Proposed NSW Government settlement with Metgasco

Email received from:  NO VOTE:-


It is quite extraordinary but the Board has refused to confirm whether it obtained any expert valuation on Metgasco’s Northern River assets which it used as a basis for negotiation of the $25m settlement with the State Government. The Board has also declined to make available any information on the basis for the settlement.
In the meantime we have become aware that the Secretary NSW Industry has made available to the Company some details of the Government’s approach to the negotiations. These reasons make for the most disturbing reading.
Based on the most recent article by Hamish Broome in the Northern Star, it would appear that the Department has also made at least some of this information available to other parties. The article may be accessed at the following link: -
http://www.northernstar.com.au/news/metgasco-shareholders-wont-get-a-second-chance-at-/2870652/
Three key points made by the Department are discussed below.
Development Costs
The Department asserts “that full scale development of the Metgasco assets would require new pipeline infrastructure at a cost of over $800m”. This is a gross overestimate of the costs associated with even the largest envisaged development of the Company’s assets and simply has no supportable economic basis.
In 2011 the Metgasco engaged WorleyParsons, the foremost pipeline consultants in Australia, to examine the costings for pipeline options required to support various LNG developments of 90PJ per year for 20 years (1.6 million tonnes per year LNG). WorleyParsons found that for the preferred LNG development, the capital cost of the pipeline was less than AUD250 million. WorleyParsons advised that such a pipeline would be capable of delivering 180PJ/yr of gas at no additional capital cost.
Indeed WorleyParsons concluded that Metgasco could build an independent pipeline to Gladstone for approximately AUD800 million and, while concluding that such a development would be economic, recommended against it because of the higher capital and operating costs.
Also the Department could not fail to be fully aware of the Company’s proposal for a much more modest (and substantially cheaper) 145km pipeline development linking Casino to Ipswich since a full Environmental Assessment was lodged with Department of Planning in December 2010. This pipeline would enable gas produced by Metgasco to be sold into virtually every natural gas market in NSW (including Sydney and Newcastle), QLD, VIC and SA. Such a pipeline would enable Metgasco to transport almost 70PJ/yr to Australian gas markets.
Reserve Valuation
The Department asserted that “Benchmarked assets were all qualitatively superior to Metgasco for one or more reasons” including 2P reserves. Transactions included were Senex Energy, Strike Energy, Cooper Energy, Real Energy, Blue Energy and Westside.
Prior to the impact of restrictions imposed by the current Government Metgasco had third party certified 2P reserves of 428PJ, while the certified 2P reserves of the above companies are as follows:-
Senex Energy 550 PJ (equivalent)
Strike Energy Nil
Cooper Energy 18 PJ (equivalent)
Real Energy Nil
Blue Energy 71 PJ
Westside 347 PJ
So of the benchmark companies used by the Government most have no or very low certified 2P reserves and only one had 2P certified reserves exceeding those of Metgasco. That Company, even at the current very low oil prices, still has a market capitalisation of $144 million.
Price of Gas
The Department also asserted that the derived cost of field production ranged between $7.88 and $9.65 per GJ. These costs are up to 5 times those derived by other consultants employed by Metgasco.
A study completed for Metgasco in 2011 again by WorleyParsons, arguable Australia’s leading oil and gas consultant, concluded that the total field development costs to supply 90PJ per year for 20 years would involve Capital Costs of $1.42 per GJ plus operating costs of $0.44 per GJ. Substantially lower than the estimates relied on by the Government.
Other
The Department makes an extraordinary threat to the existing lawful business being undertaken by Metgasco and claims “The Northern Rivers will not be part of this process” [The Government’s Gas Plan sets out the approach it has adopted for refocussing the industry onto a smaller footprint].
In an even more extraordinary statement the Government does not rule out future gas development in the Northern Rivers forever merely saying “gas development in the Northern Rivers Region does not (and is not expected to meet) strategic release criteria for the foreseeable future.”
The Department also refuses to acknowledge the Government’s loss in the Supreme Court in relation to the suspension of Rosella and simply asserts “the Government will defend the legal claim vigorously”. The Department apparently has no intention of abiding by the Model Litigant Policy for Civil Litigation endorsed by Cabinet which may be accessed at http://www.justice.nsw.gov.au/legal...-for-govt-agencies/model-litigant-policy.aspx
Vote NO
Even if you favour a settlement, vote NO to this current offer which is based on threats from a NSW Government Department and founded on most unsatisfactory, and apparently unchallenged, financial analysis of the Company’s assets.
The indication of a successful NO Vote is likely to allow the Company to delay any shareholder vote until proper details supporting the settlement can be made available to all shareholders.
Regards