value of heron and blackwood?, page-17

You are right blurrt.

All we know is that up to 50% will be offered for Heron with an anticipated minimum of two appraisal wells, but even that may have changed. It is anticipated that there will be one each on Heron North and Heron South.

For information purposes it might be of interest to look at the complexities of NTP/68. Long term holders look away now as this is old information but, until the imminent releases appear, all we can do is refresh our memories.

The Heron 1 well was drilled in 1972 by Arco Australia and intersected a 52m gas bearing column in the Darwin (Epenarra) formation. Heron 1 also reached a gas charged zone in the deeper Elang/Plover formation.

At the last AGM a video was made of the presentations by the CEO Jurgen Hendrich and Exploration Manager David Maughan. The info regarding NTP/68 is at the end of Part 1 and Part 2 of the CEO report and Parts 2&3 of the Technical update..

Here is the link to access the videos.

It is better to watch the videos but to paraphrase the points about NTP/68, the CEO said:

'Blackwood is a smaller field and management know the quality of the gas (high CO2) and the size of the reservoir and so they are leaving it 100% intact as far as possible for SHs in the future.

Heron turned into a potential LNG resource to attract parties to fund expensive wells and still keep MEO SHs with a material leverage to the upside. SHs should not to set their expectations too high as Heron is not in the same calibre as Artemis, being a difficult reservoir. SHs would set the bar too high if they anticipated getting anywhere near the Petrobras deal. We need to look for partners with the calibre of PBR who also have growth vision

Wells in the area are 60-80m each hopefully we will get a couple of wells paid for in the Heron farmout. This will still leave us with 50% of the permit and still have SH funds for less risky ventures.'

To follow up David Maughan stated that: 'We have a gas discovery at P68 but there is still uncertainty. We still need to determine how good the gas is ie low or high CO2, how good is the reservoir and the likelihood of long term reservoir performance. We also need to know the quantity of gas.'

When Heron 2 was drilled dry gas was found at 3950m but the borehole collapsed at that point. MEO G&Gs believe that there is a chance of lower CO2 liquid rich gas in the deeper reservoirs.

A comprehensive review of the Heron-2 well results can be found:

in the General Meeting Presentation lodged with ASX on 24 Jan 2008.

In the final Heron 2 drilling report which is located:

* here *

Chris Hart, the then managing director states 'While the evidence from electric logs of gas saturation and the presence of some significant fractures in the perforated section appeared to be positive, the well only produced minor quantities of hydrocarbons to surface and failed to produce a consistent flow ...... The joint venture continues to believe that significant resources may still exist in the Epenarra and Heron structures.'

In Ya's post 30 Sep 2010:

Post # 5774087

He gives a great synopsis of Greater Heron (H1 & H2). His reference to MEO's 2007 market update can be found here:

ASX release 12/9/07

Since this post an outline of the GCA report was shown in the release when the Heron data room was opened:

The 14 Oct ASX release is here.

and

The NT/P68 Farmout Poster is here.

The best estimate of discovered gas for Heron North is GCA .39Tcf and MEO .29Tcf. Further to this MEO's assessment puts the best estimate of the Prospective Gas Resource of Greater Heron at 4.96Tcf. This assessment assumes 'the Greater Heron structure is filled to its structural spill point.'

In the release it also states: 'As part of the farm-out terms, MEO is proposing two appraisal wells - one on Heron South and one on Heron North'

So from all of the above we know there is gas in Heron but I believe it is still a risk to a potential farmee as to whether or not there are sufficient quantities and quality of gas in Heron for the LNG production. I can therefore see three scenarios:

If there is 5Tcf low CO2 gas (up to 9%) then TSLNG is the go and I would say the farmee would probably participate in the construction of the LNG plant. This would allow the scenario indicated by the CEO:

'74 percent (or 480 mmscfd) of the feed-gas is used to feed a 3.0 MTPA LNG plant, the CO2 removed is blended with the remaining 26 percent (or 170 mmscfd) of feed- gas to create a 25 percent CO2 feed-gas stream which supplies a 1.75 MTPA companion methanol plant.'

Whether or not the farmee would be interested in the methanol plant is an unknown.

If there is 5Tcf high CO2 gas then LNG is out of the question but there would be sufficient gas to fire up the two approved 1.75mtpa TSMP plants.

Let's not forget that it will take only 1.4Tcf of raw gas (including inerts) to produce 1.75mtpa methanol for 20 years of operation - so 2.8Tcf high CO2 gas would feed both the TSMP plants.

Again we will be looking for a JV to monetise the Tassie Shoal Methanol Plants (TSMP).

If there is insufficient gas to support the LNG project but it is low in CO2 then it may not be commercially viable for any project. 3.5Tcf could support the LNG project for 20 years but with no spare gas to blend with the CO2, sequestration would be problematical.

There is estimated to be sufficient gas in Blackwood to support one TSMP module. Perhaps the low CO2 gas from Heron could be blended with the Blackwood gas to use in two methanol plants. But would it be commercially viable to develop Heron in this scenario?

These would be questions asked by the potential farmee in the negotiations and part of the reason why the farm-out is more difficult than 360P/Artemis. Gas in the NW is generally low in CO2 and a FLNG solution was on the cards with PBR if A#1 was a success.

Farmout terms

As far as the possible terms of the farm-out we can only look at comparable value of other gas fields in the area which is, basically, limited to Magellan's purchase into Evans Shoal (as discussed in this thread) or previous farm-outs of the permit:

Petrofac

The ASX release is here.

The Petrofac farm-in was for a 10% interest in the permit by funding 25% of the well costs. They were also given the option to participate in the proposed TSLNG and TSMP at the same equity level as the farm-in. This venture was based on the 1972 H1 data along with additional seismic.

History has it that it was intended to drill two wells on Heron (H2 and H3) with an optional third well but, after the bore collapse in H2 and time constraints caused through cyclone delays the West Atlas rig was at H2 for 116 days. In the time left MEO must have decided to use the drilling option for the Blackwood wildcat. In retrospect this has allowed MEO to do more data interpretation and seismic surveys for further potential appraisal wells on Heron. As Petrofac does not participate in wildcat drills, MEO sole risked the Blackwood well.

In 2008 MEO spent $115m on exploration which included 75% Heron costs (12 Oct 2007 - 29 Jan 2008) and 100% Blackwood (1 Feb 2008 - 11 March 2008).

H2 must have cost the JV in the vicinity of $80m in drilling alone. We must add that to the cost of geotechnical studies, seismic etc when looking at the back-costs of the permit. This makes the sale, by Santos, of 40% Evan's Shoal's proven resource very cheap at $200m even though the gas is high CO2.

In 2009, prior to the permit renewal, Petrofac and MEO executed a deed of withdrawal:

The ASX release is here.

MEO regained 100% NT/P68 giving Petrofac the parting option:

'Separately MEO has granted Petrofac Energy Developments Limited an option expiring on 30th June 2011, to acquire a 5% interest in NT/P68 and an equivalent right in the Tassie Shoal Projects. To trigger the option over NT/P68, a payment representing a multiple of the Permit back costs at the time would be made.'

This presented MEO with 100% equity to bring to the data room and gave them plenty of time to complete the farm-in without third party interference. I have a feeling the Petrofac option will probably expire naturally.

Resource Development International Ltd (RDI)

The full agreement with RDI can be seen in this ASX release:

MEO's strategic alliance with Clive Palmer's RDI .

The NW Shelf permits were a large part of the agreement but regarding NTP/68 and TS the inclusion to the agreement was:

'Option to farm-in to NT/P68 and the Tassie Shoal GTL projects (LNG and methanol) to earnup to 70% interest in 3 stages

This option is subject to Petrofac Energy Developments Oceania Ltd's pre-emptive rights to match the offer by RDI within 30 days.

Option to commit to funding 100% of MEO's share of two appraisal wells (Heron-3 and Blackwood-2) to earn a 25% interest. Election to participate the earlier of 14 days after the close of the RDI IPO or 31 December 2008.

Option to earn an additional 25% interest by committing to funding 100% of MEO's share of two further appraisal wells.

Option to earn a final 20% interest by meeting MEO's share of costs in relation to:
- all further appraisal costs to achieve adequate third party gas reserve certification;
- all capital costs pertaining to bringing any NT/P68 gas resource into commercial
production; and
- 100% of MEO's share of capital costs to bring each GTL project into commercial production.'

The alliance had 'the potential to see the company fully funded with a 20% carried equity interest through to commercial production on each of its approved GTL projects in the Timor Sea subject to securing adequate gas resources from NT/P68 or third party sources.'

Of course the 'subject to' clause included a successful IPO and the GFC put paid to that so, apart from the unsuccessful drilling of Z1 in WA-361-P, it never got off the ground.

The two farm-in proposals were negotiated by MD Chris Hart, prior to Jurgen Hendrich taking over the reins as CEO. JH brings his own style to the company and appears to drive a hard bargain although he said at the AGM that the Heron farm-out would be difficult.

The reason I have included these farm-in agreements is to note what has happened in the past re NTP/68. The present farm-in will probably be totally different as it is only for Heron but, all the same, it will be an interesting comparison.

Like callent so pertinently pointed out: 'until the info is in entirety in front of investors all else is speculative'. What I have done here is to present some of the past and present facts, as I see them. Investors can choose whether or not to use them in their research and decision making. There is some speculation by everyone involved but that is a fact of life when investing in risky stocks or even running O&G companies. If the farm-out is successful and the details are released the background info may be useful.

Until MEO have access to some proven reserves in Bonaparte to get TS on the way it will always be a high risk investment. This risk may be reduced by their other ventures in the future but Heron is the way forward right now.

MEO has $98m on hand and has been trading at cash value for over four months. The CEO understands that these reserves must be used wisely (refer AGM video) which is probably why he is taking his time to ensure the SHs gets value for money. Whist this is difficult for some MEOmites to bear our patience will, hopefully, be rewarded in time. Once the way forward is clearer momentum will be restored and we will be back on the roller-coaster.

IMO.

#:>))