Australia: Energy sector update: October 2013 edition

Introduction

Welcome to the October 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

ASX-listed Cooper Energy announced on 3 September 2013 that it has been granted two new exploration permits by the Victorian Government. Cooper Energy's wholly owned subsidiary Somerton Energy will hold a 20% interest in PEP 150 and a 25% interest in PEP 171. Initial activity consisting of the acquisition of 3D and 2D seismic in the permits is anticipated to commence in 2014, with exploration drilling expected to follow. ASX-listed Beach Energy holds the remaining 75% interest in PEP 171, while PEP 150 is also held by Beach Energy (with a 50% interest), Bass Strait Oil (with a 15% interest) and Bridgeport Energy (with a 15% interest). With a variety of conventional and unconventional plays having been identified, Cooper Energy has stated that it believes these two permits have the potential for both oil and gas in the Sawpit and Casterton formations.

On 4 September 2013, ASX-listed AWE announced it has executed a farm-in agreement with ASX-listed WHL Energy to acquire a 60% working interest in offshore Victoria permit Vic/P67. The permit contains the currently undeveloped La Bella gas discovery, as well as several addtional exploration targets. WHL Energy has reported gross 2C Contingent Resources for the La Bella gas discovery, with total unrisked Prospective Resources for the La Bella gas discovery, with total unrisked Prospective Resources of 577 PJ on a P50 basis for the permit. Under the farm-in agreement, AWE will pay three-quarters of the total cost to conduct 3D marine seismic survey over the La Bella field and surrounding exploration targets, capped at US$9 million. Environment approvals are in place for the seismic survey, which is anticipated to begin before the end of 2013. After reviewing the new seismic data, AWE will be afforded the option to either surrender its interest in Vic/P67 or to sign up to the drilling of two exploration wells at a working interest of either 30% or 60%. If AWE does choose to continue drilling, it will become the operator of the permit until June 2014.

Further to our story in the August 2013 edition of the Australian Energy Sector Update, on 16 September 2013, ASX-listed AGL announced its intention to acquire all of the ordinary shares it does not already own in ASX-listed Australian Power and Gas (APG) on-market. These shares will be acquired at a price of A$0.52 per share, representing the price that AGL made in its off-market takeover offer for APG earlier in July 2013. AGL received confirmation from the Australian Competition & Consumer Commission (ACCC) on 12 September 2013 that it would not oppose the proposed acquisition of APG. On 19 September 2013, AGL announced it has acquired relevant interests in excess of 90% of both the shares and options in APG, and therefore AGL has successfully reached over 90% ownership of APG.

On 2 September 2013, ASX-listed DUET Group announced that, through its wholly owned subsidiary DBP Development Group, it has reached an agreement with Chevron Australia to link the domestic gas plant of Chevron's Wheatstone Project to the Dampier to Bunbury Natural Gas Pipeline (DBNGP). Under the agreement, DBP's existing 87 kilometre, 10 inch pipeline linking Ashburton West to a compressor station on the DBNGP will be refurbished. An additional 87 kilometre, 16 inch loop will be constructed adjacent to the existing 10 inch pipeline, while a new 22 kilometre, 16 inch pipeline connecting Ashburton West to the Wheatstone Project's domestic gas plant will also be constructed. An initial 100% take or pay gas transportation contract between DBP and Chevron Australia has also been agreed for 30 years. The gas pipeline project, valued at A$94.9 million, is expected to be completed by December 2014.

On 12 September 2013, ASX-listed drilling services provider Boart Longyear announced that a US$300 million debt offering will take place through its wholly owned subsidiary Boart Longyear Management. The net proceeds from the debt offering are expected to be used to reduce Boart Longyear's revolving credit facility. Subject to the completion of that offering, Boart Longyear also announced on 12 September 2013 that it has entered into an agreement to amend its revolving credit facility, with all changes to the facility aimed at lowering the company's ability to incur additional indebtedness.

Recently completed deals

On 10 September 2013, ASX - listed Drillsearch announced the satisfaction of the mutual due diligence conditions in relation to several binding transactions with ASX - listed Santos. Under those transactions, Santos has acquired a 60% interest in the Western Cooper Wet Gas Project, which consists of PEL 106A and PEL 513, as well as agreeing to fund a work program valued by Drillsearch at up to A$120 million aimed at accelerating the commercialisation of wet gas. Further, Santos has purchased the 28.5% interest in PEL 100 owned by Drillsearch and is farming in to a 33% interest in Inland-Cook Oil Fairway ATP 549P West. Under the transactions, Drillsearch has secured a gas sales agreement for the production of Western Cooper Wet Gas which includes both fixed and oil-linked pricing. Further, Drillsearch's interest in the Tintaburra Block has increased by 29% to a total 40% interest, further adding to its existing Cooper Basin oil reserves and production.

On 4 October 2013, ASX-listed Dart Energy announced it has completed a A$20.7 million capital raising. A$11.9 million was raised from a share placement to institutional and sophisticated investors through issuing nearly 132 million ordinary shares at an issue price of A$0.09 per share. An additional A$8.8 million was raised by a fully underwritten non-renounceable entitlement offer whereby eligible shareholders may subscribe for one new ordinary share for every 9 shares already held, also at an issue price of A$0.09 per share. The entitlement offer was significantly oversubscribed by almost A$14 million. The issue of new shares under the entitlement offer will be completed on 9 October 2013, with the new shares expected to commence trading on the ASX on 10 October 2013. Wilson HTM Corporate Finance and Bell Potter Securities acted as joint lead managers and bookrunners to the capital raising, as well as underwriters of the entitlement offer.

ASX-listed DUET Group announced the successful completion of a A$100 million fully underwritten placement on 3 September 2013. The bookbuild for the placement was oversubscribed, achieving a final price of A$2.06 per new stapled security, and a total of 48.5 million new stapled securities will be issued (to rank equally with existing stapled securities). DUET has stated that the funds raised will be used towards the Wheatstone Ashburton West Pipeline Project, which was announced on 2 September 2013 (discussed above). Sole lead manager and underwriter to the placement was the Australian Branch of UBS AG.

Market rumours and opportunities

According to the Herald Sun, Royal Dutch Shell has confirmed it is in active talks with potential buyers for its Geelong oil refinery after receiving encouraging interest regarding a potential sale. Reportedly, Shell has previously stated it intends to convert the oil refinery's site into a fuel import terminal should it not achieve a successful sale on undisclosed terms. Shell reportedly aims to complete the sale by the end of 2014.

Further to our stories in the August and September 2013 editions of the Australian Energy Sector Update, Mergermarket has reported that Korean state-run electricity provider KEPCO is in talks for an information memorandum in respect of the sale of the New South Wales state-owned electricity generator Macquarie Generation , although no final decision to place a bid has yet been made. Alinta and China- based Huaneng Group have also been reported as other potential suitors in the sale process, while the Chinese coal company Shenhua has reportedly appointed Morgan Stanley and Macquarie Capital to advise on a potential bid. ASX-listed AGL 's Head of Corporate Communication Karen Winsbury is said to have confirmed that AGL has executed a confidentiality agreement in relation to the Macquarie Generation sale in order to consider the assets, however AGL's Chief Executive Officer Michael Fraser has reportedly stated that the New South Wales Government's price expectations may be too ambitious. According to the Australian Financial Review , Goldman Sachs , the New South Wales Government's advisor, have dispatched an indicative timetable for the sale process, requiring first round bids by October 2013 and final offers in January 2014. Reportedly, completion of the Macquarie Generation sale is anticipated by June 2014.

According to Mergermarket, private Australian oil and gas company Real Energy intends to list on the ASX in October 2013 and is looking for cornerstone investors for its upcoming initial public offering (IPO) valued at A$10 million. Real Energy's Chief Executive Officer Scott Brown has reportedly stated that interest has already been received from institutions in countries including Singapore, Hong Kong, the United States and Australia. Real Energy already holds permits in the Toolachee and Patchawarra formations in the Cooper Basin. Potential customers of Real Energy may include mining companies such as ASX-listed BHP Billiton, Glencore/ Xstrata and Aureca, in addition to both domestic and international gas markets. Following the launch of the IPO, Real Energy reportedly intends to begin drilling.

The Australian Financial Review has reported that ASX-listed AWE is considering potential acquisition opportunities in countries including Australia. After reporting a A$20 million profit for the last financial year, AWE's Chief Executive Office Bruce Clement has reportedly stated that the company intends to prudently review opportunities, particularly in underdeveloped projects where AWE may add value.

Mergermarket has reported that Korean state-owned energy company Korea Gas Corporation (Kogas) is contemplating the sale of non- core assets in order to reduce its current debt and to restructure its investment portfolio. Kogas is said to have appointed Samsung Securities and Rothschild for the potential divestment of assets. Samsung and Rothschild have reportedly also been mandated by Kogas to possibly sell their 15% interest in the GLNG project , although no definite sale plans have yet been announced. Kogas also holds a 10% interest in the Prelude Floating LNG project.

According to the Australian Financial Review, ASX-listed Karoon Gas is reportedly keen to secure a partner in order to develop the Grace exploration well located in the North Carnarvon Basin. Karoon Gas currently holds a 90% interest in permit WA-314-P but may reportedly reduce its holding to 50%. The development costs of WA-314-P are estimated at A$100 million and finding a partner will help alleviate Karoon Gas of these expenses.

Despite being the subject of recent speculation regarding potential acquisitions, The Australian has reported that ASX-listed Beach Energy is intending to prioritise growth projects over acquisitions. Beach's Managing Director Reg Nelson has reportedly stated that although the company does stay alert to potential acquisition opportunities, the current project pipeline should generate sufficient growth for Beach.

The Australian Financial Review has reported that ASX-listed Infigen Energy has decided to halt plans to divest its Australian wind farm assets, citing the uncertainty regarding a further review of the Renewable Energy Target (RET) post election. Reportedly, Infigen's divestment strategy was aimed at reducing its A$1 billion debt burden. Infigen's Chief Executive Officer Miles George has reportedly noted that despite the current market not favouring the sale of renewable assets, the company will continue to investigate potential sale opportunities.

According to the Australian Financial Review, Pacific Equity Partners (PEP) may seek to sell its 83% interest in ASX-listed Energy Developments which is valued at an estimated A$670 million. Energy Developments manages a diverse portfolio of power generation projects around the world including in Australia, Europe and the Untied States. Reportedly, utilities and infrastructure funds abroad may be interested in the acquisition of the substantial Energy Developments interest. PEP's decision to divest its 83% interest reportedly followed Energy Developments' strong financial numbers and it has been noted that PEP may elect to re-IPO Energy Developments, selling the listed equities to investors.

The Wall Street Journal has reported that Investec is seeking to sell its Hornsdale wind farm project to be located in the mid-north of South Australia. Investec Australia's acting Chief Executive Officer Ciaran Whelan has reportedly stated that if offered a 'reasonable' price for Hornsdale, it would be sold without hesitation and that the company's project- finance team is currently looking at divestment opportunities. The cost of construction of the proposed 315 MW Hornsdale wind farm project is approximately A$900 million and the project is set to be one of Australia's largest wind farms once built.

In other wind farm related news, Mergermarket has reported that China's CECEP Wind Power (CECEP) has been scouting potential investments in Australia's wind power sector, participating in discussions with Australian legal and financial advisors, as well as contacting potential targets. Reportedly, CECEP has not yet retained any financial advisors and is open to approaches with potential investment opportunities. Projects that would reportedly be of interest to CECEP would be those with around 100 MW of capacity, valued between US$32.68 million to US$49 million. CECEP has a registered capital of US$246 million and CNY9 billion worth of assets.

According to The Australian , ASX- listed Transfield Services does not intend to sell its Easternwell minerals drilling business in a fire sale despite having to recently make A$285 million worth of write-downs and put the business up for sale due to the use of drilling rigs having dramatically dropped. Reportedly, Transfield's Chief Executive Officer Graeme Hunt has stated that even though the company has received several approaches from interested parties to acquire the mineral drilling business of Easternwell, those offers had not met price expectations for the business. Transfield has previously announced its intention to establish a joint venture in order to generate funds to purchase new drilling rigs so that a higher return rate on capital can be achieved than if Transfield was to purchase such rigs on its own.

Regulatory updates

PIPELINES REGULATION 2013 (NSW)

Commencing on 1 September 2013, the Pipelines Regulation 2013 (NSW) remakes the repealed Pipelines Regulation 2005 (NSW). Among others, the Regulation implements provisions covering:

• applications for authorities to enter and survey land for the determination of proposed pipeline routes, as well as applications for licences authorising the construction, alteration or reconstruction and operation of pipelines under the Pipeline Act 1967 (NSW);
• the standards regarding the design, construction, operation, maintenance and management of licensed pipelines; and
• reporting and auditing requirements, as well as applicable fees in relation to pipelines.

Other news

INVESTING IN THE AUSTRALIAN PETROLEUM INDUSTRY – CORRS FLAGSHIP PUBLICATION RELEASED

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TIMOR-LESTE OFFERS A$800 MILLION INVESTMENT TO ATTRACT ONSHORE GAS PROCESSING

ABC News has reported that Timor- Leste's Petroleum Minister Alfredo Pires has announced that the Timor- Leste Government is willing to offer an A$800 million investment in order to attract onshore gas processing of the Greater Sunrise gas fields' reserves. The Sunrise LNG project area is governed by the International Unitisation Agreement, signed by Australia and Timor-Leste. While the Sunrise Joint Venture participants (consisting of ASX-listed Woodside Petroleum (33.44% interest), Conoco Phillips (30% interest), Shell (26.56% interest) and Osaka Gas (10% interest)) have chosen FLNG as their preferred concept to develop the Greater Sunrise gas fields, they remain locked in a six-year stalemate with the Timor-Leste Government over how to process the subsea extracted gas. Reportedly, Australia and Timor-Leste are expected to pursue arbitration over the revenue sharing agreement in relation to the Greater Sunrise gas fields.

A$15 BILLION ARROW LNG PROJECT RECEIVES QUEENSLAND GOVERNMENT APPROVAL

On 10 September 2013, the Queensland Coordinator-General Barry Broe announced the approval of Arrow CSG (Australia)'s A$15 billion LNG plant located at Gladstone. Through staged development, the plant is expected to produce up to 18 Mtpa of LNG. If Arrow proceeds with development, the LNG plant will become the fourth on Curtis Island, however Arrow still needs to finalise financial close and CSG supply components for the plant. The project is now subject to environmental assessment by the Federal Government, which should announce a decision within 30 business days as required by legislation.

A$85 MILLION NATURAL GAS TENDER TO UNLOCK VICTORIA'S REGIONAL POTENTIAL

Victoria Deputy Premier Peter Ryan has announced an A$85 million investment to supply natural gas to regional communities across the state of Victoria. Under a partnership between the Victorian and Federal Governments, an A$85 million request for tender has been released for innovative delivery strategies to connect 'abandoned' regional communities to compressed natural gas (CNG) or liquefied natural gas (LNG) supplies. The tender consists of A$30 million for the provision of natural gas to Murray River communities and A$55 million to supply the remaining priority towns as part of the Energy for the Regions program. Bids for the tender will be assessed on the basis of maximising the number of regional Victorian communities which receive natural gas for the available funding.

LAND ON CURTIS ISLAND BECOMES PROTECTED AREA

Queensland Environment Minister Andrew Powell and National Parks Minister Steve Dickson have announced that 2,900 hectares of land at the southern end of Curtis Island has been declared as a protected area. The conversion of this ex- grazing land, forming part of the environmental management precinct adjacent to the LNG industrial site, represents progress towards environmental offsets required by conditions of the Curtis Island LNG project approval. For the next 25 years, LNG proponents are committed to funding the management of declared protected areas.

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