This morning the Melbourne-based company said the PEP 158 well – a follow-up to core holes drilled in the 1980s to investigate the area's coal potential – was at a depth of 113.7m.

During the past 24 hours, a core was cut over the depth 109–112.57m and recovered an unconsolidated (loose) sand of the Latrobe Formation, containing what appeared to be biodegraded oil. The core had a faint petroliferous odour and a moderate yellow-orange “cut”.

Microscopic examination showed the sands were coated with a thin oily film surrounding the individual quartz grains in places. A sample of fluid recovered together with the core would be sent to a laboratory for testing.

Lakes said it was not uncommon for oil found at such a shallow depth to lose many of its properties.

“This is the first sand observed in this well in the Latrobe Group and has occurred below a thick brown coal seam typical of what is observed offshore at much deeper depths. Logs recorded by the SEC back in the 1980s show that we should encounter further sands deeper before we enter our primary target, the Strzelecki Sandstone.

“Lakes Oil has long believed that commercial oil and gas will be discovered onshore Gippsland and, over the last few years, has spent in excess of $40 million developing its “tight gas” play.”

Almost every well drilled by Lakes Oil during that period had oil and gas shows, with Wombat-3 being the most tantalising, with eight barrels of excellent quality crude recovered.

Lakes said it planned to reopen Wombat-3 next week for further testing.

“Today’s results, together with our earlier discoveries of oil and gas, are helping us to understand a broader view of the onshore Gippsland Basin,” said company chairman Robert Annells.