There is actually a special-made drill bit for exactly such an operation. I have used it for exhaust manifold studs gone wrong.
It is a reverse-twist bit. You use a dental burr chucked into a Dremel to indent the top of the stud. Then apply the drill bit with the drill set to "reverse." Now, this is after a couple of days soaking with a penetrating oil. I have always been able to get the job done this way. It may not work in this case, but it's worth a shot.
-- Jonesy
E-mail me: rfjonesy *at* hotmail *dot* com