Fletcher Challenge Energy Results

RESULTS ANNOUNCEMENT AND OPERATING REVIEW
SIX MONTHS ENDED 31 DECEMBER 2000

Financial
„h Record Net Earnings of $308 million ¡V up 77 per cent
„h Record Net Cash Flow from Operations of $445 million
„h Net Interest Bearing Debt of $351 million
„h Gain on sale of Capstone and NZRC shares of $75 million
„h Sustained strong product prices

Operational
„h Production of 25.2 million barrels of oil equivalent (mmboe)
„h Record gas production levels in Canada of 28.8 billion cubic feet (bcf) of gas
„h Production from Maui BD oil development begins

Strategic
„h Recommendation to sell Fletcher Challenge Energy to Shell and Apache Corporation

RESULTS BY GEOGRAPHIC REGION
Upstream
NZ$ million
(6 months to) New Zealand
Canada
Brunei South America
Downstream Total
Dec 00 Total
Jun 00 Total
Dec 99
Operating Revenue 429 291 44 275 1,039 827 737
EBIT* 164 58 12 46 280 156 237
Unlevered Cash Flow from Operations 331 133 32 -15 481 384 335
Assets 1,286 1,122 363 8 1,075 3,854 4,184 3,133
* Including Unusual Items

Stock Exchange Listings: New Zealand (FEG), Australia (FLCES), New York (FEG)
FLETCHER CHALLENGE SEPARATION PROGRAMME
In December 1999, the Board of Fletcher Challenge Limited announced a decision to dismantle the Group¡¦s targeted share structure for its four Divisions: Building, Energy, Forests and Paper. In April 2000, the Board announced that it had reached agreement to sell Fletcher Challenge Paper to Norske Skog, a global publication paper producer based in Norway. The Transaction was approved by shareholders in July 2000 and the sale concluded on 28 July 2000.

In October 2000, separation recommendations were announced for the remaining Divisions: Building, Energy and Forests. The recommendations are:

„h Fletcher Challenge Building will become a stand-alone company called Fletcher Building Limited;
„h Fletcher Challenge Forests will remain as the only Division of Fletcher Challenge Limited, and Fletcher Challenge will be renamed Fletcher Challenge Forests Limited;
„h Fletcher Challenge Energy will be sold to Shell and Apache Corporation; and
„h The creation of a new company, Rubicon Limited.

Separation documentation relating to the recommendations was mailed to shareholders in mid February 2001, following submission to the regulatory authorities and receipt of the Initial Court Orders. These recommendations will be voted on at a Special Meeting of Shareholders on 6 March 2001. If the recommendations are approved, the effective date is expected to be 23 March 2001.

Detailed information on the recommendations is published on the Fletcher Challenge Limited web site on www.fcl.co.nz (Separation Update page).

CHIEF EXECUTIVE¡¦S OVERVIEW
Strong prices combined with solid production levels for liquids (oil and condensate) and North American gas were the dominant features of the half year and gave Fletcher Challenge Energy its best six monthly financial performance ever. Gas production rose 2.8 per cent. Overall production on an oil equivalent basis rose 1.6 per cent from the same period last year. The combined effect of this strong production performance and sustained high prices saw net earnings rise to a record $308 million for the six month period.

Assessments of the Pohokura discovery continued and reserves estimates were significantly upgraded during the period. A 3D seismic programme is now underway and Pohokura South, an onshore well in the Mangahewa licence area, designed to test the southern limits of the field, commenced drilling in February 2001. A further well to test the northern limits of the field is planned for later in the calendar year.

After experiencing drilling difficulties on the ¡§Maui BD Incremental Oil Development Project¡¨, the Maui Operator, Shell Todd Oil Services Ltd, completed the project to a reduced scope, and by early October 2000, had brought two new oil wells onto production. These new wells have produced up to expectation. Despite the reduced scope and additional costs caused by the drilling problems, at current high oil prices the project is expected to produce a positive economic return, as well as providing an important boost to oil production levels.

On oil prices, OPEC appears resolved to maintain a target price band of around US$25 per barrel for crude. While we may see some pressure on prices in the second half-year as the Northern Hemisphere winter comes to an end, it is unlikely that we will see oil prices fall dramatically in the short to medium term. North American gas prices have also been very strong during the period and are expected to remain strong on the back of sound market fundamentals. The full benefits of commodity price strength experienced during the period were not realised due to the hedging programme in place.

This will almost certainly be my final report to you as the Chief Executive of Fletcher Challenge Energy. In early March, shareholders will meet to vote on the sale of Fletcher Challenge Energy to Shell and Apache Corporation.

Because of this impending sale, no major strategic initiatives are planned by Fletcher Challenge Energy for the balance of the financial year and we have been closing out a number of those previously undertaken. Most notable of these is the sale of our shareholding in the Brisbane based explorer, Petroz NL, acquired at a cost of A$12.8 million in July 2000. This was concluded in January at a profit of A$7.8 million. I also expect that our interest in the Worsley Cogeneration plant in Western Australia will be sold profitably during first quarter of calendar 2001.

Planning the transition of the business to its new owners has occupied much of senior management¡¦s time since the proposed sale was announced in October last year. This planning is now well advanced and I am confident that the transfer will progress smoothly after closing. Many of the staff of Fletcher Challenge Energy are expected to find employment with Shell and Apache whilst others will move on to new challenges in other companies. It is particularly pleasing that Fletcher Challenge Energy¡¦s final period closes out with such impressive results.

GREIG GAILEY
Chief Executive

CONSOLIDATED FINANCIAL OVERVIEW
Consolidated Financial Results
Net earnings over the period were a record $308 million, up 77 per cent on the corresponding period in the previous financial year. This impressive earnings result includes several unusual items. These were:

¡X a gain of $50 million through the sale of 773,621 Capstone shares as part of a secondary public offering. The shares were sold for US$30 per share before brokerage.
¡X a gain of $25 million recorded on the sale of Fletcher Challenge Energy¡¦s interest in the New Zealand Refining Company.
¡X a gain on transfer of tax of $161 million. As part of the separation process, taxation benefits previously attributed to Fletcher Challenge Paper have been purchased by Fletcher Challenge Energy at fair value.

Offsetting these gains were restructuring and separation costs of $14 million after taxation. These costs were associated with the separation of the Fletcher Challenge targeted share structure. A permanent impairment of $13 million was recorded against the carrying value of the Kupe oil and gas field following a review based on the potential outcome of selling an interest in the field.

Net earnings before unusual items were $99 million, up 62 per cent when compared to the corresponding period in the prior year.

Net cash flow from operations of $445 million (129 cps) was up 51 per cent on the prior corresponding period, reflecting the exceptional price environment supported by solid production growth.

Total capital expenditure for the period was $535 million. This high level of capital expenditure includes $386 million for the purchase of bonds issued by Gas Investments New Zealand Limited (GINZ). GINZ is the company to which Fletcher Challenge Energy owes the Gas Loan. GINZ issued bonds into the US market supported by the payments it receives under the terms of the Gas Loan. Fletcher Challenge purchased all of these bonds during the period at market value. Additionally, during the period Fletcher Challenge Energy purchased taxation benefits from Fletcher Challenge Paper for $43 million.

Fletcher Challenge Energy issues stock options to staff and Directors as part of its remuneration practice. During the period, a significant number of these options were in the money, and exercised. It received $32 million in consideration for 5.8 million shares issued under the terms of these schemes.

The ratio of Debt to Total Capitalisation increased slightly during the period to 12 per cent. Strong cash flow was offset by the purchase of the GINZ bonds coupled with the decrease in the valuation of the investment in Capstone Turbine Corporation.

Dividend
The Board of Fletcher Challenge has not declared an interim dividend.

SALES New Zealand Canada Brunei 6 Months
Dec 00 6 Months
Jun 00 6 Months
Dec 99
Oil and Condensate (mmbbls) 4.4 2.6 0.2 7.2 7.6 7.1
Gas (bcf) 66.5 28.8 7.4 102.7 97.9 99.9
LPG (000 tonnes) 64.4 64.4 56.9 67.1
Total (mmboe) 16.1 7.4 1.5 25.0 24.4 24.5
Note: Six bcf of gas equals one mmboe and 100 thousand tonnes of LPG equals one mmboe.
Production levels differ from sales due to inventory.

SEC PROVEN RESERVES (mmboe) New Zealand Canada Brunei Jun 00 Jun 99 Jun 98
Oil and Condensate 45 39 6 90 104 106
Gas * 124 102 29 255 251 259
LPG 8 8 9 10
Total (mmboe) 177 141 35 353 364 375
* Net of pre-paid gas
Note: Fletcher Challenge Energy reviews its reserves estimates annually. The last detailed review was undertaken as at 30 June 2000 and is detailed above. Further detail of reserves quantities is available on our website at www.fce.co.nz/finance.
The reserve totals in this table do not include the upgrade to Pohokura reserves determined during the period and detailed on page 8 of this review.

THE MARKETS

Market Overview
Approximately half of Fletcher Challenge Energy¡¦s production revenues are derived from the sale of products linked to the international price of crude oil. The balance of production revenues is substantially isolated from the effects of oil price movements.

Oil
The West Texas Intermediate (WTI) oil price benchmark remained very strong, averaging US$31.74 for the period. This strength resulted from the continued effective supply management by the producer group, OPEC. Demand remained strong, although the recent slowdown in global economic growth is expected to be reflected in the demand for oil. WTI closed the period at US$26.80 per barrel.

Price differentials for Fletcher Challenge Energy¡¦s Canadian heavy oil averaged a discount to WTI of US$6.86 per barrel. Heavy oil differentials widened significantly during the period as incremental heavy/sour OPEC barrels were released onto the market.

Natural Gas

New Zealand
Demand for natural gas in New Zealand remained strong, supported by continued high levels of usage in the electricity and methanol sectors. Fletcher Challenge Energy sells almost all its New Zealand gas production by way of bi-lateral defined price contracts with large customers (including Maui gas via the New Zealand Government). In early 2001, Fletcher Challenge Energy entered into two agreements with Methanex for the sale of additional quantities of natural gas. The first contract, for the supply of 20 Petajoules (PJ) over almost 3 years, will be met through the sale of otherwise uncommitted gas from McKee. A second sales contract with Methanex, for approximately 15PJ, will be met through the development of the Mangahewa field. This is discussed in more detail in the Work in Progress section of this review.

In addition to the arrangements described above, a contract was signed with Contact Energy to supply an additional 20PJ of gas from the TAWN fields. This increase will enhance throughput at the LPG plant within the Waihapa Production Station.

Canada
North American gas prices reached record levels during the period with the benchmark New York Mercantile Exchange (NYMEX) Henry Hub price reaching US$10.10 per million British Thermal Units (mmbtu). Henry Hub pricing averaged US$5.49 per mmbtu and closed the period at US$9.78 per mmbtu. The price strength reflects declining deliverability from the established basins and plays. Strong demand growth, particularly from the electricity generation sector, has also helped support prices.

Realised natural gas prices for Fletcher Challenge Energy¡¦s Canadian business averaged C$5.55 (pre-hedging) per Gigajoule (GJ).

Brunei
The price received by Fletcher Challenge Energy for the sale of gas to Brunei LNG realised an average US$2.10 per mmbtu for the period, and reached a high of US$2.23 per mmbtu in November, which is the highest price since production began in 1999. The historically high gas prices are a result of high oil prices as the two are linked.

MANAGING RISK

Fletcher Challenge Energy operates an Energy Price Risk Management Policy that enables the use of risk management tools and techniques. The details of the risk management (hedging) positions held are disclosed within the Quarterly Production Announcement, and are available on the Fletcher Challenge Energy website (www.fce.co.nz). The full benefits of commodity price strength experienced during the period were not realised due to the hedging programme in place.

In the six month period, Fletcher Challenge Energy realised an average oil price of US$27.28 per barrel (WTI equivalent) versus a market average of US$31.74 per barrel. In North America, Fletcher Challenge Energy realised an average gas price of C$4.10 per GJ (Alberta Energy Company (AECO) pricing hub equivalent) versus the average AECO market price of C$6.01 per GJ.

Consistent with the newly introduced US Financial Accounting Standard 133 (SFAS 133) requirements, all hedges are carried within the Statement of Financial Position at fair value at balance date. Fair value includes the intrinsic and time value of the instrument, with the calculation based on the forward price at balance date.

WE EXPLORE

New Zealand
In New Zealand, the onshore Tuihu-1 well was drilled in PEP 38718. Fletcher Challenge has a 50 per cent interest in this block and is the operator. The Tuihu well was drilled to 4,350 metres and encountered hydrocarbon shows. The well has been suspended to enable a subsequent sidetrack or deepening, but the results are currently sub-economic.

As a partner in PEP 38728, onshore Taranaki, Fletcher Challenge Energy is party to a 2D seismic survey to further develop exploration prospects in that licence area. Fletcher Challenge Energy is conducting a regional Taranaki basin study to identify further trends, leads and prospects. It is also working with the New Zealand Institute of Geological and Nuclear Sciences to conduct a deep-water seismic survey in the outer Taranaki shelf to identify exploration potential.

Canada
A total of 18 net exploration wells were drilled during the period of which seven were completed as gas wells and three were successfully completed for oil production, an overall success rate of 56 per cent.

Brunei
In Brunei, exploration work focused on the integration of information received from the Blocks A & CD exploration programme, completed in July 2000. A review of the prospect portfolio is underway in advance of the contractual relinquishment of 50 per cent of the licence during 2001.

In October 2000, the Brunei government released the first draft of the deep-water licensing round. To participate in the round, a Deepwater Study and Bid Agreement between Marathon Oil and Fletcher Challenge Energy was signed during November, with provision for a third party to join the bidding group. Further details of the bidding round were presented by the Brunei Government in January 2001, and are being evaluated by the Study Group.

CAPITAL EXPENDITURE (NZ$ million)
December 2000 Upstream Activities Downstream Activities
New Zealand Canada Brunei South America Total
Dec 00
Expensed (1) 2 4 6 12
Capitalised 8 11 19
Total Exploration 10 15 6 31
Development 32 59 1 1 93
Acquisition 3 3
Investment & Other 408 408
Total 42 77 7 1 408 535
(1) Fletcher Challenge Energy accounts for exploration expenditure on a ¡¥successful efforts¡¦ basis with unsuccessful exploration expenditure being written off rather than capitalised.

WE PRODUCE

Production Overview
Combined gas and liquid production for the six months of 25.2 mmboe, was up two per cent when compared to the corresponding period in the previous financial year. Gas production of 102.7 bcf (17.1 mmboe) rose three per cent, driven by strong New Zealand and Canadian gas markets and the continued full contribution from the Maharaja Lela field in Brunei. Offsetting this increase was a one per cent decrease in liquids production. An important contributor to this decrease was the further decline of the Maui B oil reservoirs, however, this was almost fully offset by the commissioning of the Maui BD oil development project in early September.

New Zealand
Oil and condensate production in New Zealand was 4.6 million barrels, down six per cent from the same period in the prior year. The reduction reflects the underlying decline in many of Fletcher Challenge Energy¡¦s New Zealand oil fields. However, in early September the initiation of flows from the Maui BD oil development project boosted production rates by more than 5,600 bopd (Fletcher Challenge Energy share). This approximately doubled the level of oil production relative to flow rates immediately prior to the commissioning of the project. Reservoir decline will naturally see these production levels fall over time.

Gas production in New Zealand was 66.5 bcf, which was in line with production for the same period in the prior year. This continued high level of production remains supported by the electricity and petrochemical sectors. During the period, a second de-propaniser came onstream at the Maui Production Station at Oaonui, boosting the level of propane available for separate sale.

Canada
Oil and liquids production averaged 14,342 barrels of oil per day (bopd), an increase of six per cent over the corresponding period in 1999. This reflects the continuation of a renewed focus on oil development projects, which can be drilled, completed and tied in for production in a short period of time, allowing sale of product into current strong global oil prices.

Gas production averaged 157 million standard cubic feet (mmscf) per day, an increase of eight per cent over the corresponding period in the previous financial year. The near term outlook for North American gas markets remains extremely strong and Fletcher Challenge Energy continues to focus its efforts on gas exploration and development activity.

Brunei
Gas sales for the period were 7.4 bcf, a three per cent increase on the equivalent period in the prior year. Liquids production for the period was approximately 190,000 barrels, a 16 per cent rise on the prior year.
WORK IN PROGRESS

New Zealand
Fletcher Challenge Energy has initiated the development of the Mangahewa discovery in onshore Taranaki, supported by the signing of a gas sales agreement with Methanex for approximately 15 PJ. The agreement provides for the commencement of supply on commissioning of the development in July 2001, and continues until October 2002. The development consists of simple wellsite stabilisation of produced fluids prior to transport, via pipeline, to the nearby McKee Production Station for further processing to meet sales quality specifications.

To identify the optimal development concept for the Pohokura field, the contractor, Worley Limited, was engaged to conduct screening studies. Further analysis of the results from the Pohokura 1 and 2 wells has resulted in a significant upgrade to reserve estimates for the Pohokura field. Pohokura proven reserves have been revised upwards by 30 per cent to 169 bcf plus 7.6 million barrels of condensate (total 35.8 mmboe being Fletcher Challenge Energy¡¦s 33.3 per cent share).

Canada
A total of 133 net development wells were drilled during the first half of the year, up from 84 in the same period last year. A success rate of 97 per cent was achieved.

In all of Fletcher Challenge Energy¡¦s Canadian business, the focus has been on further increasing gas production. Notwithstanding this, the continued favourable heavy oil outlook has encouraged Fletcher Challenge Energy to recommence several development initiatives.
Another phase in the Hatton infill programme was successfully completed. A total of 61 development wells were drilled in the first quarter and tied in for production in October. Incremental production was three mmscf per day.
The installation of the Kneller gas gathering system in the Leduc area allowed for the tie-in of three Fletcher Challenge Energy gas wells, currently producing six mmscf per day.

Development activity on the heavy oil assets acquired from Union Pacific Resources Inc. (UPRI) continues with 13 wells successfully drilled at Baldwinton adding 1,100 bopd of incremental production.

Development activity on the Sugden heavy oil property (Saskatchewan or Plains District) commenced with the drilling of four successful development wells. A total of 14 development wells are scheduled to be drilled which, if successful, will prove up significant heavy oil reserves.

The Viking gas programme continues and saw 12 further successful development wells drilled and added three mmscf per day of incremental production.

Brunei
The Maharaja Lela plant successfully completed a high rate gas test in December, and was consequently certified to operate at a gas rate 29 per cent above its design rate. In addition to providing greater flexibility in supplying the customer (Brunei LNG), this certification provides important support to Fletcher Challenge Energy¡¦s efforts to secure a gas contract extension and expansion.

Argentina
During the period, the decision to develop the Las Bases discovery in Argentina was taken. The discovery, in the onshore Neuquen basin, will be developed through a separation and treatment facility, and a pipeline to the nearby gas transmission network.

CHALLENGE GROWS
The Challenge retail business continued its growth through the period. Challenge now has a national network of 111 service stations operating at 31 December 2000 (up from 55 this time last year) and 37 truck stops.

Challenge sales volumes nearly doubled in the six months to December 2000, rising 81 per cent on the corresponding period in the prior year. This growth has been achieved during a time of significant volatility in oil and product prices. On international markets, 91 octane reached a high of NZ$85 per barrel in August falling away again to under NZ$60 per barrel by the end of the year.

Maintaining margins during this period of price input volatility has been difficult, reflecting the vigorous competition between market participants. Challenge has actively managed its cost structure and has, through a variety of initiatives, been able to stay within budget on absolute costs while also improving on unit cost competitiveness.

Challenge will continue to investigate operating improvement initiatives to lift its financial performance. The immediate focus will be on those initiatives that will provide an improvement in Challenge¡¦s cost position in relation to the sourcing and distribution of oil products. This should allow Challenge to leverage supply efficiencies as it continues its strategy of increasing the number of independent retailers trading under the Challenge brand.

Details on Fletcher Challenge Energy and its operations for the year ended 31 December 2000 can be viewed at the Fletcher Challenge Energy World Wide Web site at: www.fce.co.nz

Information on the financial performance and position of the Fletcher Challenge Group (including the Financial Statements) is contained in the Fletcher Challenge Group Results Announcement.

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