Karoon Gas Australia Ltd. (KAR.AU) confirmed Wednesday that the latest well in its drilling campaign with partner ConocoPhillips (COP) in the Browse Basin has struck hydrocarbons, sending Karoon's shares up as much as 11% in afternoon trade.

Karoon's statement comes two weeks after a person familiar with drilling campaign told Dow Jones Newswires that the well had penetrated hydrocarbons in similar intervals to those penetrated in the successful Poseidon-1 well about six kilometers away.

A large gas pay at Poseidon-2 would provide further evidence that Karoon and ConocoPhillips are sitting on a resource offshore Western Australia state big enough to support a multibillion dollar liquefied natural gas development.

Poseidon-2 is an appraisal well testing for the presence of gas in the Plover geological formation penetrated in the Poseidon-1 exploration well.

In a welcome development, Karoon said Wednesday that Poseidon-2 struck a 20 meter gas column in the Montara formation, which sits above the Plover formation.

Karoon said early observations indicate that hydrocarbons were also penetrated in the Plover formation but their presence, and size of any hydrocarbon-bearing intervals, cannot be confirmed until further testing is complete.

However, Melbourne-based Karoon confirmed that Poseidon-2 has penetrated the same three sand intervals penetrated in the successful Poseidon-1 well.

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.

Karoon said more extensive testing of Poseidon-2 has been delayed by Cyclone Laurence. Wireline logs are expected to be gathered in the coming week, it said.

EL&C Baillieu analyst Ivor Ries said the early indications from the Poseidon-2 find are very encouraging for the JV because they appear to confirm the thickness of the intervals encountered in the Poseidon-1 well.

"The real test will come when they do a production test," Ries said.

"There is still a small risk that it doesn't flow at a good rate, but really the tone of what they're saying here today based on everything they've seen to date indicates they're going to get a pretty good flow rate from it."

Analysts have said that Karoon and ConocoPhillips could be sitting on one of Australia's biggest gas resources, noting the proximity of their initial Poseidon discovery to other major finds like Inpex Holdings Inc.'s Ichthys field.

Early-stage independent analysis has estimated they could be sitting on 7.6 trillion cubic feet of gas. At least 4.0 tcf is required to support an onshore LNG facility.

Ries said good flow rates from production testing at Poseidon-2 may indicate that the 7.6 trillion tcf estimate is "base case", with upside to about 10 tcf.

Poseidon-2 is the third well in the JV's drilling campaign. The second well, Kontiki-1, didn't find much and was written off as a duster.

Two more exploration wells, Lion-1 and Kronos-1, will follow Poseidon-2 and the venture has an option to drill a further four wells.

ConocoPhillips recently exercised an option to lift its interest in the joint venture to 60% from 51%, with Karoon owning the other 40%.

Karoon Gas shares were up 10.7% at A$9.45 in late trading.

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