eastern star gas in talks with potential asian, page-63

acecant,

What you and probably most others are thinking is what are usually "Production Agreements" used by the oil industry. (The original deal with ESG pre-STO I do not believe was a simple production agreement).

A production agreement simply agrees a split for costs and securing a volume of oil as per the split. Each can then on-sell. The farm-out operator is in charge of the production part.

The farm-in operator may further not want to deal with sales, and lets the farm-out operator deal with sales as well and rather a split for volume its a split in final profit. This is especially true when there are lots of small interests in a single oil well.

So, a farm-in arrangement an operator normally "buys in" or acquires an interest in a lease or concession owned by another operator on which oil or gas has been discovered or is being produced. Often farm-ins are negotiated to assist the original owner with development costs and to secure for the buyer a source of crude or natural gas.

This is what Hillgrove and Gastar did, and ESG benefited, and also sold shares in itself to Hillgrove so that it could fund itself.

However, how the cost of gas/profit from gas is split is entirely negotiable, there are no contract police patrolling Pitt Street insisting how the deal should look.

The ESG-STO deal, is I believe a volume deal based not on holes, but on sales contracts. I believe anything else would be totally unworkable otherwise. ESG as Operator makes sure that gas is behind the valve at the appointed hour.

Because of the scale of the project area, the wrinkle I believe exists is that STO do not need to come up with 35%, if they knock back a sales contract i.e. they do not want involvement. I imagine there is reflectivity and ESG would the same right as STO. i,e can knock back STo contracts. STO could I believe under this arrangement, knock back every deal put up by ESG. On this basis, STO will always have petrol in the tank and can count 35% of proved ESG reserves to STO clients. The STO gas could also be used as equity contribution in down stream projects.

Why?

STO: "I have $2/GJ contract for 2000 PJ and I am up for funding it"
ESG: "Your joking? $2? Get out of here!"
STO: "Ok you don't want in, but start getting ready for producing as per this contract and send me the bills".

Or,

ESG: "I have a contract for 2000 PJ at $7/GJ. Totally awesome. Your in right?"
STO: "Your joking. I booked that 700 PJ of gas. I need it. Get out of here."

Ok the above is simplified, but that style of agreement would protect each parties outside interests. Nowhere have I seen this to be a farm-in for ever or lose it deal. It appears to be a single farm-in over the PEL238 i.e. for everything discovered and to be discovered. The parties have 65/35 of whats proved and to be proved regardless of previous acceptance or not of sales deals, as the resource is proved up.

Nobody has suggested STO is paying for proving up, i.e. paying 35% of all ESG's costs. This proving is paid for by ESG share holders: 80% non-STO/20%STO. STO did contribute in this when they topped up recently through the CR.

In both the above sales cases, the sponsoring party pays the costs to produce the proved gas when the other party declines, and the sponsoring collects all the revenue. In STO case, they would get a payment of >$2/gj on-sold to their LNG project - $2/gj in cash and the rest in kind i.e. equity participation. ESG could do the same.

If they agree, its 65/35 of everything, costs and profits. STO enjoys 20% of any ESG dividend payment and any sp rise of course. I contend this type of contract is highly unlikely under normal circumstances. Only if NSW Govt mandated x% of gas be quarantined for NSW use, or something similar, would it occur.

I think it is nice and simple, straight-forward. Obvious.

Have at it.