Energy Sector Update: January - February 2014 - Energy Law

Introduction

Welcome to the January/February 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.

Recent announcements

On 10 December 2013, ASX-listed Ambassador Oil and Gas announced that it has farmed-out to ASX-listed New Standard Energy a 52.5% working interest in exploration permit PEL 570 located in South Australia's Cooper Basin. Under the agreement, New Standard will operate the permit and contribute up to A$42.5 million in direct exploration expenditure for five years. In August 2013, Ambassador announced that it had entered into a binding heads of agreement with Outback Energy Hunter to negotiate a 70% interest in PEL 570. As New Standard is currently in the process of acquiring Outback Energy Hunter, as part of a broader corporate transaction expected to be complete before February 2014, the farmout between Ambassador and New Standard replaces the heads of agreement with Outback Energy Hunter. The farm-out transaction represents an implied value of A$0.27 per Ambassador share, an increase of A$0.11 per Ambassador share from the implied value of the superseded heads of agreement transaction with Outback Energy Hunter.

Australia's largest natural gas infrastructure business, ASX-listed APA Group, announced on 17 December 2013 that it has agreed with ASX-listed Envestra Limited to progress a proposed scheme of arrangement to merge the two businesses. Under the arrangement, Envestra shareholders will have the option to receive 0.1919 APA securities for each Envestra share held, or receive a combination of APA securities and cash. The cash component of the second option will be subject to a A$241 million overall cap and will be offered through a 'mix and match facility'. Envestra shareholders will also be entitled to a A$0.032 per share dividend which is anticipated to be paid by Envestra in April 2014. The proposed scheme of arrangement represents an implied value of A$1.17 per Envestra share (based on an APA security price of A$6.0974). APA expects that the scheme of arrangement may be implemented by June 2014.

Further to our reporting in the November 2013 edition of the Australian Energy Sector Update, ASX-listed energy infrastructure entity SP AusNet announced on 20 December 2013 that the Federal Treasurer has conditionally approved the acquisition by State Grid Corporation of China, the world's largest electric utility, of a 19.9% interest in SP AusNet and a 60% interest in SPI (Australia) Assets and SPI (Australia) Trust (trading as Jemena). Approval was given on the condition that at least half of the board members appointed by State Grid to SP AusNet and Jemena are Australian citizens ordinarily residing in Australia. SP AusNet owns and operates electricity transmission and distribution networks, as well as gas distribution networks throughout Victoria. Jemena owns and operates electricity, gas and water assets across eastern Australia.

On 16 December 2013, ASX-listed oil and gas exploration and production company AWE announced that it had considered and rejected a takeover proposal submitted by ASX-listed Senex Energy on 11 December 2013. Senex Energy's non-binding proposal entailed issuing 1.9 Senex Energy shares for every 1 AWE share, and was subject to a 90% minimum acceptance condition and the completion of due diligence. On the same day, Senex Energy announced that it had withdrawn its proposal.

Recently completed deals

Further to our reporting in the November and December 2013 editions of the Australian Energy Sector Update, Linc Energy has officially delisted from the Australian Stock Exchange (ASX) and listed on the Main Board of the Singapore Exchange (SGX). On 11 December 2013, Linc Energy announced that it had received the required approvals in order to launch its initial public offering of 47,850,000 ordinary shares at an offering price of S$1.20 per share. At the close of that IPO at 12pm on 16 December 2013, a total of 41,841,000 shares had been applied for at the offering price. Linc Energy also announced that Genting Strategic Investments (Singapore), a wholly owned subsidiary of Malaysian conglomerate Genting Berhad, has subscribed for more than 5% of the shares on offer in the IPO. Trading in the Linc Energy shares on the SGX began on 18 December 2013. The joint issue managers, joint bookrunners and joint lead managers of the IPO were Credit Suisse (Singapore), DBS Bank and JP Morgan (S.E.A).

Market rumours and opportunities

Further to our reporting in the December 2013 edition of the Australian Energy Sector Update, on 2 January 2014 The Australian reported that Royal Dutch Shell's 23.1% interest in ASX-listed Woodside Petroleum may be up for sale in a matter of weeks. Shell's CEO Ben van Beurden did not comment on Woodside during a company briefing on 30 January 2014, but reportedly said that more details on asset sale plans would be provided at an investor day in March. It has been speculated that Shell's interest in Woodside Petroleum may be divided and sold in smaller blocks as it may be difficult to secure a willing buyer for the entire interest. Investment bankers have reportedly been approaching Middle Eastern and Asian sovereign wealth funds regarding the potential divestment of the interest. Shell has reportedly received indications of interest to acquire its refining and parts of its marketing portfolio in Australia, and is reportedly considering its options for divestment. Mr van Beurden also reportedly said that the Arrow LNG project at Gladstone had been deferred because Shell did not like the economics of the project or inflation risk; however he included Arrow and the Browse LNG project it owns with Woodside in a list of nextgeneration LNG projects Shell would continue to pursue.

On 3 December 2013, the Australian Financial Review reported that United States energy corporation Chevron is considering the sale of its interests in exploration permits located in Australia's Browse Basin, having reportedly received offers from interested parties. Reportedly, Chevron holds a 50% interest in the WA-274-P permit and a 25% interest in the WA-281-P permit and is seeking to reduce its activity in the Browse Basin in order to focus on its Carnarvon Basin LNG projects. Entities which may be interested in acquiring the permits reportedly include Royal Dutch Shell, Japan's Inpex and Osaka Gas, French multinational Total, PetroChina and ASX-listed companies such as Santos and Woodside Petroleum.

Further to our reporting in the August to November 2013 editions of the Australian Energy Sector Update, the Australian Financial Review has reported that China's Shenhua Group has withdrawn from the sale process of New South Wales state-owned electricity generator Macquarie Generation (MacGen). Further, Mergermarket has reported that China Guodian Corporation has also withdrawn from the process, claiming the uncertainty surrounding Australia's carbon tax as the main reason for the withdrawal. Three bidders – ASX-listed AGL Energy, ASX-listed ERM Power and Japan's Marubeni – reportedly remain in the running to acquire MacGen.

According to Mergermarket, ASX-listed developer of mid-scale LNG infrastructure Liquefied Natural Gas is considering divesting part of its wholly owned Gladstone LNG plant located at Fisherman's Landing in Queensland's Port of Gladstone. Maurice Brand, Managing Director of the company, has reportedly stated that the divestment will occur after the company has successfully secured adequate gas supplies for the project, which he hopes to achieve before July 2014. Once this is completed, Liquefied Natural Gas will reportedly seek to appoint advisors to raise a total of US$1.1 billion in both debt and equity to fund the project's capital expenditure.

Further to our reporting in the October 2013 edition of the Australian Energy Sector Update, Credit Suisse is reportedly approaching potential buyers for ASX-listed Energy Developments. Entities likely to be interested in Energy Developments have been tipped to include Australian infrastructure and superannuation funds such as Queensland Investment Corporation, Industry Funds Management and Australian Super, as well as Canadian investors such as Ontario Teachers' Pension Plan. Energy Developments has a reported market capitalisation of A$936 million.

Regulatory updates

OFFSHORE PETROLEUM AND GREENHOUSE GAS STORAGE AMENDMENT (CASH BIDDING) ACT 2013 (CTH)

The Offshore Petroleum and Greenhouse Gas Storage Amendment (Cash Bidding) Act 2013 (Cth) was assented to on 13 December 2013 and commenced on 14 December 2013. The Act amends the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) by seeking to provide an optimised model for allocating cash bid exploration permits in the offshore petroleum regulatory regime.

Specifically the Act:

encourages genuine bidding by limiting the discretion to refuse an offer of a permit to ensure that the highest bidder is incentivised to accept the offer of a permit;
provides for the setting of a reserve price for each of the areas being released;
pre-determines eligibility of potential bidders by separating the pre-qualification and bidding processes to allow for pre-qualification assessment of the potential bidders to take place prior to placing cash bids; and
prescribes a tie-breaker mechanism to deal with circumstances where two or more cash bids are equal.

Other news

NSW LAUNCHES SALE PROCESS FOR ENERGY ASSETS

On 10 December 2013, New South Wales Treasurer Mike Baird launched the sale processes for both Green State Power's renewable energy assets and Delta Electricity's Central Coast power stations by calling for expressions of interest.

The package of renewable energy assets includes the Hume, Burrinjuck and Keepit hydro generators, the Blayney wind farm and Green State Power's interest in the Crookwell wind farm, as well as 1,634 hectares of Mallee trees to be registered with the Clean Energy Regulator for carbon storage. The renewable energy assets have a combined output of 105 MW with longterm contracts in place for a proportion of the output. The deadline for lodging expressions of interest in these assets is 10am (AEDT) on Tuesday 28 January 2014.

The Central Coast power stations – Vales Point and Colongra – have a combined generating capacity of 1,987MW. Vales Point is a coal-fired power station located at the southern end of Lake Macquarie with a baseload capacity of 1,320 MW. This represents 8.3% of New South Wale's generating capacity. Colongra is a gas-fired power station located in close proximity to Lake Munmorah and has a generating capacity of 667 MW. The deadline for submitting expressions of interest in these assets is 10am (AEDT) on Tuesday 4 February 2014 and once those expressions have been considered, suitable candidates will be invited to submit indicative bids in the first quarter of 2014.

MOUS AGREED WITH ALL STATES AND TERRITORIES FOR EA 'ONE STOP SHOP'

The Federal Government has now secured memoranda of understanding with all Australian States and Territories consistent with its election promise of delivering a 'one stop shop' for environmental approvals. The Federal Government will now begin negotiating bilateral agreements and updating any existing agreements with each State and Territory and once drafted, those bilateral agreements will be open for public comment.

On a related note, on 13 December 2013, Queensland's Premier Campbell Newman, along with Queensland's Minister for Environment and Heritage Protection, Andrew Powell, announced that Queensland has finalised its bilateral agreement with the Federal Government relating to environmental impact assessments. This bilateral agreement allows the Commonwealth Minister for the Environment to rely on specified environmental impact assessment processes of the State of Queensland in assessing actions under the Environment Protection and Biodiversity Conservation Act 1999 (EPBC Act). Minister Powell has noted that, under the new assessment process, enhanced cooperation between both governments will ensure the highest environmental standards are met while reducing unnecessary duplication.

EPBC ACT WATER TRIGGER GUIDELINES RELEASED

The Federal Government amended the EPBC Act in June 2013 to provide that water resources are a matter of national environmental significance in relation to coal seam gas and large coal mining developments (the water trigger). The amendment commenced on 22 June 2013 and allows the Minister to consider and impose conditions directly relating to impacts on a water resource itself.

On 20 December 2013, the Department of the Environment released Significant Impact Guidelines to assist proponents in deciding whether the action has, will have or is likely to have a significant impact on a water resource. For example, the guidelines indicate, as a general principle, that an action is likely to have a significant impact on a water resource if:

there is a real or not remote chance or possibility that the action will directly or indirectly result in a change to either the hydrology or the water quality of a water resource; and
the change is of a sufficient scale or intensity as to reduce (or create a material risk of reducing) the current or future utility of the water resource for third party users (including environmental and other public benefit outcomes).

The Significant Impact Guidelines and further information can be found here.

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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Australia: Energy Sector Update: January - February 2014