Australia: Energy Sector update: August 2013 edition

INTRODUCTION

Welcome to the August 2013 edition of the Australian Energy Sector Update, a monthly publication prepared by Corrs Chambers Westgarth for clients who are interested in the Australian energy industry.

This publication brings together a brief summary of information on recently completed deals, market rumours and potential opportunities, and relevant regulatory updates.

RECENT ANNOUNCEMENTS

On 26 July 2013, the Richard Cottee-led ASX-listed Central Petroleum announced it had placed 100 million shares at A$0.10 per share, with over 80% of the placement being taken by three large domestic institutions. Proceeds from the placement will fund Central Petroleum's Surprise and East-1 assets into production. If the assets perform as expected, Central Petroleum said it will have a cash flow of A$20 million in 2014 to fund its share of a farmout.

On 15 July 2013, ASX-listed AGL Energy Limited announced a recommended takeover offer for ASX-listed Australian Power & Gas Company Limited (APG). AGL will acquire 19.9% of APG's shares, and will make a recommended cash offer of A$0.52 per share for the remaining APG shares it does not already own. AGL's recommended cash offer is conditional on requirements including notification from the ACCC that it does not intend to oppose the acquisition and on AGL receiving at least 90% of APG's shares. The Australian reported that the acquisition is valued at $158 million.

ASX-listed Dart Energy announced on 15 July 2013 that it has entered into an agreement with Hong Kong HuiHua Global Technology Ltd in relation to the sale of its wholly owned Singaporean subsidiary, Dart Energy (FLG) Pte Ltd, for approximately US$20.8 million. Completion is subject to approval from various Chinese government bodies. In March 2013, Dart Energy was restructured to focus on its high - prospect shale acreage in the United Kingdom, and the company has sought to divest assets it now considers non-core, including Dart Energy (FLG).

ASX-listed Cue Energy Resources announced on 5 July 2013 that it has agreed to increase its interest in Woodside Petroleum's WA-389-P in Western Australia's Carnarvon Basin from 35% to 40%, subject to necessary regulatory approvals. BHP Billiton (Australia) Pty Ltd is also increasing its stake in WA-389-P from 40% to 60%, as Woodside exits the offshore project. BHP will assume operatorship. Cue Energy Resources sees significant remaining hydrocarbon potential in the permit, which is already substantially covered by 3D seismic. The block is located north of the Perseus and Rankin gas fields.

On 27 June 2013, Electricity Generating PCL (EGCO), Thailand's second largest private power producer, announced it has acquired the Boco Rock wind farm, south of Canberra for A$110 million. Boco Rock is a green field wind farm with an initial installed capacity of 113 MW, and is expected to be operating in February 2015. It has entered into a 15 year Power Purchase Agreement with EnergyAustralia Pty Ltd. EGCO is reportedly seeking other growth opportunities.

ASX-listed Senex Energy is finalising sale documents for its 15% interest in the Santos-operated Cuisinier Oil Field and its interests in ATP 752P in the Cooper-Eromanga Basin to existing joint venture partners following their exercise of pre-emptive rights. Bengal Energy Ltd announced on 26 June 2013 that it will increase its holding in the Cuisinier Oil Field and ATP 752P to 30.357% by exercising its pre-emptive right to purchase an additional 5.357% for A$7.6 million.

RECENTLY COMPLETED DEALS

On 16 July 2013, ASX-listed Strike Energy Limited and ASXlisted Orica Limited jointly announced they have entered into a binding term sheet for the supply of up to 150 PJ of gas over 20 years from PEL 96, in which Strike has a 66.7% interest and is the operator. Under the agreement, Orica can provide up to A$52.5 million of gas pre-payments in order to secure its gas offtake as Strike achieves appraisal and development milestones. The deal will allow Strike to evaluate and commercialise a large prospective gas resource at PEL 96, which it says has 2.7 to 6.3 Tcf of gas (net to Strike).

On 5 July 2013, ASX-listed Cooper Energy Limited announced it has entered into non-binding agreements with ASX-listed Bass Strait Oil Company Limited. Under the agreements, Cooper Energy may acquire 25.8% of Vic/P41 and 50% of Vic/P68, located offshore in the Gippsland Basin, by funding approximately A$1 million of reprocessing, merging and analysis of multiple 3D seismic datasets. Cooper Energy acquired 19.9% of Bass Strait Oil Company in 2012.

On 4 July 2013, ASX-listed Drillsearch Energy Limited announced it has negotiated a joint venture with ASX-listed Santos Limited to develop and commercialise Drillsearch's wet gas assets in the Cooper Basin, PEL 106A and PEL 513. Under the agreements, Santos can earn a 60% interest and operatorship by farming-in for A$100-120 million. The agreements are supported by a Gas Sales Agreement for production until 2025. Drillsearch will also acquire an additional 29% interest in the Cooper Basin based Tintaburra Block Oil Joint Venture from Santos for A$36.8 million, and will sell its 25.8% interest in PEL 100 to Santos for A$15 million.

MARKET RUMOURS & OPPORTUNITIES

On 12 July 2013, The Australian reported that speculation of a takeover of ASX-listed Santos Limited has intensified, after the A$13.5 billion market capitalisation energy group's stock price rose 8.1% in the preceding week. Chevron or Exxon have been suggested as potential bidders.

On 8 July 2013, the Australian Financial Review reported that ERM Power is interested in the NSW state-owned electricity generator, Macquarie Generation, which owns two generators and is reportedly valued at A$2 billion. ERM Power, with an A$500 million market value, is said to be seeking bidding partners and has hired financial services provider UBS. Thailand-based Ratchaburi Electricity Generating, ASXlisted AGL Energy Limited and two Chinese state-owned corporations, Shenhua Group and China Huaneng Group, were also reported as potential buyers.

On 5 July 2013 the Dominion Post reported that ASX-listed AMP Capital Investors Limited is investigating potential acquisitions of energy distributors. The report confirmed AMP recently acquired a 42% stake in the New Zealand gas and electricity distributor Powerco from Brookfield Infrastructure Partners L.P. for US$408 million. The remaining 58% of Powerco is owned by QIC Limited.

The Australian Financial Review reported on 2 July 2013 that ASX-listed Beach Energy Limited is increasing a debt facility by A$150 million to A$320 million, promoting speculation it could target smaller rivals. According to the report, Beach Energy already had A$343 million on its balance sheet at the end of 2012 and received US$190 million from Chevron in a transaction in February. The report said Beach Energy may have as much as A$500 million in cash available before drawing any new debt, and suggested that instead of focusing on a small player, Beach Energy may be amassing a war chest to target a larger rival.

REGULATORY UPDATES

ELECTRICITY AND ANOTHER REGULATION AMENDMENT REGULATION (NO. 1) 2013 NO. 105 (QLD)

The Regulation amends the Electricity Regulation 2006 (Qld). The amending Regulation requires an itemisation of carbon and "green scheme" costs on household power bills. The bills must display an estimate of the impact of the Renewable Energy Target scheme costs on residential customer bills.

NATIONAL GREENHOUSE AND ENERGY REPORTING AMENDMENT (STREAMLINING REPORTING) REGULATION 2013 (CTH)

The Regulation amends the National Greenhouse and Energy Reporting Regulations 2008 (Cth) to reduce compliance costs for reporters under the National Greenhouse and Energy Reporting Scheme by streamlining reporting requirements. Amongst other amendments, statistical uncertainty associated with emissions reporting will only need to be calculated by reporters with the largest emission sources.

ENVIRONMENT PROTECTION AND BIODIVERSITY CONSERVATION AMENDMENT ACT 2013 (CTH)

The Amendment Act was assented to on 21 June 2013 and amends the Environment Protection and Biodiversity Conservation Act 1999 (Cth) (EPBC Act). The Amendment Act establishes significant impacts of coal seam gas and large coal mining developments on a water resource as a new matter of national environmental significance. The Amendment Act requires robust environmental impact assessment processes, and inserts associated penalty provisions, for developments that have or may have a significant impact on a water resource.

"Water resource" is broadly defined and it is likely that a much greater number of coal seam gas and large coal mining developments will now require approval under the EPBC Act. The Amendment Act does not allow actions that trigger the environmental impact assessment process to be approved by a State or Territory under a bilateral agreement, as was previously allowed under the EPBC Act.

PETROLEUM RESOURCE RENT TAX ASSESSMENT AMENDMENT REGULATION 2013 (CTH)

The Regulation amends the Petroleum Resource Rent Tax Assessment Regulations 2005 (Cth) (the principal Regulations).

The Regulation extends the existing framework under the principal Regulations so it appropriately applies to onshore integrated gas-to-liquid operations and the North West Shelf LNG project. The Regulation also integrates gas-to-electricity operations, in response to the extension of the scope of the Petroleum Resource Rent Tax Assessment Act 1987 (Cth) in 2012.

POTENTIAL INCREASED ARBITRATION RIGHTS FOR NSW LANDHOLDERS

On 17 July 2013, NSW Premier Barry O'Farrell announced the potential introduction of legislation to significantly strengthen landholders' rights during arbitration with coal seam gas companies in relation to land access. The potential amendments to the existing regulatory framework would prevent a licence holder from objecting if a landowner chooses to have legal representation, would require a licence holder to forego legal representation if a landholder chooses to do so, and would require a licence holder to pay reasonable legal fees for the entire negotiation period (not just the beginning) and the costs of an arbitrator. Premier O'Farrell said he would only proceed with the proposed amendments if there is a broad consensus amongst key stakeholders.

OTHER NEWS

UNDERGROUND COAL GASIFICATION IN QUEENSLAND

On 8 July, the Queensland government released the final recommendations of an Independent Scientific Panel examining the future of the underground coal gasification (UCG) industry in Queensland. The Panel considered the technical and environmental aspects of two separate trial UCG projects being conducted by Linc Energy and Carbon Energy.

The report suggests both companies have shown they can successfully commission and operate their technology. However, neither has yet demonstrated effective remediation of underground chambers.

The Panel's recommendations include that:

• the Queensland government permit Carbon Energy and Linc Energy to continue their trial projects;
• a process be established to demonstrate successful 'decommissioning' of the underground cavities used as part of the UCG process; and
• until decommissioning is demonstrated, not to commence any commercial UCG facility.

The Queensland government has provided in-principle support to these recommendations. However, it will not make a final decision on the future of the UCG industry without the necessary data and information from Carbon and Linc's trial projects. In response to the Panel's report, Linc Energy said it was in the process of decommissioning a gasifier at Chinchilla.

REGIONAL PLANS FOR COMMENT

The Queensland government has made the Central Queensland and Darling Downs draft regional plans (both dated June 2013) available for public comment. The draft plans seek to address land use conflicts between agriculture and resource activities. The plans are open for public consultation until 20 September 2013.

Proposed resource activities in designated Priority Agricultural Areas will need to meet assessment criteria as a condition of approval. The proposed assessment criteria are to be applied through existing approval processes, such as environmental authorities.

The State government is considering options to allow local governments to have a say in determining what are appropriate resource activities within a PLA.

AUSTRALIA TO MOVE TO EMISSIONS TRADING SCHEME ONE YEAR EARLY

On 17 July 2013, Prime Minister Kevin Rudd announced that Australia will move to an emissions trading scheme on 1 July 2014, one year earlier than previously planned. Under the previous arrangements, carbon was to be fixed at $25.40 per tonne until July 2015. Under a floating price, it is expected to be approximately $6 per tonne. The early transition is aimed to bring Australia into line with its major trading partners.

WORLD FIRST CARBON CAPTURE DEAL

NSW state-owned electricity generator Macquarie Generation and biofuels company Algae.Tec have entered an agreement for the capture and reuse of emissions from Bayswater power station, one of Australia's largest coal-fired power stations. Algae.Tec will initially take 270,000 tonnes of carbon a year, which will increase to 1.35 million tonnes per year in the future. Carbon dioxide emissions will be fed into sealed tanks containing algae. The algae will be subsequently harvested and processed to create a projected 250,000 tonnes per year of sustainable transport fuels.

TARALGA WIND FARM FUNDING

The Australian government's Clean Energy Finance Corporation will fund $37.5 million of debt for the Taralga Wind Farm, in New South Wales. The wind farm has an installed capacity of 106.8 MW, and is estimated to reduce Australia's carbon emissions by 250,000 tonnes per year. The Taralga Wind Farm has a 10 year Power Purchase Agreement with EnergyAustralia Pty Ltd. The funding will allow the project to use Australian sourced and engineered wind towers from Victoria-based manufacturer Keppel Prince Engineering.

UN SECRETARY SUPPORTS EUROPE'S CARBON PERMIT BACKLOAD

In early July, the European Parliament voted in favour of temporarily removing a maximum of 900 million carbon permits from trade, out of approximately 1.7 billion. The initiative is intended to increase carbon prices. The UN secretary has supported the move, suggesting it is a clear indicator the European Union is committed to carbon pricing.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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