Tri-Star continues to seek confirmation of reversion of CSG interests and other claims

October 2, 2019

On 27 September 2019, Tri-Star Australia Holding Company, and other companies within the Tri-Star group (Tri-Star) filed Further Amended Statements of Claim against Australia Pacific LNG Pty Ltd (APLNG) in two related proceedings in the Supreme Court of Queensland.

The proceedings, referred to below as the “2002 Deed Proceeding” and the “JOA/Markets Proceeding”, concern interests in coal seam gas (CSG) assets in the Bowen and Surat Basins in Queensland, and agreements relating to those interests.

Tri-Star’s claims include:

  1. A claim that CSG interests equivalent to about 21% of APLNG’s 3P reserves (2,692 PJ) and 21% of APLNG’s 2P reserves (2,503 PJ) have reverted to Tri-Star;
  2. In the alternative, requests for the Court to rule on the proper interpretation of key contractual terms relevant to calculating when Reversion will occur (if it has not already occurred);
  3. Claims relating to access to, and ownership of, infrastructure necessary to produce, process and transport gas to East Coast gas markets;
  4. Claims that APLNG has charged significant costs to the joint venture accounts which are impermissible under the relevant operating agreements;
  5. Claims for damages in relation to gas produced and sold by APLNG after Tri-Star contends reversion occurred;
  6. Claims that market sharing provisions in certain operating agreements required APLNG to offer Tri-Star participation in LNG and other gas sale agreements obtained by APLNG (i.e. contracts with third party buyers rather than affiliates of APLNG); and
  7. Claims that APLNG has underpaid royalties to Tri-Star and that royalties should have been paid by reference to the arm’s length market value paid by the third party buyers of the gas rather than by reference to affiliate sales by APLNG to its subsidiaries.

Tri-Star welcomed the progress in the proceedings.

“The proceedings are progressing and we hope they will provide clarity and certainty for both Tri-Star and for APLNG,” a Tri-Star spokesperson said.

BACKGROUND

2002 Deed Proceeding
In the 1990s, Tri-Star discovered and appraised a number of CSG fields in Queensland, including the Fairview, Durham Ranch, and Spring Gully fields.

In February 2002, Tri-Star “farmed out” its interests in these CSG fields (Assigned Interests), and its interests in the joint operating agreements(JOAs) which governed them, to APLNG (then Oil Company of Australia Ltd) to operate and develop the fields under a farmout and reversion deed (the 2002 Deed).

Under the 2002 Deed, Tri-Star and APLNG agreed that when APLNG’s revenues from the Assigned Interests exceeded the development costs, interest and royalties, a 45% share of the Assigned Interests would revert to Tri-Star (Reversion).

The calculation of when Reversion occurs is determined by a formula contained in clause 16.3 of the 2002 Deed (Reversion Trigger). A worked example of the operation of the Reversion Trigger is set out in Schedule 7 to the 2002 Deed, and in Tri-Star’s view, prevails to the extent of any inconsistency with clause 16.3.

Revenues to be included in the calculation of the Reversion Trigger comprise two elements:

  • sales proceeds from gas produced from the Assigned Interests; and
  • “all receipts, revenues, incomes, rights, entitlements and benefits” derived from or in connection with the Assigned Interests.

APLNG also agreed under the 2002 Deed to pay Tri-Star a royalty on sales proceeds from the sale of gas produced from the Assigned Interests.

Tri-Star now claims that Reversion has occurred and that APLNG has underpaid royalties.

In October 2014, Tri-Star filed, and in October 2015, Tri-Star served, the 2002 Deed Proceeding to have its claims determined.

APLNG filed its defence and counterclaim in this proceeding in April 2016, and in doing so, significantly broadened the scope of issues in dispute with Tri-Star. Those issues included APLNG seeking orders that Tri-Star has no rights to access certain infrastructure (a number of processing facilities and pipelines) required to process gas produced from the CSG fields, and to transport sales gas to markets.  The counterclaim contends that if Tri-Star is correct in its claim that Reversion has already occurred, APLNG is entitled to recover the costs APLNG incurred in exploring and developing the Assigned
Interests between the date of Reversion and the date of judgment.

Tri-Star’s reply and answer was filed in March 2018. In response to APLNG’s costs claims, Tri-Star alleges that APLNG has, since Reversion occurred, taken and sold Tri-Star’s share of gas produced and that the value of that gas (together with the value of any underpayment of the royalties) should be
offset against the amounts claimed by APLNG (if those amounts are found to be owing).  Tri-Star has now amended its claims to clarify additional disputes between the parties, including the issues brought into the proceeding in APLNG’s defence and counterclaim.

Tri-Star’s Past Reversion Claims

In September 2008, Origin Energy Limited (Origin), then the 100% owner of APLNG, announced to the Australian Stock Exchange (ASX) that it had entered into an agreement with ConocoPhillips to form a 50/50 joint venture to develop its CSG assets in a CSG-to-LNG project. The CSG assets included the Assigned Interests transferred by Tri-Star under the 2002 Deed.

The proposed joint venture was to be effected by a subsidiary of ConocoPhillips taking a 50% shareholding in APLNG, in return for payments to APLNG exceeding AUD $7.5 billion (ConocoPhillips transaction)1.

The ConocoPhillips transaction was completed in October 2008.

Tri-Star contends that at least AUD $1 billion of the payments made by ConocoPhillips to APLNG for the interests in the CSG assets were revenues derived from, or made in connection with, the Assigned Interests transferred to APLNG under the 2002 Deed. This sum substantially exceeds the development costs, interest and royalties which APLNG asserts had been incurred up to October 2008.

Accordingly, Tri-Star contends that as a consequence of the ConocoPhillips transaction, Reversion occurred by 1 November 2008.

Further interests in APLNG and its CSG assets were sold to Sinopec in 2011 and 2012:

  • in April 2011, Sinopec acquired a 15% shareholding in APLNG for USD $1.765 billion; and
  • in January 2012, Sinopec acquired a further 10% shareholding for more than USD $1.1 billion.

Tri-Star contends that a significant portion of the payments made by Sinopec to APLNG for these interests are revenue under the 2002 Deed which trigger Reversion. Accordingly, Tri-Star claims that, in the alternative to Reversion having occurred in November 2008, it ought to have occurred in 2011 or 2012 following Sinopec’s investment in APLNG.

APLNG has failed to recognise that Reversion has been triggered or to transfer 45% of the Assigned Interests back to Tri-Star.

Tri-Star commenced the 2002 Deed Proceeding to clarify these claims and to seek orders to effect the Reversion of the 45% interests to Tri-Star.

1 For more detail in relation to the ConocoPhillips transaction, see the Independent Expert’s Report of Grant Samuel, which Origin released to the ASX on 15 September 2008, pages 1 to 12. https://www.asx.com.au/asxpdf/20080915/pdf/31c9dthjmlj00q.pdf). 

Alternative Reversion Claim – Interpretation of terms relevant to Reversion Trigger

Tri-Star has also asked the Court to rule on the proper interpretation of terms in the 2002 Deed relating to sales proceeds, revenue, development costs and interest. The interpretation of these terms is relevant to calculating when Reversion will occur (if it has not already occurred).

Tri-Star seeks to clarify the amount that should be included in sales proceeds and revenues for the purposes of calculating the Reversion Trigger.

Tri-Star’s position is that the (higher) amounts paid by third party LNG and domestic buyers for gas produced from the Assigned Interests should be included in sales proceeds and revenues when calculating the Reversion Trigger. APLNG contends that lesser amounts, calculated by reference to affiliate sales by APLNG to its subsidiaries, should be included in the reversion calculations.

Tri-Star also contends that APLNG has included costs in its Reversion calculations, which are not permitted under the 2002 Deed. Those costsrelate to labour (estimated to be in excess of $1.65 billion for labour performed at APLNG’s Brisbane head office and other off-field locations) and overheads in
excess of the mandated per well overhead charges allowed under the JOAs (estimated to be in excess of $925 million).

Finally, Tri-Star seeks to clarify how interest should be calculated for the Reversion Trigger. Tri-Star’s position is that for the purposes of Reversion Trigger, interest should be calculated by reference to the net development and other costs, after deducting revenues. APLNG asserts that interest should
be applied to gross development costs, without accounting for any revenues.

Relinquished Block and Forfeited Interests Claims

Tri-Star has also made claims in relation to certain relinquished and forfeited interests, which were subsequently reacquired by APLNG, and whether they form part of the Assigned Interests which revert (as to 45%) to Tri-Star.

Impact of Reversion occurring 2
If the Reversion claim succeeds, Tri-Star will hold substantial CSG reserves. APLNG estimates that the Assigned Interests represent approximately 21% of APLNG’s 3P CSG reserves and approximately 21% of APLNG’s 2P CSG reserves.3

As part of the 2002 Deed proceedings, Tri-Star has also sought clarification as to its rights under the 2002 Deed in relation to infrastructure constructed by APLNG for the CSG fields, following Reversion.  In particular, Tri-Star is seeking clarification of its rights to access infrastructure which will allow TriStar to sell some/all of its gas from the Assigned Interests to markets other than APLNG.

In addition, if Tri-Star succeeds in its past Reversion claims, it is also seeking damages against APLNG for what Tri-Star contends is the wrongful taking of Tri-Star’s share of gas following the alleged Reversion dates. The value attributed to this gas is approximately $3.36 billion less the proper costs
of producing, processing and transporting the gas as permitted under the operating agreements.

2 The following matters represent Tri-Star’s views as to the impacts of reversion. Readers should make their own enquiries. Origin, a shareholder of APLNG, has made its own disclosures as to the potential impacts of reversion. See for example Origin’s half yearly report to 31 December 2018, Appendix 3 at pages 81-82 and Origin’s annual report dated 30 June 2019 at pages 49-50.

3 Origin’s annual report dated 30 June 2019 at page 49.

Royalty claims

Tri-Star has also asked the Court to rule on the proper interpretation of terms in the 2002 Deed relating to the calculation of the royalty payable by APLNG to Tri-Star.

Tri-Star contends that it is entitled to be paid the royalty calculated by reference to the arm’s length market value paid by the third party buyers for gas produced from the Assigned Interests. However, APLNG is calculating and paying the royalty on lower gas prices calculated by reference to the affiliate
sales between it and its subsidiaries. Under the 2002 Deed, the royalty payable is 3% of sales proceeds from the Assigned Interests and is payable in relation to the Fairview, Spring Gully, Durham Ranch, Walloon and Condabri fields.

JOA/Markets Proceeding

In April 2017, Tri-Star commenced a separate proceeding to clarify APLNG’s obligations to offer markets under various JOAs which govern the operation of the CSG fields. In particular, Tri-Star:

  • contends that the market sharing provisions of the JOAs required APLNG to offer it participation in various LNG and domestic gas contracts which it obtained in relation to gas sourced (in part) from the Assigned Interests. APLNG contends that market sharing obligations under the JOAs are limited to affiliate sales between APLNG and its subsidiaries;
  • seeks to clarify its rights under the JOAs of ownership and access in relation to infrastructure necessary to process and transport its share of gas to markets, including markets which TriStar contends are required to be offered to Tri-Star under the market sharing provisions; and
  • alleges that APLNG has significantly overcharged expenditure on the Joint Accounts by including labour costs and overhead costs that are  impermissible under the JOAs. The reduction of these costs would impact the Reversion Trigger such that Reversion would occur
    sooner (if it has not already occurred).

Tri-Star has also joined certain other parties (Santos owned entities and AGL) to the JOA Proceeding, because they are parties to the JOAs which the Court is being asked to rule upon. However, no claims are made by Tri-Star against those other parties.

Next steps in both proceedings

It is currently expected that APLNG will file its defence in late 2019. The other defendants will likely file their defences at the same time.

Tri-Star will then file its responsive pleadings. Tri-Star’s best current estimate is that the pleadings will be finalised by mid-2020.

Once the pleadings have closed, the parties are expected to undertake discovery of documents and exchange of evidence.

ENDS