Australia: Energy Sector Update: April 2014 edition

Introduction

Welcome to the April 2014 edition of the Australian Energy Sector Update, a monthly publication prepared by Corrs Chambers Westgarth for clients and contacts 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.

Warrego Energy has announced a A$40 million farm out agreement with Dutch companies Dyas BV and Mazarine Energy for the appraisal and development of the West Erregulla onshore tight gas field in Western Australia. Located within the Perth Basin, West Erregulla contains an estimated 185 billion cubic feet of gas in place with a 3 trillion cubic feet unconventional upside potential. Following completion of the agreement and receipt of all regulatory approvals and environmental, safety and Traditional Owner permissions, the farm out will provide Warrego with a 20% equity stake, Dyas with 30% and Mazarine with 50% equity in the project. 3D seismic surveying will commence in 2014. The parties plan to drill an appraisal well in 2015 and first gas is currently scheduled for 2016. Under the terms of the agreement, Mazarine will take over from Warrego as operator of West Erregulla once the appraisal program has been completed.

Recent announcements

On 10 March 2014, Chinese company Landbridge Group announced that it conditionally intends to make an unsolicited off-market takeover bid to acquire all of the ordinary shares in WestSide Corporation , the ASX-listed coal seam gas producer. WestSide operates the Meridian SeamGas CSG gasfields, located 160 kilometres west of Gladstone in Queensland's Bowen Basin, in joint venture with Mitsui E&P Australia and holds interests in various exploration tenements in the Bowen and Galilee Basins. The intended bid is for cash consideration of A$0.36 per share. As reported by The Australian Financial Review , this values WestSide at approximately A$160 million, and follows PetroChina 's withdrawal in May last year of a tentative proposal to takeover the company. Landbridge's intended bid is highly conditional and, as reported by The Australian Financial Review , is subject to, amongst other things, WestSide not entering into any new gas sales agreements for a duration of greater than six months. Despite this, WestSide executed a binding 20-year gas sales agreement with Santos ' GLNG Project in late March for the supply of up to 65 Terajoules a day, commencing in 2015. On 2 April 2014, WestSide's Managing Director, Mike Hughes, reportedly told The Australian Financial Review that he had received no further word from Landbridge since WestSide signed the gas sales agreement and declared the conditional proposal from the Chinese bidder as "manifestly inadequate." Hughes reportedly said "If someone wants to get on and make a real offer at a real price, then clearly we'd consider it".

On 31 March 2014, Seven Group Holdings announced that it had signed a merger implementation agreement to acquire all of the shares in Nexus Energy , the ASX- listed oil and gas producer, for A$0.02 cash per share.

Subject to shareholder approval and regulatory and other conditions, the transaction is expected to be finalised in late June 2014. It also announced that as part of the arrangement it will effectively replace Nexus Energy's senior and a majority of its unsecured debt funding financiers, and provide working capital to Nexus Energy to continue its operations, including an up to A$40 million bridge-loan facility effective immediately (subject to draw down conditions). Seven indicated that the majority of note holders have agreed to accept an offer of A$0.89 (plus accrued interest) per dollar of face value of their notes. In a related announcement, Nexus has indicated that Seven has entered agreements to acquire all of the debt under Nexus' Senior Facility Agreement so that on completion it will be Nexus' sole senior lender under the facility relating to the Longtom gasfield.

In the March 2014 edition of the Australian Energy Sector Update we referred to Woodside Petroleum 's entry into a non-binding Memorandum of Understanding (MoU) with the Leviathan Joint Venture participants, Noble Energy Mediterranean Ltd , Delek Drilling LP , Avner Oil Exploration LP and Ratio Oil Exploration (1992) LP , for the potential acquisition of a 25% interest in the Leviathan gas field off the coast of Israel for over US$2.5 billion. On 28 March 2014, Woodside said the parties had not executed the definitive agreements contemplated in the MoU by the target date and that the parties' discussions were continuing with the Israeli Government with a view to resolving the remaining issues and executing the definitive agreements. According to an unsourced Globes report, the delay in execution was because Woodside did not agree with the Israeli Ministry of Finance's recommended formula for taxing gas exports. According to Globes , it is estimated that the deal will be approved within a few weeks, after the Passover holiday.

Mergermarket has reported that Oilex , the Australian oil and gas explorer, has 30 parties in a virtual data room set up to facilitate the farm in of its Wallal Graben acreage in the Canning Basin. Oilex is running the stake sale process in- house and hopes to close a deal after mid-2014. Interested parties are reportedly made up of North American and UK strategics and international private equity firms.

Further to the March 2014 edition of the Australian Energy Sector Update, AGL Energy has lodged an appeal against the Australian Competition and Consumer Commission (ACCC)'s decision opposing its A$1.5 billion takeover of New South Wales largest electricity producer Macquarie Generation with the Australian Competition Tribunal (ACT). In its decision on 4 March 2014, the ACCC determined that AGL's purchase of MacGen would "substantially lessen" competition in electricity retailing in NSW. MacGen's key assets are the Bayswater and Liddell power stations in the Hunter Valley, which together account for 27% of the State's electricity capacity. If the takeover is successful, AGL's share of generating capacity in the National Electricity Market would increase to approximately 21%. The ACCC said the acquisition would mean the three largest retailers in NSW, AGL , Origin and EnergyAustralia , would own as much as 80% of the State's generation capacity, dominating the market and making it difficult for smaller retailers and new entrants to compete.

According to The Sydney Morning Herald , AGL's Managing Director, Michael Fraser, said the ACCC's decision "can't be left unchallenged". The ACT has three months (with a possible further three month extension) to make a decision on AGL's application. The potential six month appeal process leaves the NSW Government's attempted privatisation of MacGen in a state of uncertainty. ACCC Chairman, Rod Sims, told The Sydney Morning Herald that the outcome of the ACT's decision "is going to have major implications for the energy industry" because "the implications for competition are extremely significant".

According to The Sydney Morning Herald , Treasurer, Mike Baird reiterated that the State would only consider offers that exceed its retention value, understood to be around A$1.5 billion. An unsourced report in the Australian Financial Review noted that ERM Power , one of the under bidders in the MacGen sale process, is thought to be working on a means to fund a higher offer.

The Australian Financial Review also reported that offers to buy Green State Power , the State-owned renewable energy company, were due at the end of March, with parties able to bid for parts, or all, of the wind and hydro portfolio. Infigen Energy is reportedly among those potentially interested on the assets, along with Chinese buyers.

Caltex Australia announced that it has entered an agreement to acquire the Scott's Fuel Divisions , which includes 28 retail sites and 18 depots, for approximately A$95 million (including working capital and related acquisition costs). The deal, scheduled for completion in mid-2014, is to be funded via existing facilities.

According to Caltex, the acquisition is consistent with the company's strategy of being Australia's leading transport fuels provider and will complement its existing national network. Managing Director and CEO, Julian Segal, said the network expansion also "supports [Caltex's] recent supply chain investments including the soon to be commissioned A$85 million terminal at Pelican Point, South Australia."

Expressing a similar desire to increase its exposure to the retail fuels market, and despite recently announcing the closure of its Bulwer Island refinery , BP reportedly has plans to buy additional retail assets in Australia. According to The Australian , the company remains committed to capturing a greater share in the Australian fuels sector and is in confidential discussions to acquire more petrol stations. BP Australia's President, Andy Homes, reportedly confirmed that BP is "looking to buy more retail assets" with The Australian speculating that any retail assets BP acquires being likely to come from the independent sector. Mr Holmes reportedly cited the growth of "very large refineries in Asia" as the biggest factor in the decision to close Bulwer Island.

Shell also announced, on 21 February 2014, the sale of its Australian downstream businesses, excluding aviation but including its Geelong Refinery and 870-site retail business, to Vitol for approximately A$2.9 billion. Despite the divestment of its downstream assets, Shell's Australia Country Chair, Andrew Smith, said the company "will continue to play a major role in the development of Australia's expanding liquefied natural gas industry", and looks forward to strengthening its presence in the years ahead. The deal is conditional upon regulatory approvals and is anticipated to close in 2014.

On 24 February 2014, Energy Developments announced a A$50 million placement of new shares at A$5.55 each, primarily to fund the A$21 million acquisition of 21 MW of generation assets from Clarke Energy Australia . The assets will be leased back to Clarke Energy Australia for an initial lease back term of 12 to 18 months. In conjunction with the placement, Energy Developments also announced that majority shareholder, Greenspark Power Holdings , was intending to sell 18.25 million existing shares. Following the selldown, Greenspark's relevant interest in Energy Developments will be reduced from approximately 84% to approximately 69%.

Further to the March edition of the Australian Energy Sector Update, Mergermarket has reported on 24 March 2014 that discussions which saw South Korean energy company S-Oil selected as the preferred bidder for Australian fuel supplier, United Petroleum have been terminated by both parties after the parties reportedly failed to reach agreement on conditions. S-Oil reportedly offered a sale multiple that was thought to be around ten times earnings.

Market rumours and opportunities

Tap Oil' s Chief Executive, Troy Hayden, said that the company will "continue to pursue the sale of assets that we consider non-core", reported The Wall Street Journal . The article said Tap Oil plans to sell its stake in a number of oil and gas fields off the north coast of Western Australia, preferably as a package – but is willing to consider offers on individual assets. These assets include Tap Oil's 10% interest in the Apache -operated Taunton oilfield in the Carnarvon Basin, which is currently being assessed for development after oil flowed from a test well at a rate of 2,800 barrels per day. Also up for sale is the company's 12% stake in the Eni -operated Prometheus and Rubicon gas discoveries in the Bonaparte Basin and its 22.47% interest in a licence covering the Maitland gas and condensate field.

On 20 March 2014, an unsourced report in The Australian Financial Review suggested Hong Kong company CLP Holdings could be looking to sell Australia's largest foreign-owned energy group EnergyAustralia , citing its struggles in the Australian energy space. It was reported that a deal would likely be valued in excess of A$5 billion.

Icon Energy , the Australian onshore oil and gas company with interests in the Cooper, Surat and Gippsland Basins, is reportedly planning to expand its portfolio in Queensland by acquiring new tenements and through farm-in opportunities. With a preference for the Cooper Basin, according to a recent Mergermarket article, Icon is expected to bid for permits that the Queensland Government made available in April through a competitive, non-cash tender process. For more information about this tender, see "Other news" below.

On 1 April 2014, The Australian reported that Woodside , ConocoPhillips , Apache , Eni , Sinopec , and PetroChina are believed to have been approached about buying into Thai natural gas, petroleum and petrochemical company PTT 's A$2 billion Montara project located off the northwest coast of Australia. PTT's move to divest its interest in the Montara oil fields reportedly coincides with the company's search for investors for its Cash and Maple gas projects off the West Australian coast.

In the March 2014 edition of the Australian Energy Sector Update we noted that Santos ' CEO David Knox reportedly thought the company had become an increasingly attractive takeover target now that the majority of capital spending on the US$18.5 billion Gladstone LNG (GLNG) project, in which Santos has a 30% interest, is complete. On 27 February 2014, Mergermarket reported that joint venture partner, Korea Gas Corporation (Kogas), the listed state-run energy company, announced that it will not be selling its 15% stake in the project. Santos and Kogas own the project together with Malaysia's Petronas and Total .

Regulatory updates

REGIONAL PLANNING INTERESTS ACT 2014 (QLD)

The Queensland Regional Planning Interests Act 2014 was assented to on 28 March 2014 and seeks to resolve potential conflicts which may arise from the interaction of competing land users like farmers and resources companies. Under the Act, if a party wishes to carry out a resource or other regulated activity in an area of "regional interest" (being Priority Agricultural Areas, Priority Living Areas, Strategic Environmental Areas or Strategic Cropping Areas) they must reach an agreement with the landholder, or apply for a Regional Interest Development Approval. Deputy Premier and State Development, Infrastructure and Planning Minister, Jeff Seeney, said that the assessment process under the Act "restores the balance of power between rural producers and resource companies when new mining or gas developments are proposed, and offers greater incentives for resource companies to reach mutually beneficial agreements with landholders." A copy of the Act can be found here . A link to the Corrs Thinking Piece discussing what the Act means for resources projects can be found here .

Other news

GOVERNMENT RELEASES LAND FOR PETROLEUM AND GAS EXPLORATION IN QUEENSLAND VIA A NON-CASH COMPETITIVE TENDER

The Queensland Government has released six areas of land for petroleum and gas exploration through a non- cash competitive tender. On 4 April 2014, the Minister for Natural Resources and Mines, Andrew Cripps, announced that over 16,400 square kilometres of land in western Queensland was being released through the tender process for authorities to prospect for petroleum and gas. The land comprises approximately 5,160 sub-blocks with one area in the Carpentaria Basin, two in the Georgina Basin, one in the Cooper-Eromanga Basin and two in the Eromanga Basin. Minister Cripps said "the land we are releasing has potential for new discoveries of both conventional and unconventional petroleum resources."

There will be no cash bid component to tender applications for exploration rights over the released parcels of land. This means that the tenements will be competitively allocated after an assessment of each tenderer's proposed work program, technical and financial capability, and capacity to meet all relevant assessment criteria. According to the Department of Natural Resources and Mines (DNRM), this provides explorers with "equity in opportunity to access land." Non-cash or "work program based" tenders are called for land of unknown prospectivity to help facilitate continued interest in greenfields development from the smaller mining exploration sector.

Minister Cripps said that "Queensland's mining industry will benefit from the release of under-explored land, considered to be frontier areas" and "delivers on the Government's election promise to grow resources as one of the four pillars of the economy." More information about submitting a tender can be found at the DNRM website . Tenders must be submitted before 4.30pm on Monday, 29 September 2014.

RESOURCESQ PARTNERSHIP GROUP ANNOUNCED

Six resource industry experts have been selected to form the ResourcesQ Partnership Group to work with the Queensland Government to help drive growth and jobs in the sector over the next 30 years. Minister for Natural Resources and Mines, Andrew Cripps announced that the ResourcesQ Partnership Group will be chaired by Steve de Kruijff, former COO of Xstrata's North Queensland Copper Division and former Queensland Resources Council President. The other group members are Dr Laurie Hammond, Chair of CRC Mining , Theo Psaros, leading transport infrastructure consultant and former COO of MetroCoal , Brendan Ostwald, CEO of mining services company Ostwald Bros Pty Ltd , Gavin Becker, former CEO of Metallica Minerals , and Dr Julie Beeby, Queensland Resource Industry Ambassador and former CEO of WestSide Corporation Limited . The ResourcesQ Partnership Group will provide strategic advice and recommendations on the ResourcesQ initiative and "will play a key role in ensuring broad industry consultation" guides the State's strategic direction and is able to address industry challenges.

NEW SOUTH WALES FREEZE ON CSG EXPLORATION LICENCES

In late March 2014, the NSW Government announced a six month freeze on processing new petroleum exploration licence (PEL) applications and an audit of existing PELs. The freeze will remain in place until 26 September 2014 while the NSW Government puts in place a new best practice application process. Proponents wanting to explore for coal seam gas in NSW must apply for a PEL meaning this decision effectively places a moratorium on new coal seam gas developments in the State until September. The announcement also increased the fee for a PEL application from A$1,000 to A$50,000, effective immediately.

The announcement also referred to a recent decision by the NSW Minister for Resources and Energy, Andrew Roberts, to refuse Grainger Energy 's five coal seam gas exploration licence applications covering 43,100 square kilometres of the Riverina and a "show cause" notice issued to Leichhardt Resources as to why its three PELs (near Moree, across Nowra and between Bylong and Denham) should not be cancelled.

AUSTRALIA-KOREA FTA REFERRED TO SENATE INQUIRY; AGREEMENT OFFICIALLY SIGNED ON 8 APRIL 2014

Further to our reporting in the March edition of the Australian Energy Sector Update, on 27 March 2014, the Senate referred the Korea-Australia Free Trade Agreement (KAFTA) to the Foreign Affairs, Defence and Trade References Committee for closer inspection. The KAFTA was nevertheless officially signed in Seoul on 8 April 2014 and will see tariffs reduced on a range of Australian agricultural export commodities and services. The KAFTA is expected to provide an estimated boost to Australia's economy of around A$650 million once in full force. The full text of, and information about, the KAFTA is available here .

AUSTRALIA STRIKES-FREE TRADE AGREEMENT WITH JAPAN

After seven years of negotiations, on 7 April 2014 Australia and Japan (Australia's second largest trading partner) concluded negotiations on an historic Japan Australia Economic Partnership Agreement (JAEPA) with the beef and horticultural industries to secure major concessions. To the extent that Australia's resources exports are not already tariff-free, all tariffs on energy and mineral products will be eliminated within ten years with immediate tariff elimination for coking coal, petroleum oils, aluminium hydroxide and titanium dioxide. JAEPA also raises the screening threshold from A$248 million to A$1.078 billion before private Japanese investment into non-sensitive sectors in Australia has to be considered by the Foreign Investment Review Board. The full text of, and information about, the JAEPA is available here .

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