Chairman's Message

January 2009 is the start of our third year as a company with outside shareholders. I explained last year that at the beginning of 2007 we determined that the acreage we had was simply too great for us to do the necessary exploration and development drilling work to maintain our leases. We, and in fact the region, did not have the resources in trained manpower or equipment and so we decided to look for partners. We farmed-out certain leases to Saber Energy, a company owned by a Canadian group called Tau Capital, to facilitate the development of our original acreage. In addition Kalahari Energy (KE) agreed a royalty with them for each unit of commercially produced gas.

After our agreement with Saber Energy was concluded, we moved our primary field operations to the north near a town called Serowe which is also close to the giant DeBeers mining operations at Orapa and, importantly, not far from the national grid. We established a work site and started drilling to develop this acreage. This has been our primary focus in 2008.

Early in the year (2008) the Botswana Power Company (BPC) called for tenders to build a 250 megawatt independent power production unit. KE and others formed a consortium company called Karoo Sustainable Energy (KSE) to bid. KSE were in competition with 33 other organizations and in late July BPC announced that KSE had won. With the turmoil in the international financial markets final negotiations dragged on longer than anticipated but orders have been placed with General Electric (GE) for an initial 2 turbines. Winning this was a great achievement for KSE but equally important for KE. The plant will use KE’s gas and KE will own a significant part of the power plant.

In addition to the importance to Kalahari Energy this is a major step for the development of coal bed methane (CBM) in Africa. This is the first independent power production unit in Southern Africa in recent memory and is a direct response to the energy shortages in Botswana. It is also the largest energy project in the world to significantly involve CBM. In particular the agreement to use KE’s gas gives KE an “offtake” for its product which facilitates financing of further development. It is very helpful that it is an agreement with a governmental company. Subsequent to the announcement we had Government ministers visit our site with TV and radio coverage. First power is expected to be produced by the second quarter of 2010. This will not be the full 250 megawatt output. Power generation capacity will be increased as further CBM development takes place.

We continued our look for appropriate partners for the development of the potential of our resources and in November 2008, concluded a joint venture with a major, publically listed, resources company, for further CBM exploration and beneficiation (more detail to follow). This could take many forms. Gas to liquids is one generic term and in this Liquid Natural Gas (LNG) and Dimethyl Ether (DME) are distinct possibilities, which will be determined by a pre-feasibility study. The key to success in this business will be technical expertise and access to finance in large amounts. It would be beyond our abilities to do this on our own and we are pleased that with our JV partner, there are the requisite skills and access to sufficient financial resources to develop this venture profitably.

On our own, however, we are exploring the uses of compressed natural gas and the application in Botswana. We have hired a director of business development and are working with the Department of Education with endorsement of the Department of Energy to develop a gas to schools service. In addition, KE is targeting various mining companies and major distributors. There are two significant factors to the success of this business. One is the efficiency of CBM as a fuel: it is clean, there is little adverse environmental impact, and it is in Botswana. The second factor is that we believe there is already a shortage of diesel and other liquid fuels in Southern Africa and this will continue in the coming years.

The original vision of Kalahari Energy to develop a new energy source to meet the growing need for power in Botswana still holds. We have been right. There are continual power blackouts due to the supply-demand imbalance and Botswana needs more electricity. There is an added impetus since 70 % of electricity comes from South Africa and they need it themselves. It is now recognized that we have a solution. Secondly by understanding the different uses of a resource like CBM we can exploit the possibilities in compressed natural gas which we can develop ourselves in schools, villages and industry in Botswana and the other uses of CBM to create other sources of energy for the domestic market and ultimately for export markets.

Since our inception, there have been many learning experiences, but we have achieved most of our goals. KE are developing businesses for CBM and are now in the final stages of proving reserves. The big test, the commercial viability of the gas underneath the Kalahari will be answered this year. We know it is there. We can now get it out but to do it commercially will involve using new techniques to drill, most importantly, horizontal drilling. This works in the US and particularly well in Australia but has not been done here. We will start soon and should have some answers to some important questions quickly. KE are optimistic as are the experts who study our data and visit our site. However, the proof is in the results of the actual drilling.