artemis boundary, page-46

Hi fellow PPs (MEOmites, MOGgies and CUEties alike)

I'm with you Jak. MEO, MOG and CUE are all penny stocks. In the US, brokers class anything below $5 as a penny stock and the lower the price the greater the volatility and are all very high risk in the short term. So, if they are being held for the long term, the fundamentals need to be right. If three companies are aligned in a project as large, potentially, as Artemis and the deal falters all three are bound to be affected.

In the present situation, without the PF, MEO would retain 70% which gives them a greater risked value. CUE and MOG would retain 15% but their risked value would be diminished because of the loss of a major P&E Company on board and no change in their %ge share.

I've been following the discussion about the PPs statements, boundaries, spoils of any gas that might be there etc. etc with interest but I am beginning wonder if CUE really is that interested in developing the NW permits they share with MEO and MOG.

If they are, I dont understand why they have given up so much of the permits WA-360/361-P so easily. CUE may be a great company with bountiful assets (I only say this because CUE SHs have shared this fact with us) but I dont think it is very helpful butting heads when all PPs interests regarding the outcomes of a project are put at risk.

I must say I am also puzzled by the ambiguous statement released by CUE and leaves me with some questions.

My dilemma is with the term 'status quo'. Literally translated this refers to 'keeping things the way they are.'

Let's have a look at the history of the JVOA in regards to permits WA-359-P, WA-360-P & WA-361-P, if nothing else to while away the time, and see if the 'status quo' has been retained since the farmout to MEO. This will also explain to newbies how the present permit share came about between the three PPs.

Originally CUE and Gascorp(unlisted) each had a 50% participating interest in WA-360-P and WA-361-P. In WA-359-P, CUE and Exoil(unlisted) each had a 50% interest.

On 25 Oct, 2007, MEO secured a 60% participating interest in the three permits via a seismic acquisition option and assumed the role as Operator for each permit. In the accompanying release MEO stated:

'MEO has identified a number of commercialization paths for any gas resources confirmed in the permits, including tie-in to nearby under-utilized gas production facilities and/or third party gas supply to new or proposed Northwest Shelf LNG developments requiring additional gas supplies.'

So as far back as Oct 2007 MEO (as a visionary company - please refer to TSMP/TSLNG) announced their intentions to supply any gas to new or proposed NW Shelf LNG developments. At the time none of the participants would have known the potential GIP would be sufficient to supply its own LNG facility.

MEO saw potential in the area. They were not afraid of putting in the effort, through investing both capital and time, to become actively involved in surveying and promoting the permits. CUE, Gascorp and Exoil were quite happy to stand by and be free carried to the first well in each permit to lessen their risk. Over time they were even happy to relinquish more of their share by reneging on shared 3D seismic costs and let MEO forge ahead on their own as I will show.

The original agreement included that if:

'In any of these permits, if MEO decides to fund 100% of the cost of a single well, a 70% interest will have been earned. However, if the existing permit holders elect to pay 10% of the cost of a single well in any permit, the MEO interest in that permit would remain at 60%.'

On 3 July 2008 MEO entered an agreement with RDI to drill Zeus#1 in permit WA-361-P. Initially MEO traded a 35% share to RDI in exchange for a free carry for Zeus #1. This left MEO with 25%. The same option was placed by RDI on the 359P & 360P subject to certain conditions.

On 21 Sep 2008 CUE and Gascorp opted not participate in the funding to retain their 20% interest. This increased MEOs share to 35% with Cue and Gascorp reverting to 15% each. In the same release MEO stated again:

'In the event of a major discovery at Zeus-1, MEO sees a plethora of commercialisation options including the possible application of Floating LNG (FLNG) technology.'

2 Dec 2008 RDI announced it was unable to exercise its options to farm-in to WA-359-P and WA-360-P by December 1 and they had subsequently lapsed. This was because of a delay in the required IPO of their new listed company. However RDI continued to fund 80% of Zeus#1 which was not declared a discovery so RDI bowed out of any further wells but still has a 35% share in 361-P.

23 Dec 2008 the PPs agreed to a 12 month extension to the farm-in terms for the permits 360-P and 361-P. The extension until 1 Jan 2010 was agreed upon for MEO to retain its current 60% interest in the permits. MEO was required, by 31 Dec 2009, to commit to drilling at least one well in each of the permits in 2010.

10 Mar 2009 MEO stated its working interest in WA-360-P had increased to 70% by contributing 90% of the cost of the Artemis 3D survey of 360-P. This led to the present share arrangement of MEO 70%, CUE 15% and Gascorp 15%.

In the meantime Gascorp's 15% share of 360-P was transferred to publically listed Moby Oil

So MEO have earned their 70% share in 360-P by both CUE and Gascorp deciding to opt out of sharing costs in the seismic work carried out by the operator.

This is also confirmed by CUE on their website here:

'In December 2009, MEO irrevocably committed to drilling the Artemis -1 well and as a consequence Cue assigned a 5% interest to MEO and reduced its equity in WA-360-P to 15%. Cue will have a free carry through the Artemis -1 well.

The other PPs had the option of being more actively involved but chose not to. The PPs made these decisions and accepted the terms on which they were based.

This is important to define the 'status qou' as it stands at the moment. 70% MEO, 15% CUE and 15% MOG.

Question 1: CUE did have the option of contributing 5% of the costs and retain their %ge at 20%. Why should MEO invest and do the work and now give up 5% as implied by some CUE SHs?

I don't think this sentiment was very well thought through. And where would this sit with the 'status quo' in relation to MOG.

In the mean time MEO have opted not to continue with WA-359-P as MEO stated 4 Jan that 'Technical studies have not sufficiently de-risked the Hephaestus leads'. This permit has now reverted to 50% CUE and 50% Exoil. If CUE and Exoil continue exploring this permit and find another gas field then MEO will have to accept the consequences of that decision.

So lets have a look at the WA-360-P Update released by CUE 24 March.

In the first paragraph it states:

'On 21 December 2009, MEO through its wholly owned subsidiary North West Shelf Exploration Pty Ltd, under the terms of the farmin agreement with Cue Exploration Pty Ltd a wholly owned subsidiary of Cue Energy Resources Limited and Rankin Trend Pty Ltd, irrevocably committed to drill the Artemis 1 well in WA-360-P at its sole cost. Cue will have a 15% interest in the well and will be fully carried for all costs related to the well. MEO has announced that the well will be drilled in Q3/Q4 2009.'

Now this is the status quo as per the present agreement by the permit participants (PPs). Taking this first paragraph CUE expect MEO to drill the Artemis 1 well in WA-360-P at its sole cost.

Question 2: If MEO farmout any of their share (70%) of the permit will that not alter the 'status quo'? Is this what CUE means?

It will immediately change the status of MEO's 'sole cost' arrangement. It doesnt matter who the PF is. MEO is the operator who has done the hard yards in (1) Defining the Artemis prospect and (2) attracting a major O&G Company to give the prospect the best possible chance of success so that (3) it will provide benefits for all PPs and their SHs.

Question 3: Does CUE expect MEO to sole drill 360-P to keep the 'status quo'?

This will be the only option for MEO if CUE continues with its stalling tactics.

The next paragraph in CUEs release states:

'MEO has been in negotiations with a potential farminee in relation to MEOs 70% interest in the well. Cue is not a party to those negotiations, but has been asked to vary a number of significant provisions of the current Joint Venture Operating Agreement (together with a Heads of Agreement WA-360-P).

This is self explanatory. CUE is correct in saying MEO can only negotiate its own 70% interest in the well (note this refers to a singular well) with the preferred farminee.

Of course MEO can only discuss the percentage of their share of 360-P they are willing to trade for the PF to participate in the drilling of that well. And MEO will be discussing any other benefits the PF is willing to trade for up to 50% entry into the permit.

MEO cannot discuss any possible involvement by the other PPs in future projects envisaged by the PF. All they can do, as operator, is to try and get the best possible deal which, in their view, will provide most benefit to all PPs and their SHs.

The discussions went beyond the simple fact of just drilling Artemis as the PF obviously wanted to consider the incorporation of an LNG processing plant in the event of success. The PF must have required some assurances but MEO could not answer on behalf of CUE or MOG. This is why side agreements were drawn up and put to the PPs.

So, in October all PPs were introduced to the PF and a proposal for an LNG plant was put forward in the event of success at A#1. There were some ammendments made to what was originally discussed and this was put to the PPs 5 Mar.

Remember MEO had already stated on no less than two occasions, since becoming the operator in Oct 2007, that any gas could be used to supply new or existing LNG projects.

We now know that MEO and MOG agreed to the SAs but CUE do not but are willing to ebter further discussions.

Question 4: Which current provisions have CUE been asked to vary in the current Joint Venture Operating Agreement?

Unless there is a prior MOU or HOA already drawn up between the PPs regarding any further action once gas is found (and hasn't been released to the ASX/SHs) the status quo can only mean the present 15% share CUE has in permit 360P.

Question 5: The statement refers to a number of significant provisions. How many provisions are included in the SAs and what could they possibly be?

As far as I can see, the current provisions can only refer to the agreement up to the drilling of the first well and CUE/MOG participating in the cost of further wells after A#1.

This leads us to the last paragraph (I will look at para 3 later):

'Cues 15% free carried interest in the Artemis 1 well will not be altered by the outcome of these discussions.'

This answers Q4. CUE actually states that their 15% free carry in A#1 will not be altered by the outcome of these discussions.

From this we can only conclude that CUE understands that the original farmout agreement with MEO still stands and the 'status quo' is being maintained. This means the present hold up has nothing to do with the original farmout agreement between MEO, CUE and MOG.

Unless there is a cryptic message involved the delay must be to do with the side agreements and not the 'status quo'

So going back to para 3 in CUEs release:

In our view the proposed amendments disadvantage Cue and its shareholders relative to the status quo. We are continuing discussions in an attempt to resolve these differences.

Without knowing any details it is difficult to determine what these differences are and to what 'status quo' is being referred. It must be to do with the proposed LNG plant and associated gas feed which CUE doesnt want to be a part of.

Perhaps CUE was under the assumption that Artemis would be developed and the gas sold on. If this was the case then CUE would still have to be a party to the upstream costs.

That is to say, once A#1 was drilled and successful they would still have to contribute 15% to the cost of further development wells and receive 15% of the proceeds of the gas once sold. Is this is the status quo to which they refer.

Question 6: The PPs will need to find a buyer for the gas so why not sell it to the PF - unless CUE have already lined up a buyer?

Is the real play by CUE that they are indeed keeeping their options open and looking for their 15% to supply a potential FLNG project at Caterina?

Or are CUE using their position in Artemis as extra leverage to a future farmin partner in their 100% owned WA-389-P with an estimated 11Tcf GIP. In their latest statement on their website: 'Cue expects to finalize a farmout in first quarter 2010.'

The Caterina Prospect looks rather more stranded than other fields in the area and looks better suited to FLNG than a pipeline, but will there be sufficient gas to support this?

Whether MEO still owns a 70% or 20% share of WA-360-P does not matter. The 'status quo', or 15%, is still the same for CUE.

I believe the SHs of all PPs should be better informed as to what the 'status quo' presently is, and why CUE believes their position is being jeapordised.

But of course, this would break the confidentiality agreement. So, as usual, SHs are being kept in the dark as the PPs are being shielded by a veil cast by the PF.

The only conclusion I can come to is the same as everyone else and that is the whole deal is being held up by CUE, for whatever reason, as both MEO and MOG have both signed the SAs.

CUE is within its rights to negotiate or ignore these side agreements, but it seems to be strange to do so at the 11th hour.

Question 7: Are we going to have the same problem with any further negotiations the Operator has with any other PFs?

I know the cause of the delay is not known but I do have three further questions:

Question 8: Where does the 'status quo' for MOG and MEO sit in CUEs determinations? Both have agreed to the SAs but are now dis-advantaged third parties to the impasse between CUE and the PF.

Question 9: I wonder how CUE SHs will feel down the track if the PF continues with the deal but CUEs management have left them on the sidelines with their 15% gas.

Question 10:What is this doing to CUEs reputation both with their present partners and future business transactions they may undertake? Not that this is any concern of mine but MEO still have a working partnership with them in two permits.

So many questions to which mere mortals must patiently await the answers. I think there is more to this than meets the eye. But it is hard to see around the blinkers.

I still hope that common sense prevails.

But then this is the big time and I wouldn't expect any less jockeying by the knights with their herrings.

#:>))