eni farms in to heron, page-20

Hi blurrt

I'm not ignoring you - just digesting events over the last couple of days and the grey areas surrounding the vagueness of the farmout contract. I will put my thoughts down elsewhere.

In the mean time it could well be Eni who wanted to buy into Barossa/Caldita (B/C). To remind others what we are talking about:

* Here is a Jan 2011 article from the West Australian *

For CNC to get their way there would need to be a readjustment of equity in the Wickham LNG plant as suggested in the article:

'Its (CNC) 60 per cent stake in Barossa-Caldita should be worth several hundred million dollars.

Santos, which owns the other 40 per cent, also would not comment, referring all questions to operator ConocoPhillips. Santos has previously said it is keen to advance Barossa-Caldita's development.'

and

'The fields' development is also likely to require an equity shake-up to better mirror the ownership structure of the Darwin LNG plant, where ConocoPhillips has a 57.1 per cent stake, Santos 11.4 per cent, Italy's ENI 11 per cent, Japan's Inpex 11.3 per cent and Tokyo Gas-Tokyo Electric 9.2 per cent.'

So what would the scenario be? Santos and the new company develop the fields, build a pipeline to Wickham where Santos, and potentially Eni, would have to participate in the cost of additional trains. It seems to me CNC will be able to sit back and reap the benefits at both ends of the deal.

Santos, evidently, have never been keen on TS and would have preferred a pipeline from ES to Darwin for processing but they never got on with it. The ES PPs didn't mind developing the field and selling on the gas but that was all. Maybe Santos want to realise their ambitions at B/C. CNC obviously don't want to develop the field but want the gas. CNC could argue that they are paying the higher %ge of the plant expansion but then they are getting a higher reward.

The new company may possibly see the many virtues of the TS solution. If it was Eni then they may still see it as a scenario for the future. Get TS up and running and, by then, the 'use it or lose it' rule may kick in for B/C. If Heron has 5Tcf low CO2 gas then this could well start the ball rolling.

Another European company may have been Total. They are close to their FID for a pipeline from the Ichthys field (Inpex 76%, Total 24%) to a plant to be constructed in Darwin. Perhaps they are looking at B/C for an extra gas feed. The 12.8 tcf from Icthys would probably be enough though.

When JH talks about changes in rules and regimes he is probably thinking of the stalemate with the stranded gas in Bonaparte:

Rules: like the 'use it or lose it' already mentioned, carbon emissions, environmental issues etc.

Regimes: referring to a change in the dynamics of the P&E industry in relation to exploration and production, refining and retail through disruptive forces such as the rule changes above. The long standing major players have always had access to an abundant supply of HCs and control of the markets. With the advent of depleting supplies and increased costs, smaller companies with innovative ideas in technology, production and access to lateral thinking are beginning to challenge the existing way of thinking to disrupt the major companies' monopoly.

For example, MEO have long been the advocates of the lower cost FLNG solution (such as the TSLNG project) rather than the building of costly pipelines. Coupled with the sequestration of CO2 to produce methanol at the same processing complex, it can solve the problems associated with changing environmental rules and soon to be costly carbon emissions.

A Deloitte Research report on the subject:

* Can be found here *

This gives an alternative solution to stranded gas in the region thus challenging the present regime. The survivors will be the companies who are able to change their way of thinking. MEO have the ideas and the approvals to put these ideas in place; it is just a matter of convincing major parties to come on board. It appears Eni is one of those.

Of course there is resistance from some major P&E players and it will take an astute manager to swing them around. The majors are manipulating the rule makers to suit their best interests, as they have done for years, but I don't know if they will continue to succeed.

Similarly with ES, Magellan is finding it difficult to convince the other PPs to use the Darwin solution, otherwise the sale would have been finalised by now. Perhaps TS is an alternative for Magellan but we will have to wait and see.

In the mean time MEO SHs are still waiting for the light at the end of the tunnel. The confirmed drilling of Heron North is a positive step but, according to the agreement, we are still in the grip of needing one successful drilling outcome to move forward, hence the lack of positive response from the market.

IMO there may be more to the deal but MEO/Eni are not showing all their cards just yet.

But I'll talk about that later.

#:>))

PS - apologies for the lengthy reply blurrt but I do tend to ramble. We should get some answers regarding Magellan/ES by Wednesday week - unless there is another extension.