Carbon Energy : Letter to Shareholders

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23 April 2016

Dear Shareholder,

By now most of you would be aware of the extraordinary decision announced by the Queensland Government earlier this week to ban Underground Coal Gasification (UCG) in Queensland.

Queensland Government Bans UCG

On 18 April the Queensland Government took the extraordinary step of introducing a ban on underground coal gasification in Queensland with plans to introduce legislation to give effect to the ban by the end of this year.

This is a decision that has profound implications not just for Carbon Energy shareholders but for every business operating in Queensland, as well as Queensland's ability to attract future investment.

We have been working co-operatively with the Queensland Government for eight years to develop our energy project in Queensland, which promised to be an important part of the solution to the looming gas shortage on the Australian East Coast.

The Queensland Government set the UCG assessment rules, which Carbon Energy has followed meticulously and successfully delivered on, at every stage. Your Company was responding to an 'evidence based decision making' process, which has been so heavily promoted by the current Government. The fundamental finding of our technology trial was to prove it could be operated in an environmentally responsible way.

The political decision to ban UCG, flies in the face of the 'evidence based' approach and denies Queenslanders future access to a huge energy source and a fledgling industry which would subsequently provide royalties to the State.

Despite our shareholders investing more than $150 million on the assumption the Queensland Government would play by its own rules, our Bloodwood Creek investment is now in serious jeopardy.

Carbon Energy's response

The Board and management team have taken decisive action to address this issue including seeking urgent meetings with the Premier and responsible Minister's to understand the background to this extraordinary decision and to put forward our case for the ban to be overturned on our technology and to get recognition that keyseam did indeed pass the ISP.

We are also evaluating a range of other potential measures to protect the value of this investment for Carbon Energy shareholders and will have more to report on this in the future.

The way forward

While the importance of our Bloodwood Creek project to Carbon Energy is clear, our business is now far broader than UCG in Queensland. This is a fact attested to by the valuation attributed by accounting firm PwC of up to US$40 million to our Technology Licence Agreements for China alone and independent broker research by APP Securities which values CNX at in excess of $225 million excluding the value attributed to our Queensland assets.

This compares to our current market capitalisation of $15.9m.

For several years your board has been implementing a deliberate strategy to diversify Carbon Energy's operations to mitigate risk and pursue a global vision to commercialise UCG internationally.

A joint venture in China, backed by respected Chinese entrepreneur Mr Huihai Zhuang who controls a number of investment groups with business interests in retail, real estate, new technologies and resources will be funded by a US$30 million investment from JinHong. Mr. Zhuang has demonstrated his support of Carbon Energy through a $2 million private placement last year and

$2.85 million placement and rights issue in the most recent capital raising.

The JinHong joint venture is progressing and we look forward to reporting on important milestone developments in the near future.

I can assure shareholders that your Board and management team are working to seek an urgent resolution to the Queensland Government decision.

I will progressively update shareholders on further developments. I also encourage shareholders to visit the company's website (ww.carbonenergy.com.au), which will be updated regularly with further information.

Yours sincerely,

Dr Chris Rawlings Chairman