CARBON CAPTURE AND STORAGE FLAGSHIP SOUTH WEST HUB PROJECT REVIEW REPORT

10 November 2015 Introduction In 2010 a consortium consisting of the Western Australian Department of Mines and Petroleum (DMP) and companies in the South West of W.A. with a potential interest in carbon capture and storage (CCS) submitted a business case to the Commonwealth Government and sought funding under the CCS Flagships Programme for investigating the potential for geological sequestration of carbon dioxide in the Lower Lesueur Sandstone formation, near Harvey in south west W.A.

In June 2011, the Commonwealth awarded funding for the South-West Hub Project (the SWH Project or Project), to be used for geological data acquisition, preliminary studies (including risk assessment and social impact assessment), project engineering and management. An initial tranche of $52 million was made available and it was then intended that further funding could be made available if and as the Project progressed.

The project to date is best characterised as ‘pre-competitive, exploration’ for carbon storage. Of the $52M available under the Programme, $30M has been allocated and paid to DMP under a funding agreement between the Commonwealth and DMP. Another $22M was allocated under a funding agreement between the South West Hub Joint Venture Pty Ltd (SWH JV).

An independent review (the Review) has been commissioned by the Commonwealth Department of Industry & Science (DoIS) to consider whether the project activities under existing funding are consistent with CCS Flagship Programme aims and to determine the most effective, value for money activities to be carried out within the remaining funding envelope.

Professor Andrew Garnett, Director of the Centre for Coal Seam Gas and Director of CCS in the Energy Initiative at the University of Queensland and Dr Jim Limerick from Ramelton Consulting were appointed to jointly undertake the Review. It is important to note that this Review, and the subsequent report produced, is project specific and its analysis and findings do not represent the performance of other CCS projects.

Scope of the Review In providing the commissioned advice to DoIS the Reviewers were required to: • Assess proposed project outcomes against remaining funding allocation, including whether the proposed project outcomes provide positive benefits to the aims of the CCS Flagship Programme in the context of changes to the broader policy framework; • Assess whether project has sufficient stakeholder support; • Undertake a high level examination of the project governance and organisational arrangements; • Assess completed deliverables and review remaining deliverables as set out in project plans for both JV and DMP; • Assess the quality of the technical work done to date; • Provide advice on which project activities are essential, highly desirable or discretionary under current funding in line with CCS Flagship Programme aims; and

1 • Advise if there are any alternative approaches to the current project plans and project governance that could be considered. Review Process The Review was conducted in May - June 2015. Interviews with key stakeholders were held in Perth and Bunbury, including a half-day of presentations, one by the DMP Project Manager and a second one by the SWH JV Manager. This was followed by interviews individually with each Manager and their technical advisors. Ramelton Consulting attended half a day of a three-day Risk Analysis Workshop facilitated by URS for the JV (not by the DMP-JV jointly). The JV provided a copy of the draft URS Risk Report to the Review. Based on the information thus gathered, a Situation Report was prepared setting out the factual state of play as at May 2015. This was provided to each Manager for comment so as to get an agreed basis of facts for the Review to proceed from. Following an analysis of the Project’s situation, the Review prepared a number of draft options that could be considered by the DoIS as a way forward. These options were provided to DMP and the JV by the DoIS for comment before they were formally presented to DoIS Executive Management on 25 June 2015. The aims of the Flagships Programme are presently described on the DoIS website in the following terms: "The Carbon Capture and Storage Flagships (CCS Flagships) Programme was established in May 2009 and supports the construction and demonstration of large-scale integrated CCS projects in Australia". "The Programme promotes the wider dissemination of CCS technologies by supporting a small number of demonstration projects that capture CO2 emissions from industrial processes, provide transport infrastructure (generally pipelines) and safely store CO2 underground in stable geological formations. Key priorities of the CCS Flagship projects include:  Multi-user infrastructure – development of storage sites in high-emission regions, with pipeline infrastructure to support the transport of CO2 from regional emission sources.  Integrated capture and storage – projects that demonstrate technologies and geologies for capture and storage of CO2." [underlining is Reviewer’s emphasis] The South West Hub Project is described as being “based around an integrated multi-user capture, transport and storage infrastructure project….The project has progressed under a staged and gated approach, with an initial focus on proving up suitable geological storage”. Independent Assessment Panel comment on SW Hub application: The Independent Assessment Panel (IAP) reviewing the Flagship applications described the South West Hub proposal as “essentially a pre-exploration1 proposal for a storage resource that would have major development potential if proven. It is a high-risk, high-reward proposal…” Note that both DMP & SWH JV subsequently informed the Review that they had not been provided with a copy of the IAP assessment.

Changes to the Project circumstances since funding awarded in 2011 When applying for Flagship funding, applicants had to: • Have a commitment for significant financial support from industry. • Demonstrate mechanisms for safe and secure transport and storage of all the CO2 captured. • Reach Final Investment Decision to allow projects to be operational by 2015 (although the IAP suggested 2020 was more realistic). • Have commercial relationship or title over storage area and transport infrastructure.

1 ‘pre-exploration’ is a short form of ‘pre-competitive exploration’.

2 Circumstances have changed materially in several respects since the SWH Project was awarded funding under the Flagships Programme. These changes are noted below. Federal Government policy settings have changed: Carbon Tax legislation has been repealed and there is no emissions trading scheme in prospect. There has been no carbon pricing mechanism since 1 July 2014. Furthermore, CCS currently has no developed method to qualify it for consideration under the Direct Action for the Emissions Reduction Fund (ERF) under the replacement Federal Government climate change policy regime. The Business Case in the SW Hub Flagship application was premised on an assumption that “carbon is adequately priced”, so the commercial incentive for local industry to undertake CCS no longer exists. No industrial source of carbon dioxide is in prospect in the next decade or more: The Perdaman coal-to-urea project, originally proposed as the main industrial source of CO2, has been unable to secure a supply of coal and consequently is unlikely to be built; no other high- CO2 source is in prospect in the area before 2025 and consequently there is no case to build a CO2 pipeline from Collie as originally planned. Alcoa was originally proposing to build a pipeline to carry 350,000 tonnes per year of CO2 from an industrial source (CSBP) in Kwinana to chemically stabilise its residue ponds at Kwinana, Pinjarra and Wagerup in the South West, with some 100,000 tonnes being made available for what was defined as a “test” injection into the Lesueur Sandstone; Alcoa has since adopted alternative residue stabilisation technology and this pipeline will not proceed. The CO2 for any limited test injection (up to 100,000 tonnes once-off) is now proposed to be tanker-trucked from Kwinana, although the practicality of moving over 2,000 truck-loads to site was not presented to the Review (and may not have been investigated in detail, nor the need for significant industrial infrastructure[buffer storage, pressurised columns etc.] at the site). The relevance of the Joint Venture has changed materially: The three potential customers for use of the reservoir that were foundation members of the SWH JV no longer have a demand for CO2 sequestration (and in one case - Griffin Energy has entered administration). Only the Electricity Generation and Retail Corporation (trading as Synergy) has an ongoing commitment to contribute $200,000 per year. For further details, see the Situation Report. State legislation has not come into force: The passage of State legislation to allow injection of Greenhouse gasses (GHG) has passed the Lower House of State Parliament but its passage in the Upper House is pending. Consequently, regulations have not yet been drafted so no criteria are available to guide either the release/gazettal of exploration acreage or the subsequent conversion into a GHG injection licence. Importantly, there is no certainty as to what entity might undertake a CO2 injection “test” (i.e. some relatively small volume injection). DMP has declared in interviews for the Review and in public forums it will not inject any CO2 (as DMP will have transitioned from being “sponsor” to “Regulator”). Furthermore, based on NOPTA pre-qualification criteria applicable in the offshore and oil and gas space, DMP as “Regulator” may find the SWH JV is not an entity with appropriate capabilities to be awarded an exploration permit, so hand-over of the Project may not occur as originally indicated in the proposal document. While the Amendment Bill allows an exploration permit holder “to inject, on an appraisal basis, a greenhouse gas substance into a part of a geological formation”, until the legislation and regulations come into force neither GHG exploration permits nor subsequent injection licences can be issued.

Proposed Project Outcomes Original Scope of South West Hub Project: The original application for Flagship funding proposed the following staged approach:

3 1. Preparation Phase: DMP to assess storage capability of an unconventional reservoir with no seal rocks (Lesueur Formation), via seismic survey and 4 stratigraphic wells; oversight new geosequestration amendments to petroleum legislation in WA. 2. Support for National Geosequestration Laboratory (via Education Investment Fund EIF funding) 3. Enabling Phase: DMP to hand over project leadership to SWH JV (when legislation passed) for test injection of 100Kt of CO2 sourced via a pipeline from Kwinana 4. Base Case (not funded as part of the initial Project): commercial scale storage of 2.5Mtpa CO2 from Perdaman coal-to-urea plant (then) soon-to-be-built at Collie Project scope as at June 2015: The first two points are works in progress (EIF funding has been spent, seismic data acquired and 4 wells have been drilled) while the latter two have effectively been abandoned, although DMP and SWH JV alike remain keen to see a small CO2 “test” injection. (but the Review is unconvinced of the necessity for this, including, but not only, why it should be considered at this time). The Project’s objectives have transitioned from a demonstration scale commercial CCS project, to what the IAP in its assessment described as “essentially a pre-exploration proposal for a storage resource” by demonstrating (in some unarticulated way) that residual trapping is (or is not) an ‘effective’ mechanism for trapping CO2 in the Lesueur Formation which has no conventional seal rocks. Project funding commitments to date: The following funding has been committed to the Project: • DMP (pre-Flagships Programme): $11.7M • CCS Flagships: $52M ($30M allocated for DMP, $22M for JV) • EIF for National Geosequestration Laboratory $48.4M (for capital) • Australian National Low Emissions Coal Research and Development (ANLEC R&D): $2M • SWH JV (Synergy2 and Alcoa only): $400k/yr since 2013 Stakeholder Support The Review undertook interviews with DMP and all the JV partners (the new owners of the former Griffin Energy assets, Bluewaters Power, were interviewed also), as well as other community and government stakeholders as listed in Attachment 2. It is our judgement that the Project continues to have very strong support from the State Government (both through DMP and its energy enterprise, Synergy) and has a good level of community support (with little evidence of community opposition). To some degree this may be due to the fact that DMP has not needed to undertake key activities which may be required by an industrial proponent (injection and statutory land access for 3D seismic or drilling or large scale construction) and caution should be exercised in extrapolating this apparent community support to a commercial operation. Support from industry stakeholders is judged to be mediocre because there is clearly no business case now for geosequestration. Flagships criteria required ‘significant’ investment on behalf of industry proponents – this has not yet eventuated. Perhaps, though, the best test of support was the question put to each JV member: “would your company be prepared to take uncapped operator liability as required by an exploration permit”, and “would your company be prepared to underwrite liability for loss of containment in the reservoir in the event of a trial CO2 injection?” with none prepared to offer this at this stage. In a case where Operatorship (as under oil and gas regulation) will be ultimately required, it would be wise for the Commonwealth to get an undertaking at least in principal from a company that which was willing and able to accept the liability regime which accompanies it.

2 Synergy is a WA government trading enterprise established under the Electricity Corporations Act 2005 (WA) (Act).

4 Project Governance Arising out of the Project being managed under two separate Funding Agreements, it has from the outset proceeded as two sequential projects, not as one integrated project collaboratively led by two proponents each with input into key early investment (data acquisition) decisions. The Preparation Phase has proceeded under (virtually) sole DMP control and SWH JV involvement in planning of investigations has been minimal. Indeed, as the Project has progressed, the extent of collaboration and information exchange between these two parties has diminished to the point where, in the Review’s opinion, a serious lack of communication between the DMP and SWH JV management teams is now impacting negatively on the Project. The Steering Committee is ineffectual and is constrained by its Deed from making decisions in regard to the Project. Fundamental material changes have occurred compared with what is in the Funding Agreements and in the Project Plans without clear evidence of change management controls over the decisions and the risk implications of those changes for the future of the Project and more importantly, perhaps, without a significant reframing by the Commonwealth of the core objectives of the project in the Flagships context.

Performance of the Parties DMP The activity based milestones, as set out in Commonwealth – DMP Funding Agreement, have been met and $30M Flagship funding has been paid out by the Commonwealth in full: • Stakeholder and community engagement is widely acknowledged as well done (little negative community reaction to date) • DMP-NGL Agreement has been executed: DMP are obliged to provide a well-site facility • 2D seismic surveys completed • The Harvey-1 well has been drilled and completed – though it did not plan for and acquire critical data required to fully inform the reservoir and trapping concept. (The opportunity to dynamically test the well, or to suspend and test at a later date was not planned for or taken). • A $10 million, 3D seismic survey has been completed (data analysis still in progress) – the need for this survey prior to acquisition of other critical data was challenged by some interviewees during the Review, though DMP reportedly do not recall any objection at the time. • Three shallow (1350-1800m) stratigraphic wells have been drilled (operations of data analysis still in progress at the time of the Review) – again the need for this as well as the location of the wells is contentious in the context of other project uncertainties. • Planning is underway for a 5th and final well in this phase (i.e. Harvey-5, proposed depth between 2500-3150m) but (untested) cost estimates ranging from $8.7M to $13.7M exceed remaining DMP funds. Objectives and thus scope and costs are still not tied to clear decision criteria, nor do they incorporate a full interpretation of all available data.

However the question must be asked whether activity based milestones, as distinct from outcome based milestones were appropriate for this “exploration” type of project. Any exploration project requires incremental adaptation of Programme design based on data acquired at the end of each major activity milestone. Consequently, there is a significant contrast, not clearly recognised in the Funding Agreement, between doing the originally outlined, contracted work on time and on budget and doing the right work on time and on budget. The inherent nature of such projects requires well designed, model update processes as well as discipline and integrated technical review and decision making processes tied to clear a-priori decision criteria.

SWH JV 5 Milestones as set out in original Commonwealth – SWH JV Funding Agreement were varied in April 2015, with the following milestones deleted from the original schedule: ▫ Kwinana CO2 pipeline ▫ Collie CO2 pipeline ▫ Compressor Front End Engineering Design (FEED) ▫ Trial injection of CO2 (2.5Mtpa CO2) • A newly-defined ‘Phase 1’ work has been deemed to be completed. . • Now “the Commonwealth in its absolute discretion will decide whether the Project should proceed to Phase 2”. This requires the submission by the JV to the Commonwealth and acceptance of a Business Plan which, after at least one request for resubmission, has been put on hold pending this Review. • Remaining Flagship funding is available but has not been paid to the JV pending this Review and Commonwealth approval to move to Phase 2.

Quality of technical work to date A detailed, in-depth technical review was not included in the scope of this Review, neither was examination of the data acquired. Rather, an opinion has been formed as to technical governance in the form of the ‘exploration and appraisal’ strategy and work Programme sequencing and integration or appropriateness of the data collection and analysis with respect to the objectives set for the Project and the relevant ‘spend’ decisions which needed to be taken at given times. From the start of the project, and despite the expenditure of over $25 million to date in data acquisition, key terms such as what constitutes “storage capability” and “safe and secure” storage objectives remain undefined. The Review believes that clear definitions of objectives, along with target confidence levels required to justify incremental investment, were needed in order to define which data and analyses were essential to scope-out and cost and sequence an effective work Programme design (i.e. an appraisal strategy). Furthermore the necessary discipline of making incremental expenditure on new data collection after full analysis of previous activity in order to gain an incremental increase in confidence in reaching these target objectives is not evident in the Project Plans or Milestones or in any presentations made to the Review. Accepting there is never enough data for 100% confidence, decisions to spend money in further data collection must always be based on the best confidence levels that can be achieved with existing data, against target levels appropriate for the phase of the project (and increasing with increasing spend on data and analyses). For it to be an effective spend, all new data collection must be designed to increase confidence levels of achieving the target outcomes and to help polarise the “stop’’ vs. “continue” decision against key pre-set criteria. Without this disciplined approach, the Funding Agreement can be read as simply a contract to spend all available funds and acquire all the initially proposed data irrespective of either significant exogenous changes or of progressive findings and their impact on the likelihood of contributing to Flagships aims. Examination of Project Plans and related documentation indicates no a-priori assessment of confidence target levels for containment, injection rates or ‘break-even’ storage cost ranges i.e. the real terms, discounted, storage and injection cost per unit injection3. No stop/go decision criteria appear to have been developed and therefore no effective “test” (confidence levels) on whether or not to invest in the next stages or what data and analyses to invest in. Critical decision-polarising data have not been identified or acquired in a cost effective sequence. Moreover, the Review was presented with no evidence of a technical discipline-specific and integrated stage-gate independent review process. Technical overview of the Project appears to be heavily reliant on a single external, technical advisor

3 Real terms break-even storage cost is PV[Capex(t) + Opex(t)]/PV[Injection(t)]; where the capex and opex terms are only related to the storage and injection element of the project. They can be equated to a real terms carbon storage price, charged by a storage facility for pre-tax, break-even conditions.

6 A sample of individual pieces of post-Harvey-1 technical study work that has been viewed (briefly) by the Review all seem to have been well done, though the Review questions whether all the various ANLEC R&D studies needed to be done at the current stage of the Project to achieve its (ill-defined) objectives. (DMP subsequently confirmed that they do not consider the work to be on the critical path nor to be key to decision making. ANLEC R&D’s research philosophy was not a subject of this review). Importantly, there is not yet an integrated picture which emerges from those studies and integration into a set of scenarios on which to make drilling and data acquisition decisions appears to have been poor. Furthermore it is not clear to the Review who within the Project teams (either DMP or SWH JV) would or could do this integration work. The Project appears to have progressed with views, assumptions, well numbers and injection rates anchored by outcomes from the early Schlumberger dynamic modelling work. The validity of the assumed requirement for 6 to 9 wells to deliver a commercial-scale storage facility, as derived from that modelling, should be revisited in light of data gathered to date and an exploration of a fuller range of key uncertainties. This information is critical to determining the likelihood of the financial viability of using the Lesueur as a future storage formation, in the event that it was found likely to be technically capable in terms of storage effectiveness or injectivity and containment.

Risk Assessments 2010 IAP assessment In its Stage 2 Evaluation Report the IAP found that “there is still a high degree of uncertainty around injectivity, storage capacity and containment potential of the Lesueur due to lack of site specific data. A comprehensive exploration and appraisal Programme is needed to reduce key uncertainties relating to long term storage potential in the reservoirs” (see p.38). In its risk assessments (Appendix H) the IAP listed under storage risk: “No data, risk of no seal (cap rock), no portfolio approach and no regulatory approval precedents. Not a hub concept‐ (see p.49)”. Under financial and commercial risks the IAP noted “If Perdaman does not proceed, no CSWH. No private sector operator identified for transport and storage. Major commercial operator for free source of CO2/capture ‐ Perdaman. Coal supply risk for Perdaman ‐ Griffin bankrupt. Commercial finance partly secured. Domestic finance subject to assurances for carbon price premium.” The present Reviewers note that this IAP assessment of a “high risk” project should , by definition, have conditioned proponents and the Commonwealth to expect that the project would most likely not be developed after initial phases of data acquisition and study (assuming critical data had been acquired). In turn, tracking of the critical risks and targeting of critical data should have been a core project management and Steering Committee function.

2012 project risk assessment A risk review conducted by Deloitte in February 2012, with representatives from the Commonwealth (then DRET), DMP and the JV identified eight primary objectives as being at risk:

• Prove that the Lesueur is geologically appropriate to store and retain CO2 • Meet the terms of Federal, State and Local Governments • Secure community acceptance and manage expectations • Secure an appropriate commercial model • Secure an appropriate Joint Venture structure and agreement • Secure a formal and structured Project Management Office • Secure necessary funding • Secure an adequate pipeline route.

7 In conclusion, Deloitte reported that: • Proving up the geology, securing the necessary funding and community acceptance are raised as the key challenges in moving forward [Reviewers note that this reference to “proving up” is indicative of the inexperience in exploration risk assessment as well as the tone of the project documentation. The key task was not to prove that the geology worked, rather the focus should have been to establish whether or not it was likely to work and with what confidence. This is a common misconception in those not well versed in exploration and prospect maturation]. • Securing a formal and structured Project Management Office was considered the objective with the lowest risk exposure when compared against the other project goals. [Reviewers note that while the Project employed some scientific capability with experience in the Otway project, it did not employ experienced exploration and appraisal management competencies or processes, nor did it clearly recognise or assess a need for these]. 2015 technical risk assessment A peer review technical assessment facilitated by URS was conducted over three days in May 2015 attended by a wide range of experts, including some from other CCS-related projects in Australia and ANLEC R&D technical advisors. DMP was represented by Petroleum Division technical advisors as well as the DMP SWH Project Technical Advisor. The workshop also included independent senior technical advisors from the oil and gas industry. URS’ analyses found that: • the JV-proposed risk containment target is exceeded, even in an assessment in which modelling assumed only 100Mt was stored (c.f. 240Mt in the Project Plan) ▫ in half of the modelled scenarios CO2 reached a level considered to be de-facto ‘leakage’. [Reviewers consider the ranges modelled to have been inadequate optimally to investigate injection and containment risk for the data available at the time] ▫ the expert group considered that it was more likely than not (~80%) probability that over 1% (1Mt CO2) would ‘’leak’’ over 1000 yrs • reasons for risk of loss of CO2 containment, 95% of risk was due to: ▫ Migration of CO2 up existing faults and fractures (highly speculative); and ▫ Migration of CO2 by matrix flow (i.e. gas percolation upwards) – note that even after drilling 4 wells, appropriate project-critical dynamic flow data has still not been acquired • there is a high level of uncertainty around modelling because it is very conceptual and lacking data on which to base assumptions [Reviewers note that, even given absence of project-critical dynamic data, the degree of uncertainty is higher than it need be as a considerable amount of data already acquired has not yet been incorporated into an appropriate suite of scenario models]. • noted high level of uncertainty around modelling in part because of a paucity of data. [Reviewers reiterate that decisions (to stop, modify or progress) have always to be made under conditions of uncertainty – hence the need for clear a-priori decision criteria]. In summary, the Review is of the view that, while this was the first clear attempt to set criteria and include significant independent review, by parties not invested in the project, the URS’ assessment was rooted in, and therefore limited by, an inadequate set of scenario models. Sub-surface resource analyses are always limited by availability data, and while this in and of itself is not a justification for additional expenditure, decisions need to be made on the best analysis available with data available at the time. The risks identified in this workshop should be compounded by the risk that the scenarios were not sufficiently representative of the range of possibilities (e.g. 750m completion, cell size choice implies no impact due short range heterogeneity, relatively high lateral connectivity but low vertical connectivity etc.). Furthermore, containment and injection of 100 Mt is inherently less risky that the project’s initial Flagships proposal targets of 240 Mt (or 6 Mtpa). Satisfactory assessment at 100 Mt does not indicate that 240 Mt is achievable as injection rates and likelihood thereof, do not

8 scale linearly. The minimum acceptable (scale and rate) for the project needs to be revisited. This needs to be in 4 main dimensions for the ultimate industrial scale site:- 1. A practical definition of “leakage” (e.g. target minimum allowable migration depth or formation) and a maximum acceptable rate and volume4. 2. The minimum injection rate of interest per annum. 3. The minimum duration of interest for which this minimum rate required (noting that together 1 & 2 represent the minimum capacity) 4. A maximum unit break-even cost for storage.

Major findings by the Review • The SWH Project has ab initio been recognised as a “high risk / high reward project”; many of the risks identified by the IAP have come to pass so that the commercial scale demonstration aspect of the original application for CCS Flagship funding is no longer relevant. • Project governance (specifically technical governance, the operation of the Steering Committee and management of change) needs to be significantly improved (see details under Governance section above). This stems in part from the fact that the Funding Agreements make inadequate provisions for material change and lack clarity on objectives. • The Project Milestones were based on activity achievement (e.g. well complete) vs. achievement of a desired required outcome from investment (e.g. increased confidence). • The Project has been driven in part by the form of the contract and Flagships Programme to complete activities (i.e. spend funds) on time, rather than to complete analyses in time to inform subsequent activities/spend. • The Preparation Phase has proceeded under (virtually) sole DMP control; JV involvement in planning of investigations has been minimal even though they would be required to invest or be ‘on-risk’ based on those investigations. There has been minimal engagement and no agreed criteria for the work-Programme and the current working relationship is poor. • Project remains a work-in-progress: substantial further analysis of data already gathered remains to be done. • Harvey 5 Well is currently proposed to be drilled into the Lower Wonnerup (the proposed CO2 injection zone); it is presently in the planning stage but highly likely (absent clear criteria) to be insufficiently funded if it is required to be drilled and adequately tested using only the DMP funding allocation. It is not self-evident that investment in this well is justified and if it were to be found so (after further data analyses and setting agreed decision criteria) it would be pointless to drill if critical data were not acquired for lack of sufficient remaining funds. • Commercial make-up of the SWH JV has changed significantly: the only partner with a realistic potential to be a future source of CO2 is Synergy’s coal power station, assuming company is prepared to invest in carbon capture technology. • There is no reasonably foreseeable demand for CO2 sequestration coming from industry in the south west of WA within the next 10 years, assuming government GHG policy settings remain substantially as they are. • Before it could take over leadership of the Project, as originally proposed, SWH JV would have to apply for and be granted a GHG exploration permit under the amended State legislation: ▫ Criteria for selection not yet set ▫ Will require technically and financially competent entity

4 It is noted that the SWH JV did make a definition of ‘leakage’, in time for the URS risk workshop in 2015. This is a development in the right direction, though it is apparently not accepted by DMP and it is unclear whether there was any discussion on it.

9 ▫ Will likely need an identified source of CO2 for injection ▫ Permit term will be 6 years + 5 years (1 renewal only)

• The status of Flagship funds is as follows: ▫ the $30M originally allocated to DMP has been fully drawn as Milestones were met; and ▫ a portion of the $22M originally allocated to SWH JV has been drawn down, with the balance yet to be paid. • Both Funding Agreements are nearing end of term. This has been a constraint on planning /execution of data collection to meet activity-type objectives. • There is no effective, collaborative overall Project governance: ▫ Steering Committee is explicitly not a decision making body; ▫ working relationship between DMP and SWH JV has deteriorated - lack of communication is seriously impacting the Project; ▫ disagreement on appropriateness of significant portion of DMP data gathering (meant to inform DMP knowledge and future JV investment) • Government GHG abatement policy changed fundamentally : ▫ No carbon price regime, so Project business case is now invalid.

10 Options available to the Commonwealth in light of this Review 1. Terminate Agreements Terminate DMP and SWH JV Funding Agreements because the Commonwealth determines that either: 1.1. The Project no longer satisfies essential criteria for Flagship Funding; and/or

1.2. There is insufficient confidence, based on recent risk assessment, in the storage potential of Lesueur to continue funding. Outcome: • No disbursement of remaining Flagship Funds not yet paid under SWH JV Funding Agreement: ▫ Sufficient cash still held by DMP to wind up the Project, including any decision to plug and abandon wells; and ▫ Funds paid to date to JV likely sufficient to wind up JV operations. • The Project will have reached no firm conclusions as to the effectiveness or otherwise of residual trapping of CO2 as a potential type of geological containment mechanism for sequestering GHG. There will remain unused data which will be available to future industrial users. Analysis of the existing data would improve confidence in the assessment of the storage potential of the Lesueur at a time when it is needed. 1. Continue with Business as Usual Extend term of both Funding Agreements and continue business-as-usual. This is a ‘high-risk’ option because: • it does not address the governance issues around decision-making and collaboration between the parties; • if DMP attract no further direct Commonwealth funding this would require negotiation with SWH JV to transfer “its” allocation of Commonwealth funding to DMP to get the required data out of Harvey 5; • agreement is needed regarding ‘whether’ to and if so ‘how’ to proceed with the proposed CO2 test injection, including the identification of an appropriate GHG tenement allocation route and approved Operator; • none of this can happen until the amended State legislation is passed and regulations are gazetted – timing is uncertain; • the latest JV Project Plan (not approved) is predicated on DMP transferring leadership of the Project to the SWH JV for the ‘test’ injection ; • the SWH JV as currently constituted has not the technical or financial capacity that would most likely be required by the State before it would grant such a tenement or injection permit. • the remaining SWH JV partners seem unlikely to be willing to accept Operator liability for exploration drilling testing. Outcome: • Confusion, significant risk of sub-optimal use of remaining Flagship funds. Continued misalignment between what DMP wants to acquire for their purposes vs. what industrial proponents might require for theirs.

2. Re-focus objectives, proceed under improved governance Re-focused objectives: • IAP assessed the SW Hub Project as “a high-risk, high-reward proposal in that the existence of an onshore site with appropriate seals is unlikely based on the work of the Storage Taskforce”. • Accordingly, re-focus SWH Project as a case study to demonstrate (with appropriate attention on definitions and decision criteria – see below) whether or not:

11 ▫ ‘residual trapping’ might be an effective mechanism for securely storing CO2 in a geological formation that has no conventional seal rocks ▫ such formations are amenable to being sufficiently well characterised to satisfy acceptance criteria set by a regulator ▫ this type of geological structure has potential for future commercially viable development. • If the answer to each of the above is ‘YES’ then it could, but would not inherently have, major implications for similar geological formations elsewhere. Modified governance arrangements: • All technical work subject to independent (as determined by the Commonwealth) peer review prior to decision making on the scope of work and amount of spend on additional technical work. • Decision criteria will be set to guide whether or not any additional field work (drilling, testing, seismic) is required. The Commonwealth has the right to approve these decision criteria. • A detailed scope of study (Updated Analysis) must be developed in order to maximise the value of the data acquired to date to provide updated analyses to best inform the new decision criteria. The Commonwealth will have the right to be consulted in depth on creation of this Updated Analysis. The conduct of and expenditure on this Updated Analysis will be subject to the prior approval of a modified project plan (which will incorporate a change control and technical review processes). • DoIS retains the right not to fund all or any part of the Updated Analysis. A ball-park estimate of $2-3 million might be needed to conduct this Updated Analysis and the associated reviews and oversight. It is noted that some remodelling work at least has been initiated with DMP with Odin Consultants (and possibly with ANLEC R&D), however, it is not clear to what extent this already commissioned work is ‘locked in’ or indeed whether it is the right work to optimally inform a decision on whether or not to drill Harvey-5. • DoIS retains right not to fund Harvey 5 Well (at its sole discretion) • DoIS has no obligation to fund beyond (possible) agreed scope of Harvey 5 Well. Outcomes: • Firm: Reframed “Flagships objectives for SWH JV” and key Decision Criteria. • Firm: DMP Agreement varied or otherwise re-negotiated; JV Agreement terminated or otherwise modified (esp. reallocation from JV to further DMP-managed works, which may be required) • Firm: Updated Analysis work Programme (est. $2-3 million) leading to a decision of whether or not to drill and test the Harvey-5 well. • Contingent on Updated Analysis and Decision Criteria: Some/all of JV-remaining funding redirected to DMP to achieve new Flagships objective via an optimal Harvey-5 well (and some form of flow test).

12 Recommendation

The Commonwealth should formally revisit and reframe its objectives for the South West Hub Project in the context of the changed industrial and policy circumstances and then decide whether to terminate the Funding Agreements or proceed to provide further funding under the ‘’Refocus’’ option described above.

If the ‘’Refocus’’ option is taken then the following next steps are recommended. 1. STOP collecting more field data – there is no rush 2. Define (i) decision criteria and confidence level required whether or not to fund further field work including H-5 (Cwlth); and (ii) gazettal decision criteria (DMP/JH). For example, decisions may be framed as follows (for further development): ▫ Criteria for containment: there should be at least a P50 level of confidence that X million tonnes per year can be injected into the lower Wonnerup and YY% of the injected volume will be contained below the Eneabba within a 1,000 year period. ▫ Criteria for injectivity: there should be at least a P50 level of confidence that X million tonnes per year injection rate can be sustained for XX years ▫ Criteria for likely commerciality: the required sustained injection rate can be achieved at a P50 level of confidence, pre-tax, real terms break-even price of storage of less than $X/tonne. ▫ Alignment with regulator: the WA DMP should confirm (in principle) to the Commonwealth that a) the above containment criteria, if confirmed after the H-5 well and as reviewed by independent parties, would be sufficient to justify gazettal of the acreage and that, b) assuming a higher level of containment confidence results after subsequent work by an Operator within a GHG Exploration Permit, then award of an injection licence might similarly be considered. 3. Decide on SWHJV future role, noting that any possible future involvement as tenement holder and/or potential operator of the site will ultimately be a decision for DMP as Regulator under the amended legislation. 4. Redefine Commonwealth objectives (minimum scale, project scope). 5. Vary the Commonwealth-DMP (and Commonwealth-JV?) Funding Agreements 6. Using all relevant current data define and cost a detailed ‘Updated Analysis’ technical work Programme ▫ DMP with independent Commonwealth Technical Resource(s) (CTR): Based on new objectives and decision criteria, complete with individual discipline and integrated review process 7. Commonwealth to approve (or not) the redefined work Programme with advice from CTR 8. Ensure an integrated, independent technical review is undertaken (Cwlth - CTR) 9. Ensure a new risk assessment is undertaken and compare with criteria established as above (Cwlth & DMP) 10.Decide whether or not to fund H-5 & post well analysis (Cwlth)

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