the latest update

Hi there MEOmites

If nothing else yesterdays WA-360-P Activity Update cleared up a couple of sticking points that we have been discussing endlessly over the last few months and now we are beginning to get a more rounded picture of the game of chess that has been, and still is, going on.

I know my posts are long, and maybe I sometimes state the obvious, but I am who I am so please enjoy a cup of your favourite brew and bear with me.

All the following commentary assumes there is gas in Artemis and I also apologies if I have repeated any other sentiments posted already.

1 - The Preferred Farminee

After the data room opened there were about twenty companies on a short list. MEO selected their preferred farminee 'on the basis of the tangible benefits it brings to the WA-360-P JV including the following':

. 'An extremely well resourced global energy company who is a recognized technology leader'

After the drilling problems at Zeus and Heron the expertise a major would bring with them would be most beneficial. Companies like Petrobras and Statoil have developed drilling techniques in deep water environments that would be a major benefit to the permit participants (PPs) and would help increase the potential success of Artemis#1.

. 'Independence from existing and planned LNG projects, allowing the most economically attractive development option to be pursued in the event of exploration success'

For months now we have been trying to interpret the CEOs previous statement regarding Independence in an earlier release. Now we have the clarification and it does not refer to the Independence as state controlled but an independent player in Oz. This widens the field of potential PFs to again put Petrobras and Statoil firmly on the top of the list.

This also explains Colin Naylor's reference to the CEO being mis-quoted, as posted previously in the MEO forum.

The reference to 'independence from existing and planned LNG projects' is very important IMO. Woodside and Chevron both have major projects lined up. The time frame for WPLs Pluto is 2013 and CVKs Gorgon expects to start delivery in 2014.

If either of these were to be the PF then where would Artemis and her PPs be in the pecking order? Admittedly, A#1 would need to be drilled to secure the permit conditions but what about development after that? The junior PPs would like to see income from the prospect ASAP. This is especially so for MEO who would like to get their Tassie Shoal projects under way.

But would Chevron and WPL develop their other fields first to placate longer term partners? There is also the question of a cost effective way of tying into pipelines to the mainland LNG trains for processing.

This dilemma would be negated by a new major player in Australia who would seek to develop and process any resource immediately thus reducing the wait time, and quickly prove their status in the Australian O&G scene and reputation in the World gas scene.

I presume the PF would also bring a ready market for the LNG. This would also tie neatly into the governments use it or lose it policy when applying for FIRB approval.

The whole idea of independence, in the context it was originally meant, fits perfectly with the medium/long term prospects of MEO.

. 'The rights conferred upon all parties to participate in a stand-alone LNG project at the same participating interest as its upstream'.

This is self explanatory indicates that all PPs would retain their %ge participation in both the development of the prospect and the construction of the LNG project. How this would be set up includes side agreements which I will look at later.

2 - Recognition of the PF by the PPs

The ann states that:

'In October 2009, MEO introduced the WA-360-P partners to the preferred farminee.'

This confirms that the PF was known to the PPs as early as October, probably just after the 20 Oct 2009 when, in the WA-360-P Farm-in Progress Report, it stated that:

'The final stages of what has been a thorough due diligence process are scheduled for the week of October 26th. Meetings to secure the requisite approvals to execute binding agreements have now been scheduled.'

and confirmed in the latest report with the inclusions,

'At this meeting, the requirement for two side agreements to be executed by all parties was tabled. These side agreements were to address the establishment of a stand-alone LNG project and to improve aspects of the Joint Operating Agreement (JOA).'

All parties must have been invited to this meeting to discuss the agreement and would have included MEO, CUE, Gascorp(Rankin)/MOG and the PF. Mr Steven Koroknay would have already been elected as a Director of CUE (9 Oct).

I mention this because I would have thought any objections should have been tabled and ironed out during these meetings by all PPs and the PF. An MOU, even though it may not have held much weight, could have been drawn up.

These meetings may also have attributed to the confidence MOG (Albers) had in the acquisition/transfer of Rankin Trend from Gascorp to MOG and using it for a subsequent Rights Issue.

This also confirms how well the confidentiality agreement has been adhered to by all parties since it was put in place.

4 - The Side Agreements (SAs)

In the statement it says:

'Unanimous agreement to the two side agreements was a pre-requisite to execution of the farm-in agreement.'.

This aspect of the whole procedure is the crux and ultimate hold up of the agreement being executed. It has been discussed in full today on other threads with some very sound reasoning by other posters.

It is very difficult to comment upon the agreements without knowing the detail of the PPs objections. I dont know why all PPs agreed to the side agreements in October and to be presented with them again 5 Mar only to have one PP renege on the signing.

My initial reaction to the TH being called at the time was that the deal had finally been executed but the timing wasnt quite correct for the joint announcement. Then came the suspension and the niggling thought something was wrong. I still hoped that the JV was to be announced last Friday in line with Petrobras Q4 report. Then came the bombshell that one of the PPs had decided not to sign.

One clue to the change of heart (after all the PPs did have months to scrutinize the original SAs and the non-signing PP had a further 12 days to offer their objections) may lie in the wording of the SAs: ' ..... including

1. A Heads of Agreement (HoA) to facilitate alignment and effective operation of the proposed joint venture with respect to the potential implementation of an integrated LNG project in the event of exploration success;

and

2. A side letter acknowledging certain requirements. The side letter subsequently developed into an Acknowledgement and Amendment Agreement (AAA) which included minor amendments to clarify and improve certain operating aspects of the Joint Operating Agreement (JOA) requested by the preferred farminee.'

This does infer that some changes were made to the original SAs which the non-signing PP may not have been made aware of before the 5 Mar. The PP still had 12 days but this may not have been enough time for the lawyers/board etc to scrutinize the changes and the discuss any implications to their SHs and direction of the Company. After all the rest of the deal has taken almost five months.

I think the majority of other MEOmites concur that the sticking point is the LNG processing factor. The PF is seeking assurances from the PPs so they know for sure what the procedure will be in the event of success at A#1 and subsequent LNG plant, whether it is land based or, more likely, FLNG. I don't think MEO or the PF will want any problems at that stage.

In the thread 'the intentions of CUE' many theories have been put forward, and judging by MOGs release supporting the deal, especially when they have said in earlier reports that this is a company making deal, it probably is CUE that is not happy. There is no need for me to go into all this again as it has well and truly been covered.

I believe that, possibly, CUE dont want to be involved in the cost of constructing the LNG plant. I would agree with the sentiment that it would be remiss if the deal fell through on such a relatively minor sticking point. I dont think the ute analogy would work for CUEs share of gas (we havent heard from pursuitute for a while, who would be an expert in this field).

In solving this problem perhaps they should look at the situation that eventuated in the straddling permits of the Io/Jansz complex which was deemed to be part of the same field.

Permit WA-18-R, (Mobil (25% operator) & Chevron (50%) Shell (25%)) holds the Jansz discovery whilst neighbouring permits WA-25-R & WA-26-R (Chevron (50% operator), Mobil (25%), Shell (12.5% & BP (12.5%)) holds the Io discovery.

The common partners are Mobil, Chevron and Shell with BP being the odd one out, holding a share of 12.5% in WA-25-R & WA-26-R (Io) only.

BP was the hold up in the implementation of the Greater Gorgon LNG project as they didn't want to participate in the construction of the processing plant on Barrow Island. This meant the project couldn't go ahead because of the need to enable the unitisation of the Io gas field with the Jansz gas field.

This created an impasse which was resolved in May last year when BP, Chevron, ExxonMobil and Shell executed an agreement, whereby BP agreed to contribute to upstream capital costs, supply gas from its share of gas from Io and then buy it back as LNG from Shell once it has been converted.

I am sure the PPs and the PF could come to some similar agreement to come to terms with what must be only a relatively minor issue in such a potentially massive project.

I believe CUE and MEO are both still willing to negotiate the terms of the SAs as shown in the wording in the report:

'On 17 March the remaining party advised MEO that its board 'is unable to agree to the documents as currently presented'. MEO remains actively engaged with this party to ascertain what their substantive issues are and will endeavour to have these resolved to the satisfaction of all parties.'

Once a resolution is found MEO will then present this to the PF. In the mean time the PF is contemplating the economics of processing 85% of the gas (or rather taking on board CUEs 15% cost of the FLNG plant making it 65% contribution). After all they will be providing the majority of the capital expenditure in the project and CUE shouldn't get their gas processed for free.

5 - Implications

Using MEOs heading this part of the activity update is self explanatory. It is important to note that:

'MEO is committed to drilling the ~12 Tcf2 Artemis prospect in 2010 and has secured an option over a drilling rig for a spud date between 1 September 2010 and 1 December 2010.'

MEO have also confirmed that they are preparing to re-open the farm-in opportunity in the event that the preferred farminee elects to withdraw from the transaction.

This may not be as lucrative as the present deal on the table. There is still the question of any side agreement a PF may need to be assured of by all PPs in the event of success and the timing of the development of Artemis.

Hopefully it won't come to that and common sense prevails.

Finally, no matter what is written elsewhere on HC the drilling of A#1 before the expiry date by MEO is a dead set given. MEO have the funds and have confirmed they have a rig lined up.

A further retail CR is also a possibility before or after the drilling of A#1. CUE and MOG will also have to pay their share of further wells in the event of success.

Remember the VPS of 70% Artemis is around be $3.18 risked and $9.93 unrisked (20% is 91cR and $2.83UR). There is no way MEO will relinquish their 70% hold on the permit.

6 - Conclusion

Dont panic.

#:>))