Sole Project

Below is a summary of the Sole Project.

COE share was $355 million offshore project:
• drilling and completion of 2 production wells
• 67 km pipeline and umbilical link to Orbost Gas Plant
• shore crossing to plant
COE completed under budget at $335M.

APA were required to perform a $250 million upgrade to Orbost Gas Plant. Commissioning expected to commence in September 2019 and commencement of sales gas supply in December 2019 at a date to be advised by APA.

COE received liquidated damages of $19.8 million received as a consequence of the delay to the commencement of gas production from the Orbost Gas Processing Plant.

20.08.20 - COE and APA entered into a Transition Agreement that supplements the existing project documents, and sets aside potential claims and entitlements available to either party. It also provides for the sharing of costs and revenue whilst OGPP commissioning proceeds towards completion. The Transition Agreement will expire on the earlier of the date of Practical
Completion or 1 May 2021 (unless extended).
Practical Completion requires a demonstrated capacity to maintain stable supply of 68 TJ/d.


Phase 2 works to increase gas processing capacity, which will include the flexibility to reconfigure the two absorber vessels from a sequential to a parallel arrangement, indicative cost of $15M (COE share $7.5M)


Observations
1. COE received liquidated damages of $19.8 but then had to contribute $7.5M toward Phase 2 works. So we received $12M (which is 3.5% of COE offshore project cost of $335 ~ essentially enough for interest repayments for the one year deferred).

Questions / Thoughts
1. COE are now exposed to 50% of all costs pertaining to the plant going forward (until PC). Not sure why they would agree to this, as APA were required to deliver the OGP, not COE?

2. COE state they will earn a comparable net cash margin as if all the gas had been processed at the OGPP. Given the Transition Agreement allows for the sharing of revenue and costs, how is this possible. The most they could achieve is half the margin (as the other half is shared with APA).

3. Also, the only way they could earn a "comparable net cash margin as if all the gas had been processed at the OGPP" is if the cost of purchasing back up supply gas = cost of producing gas from their wells. Obviously it will cost less to produce from their own wells, so how is it possible they can earn a comparable net cash margin if they are purchasing gas (And sharing costs with APA)

4. The decline in production this week is worrying. Perhaps they have had to clean the absorbers again? It's only been producing for one month (and only at 45TJ max versus 68TJ to achieve PC) and possibly already required downtime.

Practical Completion by achieving stable production of 68TJ seems miles away now. Is there a plan to get there. And why have we agreed to share revenue on sales (of our gas) with APA until they deliver the plant. Is this not an incentive for them to not complete it - after all we have set aside any further liquidated damages, and they receive a share of the revenue (of our gas, that we spent $355M drilling/ connecting).

I am struggling to see the commercial rationale for this Transition Agreement (specifically why we would share revenue on our gas, and agree to contribute to costs in respect of APA's deliverables)

@cmonaussie what are your thoughts please as upon detailed review I'm quite dumbfounded. What have I missed here