DEPARTMENT OF RESOURCES, ENERGY AND TOURISM

Resources Division

Interim

OFFSHORE PETROLEUM GUIDELINE FOR GRANT AND ADMINISTRATION OF A RETENTION LEASE

This interim guideline is issued pending a current review of retention lease policy as part of the Government’s Energy White Paper process.

Please note: as of 1 January 2012 the National Offshore Petroleum Titles Administrator (NOPTA) is the first point of contact on all titles administration matters relating to offshore petroleum and greenhouse gas storage.

Retention Lease Guidelines Updated May 2012

2

INDEX

1. OBJECTIVE..................................................................................................................................................... 3

2. SCOPE............................................................................................................................................................ 3

3. DEFINITIONS AND TERMINOLOGY..............................................................................................................3

4. KEY FEATURES.............................................................................................................................................. 4

5. ASSESSING WHETHER A DISCOVERY MEETS THE CRITERIA FOR A LEASE........................................4

6. APPLICATION FOR A RETENTION LEASE...................................................................................................6

FIGURE 1: RETENTION LEASE APPROVAL PROCESS...............................................................................8

7. ASSESSMENT OF APPLICATIONS................................................................................................................9

8. RE-EVALUATION.......................................................................................................................................... 11

9. REVOCATION OF A RETENTION LEASE....................................................................................................11

10. VARIATION OF RETENTION LEASE CONDITIONS....................................................................................12

11. RENEWAL OF A LEASE................................................................................................................................ 12

ATTACHMENT A: GUIDANCE NOTE ON RETENTION LEASES OVER PETROLEUM FIELDS...........................14

ATTACHMENT B: DETAILS WHICH SHOULD BE INCLUDED IN AN APPLICATION FOR, OR RENEWAL OF, A RETENTION LEASE................................................................................................................................................ 16

FIGURE 2: SAMPLE SPREADSHEET.....................................................................................................................18

3

1. OBJECTIVE

1.1 The objective of this Guideline is to assist the petroleum industry to understand the requirements, indicative timing and process leading to the determination (grant or refusal) of a retention lease application under the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (OPGGSA).

1.2 A Retention Lease provides security of title for petroleum resources that are not currently commercially viable but which have genuine development potential (i.e. development is likely to be commercially viable within 15 years).

1.3 The OPGGSA, including the criteria in s142(b), has an objective to ensure exploration acreage which may contain potentially commercial exploration targets is periodically opened up to competitive exploration through the normal permit partial relinquishment provisions and the work program bidding system. They also promote development of commercial discoveries. Another objective of the lease provisions is to ensure the lessee actively seeks to address those matters inhibiting the commercialisation of the discovery.

2. SCOPE

2.1 The OPGGSA should be consulted in the first instance as the binding legislative instrument encompassing the offshore petroleum retention lease regulatory framework.

2.2 This Guideline provides a company seeking a retention lease with an overview of the relevant assessment and approval processes. It also outlines the roles of the applicant and Government comprising the National Offshore Petroleum Titles Administrator (NOPTA) and the relevant Commonwealth and state/Northern Territory (NT) members of the Joint Authority and their respective departments.

2.3 This Guideline is designed to assist an applicant in applying for a Retention Lease, or renewal of a Retention Lease, consistent with the requirements of the OPGGSA. The Guideline also outlines the process for requests for re-evaluations of commerciality by the Joint Authority and the circumstances that could lead to cancellation of a lease.

3. DEFINITIONS AND TERMINOLOGY

3.1 Where possible, technical terms used in this Guideline are consistent with those defined in the OPGGSA and a reference to a particular section (e.g. s142(b)) means a reference to a specific section of the OPGGSA.

“ORB” means the General Manager, Offshore Resources Branch, Resources Division, Commonwealth Department of Resources, Energy and Tourism who advises the Commonwealth member of the Joint Authority;

“Government” as used in this Guideline means the Joint Authority, NOPTA and those officials who directly or indirectly advise those authorities.

“Joint Authority” means the relevant Commonwealth Minister with responsibility for offshore petroleum matters (or delegate under the Act) with the relevant State/NT Minister (or delegate), where applicable;

“lease” refers to a Retention Lease;

4

“lessee” refers to a holder of a Retention Lease;

NOPTA means the National Offshore Petroleum Titles Administrator, as the technical adviser to the Joint Authority and administrator of petroleum and greenhouse gas storage titles.

“Royalty Act” means the Offshore Petroleum (Royalty) Act 2006.

Technical report means an internal government working document which is prepared by NOPTA in response to a retention lease application and provided to the Joint Authority to guide and assist in the decision-making process on a retention lease application. The technical report is not provided to the proponent.

4. KEY FEATURES

4.1 Section 142 provides for the grant of a Retention Lease over a less than commercial petroleum discovery. Section 148 also provides for the grant of a Retention Lease over blocks, forming part of a Production Licence, in which recovery of petroleum has ceased, provided petroleum remains in those blocks that is less than commercial. The licensee has 5 years from the date of cessation of production to apply for a lease.

4.2 The initial term of the Lease is 5 years (s139). Leases can be renewed for further 5 year periods if the tests provided by s142 continue to be met and previous lease conditions have been met. Except in a s148 situation where a Production Licence reverts to a Lease, the lease blocks are excised from the Exploration Permit. Importantly, the work program commitments applicable to the residual permit will not be reduced after excision of lease blocks.

4.3 Lessees are expected to actively seek to enhance the commerciality of a field in a lease area. Conditions may be attached to the lease (s136) to address this and any other matters, including environmental protection measures, specific to the lease area. The Act also enable the Joint Authority to require the lessee to undertake a re-evaluation of the commercial viability of a field in a lease area, within 3 months of the lessee receiving written notice (see Section 8 below).

5. ASSESSING WHETHER A DISCOVERY MEETS THE CRITERIA FOR A LEASE

5.1 The Joint Authority must be satisfied that the application meets the statutory criteria in s142, namely that recovery of petroleum from the lease area:

a) Is not commercially viable at the time of the application, and;b) Is likely to become commercially viable within 15 years of when the application is

submitted.

5.2 For the purposes of s142:

likely should be interpreted to convey the sense of a “substantial or real chance as distinct from what is a mere possibility”;

commercially viable petroleum should be interpreted to mean that the petroleum could be developed;

a) Given existing knowledge of the field

5

b) Having regard to prevailing market conditions, andc) Using proven technology readily available within the industry

such that the commercial rates of return from recovery of the petroleum (including recovery of all operating and capital costs and taxes, royalties and other charges) meet or exceed the minimum return considered acceptable for the type of project under consideration by a reasonable petroleum developer and by investors or lenders to the industry (i.e. an acceptable rate of return). Existing knowledge of the field includes mapping and resource estimates at proved, probable and possible probability levels.

5.3 A petroleum accumulation cannot be claimed to be not commercially viable because of the inability or unwillingness of the titleholder to acquire or apply proven technology readily available within the industry or because of the applicant’s lack of skilled personnel or financial capability. Where commercial viability is dependent on combining a development with other potential third party developments or access to third party facilities or technology, the petroleum will not be considered commercially viable if the titleholder is unable to complete an agreement to jointly develop or complete an access agreement for use of facilities or technology which provides an acceptable rate of return.

5.4 In addressing market issues, including market access, prices, and timing of market opportunities, it will be accepted that a potential market exists for crude oil, condensate or LPG recoverable from a project and that the terms and conditions of supply will determine the viability of the project. However, it is recognised that the market for natural gas is often characterised by large, long term contracts, at specified rates over specified periods, and specific quality. Therefore in some circumstances, the Joint Authority may agree that an otherwise commercially viable gas project (assuming current prices) is not commercially viable and may not proceed due to an inability to obtain a contract at prevailing market terms and conditions, which would support development. Alternatively the Joint Authority may accept that the level of resources, while substantial may be insufficient to meet any currently available market opportunity (e.g. a LNG project).

5.5 In recognition that market considerations can stall an otherwise commercially viable ‘dry’ gas project, the Joint Authority will give favourable consideration to an application for a lease if the applicant has demonstrated reasonable attempts in good faith to obtain gas supply contracts which were unsuccessful. In such a case, the major test in assessing whether the criteria have been met is likely to be assessing the applicant’s efforts in obtaining a market for gas if the project can be demonstrated to be viable at prevailing prices (i.e. otherwise passes the commerciality test). However in order to enhance the marketability of a project, it might be reasonable to expect that the lessee better define the resource if this would be necessary to demonstrate supply capability to potential buyers.

5.6 The most important aspect of processing a lease application is ensuring the application is consistent with s142. The information provided by the applicant should be sufficient to demonstrate that the discovery meets the criteria described in s142 (see 5.1). The application should also identify the circumstances which would commercialise the discovery and address their likelihood of occurrence.

5.7 An application should include an analysis of the commercial viability of a prospective development including the assumptions, the methodology, and the conclusions reached by the applicant. This analysis should provide sufficient information to demonstrate that the assumptions and methodology are realistic and lead to a likely outcome (and if appropriate, a range of outcomes). The impact of alternative reasonable assumptions should also be identified and assessed. Government will analyse the extent to which

6

there are reasonable grounds for adopting alternative assumptions and methodologies. The information submitted to support those parts of the application that are critical to convincing the Joint Authority that the tests implicit in s142 can be met, will need to be more detailed.

5.8 In October 2007, a Retention Lease Guidance Note was released by the then Upstream Petroleum and Geothermal Subcommittee of the Ministerial Council on Mineral and Petroleum Resources to provide clarification and guidance on the Government’s approach to assessing commercial viability of a Retention Lease. This Guidance Note is provided at Attachment A.

6. APPLICATION FOR A RETENTION LEASE

6.1 Applications lodged under s142 or s148 for the award, or s153 for renewal, of a Retention Lease over a petroleum discovery should be submitted to NOPTA (three copies) who will forward one copy to ORB and one copy to the relevant state/NT Department assisting their member of the Joint Authority. Applicants are encouraged to lodge their application in a timely manner. Attachment B specifies the details that should be submitted for a lease or renewal application.

6.2 Government, apart from providing clear advice on information required to be submitted for a Retention Lease, recognises the need to assist applicants by advising of relevant information held by government. This can often be achieved by consulting with NOPTA prior to the lodgement of the lease application. Government will respect any information provided on a commercial-in-confidence basis. Timely consideration of all applications, and any related request for additional information, is also an important consideration for government. While each application needs to be treated on its merits, government will make best endeavours to complete the assessment within the following timetable where the applicant has provided all relevant advice:

a) Upon receipt of an application and relevant application fee, NOPTA will send the applicant an acknowledgement and application reference number.

b) NOPTA will undertake a preliminary assessment of the application and identify any issues that require additional information from the applicant. If further information is required, NOPTA will within two weeks of receipt of the application, seek this information by letter to the applicant (as per s258 of the OPGGSA).

c) NOPTA or the applicant may request a meeting to address fully the details contained in the application and any issues arising from the preliminary assessment. This would provide the applicant with an opportunity to present its case in an appropriate level of detail on both the commercial viability and the work program. If meetings are held, ORB and relevant state/NT Departments will have the opportunity to attend the meeting. The meeting would also provide government an opportunity to provide detailed feedback to the applicant on any issues that need to be assessed in greater detail and to remedy any data deficiencies at an early stage. Alternatively, it may be mutually agreed that a meeting is unnecessary if there are no outstanding matters that cannot be otherwise resolved;

d) When sufficient information has been provided by an applicant, NOPTA will prepare a technical report addressing the criteria in s142 of the OPGGSA and recommending whether the retention lease should be granted or not. The report will also outline any conditions proposed to be placed on the grant of a retention lease and the reasons for those conditions.

7

e) Where NOPTA proposes to recommend that the JA reject an application for retention lease or change an applicant’s proposed work program, the applicant must be advised and given the opportunity either to agree to the amended work program or to provide written advice to the Joint Authority on the issue. Discussions should be completed with the applicant, where relevant, on any amendments to the proposed work conditions, and any other amendments to the proposed lease conditions, within four and a half months from receipt of application, unless the applicant requires additional time to consider the proposed work conditions;

f) Once discussions with the applicant on the report’s recommendations (and associated work program) have been completed, the NOPTA assessment report can be finalised;

g) Within five months of receipt of an application containing sufficient information for assessment, NOPTA will forward its report to the Joint Authority, through ORB and the relevant state/NT Department. Where it has been necessary for NOPTA to seek additional information from an applicant, the five month period will be extended by the length of time taken by the applicant to provide the additional information.

h) Within two weeks of receiving the NOPTA technical report, ORB and the relevant state/NT Department will oversight the report and forward it together with any relevant policy advice to their respective member of the Joint Authority for decision. The JA decision will be sought within a further two weeks. If necessary, the JA, ORB or the relevant state/NT Department may seek additional information from NOPTA or industry. A request for additional information will extend the period for the JA decision.

i) If a positive decision has been made by the Joint Authority, NOPTA will offer and grant the lease. This process should occur within six months of receipt of application but may be extended if additional information or consultation is required during the process.

An outline of this process is contained in Figure 1.

An application for a Retention Lease can, at the discretion of the applicant be over some or all of the blocks in a location. The OPGGSA s142 gives the Joint Authority discretion on which of those blocks the Joint Authority is prepared to offer a lease.

8

FIGURE 1

RETENTION LEASE APPROVAL PROCESS

NB: Timelines may be extended if further information or consultation is required.

Applicant submits application to NOPTAIndicative time from

submittal of application*

NOPTA conducts preliminary assessment and seeks any necessary additional information from the applicant

Within 2 weeks

In requested, meeting of applicant, NOPTA, ORB, state/NT Department Within 6 weeks

NOPTA undertakes assessment of application and any additional information

Within 4 months

If grant is recommended If rejection is recommended or amended work program

Applicant given opportunity to comment on proposed rejection and/or work program conditions

Within 5 months

NOPTA forwards assessment report to JA through ORB and relevant state/NT Department

Within 5 and a half months

ORB and relevant state/NT Department overview of NOPTA assessment and policy advice to JA

Within 6 months

Consideration by Joint Authority

Offer of lease

Acceptance by proponent

Grant of lease

9

7. ASSESSMENT OF APPLICATIONS

7.1 In assessing an application, government needs to first ensure that the application has been made in accordance with the OPGGSA. This requires determining whether:

a) The application has been made within the relevant application period;b) The applicant is entitled to apply for a lease;c) The blocks included by the application are currently covered by a location;d) Sufficient information has been supplied to assess the application, and;e) The relevant fee has been paid in accordance with the Offshore Petroleum and

Greenhouse Gas Storage (Resource Management and Administration) Regulations 2011 schedule 6 (currently $2,090).

7.2 Each application will be treated on its merits. Attachment B describes information that should accompany an application for a Retention Lease. The level of detail provided on any particular aspect should be commensurate with the impact that aspect has on demonstrating that the tests explicit in the s142 criteria can be met. This detail can be critical where it is not immediately clear that the application meets the tests explicit in s142.

Proposed work program in the lease area

7.3 As one aim of a Retention Lease is to ensure the holders of the lease actively seek to enhance the commerciality of the relevant discovery, government will assess whether the applicant’s proposed work program (if any -see section 7.4 below) for the Retention Lease is adequate:

a) Firstly, the work program should address those primary constraints to commercial viability that have been identified by the assessment;

b) Secondly, the work program should address other important areas where suitable information on which to base decisions is lacking. Hence, for example, further environmental studies may be needed or further seismic definition, appraisal drilling or other technical activity may be appropriate to better define the resource, and;

c) Thirdly, and most importantly, the test as to adequacy should be whether the work program is consistent (in both a timing sense, the activities proposed and the level of effort) with what a reasonable company could be expected to carry out in order to commercialise the project.

7.4 In certain cases where the reason for lack of immediate commerciality is outside the power of the lessee (e.g. related to the commodity price) and if there is little scope for proving up additional potentially commercial resources within the lease area, there may be no justification for any work program commitment, or the program may not involve any activity to be undertaken other than, for example, studies to reduce costs.

7.5 If the blocks included in the application contain other prospective reservoirs, including potentially drillable prospects, then the application should also contain a strategy for assessing the area including any proposed exploration activity in the lease area. This is to ensure that those parts of the lease area beyond the identified field are adequately explored as if they were part of an Exploration Permit.

10

Additional conditions

7.6 Government needs to determine whether any additional conditions should be included in the title. For example, these conditions may ensure impacts of exploration or appraisal activity in the lease area on other users are minimised.

Environmental and other impacts

7.7 To ensure compliance with the OPGGSA and other legislation, the likely impacts arising from the award of a retention lease on other users of the sea need to be assessed. These impacts generally will be no different from those which could occur from activities undertaken during the term of an Exploration Permit (drilling wells, seismic etc) and any assessment will not seek additional environmental studies over and above those normally provided for similar operations conducted in a permit.

7.8 As with Exploration Permits, government needs to be aware whether petroleum operations are likely to impact on other users of the area so that third party concerns can be addressed in title conditions and/or so that the company can incorporate the views of such users in its future operational plans. The impacts of any prospective developments (i.e. proposals to exploit petroleum resources) would need to be addressed at the time of consideration of a Production Licence application.

7.9 Government will also assess an application to determine the environmental significance of any decision of the Joint Authority to grant a Retention Lease in view of its statutory obligations under the Environmental Protection and Biodiversity Conservation Act 1999 and the Australian Heritage Commission Act 1975.

7.10 The applicant should also identify likely impacts on other users of the sea and any consultations they have undertaken with users to minimise potential adverse impacts from those activities that may be carried out during the term of the lease. Any issues raised by other users that may affect the grant of the title, and/or the associated conditions, should be brought to the attention of the Joint Authority.

7.11 Commonwealth agencies that may need to be consulted by the lessee include the Australian Fisheries Management Authority, the Australian Maritime Safety Authority, Telstra, the Commonwealth Departments of Defence, and Sustainability, Environment, Water, Populations and Community as well as the National Native Title Tribunal and relevant Land Councils. Other State/NT agencies also may need to be consulted. Early informal advice from the applicant will assist in determining which government agencies will need to be consulted.

Refusal to grant a Retention Lease

7.12 If the Joint Authority is satisfied that the criteria specified in s142 are not met, or information requested by the Joint Authority has not been submitted within the specified time (s141), the Joint Authority shall advise the applicant in writing that it refuses to grant a retention lease in accordance with s143.

7.13 Where the Joint Authority refuses to grant a retention lease, the applicant has 12 months to apply for a Production Licence from the date the Joint Authority’s instrument of refusal was served (s169). If the Joint Authority considers that the recovery of petroleum from the lease area is unlikely to become commercially viable within 15 years, the declaration of a location over the blocks covering the potential lease area is revoked and those blocks

11

revert to the original permit (s132), in the case of a work program permit. In the case of a cash bid permit beyond its normal expiry date, the permit expires upon revocation of the blocks.

7.14 Where an application for a Production Licence by a lessee lapses (i.e. is not made) the blocks covered by the location revert to the Commonwealth (i.e. the rights of the titleholder to those blocks lapse).

8. RE-EVALUATION

8.1 During the term of a Retention Lease, the Joint Authority may have reason to believe that the conditions applying at the time of the grant of the lease have changed and that the development of petroleum resources in the lease area may have become commercially viable, or unlikely to become viable within 15 years. In such circumstances, the Joint Authority may request the lessee (s136) to undertake a re-evaluation of the commercial viability of the field and report the results of that study to the Joint Authority within a specified period. This re-evaluation may require work to be carried out additional to that required by the lease conditions. This additional work could involve work in, as well as outside the lease area, including seismic surveying, re-interpretation of existing data, simulations, cost or marketing analyses but cannot involve the drilling of a well.

8.2 The re-evaluation should be submitted in writing within 3 months, unless NOPTA has approved an additional period. The Joint Authority is entitled by the Act to require one re-evaluation per lease term. Some activities that the Joint Authority could require to be undertaken as part of a re-evaluation, such as seismic surveying, may not be able to be undertaken and evaluated within 3 months. In such cases, the Joint Authority would, after discussions with the lessee, provide sufficient time to undertake and evaluate the work before requiring submittal of the results.

8.3 On the basis of the results of the re-evaluation, the Joint Authority may form the view that the recovery of petroleum is commercially viable. In that case, the Joint Authority may revoke the lease (see 9 below) unless the lessee applies for a Production Licence.

9. REVOCATION OF A RETENTION LEASE

9.1 If the Joint Authority is of the opinion it should revoke the lease it must:

a) Notify the lessee, and any other parties that it thinks appropriate (e.g. the operator), of its intention; and;

b) Give the lessee, and other notified interested parties, at least one month within which to make a submission on the proposed revocation (s177).

9.2 If the Joint Authority after considering any submissions, then decides to revoke the lease, it must serve on the lessee a notice of revocation of the lease. This action would allow the lessee 12 months to apply for a Production Licence. Revocation will take effect:

a) Where the lessee does not apply for a Production Licence - within 12 months after the date of service of the notice of revocation; or

b) Where the lessee does apply for a Production Licence - on a day when the Joint Authority grants, or refuses to grant, the Production Licence, or when the application for the Production Licence lapses (s158).

12

9.3 Where the revocation takes effect and no Production Licence has been granted, the blocks making up the Retention Lease revert to the Commonwealth. Where a Production Licence is granted over some of the blocks in the Retention Lease, those blocks not taken up in the licence revert to the Commonwealth.

10. VARIATION OF RETENTION LEASE CONDITIONS

10.1 If a lessee considers there are valid reasons to request a change to any conditions attached to a lease, the lessee may request that the Joint Authority vary those conditions (s264).

10.2 Applications should be submitted to NOPTA in triplicate. Applicants are encouraged to lodge their application in a timely manner. The time taken to consider the application will depend primarily on the complexity of the variation proposed and the information provided by the company in support of the application.

11. RENEWAL OF A LEASE

11.1 An application for renewal of a lease must be made not less than 6 months nor more than 12 months before the day on which the lease ceases to be in force (s153). However, NOPTA may allow the lodgement of a renewal application less than 6 months before the expiry date of the lease, but not in any case after the day on which the lease ceases to be in force. A renewal application should address all those matters required for an application for an original lease and a similar process will be followed (see sections 6 and 7).

11.2 At the time of considering the renewal of a Retention Lease, the Joint Authority will determine whether the applicant has met all the conditions included in the previous retention lease term as well as other provisions of the OPGGSA, regulations and any Directions issued under the OPGGSA relevant to the lease. If all lease conditions and legislative provisions have not been met; information requested by NOPTA under s258 has not been furnished; or the criteria in s154 can no longer be met, the Joint Authority will refuse to grant the renewal (s155).

11.3 Where the criteria in s154 can be met and information requested by NOPTA has been furnished, but all lease conditions and provisions of the OPGGSA have not been met, the Joint Authority may renew the lease if it is satisfied that special circumstances exist which would justify the grant (s154).

11.4 If the Joint Authority forms the view that it would not renew a lease, it will notify the lessee and other persons it thinks appropriate, in writing, of its intention to refuse to grant the renewal of the lease. In the notice of intention, the Joint Authority will provide particulars of the reasons for its intention and specify a date by which the lessee or other notified persons may advise the Joint Authority of matters that the lessee wishes to be considered by the Joint Authority. The lessee, and other notified persons, will be given at least one month within which to make a submission on the Joint Authority's intention not to renew the lease.

11.5 Where the Joint Authority refuses to grant a renewal of a Retention Lease on the grounds that the recovery of petroleum from the lease area is commercially viable at the time of the application (s155), the applicant has 12 months to apply for a Production Licence from the date the Joint Authority’s instrument of refusal was served, via:

- s170 (where the Royalty Act does not apply - most permits), and;

13

- Schedule 4, Clause 4 (where the Royalty Act applies - areas originally part of Exploration Permits WA-1-P and WA -28-P).

11.6 Upon grant of a Production Licence over blocks that form part of a lease, the lease will expire (s158). Where an application for a Production Licence is not made, or is unsuccessful, the lease will expire and the blocks covered by the location revert to the Commonwealth. Blocks in the lease not taken up in a Production Licence will also revert to the Commonwealth.

14

ATTACHMENT A

GUIDANCE NOTE ON RETENTION LEASES OVER PETROLEUM FIELDS

Issues surrounding retention leases covering gas fields have attracted considerable attention over the years with some parties recommending action to bring forward domestic gas developments. In view of this, the Upstream Petroleum & Geothermal Subcommittee of the Ministerial Council on Mineral & Petroleum Resources has prepared this guidance note. This note does not replace the comments on commercial viability found in the Guidelines for Grant and Administration of a Retention Lease, but it provides additional comments to clarify the Government's approach.

The Petroleum (Submerged lands Act) 1967 and when it comes into force, the Offshore Petroleum Act 2006, require that the relevant Joint Authority assess the commercial viability of the field(s) in each retention lease application both for new applications or renewal applications. This assessment will include assessing all reasonable development options, not just the particular option the applicant favours. In order to facilitate this assessment for gas fields, applicants should thoroughly address the economics of a domestic gas development in addition to consideration of LNG and GTL developments.

In assessing commercial viability, the relevant Joint Authority will use a petroleum price appropriate to the life of the field and will not necessarily accept the price used by the applicant in its assessment. The Joint Authority will take note of third party claims that particular fields are commercially viable but the assumptions used by the third party will be tested in the same way that an applicant's claim is tested. Claims and assumptions used by applicants or third parties will not be accepted if found to be unreasonable.

The Joint Authority will usually base calculations on petroleum price projections by reputable Government bodies such as ABARE, IEA or US Department of Energy. Recoverable petroleum volumes will usually be based on P50 estimates although P90 might be acceptable for a small company totally reliant on bank finance. The discount rate used in calculations should reflect the expected cost of capital needed to fund the investment. The Joint Authority will usually consider projects which have an IRR of 12% or more as commercially viable.

Every retention lease will have a work program including marketing or technical studies relevant to addressing the commercial obstacles to the development of the field. Where there is considerable doubt about the commercial viability of a field because of uncertainty about its size or reservoir properties, the Joint Authority will expect the work program to also include field work such as drilling or seismic surveys or seismic reprocessing designed to reduce such uncertainties and move the field closer to production. Joint Authorities take work programs seriously and a renewal application may be rejected if the operator has not carried out the work program in the previous term.

The Joint Authority is obliged to reject any application where it is not satisfied the relevant field is not commercially viable at the time of the application. Applications will also be rejected where the Joint Authority is not satisfied that the field will be commercially viable within 15 years. Several applications have been rejected on commerciality grounds in the past 10 years.

15

Where an application is rejected on the grounds of being currently commercially viable, the applicant has 12 months to apply for a production licence.

Upstream Petroleum & Geothermal SubcommitteeMinisterial Council on Mineral & Petroleum ResourcesOctober 2007

16

ATTACHMENT B

DETAILS WHICH SHOULD BE INCLUDED IN AN APPLICATION FOR, OR RENEWAL OF, A RETENTION LEASE

1 Name of applicant

2 Description of blocks to be included in the Retention Lease

A fee for lodging the application is payable to the ’Department of Resources, Energy and Tourism’ through an Australian bank or bank cheque (the amount is set out in Offshore Petroleum and Greenhouse Gas Storage (Resource Management and Administration) Regulations 2011).

3 In the case of a renewal of a lease, a description of the work program carried out in the previous term of the lease

To justify grant of Lease

4 A brief description of the development options considered and the detailed technical and economic assumptions used in the evaluation of commercial viability. All realistic development options should be identified.

5 Evidence that development of the discovery is not currently commercially viable but is likely to become commercially viable within 15 years, including details of:

a) Estimated recoverable and in-situ resources (especially the 50% and 90% probability levels or other appropriate information) with more detail if these are critical to determining whether the criteria are met;

b) Estimated annual capital costs (including appraisal and production drilling, facilities costs etc), if the project were to proceed;

c) Estimated annual operating costs, if the project were to proceed;

d) Estimated annual production volumes, product prices and estimated annual revenues from sales of product, if the project were to proceed;

e) Estimated annual resource taxation payable (PRRT or excise/royalty);

f) Inflation rates, exchange rates, bond rates used for PRRT assessment, depreciation and company tax provisions used in the financial analyses;

g) All numbers clearly identified as either in nominal or real $;

h) Estimated pre- and post -company tax internal rate of return (IRR) for the project and justification of minimum (or hurdle) rates of return or other criteria used to assess commerciality, including whether they reflect the level of risk for such a project and the degree of confidence (‘optimism’ or ‘pessimism’) associated with the other assumptions (see figure 2 - sample flow chart);

i) Where that rate of return is sufficient for the project to proceed under prevailing market conditions, evidence that there are other factors preventing commercial development of the discovery (e.g. market issues);

j) Identification of all relevant environmental and other factors that may impact on commerciality;

17

k) The treatment of secondary taxes(including PRRT excise/ royalty and income tax) in the commercial assessments;

l) Any other matter which the applicant considers is relevant to the current commercial viability of the development of the discovery; and;

m) Ensuring that the basis of any model and assumptions used by the applicant to assess the commercial viability can be justified and, where relevant, ensuring the impacts of reasonable alternative assumptions and methodologies on the conclusions are assessed.

6 Where, for reasons of commercial propriety, it is not possible for a consortium to provide commonly agreed estimates of, for example, project revenues and rates of return, the project operator may provide its estimates, on an in-confidence basis, or separate data may be provided by individual members of a joint venture, also on an in-confidence basis.

7 An application should identify the circumstances which would make the relevant discovery commercially viable and address their likelihood of occurrence. The details should include:

a) Particulars of expected changes to the details provided above which are likely to make development of the discovery commercially viable within 15 years;

b) Such other matters or information the applicant wishes to be taken into account in the application, including research and development of relevant technology; and;

c) Evidence that such changes would be sufficient to make the project viable.

Proposed work program

8 Lessees are expected to actively seek to enhance the commerciality of a discovery in a lease. Therefore, the application should also include details of the applicant's work plans to continue to assess the commercial viability of the field, including those factors currently inhibiting the commercial development of the resource. The work plans may include, for example:

a) Project feasibility reports;

b) Reports of reviews of exploration data, and;

c) Proposals to undertake seismic surveys and drill wells.

9 Details should include estimates of expenditure in nominal dollars.

10 In general, the years in which such work program activities are proposed to be completed will not need to be specified. However, the lease conditions should specify that the work program (including for example any seismic interpretation, well analyses etc) must be completed and results analysed prior to the submission of any application for renewal of the lease.

18

FIGURE 2

SAMPLE SPREADSHEET

The Hopeful gas field (all prices and costs are in nominal Australian dollars)

Financial year ending 30 June

Gas price ($/GJ)

Production rate (PJ)

Revenue($M)

Appraisal costs ($M)

Capital expenditure ($M)

Abandonment costs ($M)

Operating expenditure ($M)

Depreciation ($M)

PRRT ($M)

Company Tax

Net Cash Flow ($M)

1994 2.8 - - - - - - - -1995 2.8 - - - - - - - -1996 2.8 - 11.1 - - - - - -11.11997 2.8 - - 68.9 - - - - -68.91998 2.8 - - 156.9 - - - - -156.91999 2.8 23 - - - 2.5 - 11.7 50.22000 2.8 23 - - - 2.6 - 12.1 56.12001 2.85 23 - - - 2.7 - 12.5 51.52002 2.9 23 - - - 2.7 - 12.5 51.52003 2.9 23 - - - 2.8 - 12.4 51.52004 2.9 23 - - - 2.9 - 12.4 51.42005 2.9 23 - - - 3.0 13.7 7.4 42.62006 2.9 - - - 12.8 - -5.1 0 -7.7Totals 36

.95161 463.5 11.1 225.8 12.8 19.2 205.1 8.6 81 110.2

Nominal IRR (after company tax and PRRT): 9.0%

AssumptionsInflation rate for all costs and revenues 3.00% paTotal recoverable reserves 161 PJ at the 50% probability levelDepreciation: 13% Prime Cost MethodCompany tax rate 36%PRRT Exploration was compounded forward at the long-term bond rate of 7.63% plus 15%

Capital expenditure was compounded forward at the long-term bond rate of 7.63% plus 5%IRR A bench mark IRR of 12% nominal after company tax and PRRT is considered by the titleholder to be an appropriate

hurdle rate of return for the Hopeful field, based on the assumptions used in this analysis

19

Note: The assumptions used in this Figure are for illustration purposes only and do not imply acceptance of an application based on them