Carbon Energy : Quarterly Activities Report & Appendix 5B

QUARTERLY ACTIVITIES REPORT FOR THE PERIOD ENDED 30 JUNE 2016

ABN 56 057 552 137

ASX Code: CNX OTCQX Code: CNXAY

• The Company raised $3.48 million before costs through a renounceable rights issue which closed on 4 April 2016.

• On 18 April 2016 the Queensland government introduced a ban on underground coal gasification (UCG) in Queensland.

• CEO, Morné Engelbrecht, advised the Company that he will not be renewing his contract which expired 17 June 2016. Mr Engelbrecht agreed to extend his contract under the same terms and conditions up until 12 August 2016 to ensure an orderly leadership transition.

• The China University for Mining and Technology International Research Centre for UCG (the Centre) was officially opened on 24 April 2016, with Carbon Energy's Dr Cliff Mallett appointed as Director of the Centre. The Centre has been established to develop the highest standards for China's growing UCG industry.

• A key milestone was announced on 17 June 2016, being the formal registration of the Chinese Joint Venture Company, the Beijing JinHong New Energy Development Joint Venture (JV) by the Chinese corporate registry. Under the JV Agreement, JinHong will contribute US$30 million towards developing a commercial demonstration project upon the JV meeting certain milestones.

• On 23 June 2016, a Memorandum of Understanding was signed with Photon Energy NV (Photon Energy) to evaluate the development of a large scale solar power generation plant with up to 20 MW capacity at the Company's Bloodwood Creek facility in Queensland. Under the MOU, feasibility of an innovative power storage system on the Bloodwood site will also be assessed.

• On 6 May 2016, the United States District Court for the Northern District of California dismissed the complaint brought against the Company by Summa Resource Holdings LLC without the need for a hearing.

• Grant Thornton Australia have been appointed Company auditors from 28 June 2016, replacing Deloitte Touche Tohmatsu.

  SUBSEQUENT TO QUARTER END

• Following 8 years of persistence, hard work and over $150 million investment in our technology, on 25 July 2016 the Company announced it had received confirmation from the Queensland government Chief Scientist, Dr Geoff Garrett that Carbon Energy has satisfactorily completed the recommendations of the Government appointed Independent Scientific Panel (ISP). This achievement has been our most important priority since we began trials at Bloodwood Creek. Carbon Energy is the only Company to receive this acknowledgement and the ISP process has now been successfully concluded.

• Further to the close of the renounceable rights issue on 4 April 2016, under its Rights Issue Shortfall allocation, on 4 July 2016, the Company issued a further 30,769,232 shares raising

  $400,000 before costs.

• Entered into a sub-lease for part of its corporate office premises in Brisbane, which will reduce operating costs going forward.

  COMPANY UPDATE CHINA

  JinHong Joint Venture (JV)

  During the period the Company laid the foundation for strong growth in China by registering the Beijing JinHong New Energy Development JV .

  The registration triggers the initial US$10 million contribution to the Joint Venture from our Chinese partner, JinHong, of which payment is now due. In addition, JinHong will contribute a further US$20 million towards developing a commercial Demonstration Project upon the JV meeting certain milestones.

  Carbon Energy will provide technical and design services support, supervision and training for all JV projects under the Technical Services Agreement. The achievement of registration in June 2016 triggered the formal signing of Technology Licensing and Technical Services Agreements. The Technology Licencing Agreement was signed in July 2016, with the Technical Services Agreement still to be finalised and signed.

  The JV will have a non-exclusive license to use Carbon Energy's keyseam technology up until the successful commissioning of the Demonstration Project but can sub-license keyseam technology in China during the non-exclusive period. The license will become exclusive (within the People's Republic of China) after the successful commissioning of the Demonstration Project.

  To date, Carbon Energy and JV partner, JinHong have made progress in advancing the JV. Key priorities remain:

• securing a suitable coal field - more than ten coal fields reviewed to date;

• engaging the in-country engineering, procurement and construction management contractor;

• contracting an in-country drilling company; and

• commencing pre-engineering works once the coal field and engineering, procurement and construction contractor is appointed and a suitable coal field secured by the JV.

The JV remains committed to ensuring the initial project commences as soon as possible.

China UCG Research Centre

The China University for Mining and Technology International Research Centre for UCG (the Centre) was officially opened on 24 April 2016, with Carbon Energy's Dr Cliff Mallett appointed as Director of the Centre. The Centre has been established to encourage the development of UCG technology by industry and Government groups alike, as the environmentally acceptable utilisation method for coal. The Centre will seek to simplify the regulatory process by establishing national and international standards of operation for UCG and formally seek recognition by Government.

The establishment of the Centre is an important step forward in the advancement of Carbon Energy's expansion plans in China. Whilst the Centre is still being established it is currently determining the Centre's physical location on campus, the outline of the research program and conducting assessment of a number of projects suitable for initial trials.

Business Development

Carbon Energy is currently pursuing a number of business development opportunities in Asia, South America, and Australia.

MOU for a large-scale solar energy plant and storage facility at Bloodwood Creek

On 23 June 2016, Carbon Energy announced a MOU with Photon Energy to evaluate the development of a large scale solar power generation plant, up to 20MW as well as investigate the use of the site's existing underground infrastructure to store energy for use during peak energy periods.

This is a positive step for the Bloodwood Creek site and will enable the Company to realise some of the site's potential, while contributing to Queensland and Australia's growing renewable energy needs.

Confirmation of successful completion of the ISP process in QLD

On 25 July 2016 the Company announced that it had received confirmation from the Queensland government Chief Scientist, Dr Geoff Garrett that Carbon Energy has satisfactorily completed the key recommendations of the Government appointed Independent Scientific Panel (ISP) into underground coal gasification (UCG).

Dr Garrett, who led the formal peer review process of the ISP, expressly acknowledges Carbon Energy as the only company to meet the recommendations of the ISP. He also recognises that the Company's successful and innovative keyseam technology is different from that of other technologies employed, stating "it is clear that Carbon Energy has contributed to the collective understanding of UCG and the conditions under which the operation is likely to be both safe and successful."

This acknowledgment from such a senior and well respected Government source is likely to pave the way for expedited commercialisation of the Company's technology in other jurisdictions.

Dr Garrett further confirms that the ISP report and its key recommendations were accepted by the Queensland Department of Natural Resources & Mines (DNRM). Dr Garett also confirms the Company's actions demonstrating safe and effective decommissioning and completing a plan for rehabilitation were independently reviewed by experts appointed by the Department of Environment and Heritage Protection (DEHP).

The acknowledgement comes after 8 years of trials and over a $150 million investment, having been the primary aim of Company.

Since the Queensland government announced its decision not to allow UCG projects to proceed in Queensland on the 18 April 2016 the Company has held several meetings with the Government including the Minister of Natural Mines and Resources as well as other senior government officials. Despite acknowledgement of the work Carbon Energy has done to date there have been no changes proposed in regards to the proposed legislation of the ban.

Carbon Energy has done everything in its power to seek amendments to the Government's proposed ban. This has included seeking legal advice from Senior Queens Counsel on the legal options available to the Company.

Environmental sampling of groundwater and measurement of other environmental metrics continues at Bloodwood Creek, following delivery of the Decommissioning Report and Rehabilitation Plan to the Queensland government in FY15.

The Queensland government's letter, issued by the Chief Scientist, is significant for the Company as it officially recognise the success of Carbon Energy's keyseam technology in meeting the rigorous assessment parameters set out by the Queensland Government.