Welcome to the March 2014 edition of the Australian Energy Sector Update, a monthly publication prepared by Corrs Chambers Westgarth for clients and contacts who are interested in the Australian energy industry.
This publication brings together a brief summary of information on recently completed deals, market rumours and potential opportunities, and relevant regulatory updates.
On 30 January 2014, South Korean energy company S-Oil announced that it had been selected as preferred bidder with exclusive negotiation rights for a stake in Australian company United Petroleum. S-Oil has reportedly offered a sale multiple around ten times United Petroleum's earnings.
Queensland Government owned generator Stanwell Corporation Limited has announced plans to withdraw gas-fired 385 MW Swanbank E Power Station from service for up to three years from 1 October 2014. Stanwell also plans to return two coal-fired units at Tarong Power Station to service, with Unit 4 to be returned to service later in 2014 and Unit 2 in mid- 2015. CEO Richard Van Breda said that Stanwell would earn more revenue by selling gas into the market rather than using it to generate electricity. The exact timing of the Tarong units' return to service will depend on market conditions and Stanwell's portfolio requirements. On 17 February 2014 the Federal Court in Brisbane rejected an application by the Electrical Trades Union for an interlocutory injunction that would have delayed the return to service of Units 4 and 2. The Australian reported on 7 February 2014 that industry groups have indicated other businesses could follow suit and that at least two manufacturers are also considering switching from direct gas supplies to coalfired electricity.
ASX-listed Aurora Oil & Gas announced on 7 February 2014 that it has entered into a Scheme Implementation Deed with TSX and NYSE-listed Baytex under which, if implemented, Baytex will acquire 100% of Aurora through a wholly-owned subsidiary. The Scheme price is A$4.10 cash per share, being a 52% premium to the volume weighted average price (VWAP) of Aurora shares of A$2.69 for one week up to and including 6 February 2014. Aurora's directors unanimously recommended that its shareholders vote in favour of the Scheme, in the absence of a superior proposal and subject to an Independent Expert's report concluding that the Scheme is in the best interests of shareholders. The Scheme is subject to the customary conditions including, for example, shareholder approval, court approval, approval from FIRB and approval under US Hart-Scott-Rodino legislation. Although Mergermarket initially reported that rival bidders for Aurora could not be ruled out, naming NYSE-listed Marathon Oil as a potential candidate, it later reported on 14 February 2014 that initial expectations of a counteroffer may be cooling.
Recently completed deals
Further to our reporting in the January/February 2014 edition of the Australian Energy Sector Update, AGL Energy announced on 12 February 2014 that it had executed an agreement with the New South Wales government for the acquisition of Macquarie Generation's assets for over A$1.5 billion. AGL's acquisition is conditional on approval by the Australian Competition & Consumer Commission (ACCC). Prior to the agreement being executed the ACCC had released a statement of issues detailing its concerns regarding the proposed acquisition. On 17 February 2014, AGL offered the ACCC a proposed undertaking which seeks to address some of the ACCC's competition concerns. The ACCC released the proposed undertaking on 19 February 2014 for market consultation.
On 4 March 2014, the ACCC announced that it opposed the acquisition by AGL and that AGL's proposed undertaking was not capable of addressing the ACCC's competition concerns. The Australian reported that AGL was highly likely to take the ACCC's decision to the Australian Competition Tribunal.
The key assets of Macquarie Generation are the Bayswater and Liddell power stations, which together account for 27% of New South Wales' electricity capacity. If successful, AGL's registered generation capacity would increase by approximately 79% and bring the company's share of generating capacity in the National Electricity Market to approximately 21%. AGL intends to fund the transaction by a combination of a renounceable rights issue to existing shareholders raising A$1.2 billion and A$350 million of bank debt. Subject to ACCC approval, financial close is expected to be in mid-April 2014.
Rival bidder for Macquarie Generation's assets, ASXlisted ERM Power, is reportedly not deterred by its failure and will continue to look at possible power plant acquisitions. ERM's Chief Executive Officer, Philip St Baker, reportedly confirmed that the company is likely to consider the Delta Coastal power plants, the next assets to be sold as part of the New South Wales government's privatisation plan (related story in Market Rumours and Opportunities below).
ASX-listed Woodside Petroleum announced on 7 February 2014 that it has entered into a non-binding Memorandum of Understanding (MoU) with the Leviathan Joint Venture participants for the potential acquisition of an interest in the Leviathan gas field off the coast of Israel. The Leviathan Joint Venture participants are Noble Energy Mediterranean Ltd, Delek Drilling LP, Avner Oil Exploration LP and Ratio Oil Exploration (1992) LP. The MoU provides a framework for the parties to negotiate the acquisition of a 25% participating interest in each of the 349/Rachel and 350/Amit petroleum licences, within which the Leviathan field is contained. Woodside has indicated, based on information from the operator, that the field has an estimated '2C' contingent resource of 18.9 trillion cubic feet of natural gas and 34.1 million barrels of condensate. The MoU follows an initial in-principle agreement reached in December 2012 and the parties will negotiate towards a fully termed agreement by 27 March 2014. The MoU contemplates payments by Woodside of approximately US$2.5 billion and ongoing oil royalty payments.
NASDAQ-listed Magellan Petroleum announced on 19 February 2014 that it has entered into an agreement to sell the Palm Valley and Dingo gas fields in the Northern Territory, through the sale of Magellan Petroleum (N.T.) Pty Ltd, to ASX-listed exploration and production company Central Petroleum. Central will pay a total of US$31.6 million (A$35 million), comprising US$18 million (A$20 million) in cash and US$13.5 million (A$15 million) in Central stock upon completion. Magellan will also receive bonuses in the event that future gas sales revenues from Palm Valley exceed certain levels, and will be entitled to appoint one director to serve on Central's Board. Completion is expected to occur no later than 31 March 2014, subject to certain customary completion conditions. Central currently has significant holdings in the Amadeus Basin immediately surrounding the Palm Valley and Dingo fields.
Market rumours and opportunities
In other Woodside news, The Australian Financial Review reported that the company may be interested in acquiring a stake in InterOil's Elk and Antelope gas fields in Papua New Guinea. Woodside executives are reportedly thought to have held informal talks with InterOil's management centred on the purchase of a stake in Elk and Antelope. The report noted that InterOil has already entered into an agreement with Total SA to sell a majority stake in Elk and Antelope but the deal is not yet unconditional and Total is thought to be interested in a partial sale before terms become binding.
Further to our reporting in the January/February 2014 edition of the Australian Energy Sector Update, the New South Wales government has reportedly received expressions of interest for its 668 MW gas-fired Colongra power station. The sale carries approximately A$850 million of debt and includes the coal-fired Vales Point power station. Vales Point has a baseload capacity of 1,320 MW (or 8.3% of the State's generating capacity) and reportedly has long-term coal contracts in place.
According to The Australian, power company Alinta Group, which is owned by private equity group TPG Capital, could be floated within six months. Alinta owns approximately 2,500 MW of power generation in South Australia, Victoria, Queensland and Western Australia, and also owns Glenbrook Power Station located south of Auckland in New Zealand. A report in October 2013 indicated that, for the year ending 30 June 2013, Alinta's revenue increased to A$1.9 billion and Alinta achieved a net profit of A$67.3 million.
Privately held waste-to-energy project developer New Energy Corporation is reportedly in discussions to raise A$180 million to finance a project in the Pilbara region of Western Australia. The project is fully approved and reportedly has a capacity of around 18 MW. New Energy aims to start production of electricity in 2015. General Manager Jason Pugh reportedly said that New Energy is in talks with Australia-based infrastructure funds and debt providers, but that the company would like to engage players already investing in European and North American waste-to-energy projects. New Energy is reportedly also looking to raise A$150 million for a similar project in the Perth metropolitan area but that project is pending environmental approval.
Further to the January/February 2014 edition of the Australian Energy Sector Update, The Australian Financial Review reported that US-based Chevron is unlikely to sell its Australian downstream assets or its stake in Caltex. Chevron's Chairman and CEO, John Watson, reportedly indicated that the company is pleased with its current downstream portfolio and its work in building a US business and an Asian business, but did not mention the company's A$2.6 billion stake in Caltex during his presentation of the company's fourthquarter results.
The Australian Financial Review reported that Santos' CEO David Knox said that Santos has become an increasingly appealing takeover target now that the majority of capital spending on the US$18.5 billion Gladstone LNG (GLNG) project has been completed. Santos owns 30% of the GLNG project with joint venturers Petronas, Total and Kogas. The project is reportedly 72% complete and on schedule for first shipments in 2015.
On 19 February 2014, APA Group announced that it will commence a A$2 million feasibility study to advance its proposal of a gas pipeline link between its Northern Territory and east coast assets. According to APA, it has since received indicative interest from government, producers and customers. According to The Australian, APA is studying two potential options: one is an 800km pipeline from Tennant Creek to Mt Isa costing approximately A$900 million, while the other is a 1,000km pipeline from Alice Springs to the Santos-operated Moomba gas plant in South Australia which would cost about A$1.3 billion. APA has said that it will be in a position to negotiate commercial terms with shippers to reach a Financial Investment Decision some time in the next two years.
ENVIRONMENTAL OFFSETS BILL 2014 (QLD)
Queensland Minister for Environment and Heritage Protection, Andrew Powell, introduced the Environment Offsets Bill 2014 in Parliament on 13 February 2014. The main purpose of the Bill is to introduce a new streamlined environmental offsets framework, including replacing five separate existing offset policies. The new framework provides a process for imposing and enforcing environmental offsets and managing legally secured offset areas. Various reforms are proposed including, for example, to allow a proponent to pay a financial settlement offset (a calculated sum of money) into an Offsets Account post-approval, removing the proponent's obligation to deliver, manage and monitor an environmental offset over time and allowing funds to be strategically invested in the provision of on-ground offsets.
The Bill was referred to Committee on 13 February 2014 and is available here.
REVIEW OF RENEWABLE ENERGY TARGET
Federal Minister for Industry Ian Macfarlane and Minister for the Environment Greg Hunt announced on 17 February 2014 the release of Terms of Reference for a review into the Renewable Energy Target (RET) scheme. A copy of the Terms of Reference is available here.
The RET scheme was introduced in 2001 to harness Australia's renewable energy resources and is founded on a commitment that at least 20% of Australia's electricity supply will come from renewable resources by 2020. The review will be undertaken by a panel headed by former Reserve Bank board member Dick Warburton, and will include Matthew Zema, Dr Brian Fisher and Shirley In't Veld. The panel is to report to the Government by mid- 2014 and that report will be input into the Government's Energy White Paper process.
Minister for Industry Ian Macfarlane indicated that the review included considering the RET Scheme's contribution to reducing emissions, impact on electricity prices and energy markets and costs and benefits for the renewable energy sector, the manufacturing sector and households. He also said the review will be open and transparent, and will consult with a broad range of stakeholders. Minister for the Environment Greg Hunt said the review will advise the Government on the progress of the RET, the importance of investment certainty and any measures which can help ease pressure on electricity prices.
On 18 February 2014, The Australian Financial Review reported that the Prime Minister played down potential changes from the review and pledged to avoid sovereign risk for major companies that have invested in Australian renewable energy projects.
AUSTRALIA-KOREA FTA CLOSE TO BEING SIGNED
On 17 February 2014, the Federal Minister for Trade and Investment Andrew Robb publicly released the full text of the free trade agreement between Australia and South Korea (KAFTA). The Minister said that 84% of Australian exports to Korea will enter duty free on KAFTA's entry-into-force, and 99.8% of Australian exports will be tariff free after full implementation. The Minister indicated that the KAFTA delivers strong outcomes for Australian farmers and also for the resources, energy and manufacturing sectors and will facilitate more direct investment from Korea. He also flagged that the KAFTA will open doors across a range of other industry sectors. Mergermarket has reported that a free trade agreement with South Korea could stoke M&A activity between Australia and South Korea citing, as examples, LG International's reported interest in ASX-listed iron ore miner Grange Resources' A$1.7 billion Southdown project and ASX-listed Peak Resources' reported targeting of interest from South Korean end users such as Samsung C&T and Hyundai for its US$373 million Ngualla rare earths mine.
The Australian and Korean governments are expected to sign the KAFTA shortly, which will enter into force when both parties complete their respective domestic legal and parliamentary processes. The full text of the KAFTA is available here.
AEMC CALLS FOR SUBMISSIONS ON RETAIL RULE CHANGE
The Australian Energy Market Commission (AEMC) has called for submissions on a rule change request to amend the National Energy Retail Rules to stop retailers including terms in their contracts that allow them to change prices during fixed period energy market retail contracts for small customers. The rule request was made by the Consumer Utilities Advocacy Centre and the Consumer Action Law Centre. The AEMC has released a consultation paper identifying key issues for discussion with stakeholders and submissions are due on 27 March 2014. Further consultation with stakeholders will take place before the draft rule determination is published in August 2014. The final determination is due late in the year.
The AEMC consultation paper, information sheet and rule change request are available here.
CSG INDUSTRY WORKING TO MANAGE IMPACTS ON GROUNDWATER RESOURCES
On 13 February 2014, Andrew Cripps, Queensland Minister for Natural Resources and Mines, released the 2013 Annual Report for the Surat Underground Water Impact Report (UWIR) prepared by the Office of Groundwater Impact Assessment (OGIA). The report made various findings including that:
- CSG development in the Surat Basin is not commencing as early as planned;
- as a result short-term impacts will be smaller than previously predicted; and
- it is too early in the development of the industry to detect any clear water pressure impacts in aquifers adjacent to coal formations resulting from CSG development.
The 2013 Annual Report for the Surat UWIR is available here.
NEW SOUTH WALES CSG REFORMS
On 7 February 2014 The Australian Financial Review reported that AGL Energy has stepped up its warnings of dire economic and social consequences if the State Government continues to stall the development of CSG in New South Wales. The report noted that:
- with the start of Queensland LNG projects later this year, gas demand will triple by 2016 which, combined with the stalling of gas developments in New South Wales, is causing wholesale gas prices to soar; and
- the Energy Policy Institute, in its submission to the Commonwealth Government's Energy White Paper, warned that insufficient gas is being brought to market rapidly enough to avoid price hikes and shortages, and called for a task force to eliminate the blockages.
AGL reportedly suggested, in a submission on the Commonwealth Government's Eastern Australian Domestic Gas Market Study, that consideration should be given to imposing a "national net-benefits test" on new LNG export projects to consider the impact on the domestic market of further gas exports. The Australian Petroleum Production & Exploration Association reportedly opposes such a test, saying that it would add further regulatory burden without increasing gas supply.
On 18 February 2014, The Australian Financial Review also reported that increases in wholesale gas prices have driven AGL and Origin Energy to push for price hikes of up to 20% in household gas bills in New South Wales. New South Wales Energy & Resources Minister Anthony Roberts reportedly said that the government would examine the price plans and their justification, and would take part in the regulator's consultation process.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
|Most awarded firm and Australian deal of
Australasian Legal Business Awards
|Employer of Choice for
Equal Opportunity for Women
in the Workplace (EOWA)