore Brazil, sending its shares soaring as much as 28% Monday and increasing the possibility of finding another partner to share development costs.

The Australian company has now discovered oil in two out of three wells drilled in the Santos Basin, located south of Rio de Janeiro, with joint venture partner Pacific Rubiales Energy Corp. Karoon owns 65% of the venture and analysts expect it sell more of its interest if there's enough oil to underpin a multibillion dollar development.

Karoon said the Bilby-1 well discovered oil across a 200-meter gross column, although more work needs to be done to determine the size of the find and whether it can be developed commercially.

The rise in Karoon's stock lifted the company's value to 1.1 billion Australian dollars (US $1.1 billion), although doubts remain about its ability to fund projects that include developing natural gas fields offshore Australia in partnership with ConocoPhillips.

Scott Ashton, a senior energy analyst at BBY in Sydney, said it is too early to be sure the Bilby discovery can be developed commercially. "We do not know the net pay, the quality of the oil, and whether it is capable of flowing," he said in a note.

The well hasn't yet reached its target depth of 4,537 meters and Karoon expects further drilling to encounter a different geological structure, which could also contain oil.

The Bilby-1 discovery follows the success of the Kangaroo-1 well offshore Brazil. However, the drilling program hasn't been a complete success, with the Emu-1 well failing to find commercial quantities of oil.

The fluctuating fortunes of the drilling campaign has intensified volatility in the company's shares. Karoon was worth A$1.6 billion as recently as early March, just before it announced the outcome of the Emu-1 well.

Karoon is planning to test the Kangaroo and Bilby discoveries with appraisal wells.

Citigroup analyst Mark Greenwood said earlier this year that Karoon could eventually reduce its holding in the Brazil venture to 20% to raise funds for drilling and development.

Edward Munks, Karoon's chief operating officer, told The Wall Street Journal in March that the company had several funding options. "Having a discovered resource with high equity levels gives you a lot of flexibility," Mr. Munks said.

Options include a further stake sale, issue of new Karoon shares or an initial public offering of the South American assets. Of these, Mr. Munks said the company isn't likely to revisit an IPO after shelving plans in 2010.

The venture's properties are in much shallower water than giant discoveries made by international energy companies further offshore Brazil, such as the Tupi field.

However, significant commercial discoveries have been made close to the coast. Among the most notable is the Piracuca oil field just five kilometers northeast of Karoon's blocks. Petroleo Brasileiro SA, known as Petrobras, and partner Repsol SA in 2009 declared Piracuca a commercial discovery estimated to contain 550 million barrels of light oil.

Copyright (c) 2012 Dow Jones & Company, Inc.

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