COMMENTS. NATURAL GAS (CANNING BASIN JOINT VENTURE) AGREEMENT ACT 2013 David A. W. Maloney * * Partner, Allens, Sydney.

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1 COMMENTS NATURAL GAS (CANNING BASIN JOINT VENTURE) AGREEMENT ACT 2013 David A. W. Maloney * * Partner, Allens, Sydney.

2 The Natural Gas (Canning Basin Joint Venture) Agreement Act 2013 (WA) (the Act), which was enacted by the Parliament of the State of Western Australia on 18 June 2013 and received royal assent on 25 June 2013, is a novel piece of legislation. If it is intended to be a precedent for the oil and gas industry operating in Western Australia, it represents a challenge to the integrity of the work program bidding system under the Petroleum and Geothermal Energy Resources Act 1967 (WA) (Petroleum Act) and the Petroleum (Submerged Lands) Act 1982 (WA) (PSLA), as well as an unconventional use of the Government Agreements Act 1979 (WA) (State Agreements Act). The Act ratifies, and authorises the implementation of, an Agreement dated 7 November 2012 (the Agreement) between The Honourable Colin James Barnett, M.Ec., MLA, Premier of the State of Western Australia, acting for and on behalf of the said State and its instrumentalities from time to time (the Minister), Buru Energy Limited (ACN ) (Buru), Diamond Resources (Fitzroy) Pty Ltd (ACN ) and Diamond Resources (Canning) Pty Ltd (ACN ) (collectively the Joint Venturers) and Mitsubishi Corporation (Mitsubishi). Diamond Resources (Fitzroy) Pty Ltd and Diamond Resources (Canning) Pty Ltd are whollyowned subsidiaries of Mitsubishi, which is party to the Agreement as Guarantor. The Agreement is set out in Schedule 1 to the Act. The Petroleum Titles 2 originally the subject of the Agreement are: Exploration Permit for Petroleum No. EP371 (R1) Exploration Permit for Petroleum No. EP391 (R2) 3 Exploration Permit for Petroleum No. EP428 Exploration Permit for Petroleum No. EP431 Exploration Permit for Petroleum No. EP436 Canning Basin The Petroleum Titles are located in the Canning Basin, which is now sometimes referred to as the Canning Superbasin in recognition of the fact that it comprises several sub-basins (the Lennard Shelf, the Fitzroy Trough, the Broome Platform, the Willara Sub-Basin and the Samphire Embayment). A feature known as the Goldwyer Shale extends across the Broome Platform and the Willara Sub-Basin and, in a review of world shale gas resources, has been estimated by the Energy Information Administration of the US Department of Energy to contain 764 tcf of risked gas in place and 229 tcf of risked recoverable gas. 4 The Canning Basin is considered by the Energy Information Administration to be among the five biggest shale gas reserves in the world. 5 In a recent interview, Richard Sellers, Director General of the Department of Mines and Petroleum, Western Australia, upgraded the gas reserves in the Canning Basin to around 288 trillion cubic feet 6 which would, at current usage levels, satisfy Western Australia s domestic gas requirements for 500 plus years. Canning Basin Interests of Buru and Mitsubishi The five Petroleum Titles the subject of the Agreement are located over the Laurel Formation and represent only 14% of the area of the Canning Superbasin petroleum tenements in which Buru has interests. 7 Buru and Mitsubishi hold interests in numerous petroleum tenements in the Canning Superbasin. 8 In its 2012 AGM Corporate Update, Buru reported to shareholders on 30 November 2012 that: Buru had been offered two exploration permits in October 2011 and two exploration permits in February 2012 in response to applications made by Buru under the Petroleum Act; Buru s long-term Canning Basin portfolio optimisation process was now substantially complete; Buru now holds under petroleum tenements net ~ 69,000 square kms (~ 17 million acres) of land in the Canning Basin; and 2 See definition in Clause 1 of the Agreement. 3 Subject to applications STP-PRA 004 and 005 for petroleum production licences. 4 See New Standard Energy Ltd s presentation, ASX Spotlight Conference, See Emerging Unconventional Shale Plays in Western Australia, Ameed Ghori, Senior Geologist, Department of Mines and Petroleum of Western Australia, 2013 APPEA Journal. 6 The Sunday Times, 9 June See Buru s ASX announcement dated 19 June 2013 and the Schedule at the end of this article, 8 See Schedule I Interests as at 4 October 2012 in Buru s 2012 Annual Report, as updated by its three subsequent Appendix 5B Quarterly Reports.

3 Buru holds continuous basin wide acreage holdings over an area of 640 kms by 250 kms (~ 450 miles by 150 miles). Given that Buru holds most of its interests in a 50/50 joint venture with Mitsubishi, the net acreage figures of ~ 69,000 square kms and ~ 17 million acres can nearly be doubled to arrive at the dominant land position of the Joint Venturers in the Canning Superbasin. State Agreements Act The application of the State Agreements Act to ratify, and authorise the implementation of, the Agreement is unusual in that the Joint Venturers have not as yet proven the existence of sufficient commercial gas reserves to support a Domgas Project, 9 let alone an LNG Project. 10 As the Minister noted in moving that the Natural Gas (Canning Basin Joint Venture) Agreement Bill 2013 be read a second time: The Agreement concerns the establishment by the Joint Venturers of a Domgas Project, subject to them proving up sufficient natural gas from the Agreement s Title Areas, initially comprising 5 key petroleum permits, and the Joint Venturers being satisfied such a project is technically and economically viable. (emphasis added). In his leading paper on the topic State Agreements, the same Minister (then the Western Australia Minister for Resources Development) had the following to say regarding when it is appropriate to ratify agreements under the State Agreements Act: Agreements Acts are designed to be the development vehicle for specific projects. It is not the intention of government that they be used to tie up vast areas of land for long periods without any development being achieved. Nor are they simply to be a tool to secure project finance. Development proposals are, therefore, required to be submitted within a stipulated time period. The State government requires a developer to be firmly committed to a project and ready to proceed with development within a short time period following Agreement ratification. Prior to the negotiation of an Agreement Act, the State must be assured that the project is sufficiently advanced to enable the government and the developer to address the key issues in an Agreement. 11 As further evidence of the fact that the criteria stipulated above have not been met: Under Clause 35(4) of the Agreement, the Joint Venturers may, not earlier than 31 December 2015 or later than 31 March 2016, give notice to the State that they do not intend to submit proposals for the Domgas Project for any one or more of the following reasons: (a) the Joint Venturers have been unable to prove up sufficient reserves of natural gas within the Title Areas to underpin the establishment and sustained operation of a technically and economically viable Domgas Project; or (b) the Joint Venturers preparatory work under clause 5(1)(b) leads them to conclude that the production of natural gas to underpin the establishment and sustained operation of a Domgas Project is not technically viable; or (c) the Joint Venturers' preparatory work under clause 5(1)(b) leads them to conclude that the establishment and sustained operation of a Domgas Project is otherwise not economically viable. If the Joint Venturers give a notice under Clause 35(4), the Agreement terminates. The Domgas Commitment 12 is not a commitment to proceed with a Domgas Project; rather, it is a commitment to submit proposals for, and establish and operate a Domgas Project in accordance with approved proposals pursuant to Clauses 11, 12 and 13 of the Agreement, if the Joint Venturers form the view that none of (a), (b) or (c) above applies. Clause 8(1) of the Agreement expressly recognises its aspirational nature. It provides: The parties acknowledge for the purposes of this clause and clauses 10 and 11 that it is their common aspiration that the Joint Venturers will, subject to the proving up of sufficient reserves of natural gas within the Title Areas, prior to the date that is 25 years after the Domgas Project Operation Date progressively and continuously make available for sale into the Western Australian domestic gas market a quantity of Domgas (produced as part of the Domgas Project from natural gas obtained within the Title Areas) that is equivalent to at least 1,500 petajoules of natural gas. 9 See definition in Clause 1 of the Agreement. 10 See definition in Clause 1 of the Agreement. 11 The Hon Colin Barnett, State Agreements, 1996 AMPLA Yearbook 314, pp 318 and See definition in Clause 1 of the Agreement.

4 Clause 14(4) of the Agreement allows the Joint Venturers, with the consent of the Minister (after consulting the Petroleum Act Minister 13 ), to withdraw some or all of the five Petroleum Titles from the Agreement. Under a Gas Sales Agreement entered into with Alcoa of Australia Limited (Alcoa) in September 2007, Buru has agreed to sell to Alcoa up to 500PJ of gas. 14 Alcoa has pre-paid $40 million on account of the cost of that gas. If by 1 January 2015 Buru has not made a final investment decision to develop a gas project in the Canning Basin capable of delivering at least 400PJ of gas to Alcoa, Buru is obliged to repay to Alcoa the $40 million by three equal annual instalments, the first of which is payable on 31 December As at 31 March 2013, $25,064,245 was held in escrow by Buru on account of its repayment obligation. Commercialisation of Shale Gas It is unclear whether the Joint Venturers expect to be able to satisfy the requirements of a Domgas Project and an LNG Project from conventional sources of natural gas or whether they will be reliant on shale gas 15 discoveries to meet those requirements. Given the extent of the Joint Venturers acreage position and the concessions referred to below granting security of tenure potentially to the entirety of those areas for the next eight years (or thereabouts), one assumes the latter. The Joint Venturers principal natural gas exploration areas are designated by Buru as being the Laurel Formation, which is described as a Basin-wide tight gas accumulation, and the Goldwyer/Acacia system, which is described as underexplored with huge shale oil and wet gas potential. 16 However, despite the optimism evident in Buru s ASX Releases, it is notable that the Joint Venturers are yet to book any natural gas reserves. In May 2013, the Australian Council of Learned Academies (ACOLA) published a report entitled Engineering Energy: Unconventional Gas Production A study of shale gas in Australia. 17 The report was prepared for the Prime Minister s Science, Engineering and Innovation Council, through the Office of the Chief Scientist, as part of the Securing Australia s Future project. 18 The Expert Working Group, which prepared the report under the auspices of the Australian Academy of Technological Sciences and Engineering, made (among others) the following Key Findings 19 in relation to the commercialisation of Australian shale gas: Shale gas could be available to both Western Australia and the Northern Territory as a new potential energy source, particularly for some of the more remote energy users. 20 Reliable economic reserve figures for shale gas are not available, largely because there has been little or no exploration or drilling in most basins. 21 A key breakthrough in the United States has been to reduce the time and cost of shale gas extraction by drilling a number of deep horizontal wells from a single pad. Horizontal shale gas wells require an in situ stress regime that sustains vertical fracture planes at many stages along the lateral length. Local stress regimes in parts of some Australian basins may lead to fractures developing significant horizontal components; this results in less efficient extraction of gas. 22 Pipe line and road networks are much less developed in Australia than in the United States and this will have a significant impact on the rate of development of shale gas in remote regions where much of the shale gas opportunities are likely to be found and on access to potential gas consumers. 23 Natural gas liquid (NGL) content in shale gas is important, since the market for shale oil, condensate and liquefied petroleum gas (propane and butane) can be a driver of overall shale gas economics. The market for ethane from shale gas is less certain and the potential to value-add through production of 13 See definition in Clause 1 of the Agreement. 14 It is not clear whether the 1500 PJ of natural gas referred to in Clause 8(1) of the Agreement is in addition to, or inclusive of, the 500 PJ contracted for sale to Alcoa. 15 Shale gas is natural gas which is trapped in shales. 16 Buru s Updated Corporate Presentation, Buru: The Future of Western Australia's Onshore Oil & Gas Production, p 5, which was released to the ASX on 1 May P Cook, V Beck, D Brereton, B Fisher, S Kentish, J Toomey and J Williams (Expert Working Group), Report for ACOLA, 18 The report is Project Six in the series. 19 Above n 16, pp (incl.). 20 Above n 16, Key Finding 4, p Above n 16, Key Finding 7, p Above n 16, Key Finding 9, p Above n 16, Key Finding 12, p 22.

5 chemicals would depend on the price of ethane versus the price of natural gas and the competitiveness of a domestic chemicals industry. 24 Sustainable shale gas development in Australia requires that suppliers receive a price for the gas they produce that at least covers their marginal cost of production. Best estimates of the current wellhead costs of production of Australian shale gas range from around $6/Gigajoule (GJ) to about $9/GJ. By comparison, the wholesale gas price for long-term contracts of gas for the domestic market in eastern Australia is around $4/GJ while current domestic wholesale prices are about $6/GJ and the current netback price for Australian gas exported to Japan is around $10/GJ. Based on these estimates, development of Australian shale gas marketed on the east coast is unlikely to occur until domestic and international netback prices are equalised (assuming international netback prices remain above $10/GJ in real terms). 25 During the early stages of shale gas operations, large quantities of water (including saline water) used for hydraulic fracturing will need to be extracted from surface and/or groundwater resources. The extraction and subsequent disposal will need to be managed within regulatory processes including water entitlements (in most circumstances) and aquifer management plans to minimise the potential for contamination of aquifers. 26 Gaining and retaining a social licence will be crucial to all shale gas projects. It will not be possible for a shale gas development to be approached as just a local issue given that there will be stakeholders at the regional and national and global levels whose view will need to be taken into account. Experience with other resource projects demonstrates that a one size fits all approach to communication and engagement will not work for shale gas; different groups will have different concerns and will require different communication strategies. Respect and transparency are critical elements of effective engagement. 27 A number of activities associated with shale gas exploration development and production have the potential to have an adverse impact on the natural and the human environment and therefore it is essential that the shale gas activities are carefully and comprehensively monitored and transparently regulated to best practice. These include monitoring of surface and subsurface water, air quality, greenhouse gas emissions, and seismicity. The current lack of baseline data in many areas and lack of information on natural variability in particular need to be addressed. 28 These Key Findings highlight some of the challenges which governments and the petroleum industry will have to confront in order to explore for and develop commercial shale gas reserves in Australia. Many of these challenges will be exacerbated by the remoteness of the Canning Basin. Given the above, it is inconceivable that, at the time of entry into the Agreement, the State was assured that the project is sufficiently advanced to enable the government and the developer to address the key issues in the Agreement. 29 Work Program Bidding System In applying for a petroleum exploration permit, s 31(1)(d)(i) of the Petroleum Act and s 21(1)(d)(i) of the PSLA each require the application to include particulars of the proposals of the applicant for work and expenditure in respect of the blocks specified in the application. The applicant must specify a minimum program of petroleum exploration operations and a minimum amount of expenditure to be incurred in conducting those operations for each of the six years of the initial term of the Exploration Permit. The work and expenditure commitments for each of the first three years of the initial term are referred to as the guaranteed work program and must be undertaken within the Permit within the prescribed year. Failure to do so may result in cancellation of the Permit. 30 In September 1996, a consortium comprising Shell Development (Australia) Pty Ltd (Operator), Chevron Asiatic Limited and Cultus Timor Sea Limited bid an aggregate minimum guaranteed work program of 46 exploration wells and an aggregate minimum guaranteed expenditure of $177 million to secure the grant of Exploration Permits Nos WA-265-P and WA-266-P. 31 The consortium had identified 13 different play-types it proposed to test with the exploration wells; subsequent to the grant of the Permits, a further stratigraphic playtype was identified. Having shot the requisite seismic and drilled six obligatory exploration wells and four non- 24 Above n 16, Key Finding 17, p Above n 16, Key Finding 18, p Above n 16, Key Finding 24, p Above n 16, Key Finding 33, p Above n 16, Key Finding 39, p Above n 10, p See Department of Resources, Energy and Tourism (Cth), Exploration Permit Guideline: Permit Conditions and Administration, effective 1 January See David A. W. Maloney, Australia's Offshore Petroleum Work Programme Bidding System (2003) 20 JENRL 127.

6 obligatory wells at a cost of $62 million, the consortium had unsuccessfully tested all 14 play-types and reached the conclusion that further exploration of the Permits was not warranted. Of the minimum guaranteed work program, 35 exploration wells remained to be drilled at a minimum cost of $122.5 million. The consortium sought relief from the obligation to undertake the balance of the minimum guaranteed work program on the ground of force majeure. The application for relief was rejected by the Joint Authority on the ground that disappointing drilling results, poor quality seismic data or the failure to prove up a prospect 32 are not normally considered by the Joint Authority to be force majeure. The consortium then sought from the Joint Authority consent to surrender the Permits. The then Minister for Industry, Science and Resources, Senator The Hon Nick Minchin, responded to the request in the following terms: Whilst I acknowledge the difficult circumstances that the permittees face in these permits, I do not believe your proposal to allow surrender of these permits would be consistent with the work program bidding system. Maintaining the integrity of the work program bidding system, with fairness to all companies exploring offshore, is an overriding concern of the Government. 33 Despite this preliminary indication from the Federal Minister, the consortium lodged formal applications to surrender the Permits. On 23 August 1999, The Hon Norman Moore MLC, Minister for Mines for Western Australia and the Designated Authority, rejected the applications to surrender in the following terms: As you are aware consent to surrender is only usually given where the title holder has observed all of the conditions of the title. In the case of these permits you are in default of the work commitments and while consent can be given regardless of all conditions not having been met I am reluctant to extend that discretion to apply to any default in the guaranteed work commitment. This is primarily because of the impact it would have on the guaranteed work program bidding system. Accordingly, I have proposed to the Commonwealth member of the Joint Authority that cancellation proceedings for the permits be commenced. 34 Integrity of the Work Program Bidding System and the Act After 31 March 2016, s 14(2) of the Agreement allows the Minister (after consulting the Petroleum Act Minister) to approve any petroleum exploration permit or petroleum drilling reservation held by one or more of the Joint Venturers as a Petroleum Title for the purposes of the Agreement if: it is located in the Canning Basin; it is not then a Petroleum Title; the land the subject of the title is prospective for natural gas; and such approval would more efficiently or satisfactorily implement or facilitate the objects of the Agreement. On the basis of current holdings, the Joint Venturers could, subject to the criteria above being satisfied, introduce an additional 13 petroleum exploration permits as Petroleum Titles the subject of the Agreement. Parenthetically, it does not appear to be contemplated that, should additional petroleum exploration permits be added as Petroleum Titles, there will be any increase in the 1500 petajoules of gas which the Joint Venturers would be required to make available in the Western Australian domestic gas market. The Act grants to the Joint Venturers relief from certain of the conditions subject to which: the Petroleum Act Minister invited applications for the grant of permits under s 37(1) of the Petroleum Act; and the Petroleum Titles were granted and are now held by the Joint Venturers. The first concession is in respect of mandatory relinquishment of blocks on renewal of a permit. Section 41 of the Petroleum Act requires that half the number of blocks in respect of which a permit is in force be relinquished on renewal of the term of the permit. Clause 14(1) of the Agreement provides that s 41 of the Petroleum Act does not apply to an application made during the Suspension Period 35 under s 40 of the Petroleum Act for the renewal of any one or more of the Petroleum Titles. Clause 14(1)(b) requires the application for renewal to be made in respect of all of the blocks in respect of which the Petroleum Title is then currently in force unless the Petroleum Act Minister (acting with the concurrence of the Minister) otherwise consents. 32 Permit Conditions and Administration Work Program Bidding System, 01/3/R6 (Cth.). 33 Ibid, n 15 at supra. 35 The Suspension Period is the period commencing on the Commencement Date and expiring on 31 January The Commencement Date is the day after the day on which the Act comes into operation. See Clause 1 of the Agreement.

7 The result of this concession is that the Joint Venturers will have exclusive exploration rights in respect of the blocks the subject of each Petroleum Title which is renewed during the Suspension Period for five years from the date of renewal (which, theoretically, could be until 30 January 2025). This would appear inconsistent with the Minister s view that State Agreements should not be used to tie up vast areas of land for long periods without any development being achieved. 36 The second concession, set out in Clause 14(1)(d) of the Agreement, is that the Joint Venturers may, at any time during the first nine months of the final year of the term of a Petroleum Title that has been renewed during the Suspension Period, make an application pursuant to s 97(1)(g) of the Petroleum Act for: a variation or suspension of the minimum work conditions relating to that renewed term of the Petroleum Title; or an exemption from compliance with the minimum work commitments relating to that renewed term of the Petroleum Title, notwithstanding that, at the time of making such an application, the Joint Venturers have not complied with or are unlikely to comply with the relevant minimum work commitments. In such a case the Petroleum Act Minister is (in addition to his or her powers under s 97(1) of the Petroleum Act) empowered, if he or she (after consulting the Minister) considers it appropriate in all the circumstances to vary or suspend the commitments or exempt the Joint Venturers from the commitments with such variation, suspension or exemption having, to the extent the Petroleum Act Minister considers appropriate, retrospective operation in relation to the noncompliance or likely non-compliance. Hence, the Joint Venturers will be able to apply to renew the Petroleum Titles subject to minimum work commitments with the reasonable expectation that they will not have to comply with them. The third concession, set out in Clause 14(1)(e)(i) of the Agreement, is that in the determination of the minimum work commitments for any renewed term of a Petroleum Title the Petroleum Act Minister must have regard to the Joint Venturers obligations under Clauses 5 and 9(1) of the Agreement. Those clauses relate to exploration operations and field and office geological, geophysical, engineering and environmental investigations, appraisals and studies in respect of other Title Areas. 37 The usual expectation is that the minimum work commitments for the renewed term of a petroleum exploration permit would be assessed on a stand-alone basis, recognising that it could be transferred to a third party immediately after renewal, and would include several exploration wells. This concession allows the Joint Venturers to aggregate work programs across all of their Petroleum Titles and use that as a justification for a lesser minimum work commitment in respect of a particular Petroleum Title. The fourth and probably most significant concession, set out in Clause 14(1)(e)(ii) of the Agreement, is that, in determining compliance with the minimum commitments for the renewed term of a Petroleum Title, the Petroleum Act Minister may credit appraisal work carried out on any gas discovery in the Title Area or in an adjacent Title Area if in each case the Petroleum Act Minister considers that such crediting is consistent with and facilitates the objects of the Agreement. The policy considerations which underlie the requirements that the minimum work commitments be confined to exploration wells and other exploration operations, and that there be mandatory relinquishment on renewal of half of the blocks in respect of which a petroleum exploration permit is in force, are: A petroleum exploration permit can be granted in respect of up to 400 blocks, which is a very large area. The initial term of a permit is six years and as much exploration as is practicable is encouraged so as to enable the permittee to identify those blocks which will be relinquished at the expiration of the initial term. The minimum guaranteed work commitment is the minimum exploration work program to which the permittee is prepared to commit and fund. There is far more risk associated with exploration wells than appraisal wells, which is why the minimum number of exploration wells to which a permittee is prepared to commit and fund is the most important component in evaluating competitive applications. If an obligatory exploration well results in a discovery, there is nothing to stop the permittee from proceeding immediately to appraise that discovery. However, the appraisal work does not count towards satisfaction of the minimum work commitment. The Petroleum Act does not allow for petroleum exploration permits to be awarded on the basis of cash bids. Applications are assessed and permits awarded on the basis of the highest guaranteed minimum work commitment. 36 Above n See definition in Clause 1 of the Agreement.

8 On mandatory relinquishment of blocks on renewal, the previous permittee must make available to subsequent permittees of the relinquished blocks the exploration information accumulated by the previous permittee in relation to the relinquished blocks. 38 The fifth concession, set out in Clause 14(1)(h) of the Agreement, is that the Petroleum Act Minister is precluded from exercising his or her powers under s 99 of the Petroleum Act to cancel a Petroleum Title unless the Minister has concurred. One wonders how much more attractive the minimum work commitments would have been if the other applicants and potential applicants had known at the time of bidding that the same concessions that have been made available to the Joint Venturers by the Agreement would also be available to them. The integrity of the work program bidding system has been compromised. Rationale for Concessions The quid pro quo for the concessions granted by the State to the Joint Venturers under the Agreement is not entirely obvious. In announcing execution of the Agreement, the Minister said: This Agreement will help secure Western Australia s energy supplies for the future. It ensures gas discoveries are rapidly brought into production, and that gas is delivered to the State s domestic gas network, before any is exported. 39 Obviously, the Agreement only ensures gas discoveries will be rapidly brought into production if the Joint Venturers prove up sufficient gas reserves to underpin a technically and economically viable Domgas Project and if the Joint Venturers form the view that the establishment and sustained operation of a Domgas Project are both technically and economically viable. As for the claim that the Agreement will ensure that gas is delivered to the State s domestic gas network, before any is exported, Clause 8(3) of the Agreement provides that, in the event that liquefied natural gas is being produced, or to be produced, from natural gas obtained from the Title Areas, the Joint Venturers shall be obliged to market and make available for sale into the Western Australian domestic gas market a quantity of Domgas which at any time during the currency of the Agreement 40 is equal to the equivalent of at least the Relevant Percentage 41 of the aggregate energy value of liquefied natural gas which, at that point in time, has been produced for export from natural gas obtained from the Title Areas. Domgas sold by any one or more of the Joint Venturers into the Western Australian domestic gas market or as Petrochemical feeds stocks in accordance with Clause 28 of the Agreement shall be counted towards the Joint Venturers Domgas Commitment. 42 In its ASX Announcement dated 15 June 2010 regarding execution of the Farm-in Agreement with Mitsubishi, Buru noted: [Mitsubishi] operates a global energy business in all aspects of the oil and gas industry from exploration to LNG projects, refining, transport and distribution. In Australia, [Mitsubishi] is a major producer of oil, gas, LPG and LNG from the North West Shelf LNG Joint Venture. Under the terms of the Farm-in Buru will remain as operator of all of its permits. However, [Mitsubishi] will lead any LNG commercialisation efforts in the joint venture permits in the Canning Superbasin. This strategic partnership reflects Buru and [Mitsubishi s] respective strengths and shared belief in the significance of the Canning Superbasin as a potential major energy supplier to Western Australia and the region. Clearly, Mitsubishi s ambitions lie with an LNG Project and Clauses 8(3), 21, 22, 23 and 24 of the Agreement expressly address this option. It is clear from Clause 8(3) that, once LNG is being produced or planned to be produced from natural gas obtained from the Titles Areas, the Joint Venturers will have to satisfy the same Domgas Commitment as currently applies to LNG producers exporting LNG from natural gas recovered offshore Western Australia. While Clause 8(1) of the Agreement requires the Joint Venturers to make available for sale into the Western Australian domestic gas market at least 1500 petajoules over the 25 year term of the Agreement and Clause 8(2) requires the Joint Venturers to market Domgas on an ongoing basis from 31 March 2016, the Domgas Commitment does not apply until LNG is being produced, or to be produced, from natural gas recovered from the Title Areas. Typically, in the case of other Western Australian LNG projects, sales of 38 Petroleum Act, s Department of Premier and Cabinet Media Statement dated 7 November See Clause 46 of the Agreement. 41 The Relevant Percentage is 15% or such greater or lesser percentage as may be specified in, or applying for the purposes of, the State s policy on securing domestic gas supplies as published in August 2012 in the Strategic Energy Initiative: Energy 2031, as revised or replaced from time to time. 42 See definition in Clause 1 and Clause 8(3)(a) and (b) of the Agreement.

9 gas into the domestic market do not occur until ramp-up gas has been delivered to the LNG project and deliveries of LNG cargoes have commenced. Hence there is a question mark over the Minister s statement. As noted above, Clauses 5 and 9(1) of the Agreement require the Joint Venturers to continue to explore, evaluate and conduct studies in relation to the Titles Areas with a view to commercialisation of natural gas discovered there by means of a Domgas Project or an LNG Project. Those activities have to be undertaken in accordance with the Petroleum Act and the conditions of the Petroleum Titles, as both have been modified by the Agreement. Accordingly, it may be said that the Joint Venturers are now obliged to do less than the work to which they would have been committed had the conditions to which the Petroleum Titles are subject not been modified by the Agreement. The Recitals to the Agreement record that the State is entering into the Agreement for the purpose of (among other things) encouraging accelerated expenditure by the Joint Venturers in the continuing exploration and evaluation of natural gas resources within the Title Areas. The Agreement may realise this objective because, as noted above, Clause 35(4) only allows the Joint Venturers until 31 March 2016 to elect not to proceed with a Domgas Project under the Agreement. And by no later than 31 March 2016, Clause 8(2) of the Agreement requires the Joint Venturers to commence marketing Domgas 43 on an ongoing basis for sale into the Western Australian domestic gas market and for sale as Petrochemical feed stocks to any then existing or proposed producer of petrochemicals within the State. Conclusion It is difficult to understand why it was thought necessary to pass the Act before commercial reserves had been confirmed and the technical and economic viability of a Domgas Project had been established. This is particularly so if the Joint Venturers petroleum exploration permits in the Canning Superbasin are sufficient to be the source of natural gas for both a Domgas Project and an LNG Project, in which case they are likely to be designed, constructed and commissioned in conjunction with one another and with pipelines of sufficient capacity. This opens the door for others to seek prematurely the benefits of a State Agreement. The concessions given to the Joint Venturers in the Agreement will leave industry participants wondering as to the status of the work program bidding system going forward and whether statutory provisions, such as mandatory relinquishment of blocks on renewal (which has applied since 1967), are now negotiable. The benefits to the State over and above pre-existing arrangements are, at best, marginal, and certainly do not outweigh the detriment to industry regulation. Schedule Buru and Mitsubishi each hold a 50% interest in Exploration Permits for Petroleum Nos. EP371, EP390, EP391, EP428, EP431, EP436, EP471, EP472, EP473, EP476 and EP477. Buru and Mitsubishi each hold a 2.5% interest in Exploration Permits for Petroleum No. EP438 and a 37.5% interest in Exploration Permits for Petroleum Nos. EP457 and EP458. Mitsubishi has an option to acquire a 50% interest in Exploration Permit for Petroleum No. EP478 and Production Licence Nos. L6 and L8. Buru is the Operator of all of the Permits and Licences referred to above. 43 See definition in Clause 1 of the Agreement.