In the matter of an arbitration
under the Rules of Arbitration of
the International Centre for
Settlement of Investment Disputes
Case No. ARB/21/51
The International Dispute
Resolution Centre (IDRC)
1 Paternoster Lane
LONDON, EC4M 7BQ
Day 5
Hearing on the Merits
Tuesday, 6th February 2024
Before:
PROFESSOR GABRIELLE KAUFMANN-KOHLER
MR STEPHEN L DRYMER
PROFESSOR PHILIPPE SANDS
DISCOVERY GLOBAL LLC
Claimant
-v-
SLOVAK REPUBLIC
Respondent
Secretary to the Tribunal: JARA MÍNGUEZ ALMEIDA
Assistant to the Tribunal: MAGNUS JESKO LANGER
Transcript produced by Anne-Marie Stallard
and Emma Lovell
MARK TUSHINGHAM, Twenty Essex
NEIL NEWING, Signature Litigation
COLIN GRECH, Signature Litigation
PIETRO GRASSI, Signature Litigation
BEN PHAROAH, Signature Litigation
ALEXANDER FRASER, Party Representative
MICHAEL LEWIS, Party Representative
STEPHEN ANWAY, Squire Patton Boggs
ROSTISLAV PEKAR, Squire Patton Boggs
TATIANA PROKOPOVÁ, Squire Patton Boggs
DAVID ALEXANDER, Squire Patton Boggs
JAKUB KAMENICKÝ, Squire Patton Boggs
DOUGLAS PILAWA, Squire Patton Boggs
CHRISTINA LUO, Squire Patton Boggs
JULIÁN KUPKA, Ministry of Finance of the Slovak Republic
ZUZANA JEŠKOVÁ, Ministry of Finance of the Slovak Republic
PETRA LEŠOVÁ, Ministry of Finance of the Slovak Republic
CLAIRE JORDAN, SLR Consulting
EWAN WHYTE, SLR Consulting
NICOLE SKAF, Charles River Associates
PAGE
Discussion re procedural matters ........................1
DR SIMON ΜΟΥ (called) ................................3
Presentation by DR MOY ..........................5
Cross-examination by MR PILAWA .................15
Tribunal questions ...........................15
Tribunal questions ...........................26
Tribunal questions ...........................34
Tribunal questions ...........................37
Tribunal questions ...........................38
Tribunal questions ...........................42
Re-direct examination by MR NEWING ...............50
Tribunal questions ...........................51
Questions from THE TRIBUNAL ....................52
MR COLIN HOWARD (called) .............................56
Presentation by COLIN HOWARD ...................56
Cross-examination by MR PILAWA .................66
Tribunal questions ...........................77
Questions from THE TRIBUNAL ....................83
DR CHRIS LONGMAN (called) ............................86
Presentation by DR LONGMAN .....................87
Cross-examination by MR NEWING .................97
Tribunal questions ..........................123
Questions from THE TRIBUNAL ...................141
DR TIAGO DUARTE-SILVA (called) .......................144
MR RICHARD ACKLAM (called) ..........................144
Presentation by DR DUARTE-SILVA and ............146
MR ACKLAM
Cross-examination by MR NEWING .................157
Tribunal questions ..........................175
Tribunal questions ..........................178
Tribunal questions ..........................179
Tribunal questions ..........................185
Tribunal questions ..........................205
Re-direct examination by MR PILAWA ...............207
Questions from THE TRIBUNAL ....................207
Discussion re procedural matters ....................208
[Page 1]
08:59 1
Tuesday, 6 February 2024
2 (8.59 am)
3 THE PRESIDENT: Good morning, everyone. It's not yet
4 exactly 9 o'clock but I see everyone is ready, so
5 I think we can start.
6 Mr Moy is ready as well.
7 DR MOY: Yes.
8 THE PRESIDENT: Good morning, sir.
9 DR MOY: Good morning.
10 MR TUSHINGHAM: Madam President, just before we begin,
11 I wonder whether we might just have a very brief
12 discussion. We've been in discussion with our friends
13 on the other side about a few logistical matters
14 concerning post-hearing briefs and the oral closings.
15 I'm entirely in your hands as to whether you would like
16 very briefly to discuss that now or whether you would
17 prefer to discuss that later in the day.
18 THE PRESIDENT: Well, maybe you can address it now, briefly,
19 so we hear what you have to tell us and then during the
20 lunch break, for instance, we can discuss it within the
21 Tribunal and revert to you later. That makes sense.
22 MR TUSHINGHAM: Of course. Stephen.
23 MR ANWAY: Members of the Tribunal, we recognise it's a bit
24 early to be discussing this, given that we still have
25 another day and a half of hearing time left, but we have
[Page 2]
09:00 1 reached agreement on I think all of the post-hearing
2 matters and we thought it may be beneficial for the
3 Tribunal to have the benefit of our thinking before
4 perhaps it starts discussing these matters itself.
5 Number one, the parties have agreed not to do
6 post-hearing briefs. That's principally for two
7 reasons. One, it's very clear to I think everyone in
8 the room that all three members of the Tribunal are
9 extremely on top of the file. And number two, I think
10 both sides are trying to be cost-sensitive. So for that
11 reason the parties have agreed not to do post-hearing
12 briefs, subject, of course, to the Tribunal's views.
13 THE PRESIDENT: No, you don't have to explain this further,
14 because that would have been our proposal as well.
15 MR ANWAY: Excellent. Number two, that the parties do
16 corrections to the transcripts within 30 days of
17 receiving the last audio file, since the audio file,
18 given all the translations, is important to the
19 corrections to the transcript.
20 Number three, that the parties have 30 days to mark
21 "redactions" to the video, if any, and consistent with
22 the Tribunal's procedural orders, the other side would
23 have 30 days to respond to the comments from the first
24 party on those issues.
25 And finally, number four, that costs submissions be
[Page 3]
09:01 1 submitted within 30 days of that preceding event.
2 MR DRYMER: That means 90 days?
3 MR ANWAY: That's correct. The principal reason is to know
4 the time charged for all of those activities. It takes
5 30 days, just given the invoicing systems.
6 MR TUSHINGHAM: And that's agreed by the Claimant.
7 THE PRESIDENT: That's agreed.
8 MR TUSHINGHAM: Yes.
9 THE PRESIDENT: Fine, so we'll discuss it within the
10 Tribunal over lunch. I don't expect any particular
11 difficulties, but let's discuss it and then revert to
12 you. Thanks for having done the work --
13 MR TUSHINGHAM: Thank you.
14 THE PRESIDENT: -- for us.
15 Can I start with Dr Moy now?
16 MR NEWING: Yes, Madam President.
17 (9.02 am)
18 DR SIMON ΜΟΥ (called)
19 THE PRESIDENT: Good.
20 You are Simon Moy?
21 DR MOY: Yes, I am.
22 THE PRESIDENT: From Rockflow Resources.
23 DR MOY: I was formerly at Rockflow.
24 THE PRESIDENT: Oh, yes, we heard that you had changed firm.
25 Can you specify what your new firm is?
[Page 4]
09:02 1 DR MOY: Xodus.
2 THE PRESIDENT: Yes. Good, thank you. When did you change?
3 DR MOY: December 2022.
4 THE PRESIDENT: 2023?
5 DR MOΥ: No, 2022.
6 THE PRESIDENT: No, the reason I'm saying 2023 is because
7 I don't think it was signalled in your second report
8 that is from 15 September 2023. But maybe I missed it.
9 DR MOY: Yes, I've been there over a year.
10 THE PRESIDENT: Good.
11 You have provided us with two expert reports, the
12 first one of 30 September 2022 and the second one of
13 15 September 2023.
14 DR MOY: Yes.
15 THE PRESIDENT: You are heard as an expert. As an expert
16 you are under a duty to make only statements in
17 accordance with your sincere belief. Can you please
18 read the expert declaration.
19 DR MOY: I solemnly declare upon my honour and conscience
20 that my statements will be in accordance with my sincere
21 belief.
22 THE PRESIDENT: Thank you. So we have received your
23 presentation, and you know that you have 15 minutes, and
24 you know that 15 minutes is short.
25 DR MOY: Yes, thank you very much.
[Page 5]
09:04 1 May I start, Madam President.
2 (9.04 am)
3 Presentation by DR MOY
4 DR MOY: Hello, Madam President, and members of the
5 Tribunal. I would like to first of all give a little
6 bit of information about myself. My name is Simon Moy,
7 I'm a reservoir engineer with 27 years' upstream
8 experience. I've been an integral part of subsurface
9 teams responsible for onshore developments in
10 Turkmenistan and offshore developments in Trinidad.
11 I've been responsible for the classification and
12 categorisation of resources for two oil company IPOs,
13 Burren Energy and Bayfield Energy. I've undertaken due
14 diligence on projects worldwide, in Africa, Asia, and
15 Europe. I'm a member of the SPEE, the Society of
16 Petroleum Evaluation Engineers. It's a society which
17 promotes the high standards in resource and reservoir
18 evaluations.
19 I'd like to follow on briefly from my colleague
20 Mr Atkinson's presentation, and make an important point.
21 The GCOS, the geological chance of success, factors in
22 chance of discovery. It takes into account reservoir
23 presence and quality, trap and seal, the presence of
24 source rocks to generate oil and gas. All of these are
25 present in the Slovakian licence areas. And please bear
[Page 6]
09:05 1 in mind that two historical wells blew out due to the
2 presence of oil and gas.
3 So in this short presentation I'm going to go
4 through the key elements of my work and methodology, and
5 there's four main elements: production profiles,
6 benchmarking, development plans, and the development
7 schedule.
8 (Slide 3) My starting point has been Mr Howard's
9 calculation of the P50 discovered volumes. This has
10 been derived from a rigorous industry-standard method to
11 determine which of the prospects would be discovered
12 following an exploration campaign.
13 I've generated production profiles for each prospect
14 based on sound reservoir engineering principles.
15 Importantly, these calculations have used property
16 values, such as for oil and reservoir permeability,
17 et cetera, taken from Slovakian data. Benchmarking has
18 been done for both gas and oil by comparison with Polish
19 Carpathian examples, including the PGNiG data kindly
20 supplied by Dr Longman.
21 High-level development schemes and schedules
22 appropriate for the size and type of these discoveries
23 is also presented. (Pause)
24 (Slide 4) So, once prospects have been identified,
25 I've calculated the production that would be expected
[Page 7]
09:07 1 once they've been developed. These depend on three
2 interacting elements: reservoir, well and surface, which
3 are defined using material balance, IPR curves, and
4 tubing curves. These interact via pressure, fluid
5 properties, permeability, well configuration, and
6 together they determine flow rates and ultimate
7 recoveries. Each of these three elements are described
8 in detail in my first and second reports. The methods
9 I've used are industry standard.
10 Of these three I'm going to focus on the material
11 balance method and its applicability to the Slovakian
12 prospects.
13 (Slide 5) So the material balance method is used
14 across an extremely wide range of reservoir types for
15 both oil and gas. It can be used for reservoirs under
16 a range of drive mechanisms, including solution gas, gas
17 cap, aquifer, and compaction drives, and it can be used
18 in low permeability reservoirs.
19 The left-hand example on the screen is taken from
20 Dr Longman's reports. That's an extreme example, and in
21 fact represents 12 separate fields. In fact, material
22 balance could be used on each of those separately.
23 A more realistic configuration is the generic
24 example on the right-hand side of the slide, which
25 includes both sealing and non-sealing faults. The oil
[Page 8]
09:09 1 here, which is the shaded area, is in pressure
2 equilibrium and has a single oil water contact.
3 Production causes the pressure to decline, and different
4 fault blocks may show pressure declining at different
5 rates. However, what's important is that using the
6 correct averaging method, one can derive
7 a representative average reservoir pressure, which can
8 then be input into a material balance calculation.
9 For the Slovakian prospects, the pressures
10 calculated from the material balance method represent
11 just such an average reservoir pressure.
12 So, what is observed in the Polish Carpathian
13 fields. So the Ceranka report, Exhibit AA-11, contains
14 a number of cross-sections showing oil distributions.
15 (Slide 6) Now, as can be seen in the above slide, in
16 the cross-sections shown, despite extreme folding and
17 possible internal faulting, continuous distributions of
18 oil are apparent -- these are shown as the dark areas in
19 each -- with a single oil contact, oil water contact,
20 and a single depth. The presence and distribution of
21 oil is confirmed through multiple penetrating wells.
22 The oil distributions shown in the cross-sections
23 indicate that they are in pressure equilibrium.
24 Depletion resulting from production may result in
25 a range of pressures across the wells and fault blocks,
[Page 9]
09:10 1 but a representative average reservoir pressure would
2 still be definable. All of these examples could be
3 analysed using the material balance method.
4 Oil discoveries in Slovakia would be similar in
5 structure and would show similar distributions of oil.
6 They too could be analysed using the material balance
7 method.
8 (Slide 7) So turning to the issue of benchmarking.
9 Of the eight developed prospects, five are gas.
10 I undertook rigorous benchmarking of well and field
11 performance against Polish Carpathian fields, including
12 cumulative gas produced per well. Their data was
13 supplied in my exhibits, SM-51 to SM-54.
14 As can be seen from the plots, the modelled gas
15 prospects are comparable with the two Polish gas fields
16 which are highlighted. Average peak rates and
17 cumulative volume per well cover similar ranges.
18 A description of these plots is given in my second
19 report.
20 (Slide 8) Let's examine the oil benchmarking. The
21 plot shows the historic volume of oil produced per field
22 in the Polish Carpathians. Now, please bear in mind
23 that this is the result of 150 years of oil exploration
24 and development. Many of these fields were discovered
25 through drilling of surface features and oil seeps. In
[Page 10]
09:12 1 fact, these are some of the oldest fields that I've ever
2 looked at. A description of this plot is given in my
3 second report.
4 Now, looking at the right-hand side of the plot,
5 i.e. fields having produced less than 500,000 barrels,
6 these would be of a size too small to be identifiable
7 from the available Slovakian seismic data, although it's
8 likely that structures of this size may exist in
9 Slovakia.
10 Now, looking at the larger fields on the left-hand
11 side of the plot, as can be seen, the Slovak oil
12 prospects, which I've marked in yellow and purple, are
13 of a size comparable with those Polish Carpathian
14 fields.
15 In addition, where data are available, recovery
16 factors have been calculated, and one can see that these
17 bracket the range I've calculated for the developed
18 Slovakian oil prospects. In fact, Polish fields have
19 slightly higher recoveries.
20 (Slide 9) Looking at the PGNiG data supplied by
21 Dr Longman, a simple verification process revealed that
22 2,000, roughly 2,000 were inappropriate mainly because
23 the data indicated that they were drilled into
24 stratigraphic intervals which were too deep. This QC
25 process reduced the number of entries from about 4,000
[Page 11]
09:13 1 to roughly 2,000. My demonstrative exhibit, CD-8,
2 graphically presents the depth and age distribution of
3 these 2,000 entries.
4 (Slide 10) The plots shown on the screen at the
5 moment have been taken from CD-8. On the left-hand side
6 the PGNiG data from the Polish Carpathians -- that's the
7 top plot -- is compared with historic production from
8 the same region -- bottom plot -- and powerful insights
9 can be obtained. The top plot shows depth versus date
10 for each of the 2,000 wells. The bottom plot shows the
11 oil production, with a rapid increase in gas production
12 post 1945, and that's shown in red.
13 What can be inferred? Well, most of the oil
14 production, that's 87%, has come from the pre-1946
15 wells, and most of these are less than 1,000 metres.
16 Gas production is from later, deeper wells.
17 Now, taking those 977 pre-1946 wells and plotting
18 their depths on the right-hand side shows that, in fact,
19 96% are less than 800 metres, and over half are less
20 than 400 metres. These two depths are equivalent to my
21 group 1b and 2b oil prospects shown in my second report
22 at table 3-4.
23 So a valid comparison of my productivity per well
24 has to be between prospects in group 1b and 2b only.
25 Other prospects in group 3b and 9b are deeper and would
[Page 12]
09:15 1 therefore have much higher pressures and would produce
2 at a higher rate.
3 (Slide 11) So let's recap. There are 977 pre-1946
4 wells, which produced 87% of the historic Carpathian oil
5 production, and that's 71.5 MMstb. That works out at
6 an average of 73 Mstb/well.
7 Now, considering that 90% of the wells were drilled
8 before 1930, and that peak oil production occurred in
9 1910, that's from wells drilled at or before that date,
10 most of the production would have been from very shallow
11 wells.
12 A reasonable comparison could be made with my
13 estimate of 143 to 220,000 barrels per well for group 1b
14 and group 2b, taking into account that these wells would
15 be drilled using modern drilling equipment and
16 techniques, minimising wellbore formation damage and
17 maximising production.
18 With this understanding, a x2 and x3 uplift over
19 pre-1946 well performance is reasonable.
20 (Slide 12) So now let's move on to the development
21 scheme. The table above on the screen at the moment is
22 taken from my CD-9 demonstrative exhibit. The first
23 point to make is that this is not a single development:
24 this represents activities spread over six years which
25 results in the development of three oil discoveries and
[Page 13]
09:16 1 five gas discoveries.
2 Secondly, please examine the depths of these wells:
3 the vast majority are less than 820 metres. From my
4 onshore experience, wells of this type can be drilled
5 with a simple rig, completed, and hooked up in less than
6 14 days.
7 Please also look at the year 2021, the busiest year
8 for drilling. Of the 45 wells required, 43 are less
9 than 770 metres. From a drilling point of view, all of
10 the above is doable. The majority of these prospects
11 are shallow, they can be drilled quickly and developed
12 using standard oilfield equipment.
13 I'd like to present a couple of European examples
14 which illustrate the onshore oilfields similar to those
15 described in my report that are currently being
16 developed.
17 (Slide 13) The first example is the Anshof field in
18 Austria. It's presented here as an example of
19 a European onshore discovery which was rapidly developed
20 and produced in short timeframe, including the
21 environmental permitting, using many of the techniques
22 I have mentioned in my development scheme. If the
23 Tribunal is interested, there is a very nice online
24 article in NS Energy.
25 The associated gas production would still need to be
[Page 14]
09:17 1 exported or burnt for power, and although it's not clear
2 from the article what the solution to this has been, the
3 issue has clearly been resolved with little fuss and in
4 short timeframe.
5 The second example is Romanian, from an online
6 article in the Oil & Gas Journal. Again, a recent
7 discovery made by OMV --
8 THE PRESIDENT: Dr Moy, I'm sorry for interrupting.
9 I'm told there is one minute left, or one minute over.
10 MS MINGUEZ ALMEIDA: One minute left.
11 DR MOY: That's fine, I've got one more slide.
12 Again, a recent discovery made by OMV of multiple
13 fields, they are presented here as they are of a size
14 which is comparable to the Slovakia prospects. In fact,
15 two are twice the size of the largest prospects.
16 Clearly, onshore oil drilling and development is alive
17 and well.
18 So in conclusion (Slide 14) I've used industry
19 standard methodologies resulting in robust subsurface
20 models and production profiles. I've shown the material
21 balance method to be applicable to Polish fields and
22 it's appropriate for Slovakian discoveries. I've
23 undertaken rigorous benchmarking for both oil and gas
24 and have shown comparable performance between Polish
25 fields and Slovakian discoveries, and my development
[Page 15]
09:19 1 scheme and timescales reflect those observed in other
2 onshore European developments, and also reflect personal
3 experience.
4 Thank you very much.
5 THE PRESIDENT: Thank you.
6 Do I give the floor to Mr Pilawa?
7 MR PILAWA: Yes.
8 THE PRESIDENT: Yes please.
9 (9.19 am)
10 Cross-examination by MR PILAWA
11 Q. Thank you very much.
12 Good morning, Dr Moy.
13 A. Good morning.
14 Q. I'm Douglas Pilawa and I will be asking a few questions
15 today.
16 If we can keep this presentation up for just
17 a moment, and if we can go back a slide.
18 Dr Moy, was this information in either one of your
19 expert reports?
20 A. No, it wasn't.
21 Q. Okay. I don't need the presentation up anymore.
22 MR DRYMER: And what about the article that you mentioned.
23 I didn't note the name. Is that referenced in any of
24 your reports?
25 A. No, they're not.
[Page 16]
09:20 1 MR DRYMER: Thank you. I didn't remember it.
2 MR PILAWA: Can you tell me your familiarity with the Slovak
3 oil and gas regulatory framework?
4 A. I'm not familiar with it, no.
5 Q. Generally speaking, are you aware of the types of
6 permits or other authorisations that an oil and gas
7 company needs to secure for exploration or a development
8 project in Slovakia?
9 A. If it were specific to Slovakia, no. But the
10 generalities and general regulations, yes, they're
11 probably very similar. But I'm not familiar with the
12 details of regulations in Slovakia.
13 Q. Okay. And I think generally speaking, one of these
14 I think you might be familiar with, but you're generally
15 familiar with an EIA, an environmental impact
16 assessment?
17 A. That's correct, yes.
18 Q. Okay. Are you aware that in Slovakia for any oil or gas
19 producing well a preliminary EIA is required?
20 A. Yes, I've heard that, yes.
21 Q. As part of your preparation for your expert reports, did
22 you undertake any geographical analysis of the
23 1,200 square kilometres of the licence areas?
24 A. I'm not quite sure that I understand your question.
25 Q. Okay. Did you study the terrain at all?
[Page 17]
09:21 1 A. Only from what I've seen from maps.
2 Q. Okay. If we could start at paragraph 8 and 9 of your
3 first expert report, this is on page 5. Do you have it
4 in front of you?
5 A. Sorry.
6 Q. I wasn't sure if you were looking at the screen or ...
7 A. No, I'm ready, sorry about that.
8 Q. Just to follow on and understand where your expert
9 report lies in the three, in paragraph 8 you state that
10 the first question you were asked to address was to:
11 "Identify the likely volume of hydrocarbons which
12 hypothetically could be produced from the prospects in
13 the licence areas should they contain hydrocarbons."
14 A. That's correct, yes.
15 Q. Thank you. And I understand really the -- what you're
16 trying to do here is Mr Atkinson has developed his PIIP
17 estimations, which is amounts of oil and gas that might
18 be in the ground.
19 A. Might be, yes.
20 Q. And so your analysis is, if there actually is oil or
21 gas, then you are calculating the amount that might be
22 produced from those amounts?
23 A. It's -- the whole process is -- we have a selection of
24 structures that have been mapped, and we have
25 a selection of their relative in-place volumes. And the
[Page 18]
09:23 1 statistical process that's gone through allows a P50
2 discoverable volume to be estimated. So that is, if you
3 were to go out and drill that licence area in the way
4 that's been described, what is the P50 chance, or what
5 volume would you get from that process.
6 And so -- and also what selection of prospects are
7 you likely to find that are filled with hydrocarbons,
8 either oil or gas. That process is described also in
9 one of the papers that I present in my second report.
10 Q. But really what I'm trying to -- or what I'm wrestling
11 with is the uncertainty in this analysis.
12 A. That's dealt with through the statistical process that
13 we've undertaken, which is rigorous, to give you -- it
14 is an estimate. It's P50 of the likely volumes you're
15 going to discover if you undertook a drilling campaign.
16 Q. The likely volumes that you will discover if there is
17 oil or gas at each one of these prospects; right?
18 A. There won't be oil and gas at each one because you're
19 drilling the 40 prospects. But it's telling you what
20 you are likely to discover if you were drill those
21 40 exploration wells, on those 40 structures that
22 Mr Atkinson has identified from the seismic.
23 Q. And if we can go down to your next paragraph:
24 "Separately for both oil and gas ..."
25 You were asked to:
[Page 19]
09:25 1 "... generate representative most-likely production
2 profiles for the prospects in the licence areas and
3 outline a feasible development scheme."
4 Correct?
5 A. Yes.
6 Q. And that development scheme assumes that exploration
7 drilling occurs in the first instance; right?
8 A. Well, you would have to discover, yes, oil and gas first
9 through drilling.
10 Q. And your model assumes that Discovery Global would drill
11 an exploration well at all 40 prospects that Mr Atkinson
12 identified; right?
13 A. That's the -- yes, that's over two years.
14 Q. Yes. And I understand that the way that the three
15 reports interact with one another is that Mr Howard's
16 decision-tree modelling produced successful oil and gas
17 prospects; is that fair?
18 A. Not quite. So the decision-tree analysis gives you
19 an estimate based on -- first of all, you've got each of
20 the in-place volumes for each of the mapped prospects,
21 each of which may or may not contain hydrocarbons. You
22 then have a geological chance of success. Both of those
23 have been estimated by Mr Atkinson. The decision-tree
24 process is a robust statistical method that you then run
25 through to allow you to estimate a P50 likely
[Page 20]
09:27 1 discoverable volume should you drill all 40 of those.
2 And then from that volume, that P50 volume -- and that
3 was calculated for all four of the trends, the
4 geological trends -- you have a series of scenarios
5 which represent the successful prospects that would
6 contain that P50 volume.
7 So there's a selection for the two gas trends, and
8 there's a selection of prospects for the two oil trends.
9 And that's given us the eight prospects which we've
10 identified that would be either filled with oil or with
11 gas.
12 Q. So I was just trying to ultimately get to the oil and
13 gas prospects that you actually create a development
14 plan for.
15 A. Yes, sure.
16 Q. So, just to come back to that, after this campaign of
17 drilling 40 wells, the end product are oil prospects and
18 gas prospects; right?
19 A. Yes. A list of eight that are considered to be
20 successful, statistically determined, out of the
21 drilling of all 40.
22 Q. And those eight are the ones that you used to create
23 your development plan; right?
24 A. Yes. Yes.
25 Q. And I understand that the development scheme for those
[Page 21]
09:28 1 eight, that's made on a but-for basis?
2 A. Yes, so it's assuming, yes, exactly.
3 Q. And to understand that but-for basis, it's: but for
4 alleged actions of Slovakia, the development scheme is
5 what would likely have occurred?
6 A. That's correct.
7 Q. Okay.
8 Now, you're aware that the extent of Discovery's
9 drilling programme was to drill three exploration wells,
10 one at Smilno, Krivá Ol'ka, and Ruská Poruba; right?
11 A. Yes.
12 Q. And I believe that Mr Atkinson confirmed yesterday that
13 there is a very low chance of an actual accumulation of
14 oil or gas at Ruská Poruba; do you recall that?
15 A. I vaguely recall that.
16 Q. Okay. And I understand that the development scheme that
17 you've generated, the end product is one large,
18 integrated development plan; is that a fair
19 characterisation?
20 A. No. It's not.
21 Q. Well, maybe this will help. What I'm trying to
22 understand is, for example, at Smilno, the Smilno
23 prospect, your development plan does not say: here's the
24 Smilno prospect, if Discovery would have drilled here
25 and found oil, here's the specific development plan that
[Page 22]
09:30 1 future production from Smilno would look like, but only
2 at Smilno.
3 A. I believe Smilno is gas, and the reason that --
4 Q. Oh sorry, you're right. Yes.
5 A. Gas and oil have been treated differently. So there are
6 the three successful oil prospects. Each of those is
7 developed separately in terms of sequence.
8 The gas prospects, those where gas discoveries
9 occurred, had to be developed, or would be developed, as
10 a whole. Because of the amount of gas that's in them
11 you would need to ensure you had sufficient time to
12 construct the export line, and that's again described in
13 my second report. And that's why the two are treated
14 slightly differently.
15 Q. Thank you. I understand that they are treated
16 differently. But there's no just standalone Smilno
17 development plan; right?
18 A. No.
19 Q. Okay. And beyond these initial three wells, we don't
20 actually know what Discovery was planning to do, do we?
21 A. I'm not aware of what their ultimate plans would have
22 been.
23 Q. Okay. And so beyond these first three wells, the
24 development plan that you were asked to generate is
25 a hypothetical plan?
[Page 23]
09:31 1 A. It's the but-for case.
2 Q. It's not based on any fulsome drilling programme; is
3 that fair?
4 A. It's a -- we took into account -- when we did the
5 statistical approach of a drilling campaign with
6 a five-well walkway ...
7 Q. Dr Moy, I'm actually just looking for -- there's no
8 document, for example?
9 A. No.
10 Q. It's a drilling programme that you used?
11 A. No, there isn't.
12 Q. Okay. And I want to come back to the Smilno prospect,
13 the gas prospect that we were just talking about.
14 A. Mm-hm.
15 Q. So if we could open up to page 29 of your first expert
16 report.
17 A. Mm-hm.
18 Q. And this is paragraph 115.
19 A. Okay. I have it.
20 Q. Okay. Great.
21 So this is the Smilno gas prospect, and you explain
22 here in paragraph 115 that:
23 "... Discovery ... envisaged a new 15 km
24 pipeline..."
25 From the original well or any subsequent development
[Page 24]
09:32 1 well at Smilno, and that pipeline would ultimately lead
2 into the Slovakian gas system; is that fair?
3 A. Yes, based on what I have seen of those documents, yes.
4 Q. Yes. And we're going to pull one of those up.
5 So if we can pull up SM-019. This is the document
6 that you cite in that paragraph called the "Smilno
7 feasibility study". It will come up on one of the
8 screens in just a moment.
9 Are you familiar with it? Take as much time as you
10 need.
11 A. Thank you. (Pause)
12 Yes. Yes.
13 Q. And if we can scroll down to the last paragraph on this
14 page. Thank you very much. And if we can see in this
15 last paragraph that very first sentence, it kind of
16 discusses this pipeline in a little more detail, and the
17 part of the route -- or the potential route it could
18 take, saying that:
19 "Distance of extraction network to gas pipeline ...
20 9000 ... Real terrain is complicated (hills, forest,
21 brooks) - therefore proposed track of connection
22 pipeline ..."
23 Et cetera. Do you recall that?
24 A. Yes. Yes.
25 Q. And if we could go to the fourth page to get an image of
[Page 25]
09:34 1 what this path might have looked like? There we go.
2 Thank you very much. And just to orient everyone who
3 might not have seen this document, that bottom yellow
4 line, that's the Slovakian pipeline system; right?
5 A. I believe, yes, that's ...
6 Q. Okay. And the red-dotted line is a potential route that
7 this pipeline could have taken?
8 A. Yes.
9 Q. Okay.
10 Now, you didn't undertake an analysis about the
11 feasibility of building this specific pipeline; right?
12 A. That's correct, I didn't.
13 Q. Okay. And as far as you're aware, AOG, or Discovery
14 Global, didn't have any draft agreements in place to use
15 it, or any permits necessary for this pipeline?
16 A. I'm not aware of any.
17 Q. Okay. And this pipeline, this scenario, it's not
18 reflected in your ultimate development plan; is that
19 fair?
20 A. That's -- yes, that's correct.
21 Q. Okay.
22 A. Because of the volume of gas.
23 Q. Okay. We'll come to that volume of gas. But just this
24 standalone possibility is not reflected in the
25 development programme?
[Page 26]
09:35 1 A. Yes, this is for one well.
2 Q. Yes. Okay. Thank you.
3 Are you aware of how Discovery Global was planning
4 to finance its well-drilling programme?
5 A. I'm not aware of the details, no.
6 Q. Okay.
7 I want to walk through --
8 MR DRYMER: I'm just curious on that point, thank you, it
9 will help me later on and probably shorten things.
10 Have you read Discovery's submissions in this case?
11 A. Some parts.
12 MR DRYMER: Okay. I will be more specific. I'm not
13 surprising. Have you read the evidence, the witness
14 statements regarding how they intended to fund their
15 ongoing developments?
16 A. I've read through them, but it was a while back, so
17 I can't really ...
18 MR DRYMER: Okay, understood.
19 A. I'm not a ...
20 MR DRYMER: Thank you.
21 MR PILAWA: Thank you. I actually want to walk through with
22 you, Dr Moy, if we can, what it would look like to just
23 develop this one scenario, and what I mean by that is,
24 let's say we go to Smilno, we find gas there, and we
25 ultimately want to bring that gas into production. So
[Page 27]
09:36 1 I'm going to walk through a series of steps that I think
2 would need to be undertaken, and let me know if this is
3 generally the right idea. Does that sound okay?
4 A. Yes, by all means.
5 Q. Okay. So, first and foremost, if revenues wanted to be
6 generated from this, gas would need to be discovered?
7 A. Yes.
8 Q. Okay. It would need to be in sufficient quantities to
9 justify development; right?
10 A. Yes.
11 Q. Okay. And if the gas quantities justify development,
12 the exploration well would need to be turned into
13 a development well, or an additional well might need to
14 be drilled that would become a development well?
15 A. Yes, either of those.
16 Q. Yes. Okay. Great.
17 And under Slovak law, as we discussed earlier, any
18 development well must undergo a preliminary EIA. Are
19 you comfortable accepting that point?
20 A. Yes, I understand that that needs to be done.
21 Q. And of course that preliminary EIA could turn into
22 a more fulsome assessment, which we've been calling
23 a full EIA?
24 A. What are the -- I don't know what the triggers would be
25 for that.
[Page 28]
09:37 1 Q. Okay. And while all of this is going on, maybe
2 simultaneously, AOG would have to begin construction of
3 this pipeline; right?
4 A. It would need to be started, yes.
5 Q. It would have the -- it would need to have the right to
6 use the land that the pipeline is on; right?
7 A. Certainly.
8 Q. It would then need to enter into some form of
9 an agreement with the Slovakian distribution network to
10 connect to the Slovakian distribution system, right?
11 A. Yes, correct.
12 Q. And there would be additional infrastructure that's
13 required, such as a processing facility of some sort, to
14 separate the gas from other fluids; right?
15 A. Yes, pretty minimal though.
16 Q. Minimal, I accept that. But there would need to be some
17 form of a facility to conduct that separation; right?
18 A. That would probably be near the wellhead.
19 Q. Okay. So that infrastructure would obviously need to be
20 created?
21 A. You just phone up and order it.
22 Q. I'm sorry?
23 A. You would phone up and order it: it's off-the-shelf.
24 Q. Right. And once all of that is done, the pipeline is
25 built, it's connected, then AOG could have started
[Page 29]
09:39 1 generating revenues?
2 A. I presume so, yes.
3 Q. Okay. And of course, if it can't build that pipeline,
4 it can't produce gas from this site, right?
5 A. There might be and there are other options. So, for
6 example, the gas could be used for gas to power.
7 Obviously you're then generating power, you need to
8 export route. That is a scheme that isn't described in
9 my report, but that's commonly done as well, when it's
10 difficult to get an export pipeline out from a site, for
11 example.
12 Q. And what does that prospect look like?
13 A. You usually have a gas to power generator, so the gas
14 will go in, get dehydrated at the wellhead. It then
15 goes to a gas engine. That will burn the gas and
16 generate electrical power, which obviously then has to
17 be hooked up to the national grid.
18 Q. But as far as you're aware, that was not AOG's plan for
19 this site, right?
20 A. Clearly not, no, not in this case. But it's an option
21 for any operator.
22 Q. And is it fair to say that while Krivá Ol'ka is an oil
23 prospect, these are generally -- and I'm happy for you
24 to walk me through them, but these are generally the
25 same steps. Of course, no need for a pipeline to
[Page 30]
09:40 1 connect to the Slovakian distribution system, but these
2 are the same general steps to bring that well into
3 production?
4 A. Yes, I mean for oil you would not have a pipeline,
5 obviously.
6 Q. But you would have a pipeline for associated gas?
7 A. Yes. Or you could also burn it, which apparently is
8 what some operators are doing, in the UK, for example.
9 Q. Do you think that AOG -- are you talking about gas
10 flaring?
11 A. No. No. Again, the gas -- sorry, the gas is burnt to
12 generate power, and then you don't need to use
13 a pipeline to get rid of the associated gas.
14 Q. But your but-for model provides, or it anticipates AOG
15 taking that associated gas and selling it into the
16 Slovakian distribution system?
17 A. Yes, in my scenario, yes.
18 Q. So if AOG could not have done that -- well, let me say
19 this: your but-for model depends -- that scenario
20 depends upon AOG constructing a pipeline for the
21 associated gas and connecting to the Slovakian
22 distribution system?
23 A. What's described, yes, requires a pipeline for
24 associated gas, yes.
25 Q. If we could go back to -- we made a reference to this
[Page 31]
09:41 1 earlier -- the successful gas prospects, that project.
2 And we can take these images down, and if we could pull
3 up Respondent's demonstrative number two, it should be
4 RD-2, or RD-002. Great. Thank you so much.
5 We're also going to be going back to parts of your
6 expert report, and if you need both on the screen,
7 I just want to make sure that we're oriented, so just
8 let me know.
9 A. Thank you.
10 Q. I'm sure that you have seen this image before, right?
11 A. I have, yes.
12 Q. And generally speaking, do you accept that this
13 represents somewhat what your final development model
14 will look like?
15 A. Yes, in general.
16 Q. Okay.
17 A. Yes, it's an amalgam of various sources.
18 Q. Exactly. But you're okay with this image, right?
19 A. Yes, it's fine.
20 Q. Okay, and now we're going to start looking at your
21 expert report at the same time. If it's possible to
22 keep this up here and ideally still see some of the
23 details of it, we're going to try that.
24 So if we could also pull up Dr Moy's first expert
25 report, specifically page 53, paragraph 207.
[Page 32]
09:43 1 Yes, perfect. Thank you so much. Okay, in
2 paragraph 207, you made reference to this earlier, this
3 is talking about the gas developments, and can you
4 please read the sentence for the record that begins with
5 "Plateau gas rates ..." kind of towards the end and
6 extends onto the next page.
7 A. Okay, sure:
8 "Plateau gas rates will be too high to transport
9 within the existing SPP domestic gas network, therefore
10 produced gas will be fed into the new Poland-Slovakian
11 interconnector via a centrally located hub (somewhere
12 around (BM03 ...) and thence into a 75km, 500 mm
13 diameter pipeline. At the far end, it will be
14 compressed to 80 bara, and fed into the Poland-Slovakian
15 interconnector."
16 Q. Thank you, Dr Moy, and for illustration purposes, I know
17 that the parties have estimated this to 55 kilometres or
18 75 kilometres, but it's somewhere around
19 55-75 kilometres; right?
20 A. I would say, yes.
21 Q. And that's that red line on the development model. You
22 can see that; right?
23 A. I believe so. That's not my red line. The point on the
24 right-hand side I believe is close to where the
25 Poland-Slovakia interconnector enters Slovakia, so it
[Page 33]
09:44 1 would connect at some point along its length.
2 Q. Fair enough. And the reason it has to take this route
3 is because the gas prospects produce an amount, or gas
4 rate, plateau gas rates that are too high for the
5 domestic pipeline system?
6 A. Yes.
7 Q. Okay.
8 A. That's the case, because the capacities are too small.
9 Q. Okay. So in the but-for model, the development scheme
10 that you've put forward, the five gas prospects like
11 this can only succeed if that pipeline is built; right?
12 A. Yes. That's correct.
13 Q. Okay.
14 Now, for the other prospects, or the successful
15 ones, we're going to move to the oilfields.
16 A. Mm-hm.
17 Q. And those are -- there are three of them; right?
18 A. Yes.
19 Q. And I think we talked about earlier that all three of
20 those oilfields anticipate associated gas being dealt
21 with by being pumped back into the Slovakian
22 distribution system; right?
23 A. That's correct, yes.
24 Q. And actually Mr Howard's DCF monetises that amount; the
25 idea is that those are sold, right, those amounts of
[Page 34]
09:46 1 gas?
2 A. Yes, the small component, yes.
3 Q. So in the but-for model, I guess, the development scheme
4 here, for those oil prospects, that scheme to work --
5 I'm sorry, that plan to work, those pipelines would need
6 to be constructed as well; right?
7 A. As described in my second report, the associated gas is
8 disposed and sold via pipeline. But as I said, you
9 know, there are current examples where operators burn
10 its gas to power. So that would be an option. It's not
11 described as such in my report, that second option.
12 Q. Yes, your model is the one where it's fed back into the
13 Slovakian distribution system?
14 A. That's correct, yes.
15 MR DRYMER: You say it's not described as such. I know you
16 mention -- it's not modelled; is that the point?
17 A. That's correct, yes.
18 MR DRYMER: Thank you.
19 MR PILAWA: And if we look at the model just in its
20 entirety, this development plan contains 99 producing
21 wells; right?
22 A. It's a series of different field developments, a total
23 of 99, I believe, development wells; 33 are oil, and 66
24 are gas.
25 Q. Okay. So 99 wells.
[Page 35]
09:47 1 And there's also a central gas-processing facility
2 that would need to be built; right?
3 A. Yes. That would collect the gas from the gas wells.
4 Q. Okay. And the model anticipates the pipelines for the
5 associated gas that we just discussed; right?
6 A. Yes, they're not marked here, but they would be from
7 those oilfields that are at the bottom right-hand side.
8 Q. And at no point does the model ever consider that
9 Discovery fails to obtain all of the permits or
10 authorisations required for the project; right?
11 A. That's correct.
12 Q. Okay.
13 If we could go to your second report, and
14 specifically page 36. This is figure 5-1.
15 A. Yes, I have it.
16 Q. Sorry, this should be page 36. Thank you.
17 Maybe we can make this a little easier on the eyes.
18 We can remove the development plan and just focus on the
19 report. Right. We can blow that up a little bit.
20 Thank you.
21 So this is the schedule that you have proposed for
22 the exploration and development plan; right?
23 A. That's correct.
24 Q. And if we start at the top, this is the exploration
25 phase?
[Page 36]
09:49 1 A. The top line, yes.
2 Q. Exactly. That blue line that says 20 and 20?
3 A. Mm-hm.
4 Q. And this is 40 exploration drills over the course of
5 2017 and 2018; right?
6 A. That's correct.
7 Q. And it also includes site preparation, right; it's not
8 just drilling?
9 A. Yes.
10 Q. Okay. And this all takes place within the course of
11 two years; right?
12 A. Yes.
13 Q. And it doesn't account for any material delays that
14 might occur within that timeframe?
15 A. Well, you should be able to drill 40 wells in two years,
16 taking into account the time required for site prepare,
17 getting your kit and getting out there and drilling
18 those wells.
19 Please bear in mind that those 40 wells, half of
20 them are less than 1,000 metres, so you can do that with
21 a small rig on the back of a truck.
22 Q. I understand that. But I'm just talking more about kind
23 of the operational issues that one can experience in any
24 type of project like this. The model -- even if there
25 are material delays or even if there are issues, for
[Page 37]
09:50 1 example, constructing some sites, there are a whole host
2 of issues that could arise. That's uncontroversial;
3 right?
4 A. There could be, yes.
5 Q. There could be. But in your model, all of that, even if
6 there are major operational delays, 40 wells are still
7 drilled by the end of 2018; right?
8 A. I've assumed ...
9 THE PRESIDENT: Can I just ask for a clarification. If
10 I read this correctly, you have not counted time for the
11 preliminary EIA?
12 A. That's not in there, I don't believe.
13 THE PRESIDENT: That's not in there. Thank you. Apologies.
14 MR PILAWA: No problem at all.
15 So you were instructed to assume that drilling would
16 commence on 1 January 2017; correct?
17 A. Yes.
18 Q. Am I correct in my understanding that as part of that
19 instruction, you were also instructed to assume that
20 Discovery already had access rights to each of these
21 40 well locations?
22 A. I assume that that would be sorted out as part of the
23 process of site preparation and drilling.
24 Q. Okay, let me see if I just understand. I'm just going
25 to read the transcript. One moment. (Pause)
[Page 38]
09:51 1 THE PRESIDENT: Are you counting the access rights --
2 securing the access rights as part of the site
3 preparation within the two years, or do you assume it's
4 done before?
5 A. Well, some of these would be ongoing because you've got
6 two years to do the ones -- the last 20 would be in the
7 second year, so you've got a whole year to do that. And
8 I have simply presumed that there would be some small
9 amount of preparatory work prior to the drilling of the
10 first well.
11 THE PRESIDENT: Thank you.
12 MR PILAWA: So 2017 and 2018 are devoted to drilling
13 40 exploration wells, preparing the sites, and securing
14 access to all of these locations; right?
15 A. Yes.
16 Q. Okay. Are you aware of Discovery Global ever
17 undertaking a project like this before?
18 A. I'm aware that Mike has a lot of experience drilling
19 wells. And I'm aware that they had AFEs for three wells
20 which, for whatever reason, they weren't able to drill.
21 That is the extent of my knowledge.
22 Q. I'd like to talk a little bit about the Petroleum
23 Resource Management System, what we'll just call PRMS to
24 make it a lot easier.
25 Now, you mentioned it in the presentation, and
[Page 39]
09:53 1 I'm thankful for that. Would you agree with me that the
2 PRMS represents industry guidelines?
3 A. Yes, certainly.
4 Q. And oil and gas companies are both familiar with and
5 utilise PRMS?
6 A. Yes, they do.
7 Q. And financial institutions understand what the PRMS is?
8 A. One would hope so, yes.
9 Q. I was hoping that would be non-controversial!
10 You have extensive experience with PRMS; right?
11 A. Yes. I do.
12 Q. And you understand the reserve and resource
13 classification under the PRMS?
14 A. That's correct.
15 Q. And the classification of reserves is an important step
16 in a hydrocarbons project; right?
17 A. It is, yes.
18 Q. It signifies that the project has reached a stage where
19 it can be considered commercially viable; right?
20 A. If one is in the situation where you've got reserves.
21 Yes.
22 Q. Thank you. And that reserves classification often helps
23 secure financing for a project; right?
24 A. Yes, it would.
25 Q. And generally speaking, that reserves classification is
[Page 40]
09:54 1 made in some form of an independent report, like
2 a competent person's report, right?
3 A. Yes, usually.
4 Q. I'm just going to abbreviate that as CPR from here on
5 out, competent person's report; thanks.
6 A. For the benefit of the Tribunal I would like to point
7 out that there is value in prospective and contingent
8 resources as well. Not just in reserves. (Pause)
9 Q. It's fairly common for CPRs to utilise the PRMS
10 guidelines; right?
11 A. Yes, it is.
12 Q. And talking about reserves, they must be discovered,
13 recoverable, commercial, and remaining; right?
14 A. That's correct.
15 Q. And all four of those must be satisfied for a reserves
16 classification, right?
17 A. Yes.
18 Q. So it would be contrary to the PRMS guidelines to make
19 a reserves declaration if one of those criteria is not
20 met; right?
21 A. Usually, yes. When you're looking at the situation
22 here, we have a but-for situation.
23 Q. Dr Moy, I'm not talking about this situation. I'm just
24 talking about the PRMS guidelines in general.
25 A. That's correct, yes.
[Page 41]
09:56 1 Q. So if one of those -- I'm sorry, it would be contrary
2 under the PRMS guidelines to make a reserves
3 classification if one of those criteria is not met?
4 A. Yes. Could you repeat those for me, please?
5 Q. Sure. Do you want to open up the PRMS?
6 A. No, no, no, just ...
7 Q. Okay: discovered.
8 A. Yes.
9 Q. Recoverable.
10 A. Mm-hm.
11 Q. Commercial.
12 A. Mm-hm.
13 Q. And remaining.
14 A. Yes.
15 Q. You need all four of those, right?
16 A. Yes.
17 Q. And "discovered" means that drilling has taken place and
18 confirmed the existence of hydrocarbons, right?
19 A. That's correct.
20 Q. So it would be contrary to the PRMS guidelines to make
21 a reserves classifications if the hydrocarbons are
22 undiscovered, right?
23 A. Yes. Usually, yes.
24 Q. So your expert reports, which make a reserves
25 classification, even though Discovery's hydrocarbons are
[Page 42]
09:57 1 undiscovered, that does not conform to the PRMS
2 guidelines, does it?
3 A. We're talking about the but-for situation.
4 Q. But I'm not talking about the but-for situation.
5 I'm talking specifically about PRMS and those
6 requirements ...
7 A. Well --
8 Q. -- and so the question is, your expert reports, which
9 make a reserves classification, even though the
10 hydrocarbons are undiscovered, that does not conform to
11 the PRMS, does it?
12 A. It will do in the but-for case. There is a difference.
13 THE PRESIDENT: Yes, maybe can I ask for a clarification.
14 I did not understand how in the but-for you convert, if
15 I can say, resources into reserves. But the state of
16 the evidence that we have is still the resource state.
17 A. Sure. May I explain?
18 THE PRESIDENT: Yes please.
19 A. Okay, so in the but-for -- so the licence areas contain
20 prospective resources as mapped. They haven't been
21 drilled yet. The process, the decision tree, the
22 incorporation of the geological chance of success, gives
23 one an estimate of: if you went out with your drilling
24 rigs and you drilled up those 20 prospects, it would
25 give you an estimate of what your 50/50 chance of
[Page 43]
09:58 1 discoverable volumes are, and those prospects that would
2 be filled with gas and oil. At that point they would be
3 considered and classified as contingent resources.
4 So the difference between contingent resources and
5 moving on to reserves, is down to seven commercial
6 criteria, and that includes the finance, all the -- you
7 know, the environmental, the paperwork, and just
8 development plans.
9 So when I describe the volumes that would be
10 produced as reserves, it's in a but-for case, assuming
11 that those commercial criteria would be met following
12 the successful discovery.
13 THE PRESIDENT: But on what basis, on what data do you
14 accept that the commerciality requirements would be met?
15 A. Because, first of all, it's done elsewhere, it's not
16 an unusual development. It's not of a size that's
17 unreasonable. All of these seven elements, so the
18 development plan, the export route, they are all doable,
19 they are all feasible, they're all reasonable.
20 I haven't seen anything in what needed to be done
21 that one would suggest is unattainable, unreasonable.
22 So in a but-for case, knowing the will of Discovery,
23 they, having made a discovery, would actually want to
24 develop it. I can't see any barriers that would stop
25 any of those seven commercial criteria from being met.
[Page 44]
10:00 1 THE PRESIDENT: Provided they make the discovery, which you
2 account for by the probability; is that --
3 A. That's correct, yes.
4 THE PRESIDENT: Good. Thank you.
5 MR PILAWA: Thank you.
6 THE PRESIDENT: Apologies for the interruption.
7 MR PILAWA: That's fine, Madam President. I'm going to go
8 to that list of seven criteria for commerciality.
9 Okay, I'd like to put two documents on the screen.
10 We're now moving into the but-for scenario and the
11 evidence that you've presented as justifying the
12 classification for reserves.
13 Just before I do that, are you aware of any
14 competent person's report that has made a reserves
15 declaration assuming that commerciality is met?
16 A. Sorry, say that again?
17 Q. Are you aware of any competent person's report that
18 makes a reserves declaration by assuming commerciality?
19 A. Not a competent person's report, no, because it's not
20 used for that purpose.
21 Q. Because it's not in line with PRMS?
22 A. No, it doesn't deal with the but-for situation.
23 Q. The competent person's report doesn't deal with the
24 but-for situation?
25 A. No.
[Page 45]
10:01 1 Q. It wouldn't. So it's unlikely that you would qualify
2 for reserves-based lending, for example, with
3 a competent person's report that operates on a but-for
4 scenario, because that's not common; right?
5 A. Usually the competent person's report is a description
6 of what's there at the moment.
7 Q. And what we have at the moment here are undiscovered
8 hydrocarbons; right?
9 A. That's correct, in a prospective area.
10 Q. If we can pull up Dr Moy's first expert report, and we
11 are going to go -- excuse me, just give me one moment.
12 (Pause)
13 Can we go to page 57 of his first expert report, and
14 at the same time -- I'm sorry, at the same time can we
15 please pull up Exhibit AA-037. And specifically, and
16 just -- this is PRMS.
17 A. Correct.
18 Q. And specifically if we can go to page 11 of the PDF
19 itself. Okay. So down at the bottom is where we start
20 the discussion of the determination of commerciality and
21 the seven criteria that must be met; you see that,
22 right?
23 A. Correct, yes.
24 Q. We're going to look at this in your expert report at the
25 same time because I think there's a little bit of
[Page 46]
10:03 1 a difference in language, but I just want to be clear
2 here.
3 A. Mm-hm.
4 Q. So the very first commerciality requirement in your
5 report says:
6 "A technically mature development plan."
7 Under PRMS it says there must be:
8 "Evidence of a technically mature, feasible
9 development plan."
10 And the only evidence of a development plan here is
11 the one you created, right?
12 A. That's my development plan, yes.
13 Q. Would you consider your development plan technically
14 mature?
15 A. Not at this stage, no.
16 Q. Okay. Let's move to financing, the second one.
17 Paragraph 224.2 of your first expert report, and here,
18 letter B under "Determination of Commerciality". There
19 must be:
20 "Evidence of financial appropriations either being
21 in place or having a high likelihood of being secured to
22 implement the project."
23 And in your report the only evidence you have
24 provided is your opinion that "it is highly likely that
25 funding would be available"; is that right?
[Page 47]
10:04 1 A. That's correct.
2 Q. And if we go down to G in particular on AA-37, so if we
3 go down to the next page, and we will have to also go
4 down one page in Dr Moy's report. Paragraph 224.7.
5 This requirement says that there must be:
6 "Evidence that legal, contractual, environmental,
7 regulatory, and government approvals are in place or
8 will be forthcoming, together with resolving any social
9 and economic concerns."
10 Starting with evidence of legal approvals, you've
11 provided no evidence of what legal approvals might be
12 necessary; correct?
13 A. Well, that's outside my area of expertise, but I --
14 Q. And you've --
15 A. -- I simply -- the development being described in my
16 report are ones which are being undertaken right now in
17 Europe. So --
18 Q. But I'm talking about specifically in Slovakia. You
19 haven't shown any of the legal approvals that might be
20 necessary for that project; fair?
21 A. No. I haven't. No.
22 Q. And you've provided no place that they are in place or
23 they will be forthcoming, right?
24 A. I believe that they would be forthcoming.
25 Q. What are the legal approvals that would be needed?
[Page 48]
10:05 1 A. It's not my area of expertise.
2 Q. For contractual approvals, you haven't exhibited any
3 contracts or drafts of contracts for all of the
4 infrastructure needed for this project, right?
5 A. No, I haven't.
6 Q. Regarding environmental approvals, we discussed the
7 preliminary EIA that's required for all producing wells.
8 There are 99 producing wells in the model and the only
9 evidence that you have cited is that it's to be expected
10 that these go through without issue; is that right?
11 A. That's correct.
12 Q. And now on the last part, "resolving ... social and
13 economic concerns", not in paragraph 224.7 of your first
14 expert report, but reflected in PRMS. Are you aware
15 that many local Slovak citizens were opposed to
16 Discovery's project?
17 A. I'm aware of demonstrations, yes.
18 Q. You are aware that local citizens opposed the drilling
19 of Discovery's three exploration wells?
20 A. I don't know the details. I don't know the reason why
21 they were demonstrating.
22 Q. But you know there were demonstrations, right?
23 A. Yes, I'm aware.
24 Q. Am I to understand that the reason that you excluded
25 this requirement is because you do not think that there
[Page 49]
10:06 1 would be social concerns for a development plan that
2 encompasses 99 producing wells and at least two major
3 pipelines constructed in Slovakia?
4 A. Well, they have pipelines already. They have wells
5 already in Slovakia, not in this area.
6 Q. So is your testimony that you don't think there would be
7 social concerns about this development plan?
8 A. I don't think there would be anything that couldn't be
9 overcome with the right approach. Nothing that's
10 proposed in my report is of a scale or requiring
11 technology that doesn't exist. It's done right now in
12 Europe.
13 Q. In Europe. But I'm talking specifically about this
14 region of Slovakia.
15 A. In this region it's underappraised and there's, as far
16 as I'm aware, no longer any production of hydrocarbons.
17 But there are -- there is oil being produced in other
18 parts of Slovakia.
19 Q. In other parts of Slovakia. But this region in
20 particular, this would be a major development programme
21 or project in this region of Slovakia; right?
22 A. It would be a series of developments, yes.
23 Q. But one final product that has 99 producing wells and
24 multiple pipelines built; right?
25 A. Over a very large area, yes.
[Page 50]
10:08 1 Q. A mix of private land and public land, right?
2 A. Yes, just as it's done elsewhere.
3 Q. And I'm talking about the private landowners in this
4 instance. Is it your testimony that those private
5 landowners, all social concerns about building this
6 development plan, all of those social concerns would be
7 adequately addressed; is that your testimony?
8 A. Yes it is, actually.
9 MR PILAWA: Okay.
10 I have nothing further, Madam President.
11 THE PRESIDENT: Thank you.
12 Mr Newing, questions in re-direct?
13 MR NEWING: Yes, just a couple of short questions. Thank
14 you, Madam President.
15 (10.08 am)
16 Re-direct examination by MR NEWING
17 Q. Dr Moy, you discussed this morning the statistical
18 process which has led to identifying the P50 estimate.
19 A. Yes.
20 Q. Can you explain whether this identification of the P50
21 process is a standard process that is used?
22 A. Yes, it is. I mean, in my second report there's an SPE
23 paper. Even the diagrams mirror some of the material
24 that my colleague, Mr Howard has produced. Yes, so it's
25 the standard method to estimate that quantity for
[Page 51]
10:09 1 a portfolio of prospects.
2 Q. And is this a process that is taken into account by
3 other people when making decisions about --
4 (overspeaking)?
5 A. It would be, yes. Yes.
6 Q. Thank you. You were also asked some questions this
7 morning about the oil prospects and how associated gas
8 may be dealt with.
9 A. Yes.
10 Q. Can you explain whether the ability to extract and
11 generate revenue from the oil is affected by how the
12 associated gas is dealt with?
13 A. You would need to be able to get rid of your associated
14 gas. That's either by exporting it or by burning it.
15 If you couldn't, you would need to reduce your oil
16 production. Or stop it completely.
17 MR NEWING: Thank you. No further questions.
18 MR DRYMER: And just to be clear, I believe in answer to
19 Mr Pilawa's questions, a couple of them earlier, you
20 clarified that when you say burning, you mean burning to
21 produce energy, not flaring.
22 A. No, not flaring. Not flaring at all.
23 MR DRYMER: I just want to clarify that.
24 A. Sorry, yes. Yes, gas engines, so --
25 MR DRYMER: Gas engines, yes.
[Page 52]
10:10 1 A. -- it's burned properly, power is generated, and hooked
2 in. Sorry about that confusion.
3 MR DRYMER: Noted. Thank you.
4 THE PRESIDENT: Any questions?
5 MR DRYMER: No questions.
6 (10.10 am)
7 Questions from THE TRIBUNAL
8 THE PRESIDENT: I just have one question that may seem
9 a little simple to you as a reservoir engineer.
10 When does drilling begin? When you have the
11 drilling rig in place?
12 A. Yes, absolutely. The drilling rigs -- the site is
13 prepared, the drilling rig would arrive. Basically it's
14 called "spudding the well", so basically you would start
15 preparing -- driving in the casing from the surface, and
16 then you would enter into that with your drill bit and
17 start the process.
18 THE PRESIDENT: When the surface conductor is driven into
19 the ground, that is before you start drilling?
20 A. Yes, usually, because the surface conductor you don't
21 want caving in around the drill bit. So you would put
22 in a -- usually it's driven in, hammered in, to
23 consolidate the surface soils.
24 THE PRESIDENT: Yes.
25 A. And then basically you've got the starting point to
[Page 53]
10:11 1 enter in with your large-size drill bits to drill that
2 first section.
3 THE PRESIDENT: And then you bring the drilling rig to the
4 site?
5 A. No, once you -- well, usually you could use the drill
6 rig to hammer in the surface casing, and then you
7 transfer to using a drill bit to drill out what's inside
8 of that surface casing, and then you drill down and
9 you're using ever-decreasing drill bit diameters to
10 drill deeper down.
11 THE PRESIDENT: What was the position at Smilno? I think
12 you address it at -- no, you address it more generally
13 in paragraph 47 of your first report, where you speak of
14 Discovery's intentions.
15 A. Yes, hold on. Sorry, which paragraph, Madam President?
16 THE PRESIDENT: 47. Page 11.
17 A. And paragraph, did you say?
18 THE PRESIDENT: 47.
19 A. 47. Hold on, let me just ...
20 Yes, that's right.
21 THE PRESIDENT: Actually, it's not only Smilno. It's all
22 three sites.
23 A. Yes, I don't know exactly which one of those, it just
24 says:
25 "... in the case of the most advanced of these, the
[Page 54]
10:13 1 surface conductor had been driven into the ground ..."
2 THE PRESIDENT: That was the situation at Smilno, if I am
3 not mistaken, and if I am mistaken, counsel will correct
4 me.
5 A. Yes, I'm not sure which of those three it was.
6 THE PRESIDENT: I think it was Smilno.
7 MR NEWING: That is correct, madam.
8 THE PRESIDENT: That's correct; thank you. And my question
9 is: do you consider that drilling had started then, or
10 not?
11 A. It depends --
12 THE PRESIDENT: And if you don't have sufficient
13 information, you simply say so.
14 A. I do remember seeing the images, the photographs of the
15 drill rig coming along the road. I don't know which
16 site it was for, and I don't know whether the surface
17 conductor had already been driven in prior to the
18 arrival of the rig.
19 So, yes, all I know is the rig tried to gain access
20 to a site.
21 THE PRESIDENT: Good. Thank you.
22 I have no other questions. That is my main other
23 question that I had asked before. So that concludes
24 your examination.
25 DR MOY: Thank you very much.
[Page 55]
10:14 1 THE PRESIDENT: And we thank you very much.
2 DR MOY: Thank you.
3 THE PRESIDENT: Is it a little too early to take a break, or
4 do you want a relatively short break?
5 MR PILAWA: I would appreciate a 15-minute break, if
6 possible.
7 THE PRESIDENT: 15 minutes?
8 MR PILAWA: A 15-minute break.
9 MR NEWING: That's fine.
10 THE PRESIDENT: We will take a 15-minute break now, and the
11 next witness is Mr Howard; is that the plan?
12 MR NEWING: Yes, that's correct.
13 THE PRESIDENT: Yes. Good.
14 Let's take 15 minutes, then.
15 MR PILAWA: Thank you.
16 (10.15 am)
17 (A short break)
18 (10.30 am)
19 MR NEWING: Just before we start, can I just say Mr Howard
20 does have some health issues, so depending on the length
21 of the examination he may need to take a short comfort
22 break. He will let you know if that is necessary, but
23 hopefully that's okay.
24 THE PRESIDENT: Fine, please let us know if we don't
25 remember.
[Page 56]
10:30 1 MR COLIN HOWARD (called)
2 THE PRESIDENT: So, sir, you are Colin Howard.
3 MR HOWARD: That's correct.
4 THE PRESIDENT: You are our third Rockflow expert?
5 MR HOWARD: Yes.
6 THE PRESIDENT: You have submitted two expert reports, the
7 first one of 3 October 2022, and the second one of
8 18 September 2023.
9 MR HOWARD: That's correct.
10 THE PRESIDENT: You are heard as an expert and you are under
11 a duty to make only statements in accordance with your
12 sincere belief. Can you please read the expert
13 declaration?
14 MR HOWARD: I solemnly declare upon my honour and conscience
15 that my statement will be in accordance with my sincere
16 belief.
17 THE PRESIDENT: Thank you.
18 So now we see your presentation on the screen and
19 you have 15 minutes, and you can proceed, please.
20 (10.31 am)
21 Presentation by COLIN HOWARD
22 MR HOWARD: Thank you, Madam President.
23 (Slide 2) The first slide is just a very brief
24 outline of my background. I don't propose to go through
25 that in the interests of time. It's there for
[Page 57]
10:32 1 reference.
2 (Slide 3) On the second slide is just a note of my
3 instruction from Signature to calculate a fair market
4 value of Discovery's share of the Slovakian assets at
5 the date of the award, and I note that my valuation is
6 therefore an ex-post one, and a but-for scenario.
7 (Slide 4) As you will have noted from my expert
8 reports, my valuation methodology that I chose was to
9 use an income-based method, and specifically I used
10 a discounted cash flow model using the volumes and
11 geological chance of success presented by Mr Atkinson
12 and Dr Moy, the Rockflow geological and reservoir
13 engineering experts.
14 I used that model to calculate a net present value,
15 NPV, of the prospects within the licence area. I would
16 be very happy to expand on the details of my discounted
17 cash flow model, but I don't propose to go through it in
18 any detail.
19 (Slide 5) Just to note, the inputs of those
20 discounted cash flow model are Dr Atkinson's
21 probabilistic volume distributions, and his assessment
22 of the geological chance of success. I used a Monte
23 Carlo simulation methodology, combined with decision
24 trees, to establish a probability distribution of
25 successfully discovered volumes, i.e. volumes that could
[Page 58]
10:33 1 reasonably be discovered within the area. And we select
2 the P50, or median, as the most likely outcome. I then
3 identify a set of prospects that most closely matches
4 the P50 volume.
5 Dr Moy then has presented a development scheme for
6 those set of prospects, and of course those and the
7 associated costs are input into the DCF model to
8 calculate the net present value.
9 (Slide 6) Just to summarise, my valuation for that,
10 submitted on 18 September, was $133 million, a shade
11 over. The table below confirms that and is taken from
12 my expert report, second expert report.
13 At the end of this presentation there are a number
14 of addendum slides which I won't be going through in
15 detail, which explain my choice of valuation
16 methodology. And I'm happy to take questions on those
17 should the panel require.
18 I just want to move on to valuations regarding prior
19 transactions regarding the asset, and these were used by
20 the Respondent's expert in order to come up with their
21 valuations, and there are three of them: the sale of the
22 San Leon overriding royalty back to Discovery (Slide 8);
23 the proposed Gulf Resources investment; and the Akard
24 investment, all three in 2015.
25 (Slide 9) Just a quick note on the valuation of
[Page 59]
10:35 1 prospective resources, i.e. prospects, as they
2 undoubtedly were in 2015. This, of course, the
3 valuation depends on both the volume, or assessment of
4 volume, and the geological chance of success.
5 Therefore, those perception of value is dependent on
6 what we know about the asset at that time. It's our
7 perception of value at a particular point in time when
8 we make that assessment.
9 When a new piece of information becomes available,
10 we revise our estimates of volume and GCOS, and
11 therefore the valuation changes.
12 And I should just note that this process, data
13 acquisition and interpretation, is not a smooth one: it
14 goes in fits and starts as new pieces of information
15 come along. And of course our valuation would reflect
16 that.
17 I'm not going to go through it in any great detail,
18 but you will have received the demonstrative exhibit,
19 which is a timeline of different events. The second
20 column notes the asset transactions, and the fourth
21 column notes when data was acquired or interpreted, both
22 of them.
23 MR DRYMER: A very quick look, sir: this is technical data;
24 we're not talking financial data?
25 MR HOWARD: No, technical data. Yes.
[Page 60]
10:37 1 MR DRYMER: Thank you.
2 MR HOWARD: If I just come to the San Leon overriding
3 royalty (Slide 10). When San Leon Energy -- when
4 Discovery acquired the asset from San Leon, San Leon
5 retained an overriding royalty interest, and that was
6 sold back to Discovery for £120,000 in January 2015.
7 CRA, that's Charles River Associates, I use that for
8 the Respondent's quantum experts, they say this implies
9 a value of 1.8 million at the Respondent's ex-ante date
10 for the Discovery share.
11 Two things to note. At the transaction date there
12 is still a considerable amount of data acquisition
13 continuing after that, some of the data processing and
14 some of the magneto-telluric data. In fact,
15 interpretation continued for a number of years
16 afterwards.
17 The other point to note is that the San Leon sale
18 I do not believe was a fair market value transaction.
19 (Slide 11) Mr Lewis' witness statement notes that
20 San Leon was in a "cash flow crisis and needed to secure
21 cash quickly" and that the sale of the San Leon
22 overriding royalty enabled them to overcome that cash
23 crisis.
24 I don't believe Mr Lewis' testimony a couple of days
25 ago was challenged on that.
[Page 61]
10:39 1 CRA claim that this was not in fact the case and
2 that they were not cash-strapped, and present
3 information from the San Leon annual accounts to show
4 that they were in fact able to raise corporate finance
5 of several million euros. But a close reading of the
6 annual report showed that in fact that was secured in
7 a personal capacity by the CEO, Mr Fanning. So,
8 actually, the company, San Leon, did not appear able to
9 raise finance on their own.
10 They also appeared to be paying excessive finance
11 costs, and the auditors noted in 2015 there was an item
12 of concern on San Leon's status as a going concern, the
13 materiality.
14 Taking that together, I don't believe we can
15 consider the San Leon overriding royalty was a fair
16 market value calculation.
17 (Slide 12) When it comes to the Gulf Shores
18 investment, this was a deal that would include two wells
19 and an option on two further wells, this implied under
20 CRA assessment a valuation of $10.1 million in March,
21 I believe it was, at the ex-ante date, the Respondent's
22 ex-ante date. However, Gulf Shores' due diligence only
23 appeared to focus around the immediate area of the two
24 wells that they were committed to. There did not appear
25 to be a full evaluation of the rest of the licence area,
[Page 62]
10:41 1 and therefore they would not be in a position to
2 actually assess that.
3 I also note that, again, the full prospectivity of
4 the area had not been established by this date. It was
5 an evolving process that continued right up to the EGI
6 report in 2021, which was a fully integrated study of
7 all the data available.
8 (Slide 13) Pretty much the same things apply to the
9 Akard investment, which did actually proceed. Again, it
10 was funding for three wells in return for 50% of
11 Discovery's share of the licence. Although this was
12 several months later, there was still ongoing evaluation
13 and the EGI study had not been completed, which
14 Mr Atkinson based his interpretations and assessments
15 on.
16 Again, because that was not established, I don't
17 believe it's an assessment of what the licence area
18 prospectivity is.
19 (Slide 15) I now come to valuation based on
20 comparables ex-ante methodology. I note that my
21 analysis is, of course, a but-for case and is ex-post.
22 But it is possible to look at the share prices of
23 comparable companies at the ex-ante date, and this is
24 what CRA have done.
25 Essentially what they're doing, what we're doing is
[Page 63]
10:42 1 saying comparing with companies in Eastern Europe that
2 have 2P declared reserves, and bear in mind that Dr Moy
3 has stated that he believes that in due course, once
4 discovered, appraised and given appropriate permissions,
5 these would be developed in the licence area and would
6 become 2P reserves in the but-for case.
7 (Slide 16) This is the graph from the CRA first
8 report, and we're graphing the enterprise value in
9 millions of dollars on the vertical axis, against the 2P
10 reserves, millions of barrels of oil equivalent.
11 In coming up with a valuation, an ex-ante valuation,
12 in actual fact, CRA do not use the data shown on that
13 graph. They use data from a company called ADX because
14 they claim that ex-ante, they were the only company that
15 did not have 2P resources.
16 However, when we look into it, the ADX prospective
17 resources are actually gas condensate fields, offshore
18 Tunisia, and Sicily as well, I believe, and they're
19 entirely incomparable. They don't relate to the type of
20 thing we are looking to find in Slovakia.
21 They also note that ADX had prospective resources of
22 1,414,000,000 barrels of oil equivalent. I can't
23 actually find that number in the references given in
24 CRA, but I believe it's an unrisked volume; in other
25 words, it's a volume that could be there.
[Page 64]
10:44 1 CRA derive a value on their ex-ante valuation of
2 just $0.15 million. But that is based on this value of
3 1,414 prospective resources, which is an unrisked
4 number, and therefore this calculation cannot stand; the
5 logic is incorrect.
6 Conversely, when I look at this graph in front of me
7 (Slide 16) I see that, putting aside the data point for
8 JKX, there is a rough linear trend going from the origin
9 up through those values, showing there's a sort of
10 relationship between enterprise value and the amount of
11 reserves. That is not unexpected.
12 From the gradient of that line, we can get what's
13 called an enterprise value/2P ratio, which I derive at
14 $4.375 per boe. If I take the assessed volume of
15 discovered resources, i.e. the ones we simulate that is
16 the P50 value for Discovery's share,
17 8.24 million barrels, that equates to a value of
18 $36 million, as of 7 June, and of course that value
19 could be adjusted to the award date.
20 (Slide 19) When they do a similar analysis in their
21 second report, they still rely on the data from ADX,
22 from the first report, which again I believe is not
23 correct because it's an unrisked volume and the
24 calculations are not correct.
25 They also appear to make a fundamental error where
[Page 65]
10:46 1 they apply a reserve adjustment factor, or RAF, to
2 volumes which are already risked. In other words, they
3 are the discovered volumes. And that's a double dipping
4 on the geological chance of success, which they put at
5 5-10%.
6 If you correct for both the recovery adjustment
7 factor and the fact that they haven't actually included
8 associated gas from the oilfields, you essentially get
9 back to the 36 million figure I was talking about.
10 THE PRESIDENT: I think you've reached the 15 minutes. You
11 have exceeded them by 1 minute. But, of course, you can
12 get to a conclusion. I'm just saying there's not really
13 time left.
14 MR HOWARD: Yes. I will do that.
15 I'll just note briefly that when they did the
16 ex-post comparables analysis (Slide 21), it's a similar
17 picture, but the linear trend is not so apparent, and
18 they use a weighted average method of deriving the
19 dollar per boe, which I believe is not appropriate.
20 I will leave my formal presentation there. Just
21 note that at the end of the presentation I have the
22 addendum slides of my reasons for using a discounted
23 cash flow for my valuation. Thank you.
24 THE PRESIDENT: Thank you.
25 Mr Pilawa.
[Page 66]
10:48 1 (10.48 am)
2 Cross-examination by MR PILAWA
3 Q. Thank you, Madam President.
4 It's still morning: good morning, Mr Howard.
5 Can you go to slide 19, please. Thank you. Do you
6 remember this slide?
7 A. Yes.
8 Q. Those figures in the last bullet point, those are new
9 calculations that you've done; right?
10 A. That's correct, yes.
11 Q. Okay. They're not in either one of your expert reports;
12 right?
13 A. That's correct.
14 Q. Okay. And then I don't think we saw it on the screen,
15 but I received your slides, and can you confirm for me
16 that slide 22 of your presentation also contains new
17 calculations?
18 A. Which one specifically?
19 Q. The 24.7 million?
20 A. Yes. That's my eyeballing of the -- but it is derived
21 from the graph that was presented in the CRA report
22 number 2.
23 Q. And this is the first time that you've provided the
24 24.7 million number?
25 A. That's correct.
[Page 67]
10:50 1 Q. Okay.
2 I don't need the slide show any more.
3 So talking about the second expert report that you
4 issued, there were -- well, actually, let me back up.
5 You mentioned this earlier: the basic, or the analysis
6 that you are taking is the but-for analysis; right?
7 A. That's right.
8 Q. Okay. And you are calculating the fair market value on
9 your but-for basis?
10 A. That's right.
11 Q. And that but-for basis is, again, the idea that had
12 Discovery continued operating in Slovakia, it would have
13 developed a large-scale project; is that fair?
14 A. The individual oil projects are not large-scale.
15 They're quite small, in fact. The gas projects, taken
16 together as an integrated development, I would call
17 a mid-scale project, it's not a very large project.
18 Q. Okay. And that but-for scenario, the but-for,
19 specifically the DCF, it's one unified integrated final
20 product; right?
21 A. The model is a single model, but within the model, each
22 project, the individual oil projects, and then the gas
23 project, are modelled as separate incremental tranches,
24 which has to be done in order to correctly calculate the
25 tax effect at the corporate taxation level.
[Page 68]
10:51 1 Q. Okay. But they're not separated by well locations. So
2 there's no --
3 A. They are -- the three individual oilfields are separate
4 well locations, yes.
5 Q. Right, but if I'm thinking about Smilno, for example,
6 there's no fair market value exclusive to Smilno?
7 A. Not to Smilno, because it's one of the gas fields which
8 is considered as an integrated single project.
9 Q. Right. Okay. And that DCF was the $133 million that
10 you mentioned earlier, and in your second report there
11 is also a $36 million valuation from comparable
12 companies, which we'll discuss, and a 5.10 million
13 comparable transaction approach. Those were the three
14 numbers in the second expert report; right?
15 A. I recognise -- can you give me the reference to the
16 5 million one?
17 Q. Sure. It's paragraph 338 of your second expert report.
18 A. Yes, I have it.
19 Q. Okay.
20 I want to discuss a little bit the points you made
21 in your presentation about data acquisition. And
22 I believe we have received Mr Howard's demonstratives,
23 and we can project those on the screen; is that right?
24 So CD-10. I think you have a copy of it in your hand as
25 well?
[Page 69]
10:54 1 Α. Okay. (Pause)
2 Q. There are a few dates when we get the spreadsheet up
3 that I'm going to want to talk about.
4 A. Sure.
5 Q. But before we get into that, you understand that
6 Discovery Global purchased AOG in March 2014; right?
7 A. Yes.
8 Q. And the previous owner of AOG was San Leon; right?
9 A. Yes.
10 Q. Have you analysed the data that Discovery Global
11 inherited from San Leon?
12 A. Not personally. Do you mean the geological data, or ...
13 which data?
14 Q. Yes, sure. I understand that Discovery Global, when it
15 purchased AOG, inherited, for example -- if we can go up
16 on that spreadsheet? Thank you.
17 I understand that when Discovery Global purchased
18 AOG, for example, it inherited this seismic data that
19 AOG or the previous owner had taken from 2008 to 2011?
20 A. That's correct.
21 Q. So I'm talking about -- and, for what it's worth,
22 I'm also talking about July and August 2012, and then
23 the March 2013 entries right here, where the gravity
24 surveys and the interpretation reports -- I'm talking
25 about that type of data?
[Page 70]
10:56 1 A. Yes.
2 Q. So I understand that this was part of an overall package
3 of data that Discovery Global purchased. Or, I should
4 say, was handed over in the transaction.
5 A. Yes.
6 Q. So you haven't reviewed that data?
7 A. No. It's not my role to review the technical data.
8 Q. Okay. Did you review the manner in which Discovery
9 Global reinterpreted some of that data, or reprocessed
10 it?
11 A. I'm not aware of the nature of the interpretation.
12 I'm not qualified to comment on that.
13 Q. Can you tell me the value that was added by the
14 reprocessing and reinterpretation of monetary figures?
15 A. No.
16 Q. If we could put up Mr Howard's second expert report at
17 paragraph 72, and I will get you a page number in just
18 a moment. Page 18 of Mr Howard's second expert report.
19 Yes. And I'm looking at that paragraph 72, Mr Howard,
20 and that first sentence where you -- well, let's back
21 up.
22 For context, here in this part of your report, and
23 I'm happy if you want to take a moment to look at the
24 previous page just to kind of see the context, but this
25 is where you're discussing prospective resources and
[Page 71]
10:58 1 responding to CRA's report, explaining that:
2 "Certain industry codes do not recommend using
3 an income approach for prospective resources."
4 Are you comfortable with that characterisation of
5 this part of your report?
6 A. Yes.
7 Q. And you state in paragraph 72:
8 "In this context, I note that I am not preparing
9 a valuation for 'public reporting', but for a legal
10 arbitration, and neither is the Claimant."
11 Can you tell me what you meant by that statement?
12 A. Yes, this is in the context where CRA quote the VALMIN
13 code for reporting information to the Australian
14 Stock Exchange, for purposes of stock listing or
15 announcements to press releases, et cetera. It's in
16 that context.
17 Q. Well, would your report have been different if you were
18 preparing it for public reporting purposes?
19 A. If I was preparing a valuation for public reporting, you
20 would need to follow the rules of that exchange. But it
21 would be seen in the context of what it was. That is
22 not necessarily a fair market value. It's not doing
23 a fair market value calculation.
24 Q. So one of the -- well, we note here -- I'm sorry,
25 I should say you note specifically, or you make
[Page 72]
11:00 1 reference to the Australian Stock Exchange here. You
2 rely on a guidance note for listing rules, and you state
3 here that that guidance note is "underpinned by the
4 SPE-PRMS". And so you see the --
5 A. That's correct.
6 Q. Yes. Thank you.
7 Can we pull up document CRA-35 and if we could go to
8 page 16 of the PDF itself, section 5.28.6, right there
9 in the middle. Are you able to see that, Mr Howard?
10 A. Yes.
11 Q. Can you read that for the record?
12 A. "An entity must not report forecast financial
13 information derived from an estimate of prospective
14 resources."
15 Q. Okay. Thank you.
16 Sticking with your second expert report, can we
17 please now turn to paragraph 375, and this is page 99
18 (PDF page 97).
19 A. I should note on that previous quotation, that's
20 reporting to the Australian Stock Exchange. It's not
21 reporting to anyone. It is in the context of what you
22 must report to the Australian Stock Exchange.
23 Q. And in that context, the Australian Stock Exchange
24 prohibits financial forecasting of prospective
25 resources, that's what the document says, right?
[Page 73]
11:02 1 A. Financial forecasting, but that is not the same as
2 valuation.
3 Q. I accept that. I'm just trying to confirm that
4 specifically the Australian Stock Exchange prohibits
5 using prospective resources for --
6 A. For --
7 Q. -- forecasting.
8 A. -- mostly mining projects. The VALMIN code is
9 essentially a code for mining projects. They have
10 a sentence in there where they say this can be used for
11 oil and gas projects. In my professional experience,
12 I've never seen that actually happen.
13 Q. I think in the paragraph before you were talking about
14 how the guidance note was saying that this was
15 underpinned by the SPE-PRMS and that's about
16 hydrocarbons, right?
17 A. That's correct, yes. So if they were reporting on oil
18 and gas, they would use PRMS, yes.
19 Q. Thank you.
20 So going back to 375 here, in paragraph 375, this
21 $36 million valuation is based on the reserves in your
22 DCF model; right?
23 A. In the but-for case.
24 Q. Yes, and the reserves in the DCF model, in the but-for
25 case. And those reserves are the ones in paragraph 374
[Page 74]
11:03 1 immediately preceding, right?
2 A. Yes.
3 Q. And this $36 million calculation is calculated on the
4 ex-ante date; right?
5 A. It was calculated at that date, yes.
6 Q. Okay.
7 A. But the but-for case is, of course, ex-post.
8 Q. I understand that, but this calculation is specifically
9 as [at] the ex-ante date; right? That's what
10 paragraph 375 says.
11 A. Just to be clear what that means, the $4.375 per boe is
12 derived from the gradient of that graph shown in the CRA
13 report, and those enterprise values were from the
14 companies at their ex-ante date. Which is different
15 from the ex-ante data that the Claimant uses, yes.
16 Q. But I understand this to mean you are adopting the
17 ex-ante date that Charles River Associates has been
18 using, and you are providing your valuation as at that
19 date, which is $36 million; right?
20 A. No, that's not correct. My valuation is based on my
21 discounted cash flow model. I have merely said that if
22 you did use the method that CRA recommend, or propose,
23 and you look at the discovered resources, which we,
24 myself and my colleagues, have come up with in our
25 but-for case, using that value of $4.375 per boe, you
[Page 75]
11:05 1 would come up with that figure. But that is not my
2 valuation.
3 Q. Okay. I understand it's not your valuation. But that
4 $36 million derives from your discounted cash flow
5 analysis; that's correct, right?
6 A. No, it doesn't. It derives from the discovered volumes,
7 which actually come from Dr Moy's and Mr Atkinson's
8 work, and the Monte Carlo simulation, which I have
9 undertaken. But that hasn't got anything to do with
10 financial forecasting or discounting. That is purely in
11 terms of volumes. And I then just multiplied by the
12 4.375, which is not derived from my discounted cash flow
13 model. That is the gradient on the graph presented by
14 CRA.
15 Q. Okay. So paragraph 375 says:
16 "Using the $4.375/boe value ..."
17 So you're using this, and it values the reserves in
18 your DCF -- I understand this isn't your valuation, but
19 it values the reserves in your DCF model at 36 million.
20 Are you comfortable with that?
21 A. Yes. The reserves were input into my DCF model but
22 they're not derived from my DCF model.
23 Q. These are the reserves that Dr Moy -- I'm sorry,
24 I should say this: Mr Atkinson and Dr Moy have produced
25 two expert reports that then produce so-called reserves?
[Page 76]
11:06 1 A. Part of my work was to go from the unrisked volumes to
2 the risked volumes, which are the discovered resources.
3 And that part of my work is undertaken within the same
4 Monte Carlo spreadsheet that Dr Atkinson uses. But that
5 part of the work is my responsibility.
6 You will note in that spreadsheet there are initials
7 on the top of every column, just to make exactly clear
8 who did what bit of analysis. It just, from a technical
9 point of view, for data integrity, it is important to
10 keep all the information in the same Monte Carlo
11 spreadsheet.
12 So part of my work was to work out, from the
13 unrisked volumes that could be in the prospects, to do
14 an exploration simulation exercise to come up with a P50
15 volume of what is the most likely discoverable volumes.
16 And we then chose a set of prospects that almost exactly
17 matches that P50 volume of discovered resources. And
18 Dr Moy built a development schedule for that.
19 Q. Yes. I understand that.
20 This paragraph in particular though, I understand
21 it's not your valuation, that $36 million, that
22 arrives -- we arrive at that through the reserves in
23 your DCF model. Those are the words in 375; right?
24 A. The volume, the reserves --
25 Q. Yes?
[Page 77]
11:08 1 A. -- are the same as I use in my DCF model, yes.
2 Q. Okay. At the Respondent's ex-ante date; right?
3 A. Yes.
4 Q. And at the ex-ante date, Discovery Global only had
5 prospective resources; right?
6 A. Yes.
7 Q. Okay.
8 A. But of course, I should note it's a but-for case.
9 Q. I know.
10 A. Yes.
11 THE PRESIDENT: I'm not sure what -- you are saying it's the
12 but-for, but the but-for in your analysis comes later
13 than the Respondent's ex-ante date. So there seems to
14 be some disconnect between the dates; no?
15 A. Let me try to explain. It's difficult without all the
16 information directly in front of us.
17 THE PRESIDENT: But conceptually they mean --
18 A. CRA have presented data from so-called comparable
19 companies and their share prices indicate their asset
20 values, corrected for debt and cash balances, and of
21 course those can be quoted at any date that we wish.
22 They have quoted the data at the ex-ante date that they
23 chose. We have then come up with a valuation. If the
24 oil price changes over time, you would expect the asset
25 values, hence the share values, to go up and down, and
[Page 78]
11:10 1 those can be adjusted for in a very approximate way by
2 applying something -- CRA use the FTSE 350 Oil & Gas
3 index as a multiplier, which can be done, but it's a bit
4 of a blunt instrument.
5 So all I have done is take CRA's chart and say: at
6 that date, if you have 2P reserves, this is what their
7 value would be. Not just Discovery --
8 THE PRESIDENT: So you assume you would have --
9 A. If anyone had --
10 THE PRESIDENT: -- 2P reserves at the time of the ex-ante
11 valuation date; is that right?
12 A. Yes, but it's a generic description. I'm saying if
13 anyone had some reserves at that date of that magnitude,
14 we can, you know, from that graph, implies that they
15 would be worth $36 million.
16 If other companies had the same volume of 2P
17 reserves at that date, we could say that would also be
18 worth $36 million, in a very approximate way.
19 Now, at the ex-ante date of course we know Discovery
20 had not been able to drill and therefore did not have
21 those reserves. But if they had have done, they would
22 have been worth $36 million, and we could then move that
23 value forward in time to a point at which they would
24 have had, in the but-for case, the appropriate reserve
25 declarations, and we can arrive at a valuation adjusting
[Page 79]
11:12 1 using the FTSE oil and gas index or another index.
2 THE PRESIDENT: So you would take the ex-ante reserves value
3 and then you move it forward to the ex-post date, and
4 you adjust with the FTSE factor, or whatever --
5 A. 350 index. That is what you can do. It is not the
6 method I've chosen for my valuation. I'm saying if you
7 did do that, using the graph that CRA have produced, you
8 would come up with a value of 36 million at that date,
9 which can then be adjusted.
10 THE PRESIDENT: Thank you.
11 A. Yes.
12 THE PRESIDENT: Please carry on. Apologies for the
13 interruption.
14 MR PILAWA: No. No problem at all.
15 So coming to the San Leon overriding royalty that
16 you discussed, I believe -- and correct me if I am
17 wrong -- in the presentation that you gave, you
18 discussed how one of the issues with that royalty, or
19 any valuation derived from that, is that the data
20 landscape had changed?
21 A. That was one of the points, yes.
22 Q. One of the points. And you haven't quantified what that
23 change in data represents; right?
24 A. No, one would -- in order to do that, one would --
25 Q. No, that's -- this is just to move to the second part of
[Page 80]
11:13 1 the sale, the fair market value aspect.
2 So I understand that you rely on Mr Lewis' testimony
3 that the sale for the San Leon royalty value was not
4 fair market value, and --
5 A. It's one of the points that I rely on.
6 Q. It's one of the points that you rely on.
7 And one of the issues that you have with that
8 royalty -- well, let me say this: apart from relying
9 upon Mr Lewis' testimony and looking at San Leon's
10 annual report, what are the other pieces of information
11 that you've used to determine that this was not a fair
12 market value sale?
13 A. Those were essentially the two points I used. In fact,
14 the single point that the auditor raised, regarding --
15 there was a materiality issue regarding going concern,
16 that by itself I believe would make it not a fair market
17 value transaction.
18 Q. But you are aware that San Leon, to the extent it needed
19 to find alternative funding or sources of funds, it had
20 that ability at the time; are you aware of that from
21 their annual reports?
22 A. Are you referring to the loan finance that --
23 Q. Right, I'm talking about the $30 million additional loan
24 facility that they had at their disposal?
25 A. In their annual report?
[Page 81]
11:15 1 Q. Yes.
2 A. I don't know the conditions of that $30 million loan
3 facility.
4 Q. But you are aware that it exists, did I understand that
5 right?
6 A. I wasn't aware specifically of that one.
7 Q. Okay. Did you want to see the document?
8 A. Yes. By all means.
9 Q. Okay. Can we pull up C-259. Page 32 of the PDF. And
10 if you can zoom in to that middle column right at the
11 top of the page. No, other to the other side. Right in
12 the middle:
13 "In the event, that the Placing is not approved ..."
14 Do you see that at the top:
15 "... the Group has an additional loan facility of
16 £30 million available ..."
17 A. Yes. Which report is this one? What date is this? Is
18 this the 2014 --
19 Q. 2014.
20 A. 2014.
21 Q. Yes.
22 The question that I have though is, if San Leon, the
23 previous owner of the royalty, and the previous owner of
24 all of the data underlying the asset, if they were
25 sitting on an asset that would pay them passive income
[Page 82]
11:17 1 of tens of millions of dollars, wouldn't one of the last
2 things they would want to get rid of be that royalty?
3 A. I don't believe at the time they, San Leon, thought it
4 was worth that million. I think there was a gap in what
5 their valuation was and what Discovery believed. And of
6 course, in the context of the sale to Discovery,
7 Discovery is not going to go to San Leon and say:
8 I think it's worth more, let me pay you more.
9 Q. But you agree with me that San Leon of all parties was
10 in the best position at that time to place a value on
11 that royalty; right?
12 A. I'm not sure that's the case, no.
13 Q. Well, they had all the data underlying the asset; right?
14 As the previous operator?
15 A. They had the data that existed at that time. And in the
16 following months after the acquisition, Discovery
17 acquired some more data, magneto-telluric, I think. But
18 they also reinterpreted and reprocessed the seismic
19 data, and that was key to the value that they placed on
20 the royalty.
21 Q. And that's the improvement or -- the improvements with
22 the data that you can't quantify, right?
23 A. I can't put a number on it, no.
24 Q. Okay.
25 A. But clearly Discovery felt the reprocessing was worth
[Page 83]
11:19 1 doing for the -- you know, to improve the quality of the
2 data. They cannot predict what the results of the
3 reprocessing might be. Sometimes you reprocess data and
4 it confirms that perhaps a trap is not there. That does
5 not appear to be the case, because if that was the case,
6 Discovery would not want to proceed with putting money
7 into an asset that wasn't worth pursuing. They clearly
8 pursued with the asset, because they felt the
9 reprocessing improved their valuation of the asset.
10 MR PILAWA: That's fine.
11 I have no further questions, Madam President.
12 THE PRESIDENT: Thank you. Mr Newing?
13 MR NEWING: I have no questions, Madam President.
14 THE PRESIDENT: Do my colleagues have questions?
15 (11.20 am)
16 Questions from THE TRIBUNAL
17 THE PRESIDENT: We were discussing the 36 million valuation
18 through comparable companies, and you said you get there
19 by using the reserves that you have also used for your
20 DCF, and then -- is that not ...?
21 A. Yes, the work that my colleagues and myself have done
22 has come up with a volume that we think is -- you know,
23 if we proceeded, or if Discovery proceeded with the
24 exploration programme, we think that is the P50, the
25 most likely volume that would result from that drilling
[Page 84]
11:21 1 programme.
2 THE PRESIDENT: That would be produced.
3 A. Yes.
4 THE PRESIDENT: Yes.
5 A. Obviously it's a probability distribution and the P50 is
6 the most likely. It could be higher, it could be
7 greater. But the probability of it being greater is
8 equal to the probability of it being smaller.
9 THE PRESIDENT: And then you said that you took the reserves
10 at CRA's ex-ante date, and you explained to me that the
11 disconnect between the dates, because there were no
12 reserves at that date but only resources, could be made
13 up for by moving to the ex-post date by applying the
14 FTSE index.
15 A. That can be done, yes.
16 THE PRESIDENT: Which you do not -- which is not your
17 preferred method, but is the one CRA has used; is that
18 right?
19 A. Yes, if you like, that 36 million sort of arrives from
20 the volume of -- that we think might be discovered. But
21 using the data from the ex-ante date, just because
22 that's the date they're having to choose and present the
23 chart on, that analysis could have been on any day, you
24 know, and in fact they do produce equivalent charts for
25 ex-post valuation in their reports. And you might have
[Page 85]
11:22 1 seen one of them in my presentation.
2 And the data points move around a bit. But the
3 overall picture is similar. They move around because
4 the oil price is going up and down, and therefore asset
5 values will, of course, move.
6 And bear in mind that these are comparable
7 companies. The fields and assets they have are not
8 necessarily directly comparable. They are in Eastern
9 Europe, and they are 2P reserves, partly. But the asset
10 values on those charts, the enterprise value is, of
11 course, a mixture of whatever -- whether they have
12 reserves, contingent resources, and prospective
13 resources. The share price just reflects investors'
14 perception of the basket of assets that they have.
15 THE PRESIDENT: Yes. Do I understand this correctly: that
16 if we find that your reserve quantities are not
17 sufficiently certain, for legal reasons not for
18 technical reasons, then we cannot use this market-based
19 valuation because it is dependent on these quantities of
20 reserves? It is built on it; is that right? Or do
21 I misunderstand something?
22 A. All the numbers we have presented, both in my valuation
23 and in the CRA, depend fundamentally on the quantity of
24 reserves that might be found. I think that's, yes,
25 common sense.
[Page 86]
11:24 1 in terms of not sufficiently certain, obviously
2 I can't speak about the legal definition of that.
3 THE PRESIDENT: No, and I'm not asking you that question.
4 I'm just trying to understand the basis for the
5 market-based valuation. But you just answered, so
6 that's fine.
7 I have no further questions, so that ends your
8 examination. Thank you very much, Mr Howard.
9 MR HOWARD: Thank you, Madam President.
10 THE PRESIDENT: Do we wish to move on, or do we need a short
11 break? The next witness is Dr Longman; is that right?
12 MR PILAWA: Exactly.
13 MR NEWING: I'm happy to move on. I don't know if a couple
14 of minutes is needed to bring up Dr Longman's slides.
15 THE PRESIDENT: Maybe we'll just switch the slides and
16 whatever needs to be done. That will take, let's say,
17 ten minutes, because five minutes is generally not very
18 realistic.
19 (11.26 am)
20 (A short break)
21 (11.35 am)
22 THE PRESIDENT: I think we're ready to start.
23 DR CHRIS LONGMAN (called)
24 THE PRESIDENT: Dr Longman, you confirm for the record you
25 are Chris Longman?
[Page 87]
11:35 1 DR LONGMAN: I am.
2 THE PRESIDENT: From SLR Consulting?
3 DR LONGMAN: That's correct.
4 THE PRESIDENT: You have submitted two reports, the first
5 one 31 March 2023, and the second one 14 December 2023?
6 DR LONGMAN: Yes.
7 THE PRESIDENT: You are heard as an expert witness and you
8 know that I will now ask you to read the expert
9 declaration into the record.
10 DR LONGMAN: I solemnly declare upon my honour and
11 conscience that my statement will be in accordance with
12 my sincere belief.
13 THE PRESIDENT: Thank you. Now we have received your
14 presentation, and you have 15 minutes to --
15 DR LONGMAN: I think we're just waiting for it to come up.
16 MR DRYMER: You have been patient the last couple of days;
17 you will have to be patient a few minutes longer!
18 (Pause)
19 THE PRESIDENT: Is there a difficulty?
20 (Pause)
21 Good.
22 So now you have 15 minutes.
23 (11.39 am)
24 Presentation by DR LONGMAN
25 DR LONGMAN: So yes, good morning, Madam President, members
[Page 88]
11:39 1 of the Tribunal.
2 I think as we've established, I'm Chris Longman.
3 I'll run through a presentation this morning.
4 I'm a geologist by background, and I have had 40 years
5 plus working in the upstream oil and gas industry.
6 (Slide 2) I'll run through a series of topics this
7 morning. I won't go through this slide in detail. It
8 will become apparent as we run through it what we're
9 reviewing, the licences, the potential, and what's being
10 done on those licences.
11 (Slide 3) As has been shown before, the Discovery
12 Global licences are in the north-eastern quadrant of
13 Slovakia. It's the blue circle in the top right-hand
14 diagram there, within the Carpathian Mountains, and the
15 geological setting of these licences is one of a series
16 of nappes that are thrust from the southwards over each
17 other, so successive thrusts override the previous one,
18 and you can see that in the bottom left diagram here
19 where you've got a series of thrusts that are moving, as
20 I say, from left to right, each one overlying it.
21 The most important thing about that is that it's
22 a very complex structural setting, so there's lots of
23 faulting and fracturing within the rocks themselves.
24 And I think as has been mentioned before, the surface
25 nappe within the Claimant's licences is mostly the
[Page 89]
11:40 1 Magura nappe and a little bit of the Dukla nappe.
2 (Slide 4) This map shows that in a little bit more
3 detail. The Claimant's licences are in the pink outline
4 there, and you can see that the Magura nappe, in the
5 sort of dirty grey colour, the Dukla nappe, the darker
6 grey, are the ones that cover the Claimant's licences.
7 And then the Silesian nappe, further to the north-east,
8 doesn't actually overlie the -- or underlie the
9 Claimant's licence area.
10 So looking at that in terms of trends, the
11 Claimant's licences are on trend with the Magura and
12 Dukla nappes, but I don't believe they are on trend with
13 the Silesian nappe.
14 The key to that is that there's a lot of analogue
15 data from Poland, less so from Slovakia, where there has
16 been an exploration history in all these nappes, and
17 therefore, in my opinion, the analogues should focus on
18 the Magura and Dukla nappes, rather than the Silesian
19 nappe. Although, taking into account the Silesian nappe
20 is important and, as you will see later, I have done
21 that.
22 (Slide 5) You've seen these diagrams as well before
23 from Mr Atkinson. It's really just trying to reinforce
24 that when we're looking at analogue field information,
25 the most relevant ones I think are those that are in the
[Page 90]
11:42 1 same nappes as are prospective in the Claimant's licence
2 area.
3 Mr Atkinson yesterday provided a diagram in which he
4 had noted that the reservoir and porosity parameters in
5 the Silesian nappe were better than in the Magura and
6 Dukla nappes. Again, I think that's important just as
7 a general reference point, to indicate that while you
8 can take note of the Silesian nappe, the best analogues
9 are those that are relative to the Claimant's licence
10 area.
11 To that extent, I find it difficult to accept some
12 of the benchmarking that was done by the Claimant in
13 relation to the licences, and they were referenced
14 yesterday again, I think, with the purple and blue
15 outlines.
16 (Slide 6) In addition to the analogue data from the
17 Polish nappes, there's also been some recent exploration
18 in Poland, and this map here shows the location of
19 12 wells drilled since 2000, all to the north-west of
20 the Claimant's licence area, some within the Magura and
21 Dukla nappes, some within the Silesian nappe. I think
22 the important thing to note out of that is that in the
23 last 20-plus years, of these 12 wells, we're not aware
24 that any commercial discoveries have been reported.
25 (Slide 7) Moving a little bit on to the Claimant's
[Page 91]
11:44 1 licence themselves, the database that they have, again,
2 the outline of the licence is in pinky-purple, so the
3 primary information that we've got is a series of
4 seismic data and historical wells. There are some
5 34 wells, but as you can see from the map, they are
6 clustered in three main areas. The last well was
7 drilled in 1998, so there has been no recent drilling,
8 and the seismic is 770 kilometres or so of 2D data
9 dating from the early 2000s.
10 There's also additional data, gravity, magnetic,
11 surface geology, et cetera, and, as has been referenced
12 before, magneto-telluric data that was acquired by the
13 Claimant but hasn't been used in Mr Atkinson's
14 evaluation.
15 It's important to note, I think, that the Claimant
16 did not acquire any seismic data or drill any new wells
17 during the period it held the licence.
18 (Slide 8) Mr Atkinson has created a series of 40
19 leads, and we had a debate yesterday about leads versus
20 prospects. My view is that they are leads because they
21 are not well-enough defined under PRMS to qualify as
22 prospects.
23 Of those leads 18 are oil, 22 are gas, and the map
24 here in the top shows Mr Atkinson's interpretation
25 underlying red circles, which are actually taken from
[Page 92]
11:46 1 the Claimant's 2017 investor presentation where they
2 identified 11 prospects. So it's just a comparison of
3 the 11 that were referenced in 2017 in the investor
4 presentation with the 40 that Mr Atkinson has
5 identified.
6 And you can see there's some similarity and some
7 difference. One of the key differences, as was
8 referenced again yesterday, is that the Poruba feature,
9 which is one of the three AFE wells, doesn't feature on
10 Mr Atkinson's analysis.
11 (Slide 9) We have had a look at the data underlying
12 the interpretation of those 40 leads. We didn't have
13 that data to start with, but we were provided it halfway
14 through.
15 We focused on the eight leads that have come out of
16 the decision-tree analysis which, again, has been
17 referenced in the proceedings, to have a look at how we
18 viewed those leads. And we felt that three of those
19 were very poorly defined and probably didn't even
20 qualify as leads, and we looked in the remaining five.
21 This is just an example of one of them, and what
22 I was trying to do here, which I don't need to go over
23 now because, again, Mr Atkinson referenced it yesterday,
24 is that the area that was interpreted has then been
25 assumed to be the most likely case, and Mr Atkinson
[Page 93]
11:47 1 doubled his area, so as he demonstrated yesterday, 50%
2 of the time the area is going to be sampled from an area
3 that was bigger than actually mapped.
4 You can also see from this that one of the other
5 problems is, if you double the areas, then they start
6 overlying each other, the prospects.
7 And I have to note that these leads are identified
8 on what is very poor seismic data quality.
9 (Slide 10) Looking at some of the oil leads, and
10 most of this sort of benchmarking analysis is available
11 for oil rather than gas, because there's very little
12 analogue gas data.
13 So this is just a plot of looking at the cumulative
14 production from nappes in Poland relative to a fixed
15 area, so 1,000 kilometres squared. The reason for doing
16 this was to try and gauge what some of the history is,
17 and what the oil leads identified by Rockflow are
18 indicating, and you can see there that under our
19 analysis we have a significantly higher density of
20 potential resource in Rockflow's analysis than has been
21 evident historically. It's even bigger than the
22 Silesian nappe, which is the best of the nappes, but is
23 significantly bigger than the Dukla and Magura nappes,
24 which are the two relevant nappes for the leads
25 identified. They are all identified within the Magura
[Page 94]
11:49 1 and Dukla nappes.
2 (Slide 11) The other element to do with the leads is
3 not only the size of them, but also the geological
4 chance of success. Again this was referenced yesterday.
5 Mr Atkinson and myself used the same methodology to
6 calculate the chance of success, but we have a different
7 view of the input data.
8 You can see here that Mr Atkinson's assessment of
9 the geological chance of success is roughly three times
10 my assessment, and there's very little independent
11 analysis of GCOS, but there was the RPS 2012 CPR, which
12 again was referenced yesterday, and that gave an average
13 of 9% for each of the individual reservoir targets that
14 were analysed in that report.
15 There's another issue about the chance of success,
16 which is that no dependency between leads has been
17 accounted for in the Claimant's analysis, and the little
18 chart at the bottom there just shows the same one we had
19 before. But the two prospects that are adjacent and
20 potentially overlie each other, if you drill one and it
21 fails, then the chance of success on the other one is
22 obviously going to reduce. Equally, the corollary would
23 be true: if you drill the first one and it's a success,
24 then the chance of success would improve on the other
25 one.
[Page 95]
11:51 1 (Slide 12) The decision-tree analysis that was
2 undertaken uses the resource volumes, which I think are
3 overestimated, and also the GCOS figures, which, again,
4 in my opinion, are overestimated. And that was run
5 through an analysis to come up with a statistical output
6 of the most likely, the P50 outcome.
7 Each time that gets run, you end up with a different
8 output, and you can see there it just compares the 2022
9 figures with the 2023. So the first time there were
10 nine prospects, the second time there were eight
11 prospects, and we've got three oil prospects and five
12 gas prospects in the latest version. Some are
13 consistent between the two years; others are not.
14 (Slide 13) A little bit more just looking at the
15 individual well production. Again, this is trying to
16 benchmark the -- sort of sense-check what's being done.
17 Again this is oil, because that's where we've got some
18 historic comparison.
19 Using our analysis we've got somewhere around about
20 20 million -- sorry, 20,000 barrels per well from a lot
21 of the historical data, and in the Claimant's analysis
22 they are recovering round about 400,000 barrels per each
23 well in their development scenario, which is
24 a significant increase, whichever way you look at it,
25 and has a double effect, because if you can produce more
[Page 96]
11:52 1 oil from a well, then you need less wells to develop and
2 therefore the cost of any potential development is
3 reduced.
4 (Slide 14) There's also an issue over the drilling.
5 Mr Moy put his chart up earlier on today, and as is
6 referenced, the concept is to drill 40 exploration wells
7 and, in the event of the success, modelled
8 99 development wells.
9 The concept of drilling 40 development wells
10 consecutively by any company exploring, without the
11 opportunity to reflect and integrate whatever
12 information you get from those 40 wells, is not
13 something I've ever come across, and it wouldn't really
14 make any sense to me in a process.
15 And the 99 development wells are drilled in
16 a four-year period. Again, an extremely aggressive pace
17 of drilling. And the charts at the top right there just
18 compare the rate of drilling for exploration and
19 development with the historical activity, and again it's
20 a significant increase.
21 I should note that this chart is corrected from the
22 figure that was in my second report, because I had
23 erroneously divided the 99 wells by five years rather
24 than four years. So it actually looks worse in this
25 chart than it did in my second report.
[Page 97]
11:54 1 (Slide 15) Another thing to look at is the oil leads
2 in relation to the historical information. You've seen
3 the chart at the top. That is the three leads that were
4 assessed to go into the DCF calculation from 2023 in
5 yellow, plotted against historical field size for
6 Poland, or for the Carpathian -- the Polish Carpathian
7 fields. And you can see even on that analysis two of
8 those leads would be in the top eight all-time.
9 I'm nearly at the end.
10 THE PRESIDENT: You're over time, but I understand that you
11 soon are done.
12 DR LONGMAN: And in the bottom chart, that's just plotting
13 all 18 of the Rockflow oil leads against the historical
14 ones, and you can see how dramatic the difference is.
15 (Slide 16) So in summary, I don't think the licences
16 are on trend, and there's little historical analogue for
17 what's been done.
18 THE PRESIDENT: Thank you.
19 Mr Newing.
20 (11.56 am)
21 Cross-examination by MR NEWING
22 Q. Good morning, just about, Dr Longman. My name is Neil
23 Newing and I will be asking you some questions on behalf
24 of the Claimant.
25 I would ask you, please, to turn to your first
[Page 98]
11:56 1 expert report. We're going to look at page 5 of the
2 PDF, and I think it's internal page 1 if you are looking
3 in the hard copy. And I am looking at paragraph 2.
4 A. The bullet points?
5 Q. Yes. I will just wait a moment for that to be brought
6 up on screen. (Pause)
7 It's at page 5 of the PDF, please.
8 Okay, so in this first bullet point do you see you
9 stated the general conclusion that:
10 "It is extremely unlikely that any significant oil
11 or gas accumulations lie within the Claimant's
12 exploration areas ..."
13 Do you see that?
14 A. I do.
15 Q. And at the time of this first report you had not
16 conducted any assessment of the licence areas yourself
17 to determine what hydrocarbons might be in place, had
18 you?
19 A. No, that was based on the review of the information in
20 Mr Atkinson's first report.
21 Q. I understand that you had, however, reviewed at that
22 point the study which had been conducted by EGI; right?
23 A. We had that available, yes.
24 Q. And that study was carried out by individuals with a lot
25 of experience in this particular region; is that right?
[Page 99]
11:57 1 A. It was. Yes.
2 Q. And you have had no reason to challenge the work that
3 they carried out in that study, have you?
4 A. I haven't challenged that work, no. That's the primary
5 piece of work underlying what was done.
6 Q. And that study concluded that there were at least five
7 potential traps in the underlying Dukla nappe, didn't
8 it?
9 A. I think it identified five features for which it
10 calculated volumes, yes.
11 Q. But all of those were only in the underlying Dukla
12 nappe?
13 A. I don't remember, but I believe so.
14 Q. Okay. To refresh your memory, let's take you to
15 document AA-002. And page 75 of the PDF, please. And
16 you see there section 9:
17 "Whole volume estimates of potential traps in the
18 Smilno antiformal stack".
19 Which I understand is basically the Dukla nappe, the
20 underlying Dukla nappe, the parts underneath the Magura
21 nappe or the part that's poking out in the tectonic
22 window?
23 A. Yes, that's correct.
24 Q. And this study did not seek to assess whether there were
25 any traps in the rest of the Magura nappe, did it?
[Page 100]
11:59 1 A. I don't recall whether it sought to do that or not.
2 Q. You've referred in your first expert report to the fact
3 that EGI only identified five potential structures, and
4 compared that to the 40 identified by Mr Atkinson; do
5 you recall that?
6 A. I do.
7 Q. But as we've just seen, this study was only looking at
8 those structures that were in the underlying Dukla
9 nappe, wasn't it?
10 A. I'm not sure it was only looking at the structures.
11 Those are the ones that it identified in the end.
12 Q. But there is no part of this report where it seeks to
13 identify any structures in the rest of the Magura nappe?
14 It doesn't say one way or the other whether there are
15 any structures in the rest of the Magura nappe?
16 A. It didn't, but it created a series of maps. It then
17 focused on that particular area, as I understand it.
18 Q. But in that same area in which they identified five
19 structures, Mr Atkinson has identified eight; is that
20 right?
21 A. I don't know. I don't have the comparison between the
22 two particular areas.
23 Q. Okay. If I can take you to Mr Atkinson's first report
24 at page 36. And paragraph 107.2, you will see at the
25 bottom. Mr Atkinson states:
[Page 101]
12:01 1 "I defined 8 gas prospects in the Smilno area in the
2 Dukla Nappe, based on the Base Magura structure map
3 except for one mapped at an intra-Dukla Nappe surface
4 (the 'base Antiformal Stack' surface)."
5 Do you see that?
6 A. I do.
7 Q. So the appropriate comparison would have been to compare
8 EGI's five identified structures with the eight that
9 Mr Atkinson has identified, not the total 40, wouldn't
10 it?
11 A. I don't know for certain without going back to the whole
12 of the description around the EGI report itself.
13 Q. Since the date of your first expert report you've
14 conducted an assessment of five of the Claimant's eight
15 prospects -- I know there is a difference between you as
16 to whether they are prospects or leads, but what the
17 Claimant has said are prospects -- that are part of
18 their P50 case, haven't you?
19 A. I have.
20 Q. And in relation to the other three of those prospects,
21 your position is that you do not recognise them as valid
22 targets; right?
23 A. Yes. That's correct. We didn't see that they were
24 identified sufficiently to be classified as leads.
25 Q. And so your position is they're not even leads, but
[Page 102]
12:02 1 certainly not prospects; that's correct?
2 A. That's correct.
3 Q. But will you agree with me that whether something is
4 a prospect is based on the judgment of those that are
5 providing the funds and carrying out the drilling that
6 there is sufficient detail to justify them pursuing
7 their drilling?
8 A. I think that's a reasonable observation, yes. There was
9 an AFE for various features, so one of the
10 classifications for something being a prospect is that
11 there is a sufficient comfort by the owner to go
12 forwards with that.
13 Q. And so if there were AFEs for particular wells, you
14 would agree that those would be considered prospects at
15 that point?
16 A. I think in broad terms, yes.
17 Q. Okay. Can we also turn to paragraph 48 now of your
18 first expert report. That is on page 20 of the PDF and
19 page 16 of the hard copy document. And we're looking at
20 paragraph 48.
21 A. Yes.
22 Q. And at the very last sentence, I'm going to look at the
23 rest of this in a moment, you said:
24 "As these were notionally drill-ready, they could be
25 considered as prospects."
[Page 103]
12:03 1 Do you see that?
2 A. I do.
3 Q. So you accept, again, that being notionally drill-ready
4 is enough to be considered a prospect?
5 A. I do.
6 Q. So in this very same paragraph you are actually talking
7 about the two wells that the Claimant had intended to --
8 or in fact three wells that the Claimant had intended to
9 drill at Smilno, Krivá Ol'ka, and Ruská Poruba, aren't
10 you?
11 A. I am.
12 Q. And so your position in your first expert report is that
13 you agreed that, at the very least, the Smilno and
14 Krivá Ol'ka sites were notionally drill-ready and so
15 could be considered as prospects?
16 A. Yes.
17 Q. And were you aware that both the Smilno and Krivá Ol'ka
18 sites had AFES?
19 A. Yes, that's why I considered them as prospects
20 potentially.
21 Q. Were you aware that two of the three prospects that you
22 decided in your second report were not even leads, let
23 alone prospects, were in fact the Smilno and Krivá Ol'ka
24 sites?
25 A. I am aware of that, yes.
[Page 104]
12:04 1 Q. And so despite accepting, as you have just done, that
2 both the Smilno and Krivá Ol'ka sites were able to be
3 considered prospects as they were notionally drill-ready
4 and had AFEs, you nonetheless now claim that they are
5 not prospects?
6 A. I do. That's because my evaluation of them is very
7 different from the Claimant.
8 Q. But you have accepted that the fact that the Claimant
9 itself considered they were ready and had AFEs on them
10 is enough for them to be considered a prospect?
11 A. In the eyes of the Claimant, yes. But not in my
12 opinion.
13 Q. And obviously nothing has changed between the Claimant's
14 decision that they were prospects and today, that will
15 have changed the Claimant's view that they were
16 prospects?
17 A. I can't say that. I don't know whether the Claimant has
18 changed its view.
19 Q. Were you instructed for your second report not to assess
20 those prospects, or those areas, at all?
21 A. Absolutely not.
22 Q. But isn't it the case that in fact two of those
23 prospects are -- two of those areas that you have not
24 identified as prospects are in fact prospects, as they
25 meet the requirements that the Claimant itself
[Page 105]
12:06 1 considered them to be and they had AFEs on them?
2 A. No, that can't be the case, because at the time that
3 I was doing the analysis, the Claimant didn't hold the
4 licences. So I think there's a difference between, if
5 you go back in time, that was their view, but
6 I'm looking at it now on the basis of the information
7 that's available to me. And, as I say, there's a very
8 different opinion between my assessment and what the
9 Claimant's assessment was in the past.
10 Q. But the information you have looked at is the same
11 information that the Claimant had?
12 A. As far as I'm aware it's the same. I mean, we had the
13 dataset that was provided by the Claimant.
14 Q. The eight of the Claimant's prospects which you have
15 looked at, although three of them not assessed, as
16 I say, form part of the Claimant's P50 case; right?
17 A. The P50 decision tree case, yes.
18 Q. And so all that you have actually assessed are five of
19 the prospects that the Claimant considers would be
20 within that P50 case?
21 A. We looked at five in detail. Looked in detail at the
22 eight, but decided that three were not valid, or were
23 insufficiently well-defined to qualify as leads, and
24 reviewed the remaining 32. But only in a superficial
25 way.
[Page 106]
12:07 1 Q. And so in discounting the three that you do not consider
2 to be prospects, all you are in fact saying is that
3 those three prospects should not have formed part of the
4 Claimant's P50 case?
5 A. Well, it was the Claimant who assigned those eight leads
6 to their P50 case. That wasn't my decision. That was
7 their decision. My review was that of those eight, five
8 could be considered leads and three not.
9 Q. So you have not conducted your own alternative
10 assessment of what you think the P50 case would be?
11 A. Well, I have, to the extent that I've calculated volumes
12 for and risks for those five that I identified as leads.
13 Q. But you have not actually considered across the entirety
14 of the licence areas whether the P50 case would be those
15 five prospects?
16 A. No, but I can't, because, as I say, the Claimant's P50
17 case is a statistical Monte Carlo output, which, you
18 know, that's what they came up with.
19 Q. But you haven't conducted any similar assessment of your
20 own?
21 A. No.
22 Q. Turning to the five that you did assess, could we please
23 turn to page 59 of the PDF of your second report. This
24 is page C.1 in appendix C of your second report.
25 It's page 59 of Dr Longman's second report, it's
[Page 107]
12:09 1 tab 318. (Pause)
2 Page 59 on the PDF. And if we look at paragraph
3 C.3, at the very beginning it's stated:
4 "SLR note that the majority of Mr Atkinson's
5 'Prospects' are defined based on two-way time
6 grids - either his own or those of EGI. Structures
7 which are 'drill ready' and form true Prospects under
8 [PRMS] would never be presented in TWT. TWT maps are a
9 step in the process of generating depth maps and are
10 often used to illustrate exploration concepts ..."
11 Do you see that?
12 A. I do.
13 Q. I notice it says here "SLR note", rather than "I note",
14 which you use in the next paragraph. Does that mean
15 that you did not personally conduct those assessments?
16 A. I worked with one of my colleagues, who is referenced in
17 the acknowledgments, in looking at the seismic projects
18 that we had. But the interpretation of the Kingdom
19 dataset is not my area of speciality.
20 Q. Okay. So you go on to say that these are a step in the
21 process of generating depth maps, as you say?
22 A. Yes.
23 Q. And so you would accept that the depth maps would be
24 helpful for you if you were actually trying to assess
25 this further?
[Page 108]
12:11 1 A. And there are depth maps and time maps.
2 Q. So you do accept that depth maps have been provided by
3 Mr Atkinson in his Kingdom project?
4 A. There are some depth maps, yes.
5 Q. But here you suggest that in fact that's not the case.
6 So is it the case that the depth maps were not assessed?
7 A. No. I say that the majority, there were depth maps and
8 time maps, and in fact you will see in appendix C there
9 are some depth maps and time maps.
10 Q. So the conclusion that in fact the majority are -- or
11 that the information is not sufficient has not taken
12 into account the fact that there are these additional
13 maps which have been looked at?
14 A. Sorry, I don't ...
15 Q. Sorry, I'll rephrase that question.
16 Your conclusion that, or the conclusion I understand
17 you to be drawing in paragraph C.3 is that the prospects
18 have been defined on a first stage of data, rather than
19 the next stage, which would be depth maps. But can you
20 tell me today whether you can be -- whether you know if
21 depth maps were looked at for the five prospects that
22 you have particularly looked at in detail, or SLR have
23 looked at in detail?
24 A. Yes, some were depth and some were time.
25 Q. So for the five that have been assessed, paragraph C.3
[Page 109]
12:13 1 is not applicable?
2 A. Well, the -- it ... "not applicable". It is applicable
3 to the extent that what I'm referencing here is two-way
4 time grids. Yes, there are some depth grids. Yes,
5 there were some depth grids for the five that we looked
6 at. Yes.
7 But whether it's a lead or a prospect is not
8 absolutely due to whether there's depth or time. It's
9 an assessment as to what the validity of that
10 interpretation is, how robust it looks.
11 Q. As we've mentioned, Mr Atkinson has identified what he
12 calls 40 prospects; right?
13 A. Correct.
14 Q. If we can go back to your first expert report, please,
15 at page 22 of the PDF, and 18 of your hard copy, at
16 paragraph 61 at the bottom. You are seeking here to
17 draw a comparison between the number of prospects
18 identified by Mr Atkinson and those which were referred
19 to in contemporaneous documents prepared by AOG, and if
20 we go over the page we see the table where you do that;
21 correct?
22 A. Yes.
23 Q. We've already discussed EGI, so I'm not going to look at
24 that for the moment. But this refers to three different
25 documents, or sets of documents, from AOG in 2014, 2015,
[Page 110]
12:14 1 and 2017 that you have used to compare against the
2 40 prospects identified by Mr Atkinson; correct?
3 A. Yes.
4 Q. And the conclusion which I understand you are seeking to
5 draw here is that AOG itself never identified more than
6 seven leads, or prospects, and therefore Rockflow's
7 assessment far exceeds that?
8 A. Not quite. There are seven leads identified there in
9 the investor presentation as an example, which were
10 tabulated. But I think as you may recall from the
11 presentation, I superimposed all the circles that were
12 in the investor presentation, which I think totalled 11.
13 So I think there were 11 circles, but only seven of
14 those were documented in the investor presentation.
15 Q. Understood. But the point you're trying to make is that
16 Rockflow's assessment exceeds that that AOG itself had
17 carried out?
18 A. Well, Rockflow's assessment identified a larger number
19 of leads than any of the previous assessments. Yes.
20 Q. But are you aware of, at any point in any of Discovery's
21 previous presentations, it was purporting to set out
22 a full assessment of how many leads would exist in the
23 licence areas?
24 A. No.
25 Q. And in fact they do not say anywhere in their
[Page 111]
12:16 1 presentations that these represent all of the leads that
2 would be in the licence areas, do they?
3 A. As far as I'm aware, they don't.
4 Q. And wasn't the point of such presentations to identify
5 the initial areas that they wished to drill?
6 A. I think the focus was on the initial area. But if you
7 were putting together an investor presentation, then
8 I would have thought it would be only sensible to flag
9 that you have whatever number of additional prospects or
10 leads that you are assessing at the time.
11 Q. But would you agree there would be no point in spending
12 money to identify a further 20 or 30 prospects until you
13 had someone on board, if that were the point of these
14 presentations?
15 A. No, I wouldn't. I wouldn't agree with that.
16 Q. So in your view, Discovery should have spent a lot of
17 time and money identifying every prospect or lead that
18 may exist in an area before going to any investor?
19 A. No, not necessarily. But I think that they should have
20 undertaken enough of an evaluation to be comfortable in
21 their own mind where to focus their efforts.
22 Q. But do you accept that this was not an intention on
23 their part to show everything that might exist in the
24 area?
25 A. Sorry, that this was?
[Page 112]
12:17 1 Q. That these presentations were not intended to show
2 everything that they considered might exist in the area.
3 A. I don't know. I can't say what their intention was when
4 they put that together.
5 Q. On that basis, isn't it inappropriate to say that this
6 is therefore a comparable figure to the number of
7 40 prospects identified by Mr Atkinson?
8 A. I don't see that that follows. I'm trying to compare
9 what was made available in their investor presentations
10 or Opcom minutes with what is there now. I'm just
11 comparing the two, or the sets of different analyses.
12 Q. But isn't it important to understand the basis on which
13 those numbers have been put forward, to understand
14 whether they are, in fact, comparable?
15 A. Well, as I say, I think that's the only information that
16 there is to compare. I mean, I can't go further than
17 that.
18 Q. Turning now to look a bit at the exploration history
19 that's taken place in the licence areas. You accept
20 that there has been drilling activity in the actual
21 licence areas in the past; correct?
22 A. I do.
23 Q. And can we please look at page 12 of your report, 16 in
24 the PDF, I think.
25 A. First report or second?
[Page 113]
12:19 1 Q. The first report that you've still got open.
2 A. Sorry, 12, did you say?
3 Q. 12 in your hard copy, yes, I think. And 16 in the PDF.
4 A. Yes.
5 Q. And here you set out a table that shows the exploration
6 history in the licence areas over the 20th century,
7 essentially?
8 A. Yes.
9 Q. And many of these would have been drilled with old
10 technology or techniques, and with poor, if any, data;
11 would you agree?
12 A. The vast majority, yes.
13 Q. And yet the majority of these wells reported
14 hydrocarbons existing, didn't they?
15 A. Well, there were a lot of hydrocarbons reported, but
16 that's partly because this is an area where everything
17 is -- the whole petroleum system is one where you have
18 hydrocarbons, but the difference is, have you got
19 hydrocarbons trapped in a viable feature and a potential
20 field. And most of these are what appeared to be shows,
21 apart from a couple of the historic fields that were
22 produced.
23 Q. But this is despite the fact that they actually had
24 little data to go on to try and find actually where to
25 put those wells, and the older technology that would
[Page 114]
12:20 1 have existed?
2 A. Yes, I don't know the basis on which all those wells
3 were located.
4 Q. And you will accept that no drilling has taken place
5 since the acquisition of the data that is now available,
6 and that Discovery has interpreted the 2D seismic, the
7 gravity, the MT data?
8 A. Yes, the last drilling was 1998.
9 Q. And so all of that data that's been acquired since would
10 most likely improve the chances of being able to find
11 something, or put something in the right place?
12 A. It should improve the ability to put something in the
13 right place. It won't necessarily improve the chance of
14 finding something.
15 Q. Based on the fact that wells which were drilled without
16 the benefit of that data had discovered hydrocarbons,
17 isn't it likely that wells drilled with the benefit of
18 that data would also discover hydrocarbons?
19 A. No, that doesn't necessarily follow. As I say, this
20 area is one where you've got an active petroleum system,
21 everything is faulted, fractured, broken. So there's
22 a lot of seeps, there's a lot of oil and gas in
23 fractures and coming to the surface. So that's why you
24 would have acquired or would have seen a lot of shows in
25 historical wells.
[Page 115]
12:22 1 What you're trying to achieve is a viable structure
2 with reservoir in that is large enough to be
3 a commercial discovery these days.
4 Q. But with the benefit of the data that has now been
5 acquired, as you say, would that not improve the chances
6 of being able to find where those would be?
7 A. It should improve the chances, but the quality of the
8 data is still -- it still makes it difficult to give you
9 confidence in what is in the subsurface.
10 Q. I'd like to look now at some of the benchmarking
11 exercises that you have carried out, and you've
12 mentioned some of these in your presentation today. But
13 we're going to look at your second report, please, at
14 page 10 in the hard copy, and page 17 on the PDF.
15 This is a map where you have indicated in different
16 colours the different nappes in the Polish Carpathians;
17 right?
18 A. Correct.
19 Q. And then you use this on the next page -- I'm going to
20 come back to the map -- to compare the resource density.
21 Just to confirm, this is oil only at this point.
22 A. Sorry?
23 Q. This is just oil you're looking at, at this point?
24 A. Yes, as I think I mentioned in the presentation, it's
25 very hard to get -- there isn't data on gas benchmarking
[Page 116]
12:23 1 within the nappes. So you can only really do oil
2 benchmarking.
3 Q. And so you've used the map in the table which you can
4 see on the next page to compare the amount of oil that
5 has been found in each nappe in Poland with the amount
6 of oil that Mr Atkinson estimates may exist in the
7 licence areas?
8 A. Correct.
9 Q. And so that calculation is made on the basis that you
10 need two inputs: the total amount of oil and the size of
11 the relevant area; correct?
12 A. Yes.
13 Q. And so if, for example, you had the same amount of oil
14 but across two different sized areas, a larger area
15 would result in a smaller resource density; correct?
16 A. Yes.
17 Q. So the accuracy of the resource density calculation
18 depends on how you define the area, does it not?
19 A. That's one of the components, yes.
20 Q. And if I understand correctly, if we take, for example,
21 the Silesian nappe, because it's just the easiest to see
22 on this map for the moment, as outlined in pink, you
23 have used the entirety of the Silesian nappe area in
24 your calculation for the resource density?
25 A. Yes.
[Page 117]
12:24 1 Q. Now, and you will have seen this in Mr Atkinson's
2 presentation yesterday, and he mentioned this, that the
3 green sort of blobs on the right-hand side of the map
4 are where the oil is, or where the oil has been found,
5 in that Silesian nappe; correct?
6 A. That's where the bulk of the oil that's been found lies,
7 yes.
8 Q. But in fact, there are no green blobs in the western
9 half of the nappe at all, are there?
10 A. There are green blobs that are towards the sort of
11 centre. There's no green blobs in the western half.
12 But there have been wells drilled across the area of the
13 nappes.
14 So there's been exploration there, but no success.
15 Q. But you have nonetheless used the entirety of that nappe
16 to determine the resource density, even though half of
17 it, at least, has no oil in it, or has not found any
18 oil?
19 A. I have, but it doesn't make sense to me to just say:
20 okay, well we'll compare it against the successful bid.
21 Surely you need to compare it against the areas that
22 have been explored within that nappe: (a) the Silesian
23 nappe is different from the Claimant's licence area, but
24 (b) how would you know whether the area corresponds to
25 the positive half or the negative half of the area?
[Page 118]
12:26 1 Q. But the same is true of the licence areas, isn't it? So
2 if you don't know -- if you're comparing the Silesian
3 nappe where only half of it has oil with the licence
4 areas, surely the assumption should be: well, maybe only
5 half of that will have oil. You're simply not comparing
6 the same things, are you?
7 A. Sorry, you've lost me.
8 Q. Well, if you are not going to take just the section
9 where oil has been found to compare against the licence
10 areas, you said you're taking the whole area because
11 that's where there has been exploration, and the fact
12 that oil has not been found in half of it doesn't
13 matter. But you're comparing that to the very small
14 licence areas, but you're not making any similar
15 conclusion that there may not be some oil in half of
16 that.
17 A. Sorry, I don't quite follow. If you're trying to say
18 that I could have chosen one half than the other, then
19 I suppose I could have chosen the negative half and
20 said: there's no oil there.
21 Q. Well, exactly my point, in the sense that what you're
22 doing is you've tried to show in your table that
23 Mr Atkinson's estimates far exceed those in the other
24 nappes. But, again, it depends entirely on how you are
25 comparing the areas. As you say, if you had taken, for
[Page 119]
12:28 1 example, part of the areas where there's no oil, the
2 result would have been very different.
3 A. It would. So I think I come back to my original
4 position, which is to me it seemed most logical to take
5 the entire area.
6 Q. But isn't the result of this that basically you can
7 manipulate this as much as you wish in order to get to
8 the result that you want to have?
9 A. I didn't manipulate it to get to the result that
10 I wanted to have. I took the data as I had it, which
11 was the available information in Poland, and allocated
12 it by nappe and came out with an answer.
13 Q. If we can now please turn to paragraph 109 of your first
14 expert report, and that's on PDF page 33 of your first
15 expert report, page 29 in the hard copy.
16 And you make a conclusion here by, again,
17 a benchmark analysis between the oilfields that have
18 been estimated or identified by Mr Atkinson, compared to
19 those which have been found in Poland, and say that:
20 "... the Claimant's expected field size is over
21 30 times greater than the existing Polish Carpathian
22 fields."
23 Correct?
24 A. Yes.
25 Q. And again, this is just oilfields we're talking about?
[Page 120]
12:29 1 A. It is.
2 Q. And in conducting this exercise you have included all
3 known Polish oilfields; correct?
4 A. Yes.
5 Q. Do you accept that the Polish field dataset includes
6 many fields which are smaller than Mr Atkinson's
7 prospects?
8 A. Yes.
9 Q. And the reason for this is that the data in the licence
10 areas does not allow such small prospects to be mapped;
11 isn't that right?
12 A. Well, I've simply taken the leads that Mr Atkinson
13 identified and used them. The data is not very good.
14 Would you be able to see tiny fields on that data? No.
15 But then again, if and when you drilled the 40 leads,
16 would you end up with that volume, or are you likely to
17 end up with a smaller volume? We don't know.
18 Q. So you don't know whether smaller fields may exist in
19 the licence areas, do you?
20 A. I don't, no.
21 Q. But this graph assumes a full range of oilfields in
22 Poland, including very small ones, but then compares
23 them only with those that have been large enough to be
24 mapped in the licence areas?
25 A. Well, again, it's comparing the existing data, which
[Page 121]
12:31 1 shows that in Poland there is a significant range in
2 field size.
3 Q. So you accept that the reality is that there's simply
4 not the data to be able to know what the same field size
5 may be in Slovakia, or similar field size, and so you're
6 using a set of data from Poland that is much larger than
7 the set of data that exists for the licence areas?
8 A. Well, again, I am, because I'm just using the data that
9 is available.
10 Q. But you're not comparing the same representative samples
11 then, are you?
12 A. Well, I am. I'm using, as I say, what is available.
13 Q. But what is available isn't necessarily representative
14 of what actually exists?
15 A. Well, no, but you're never going to know that until
16 you've explored. So you've got to use what data is
17 available to you.
18 Q. But the data that you've had available from Poland is
19 data that's been accumulated over 150 years. So that's
20 a much larger sample to compare against just what
21 Mr Atkinson has done.
22 A. Well, it is. But, as I say, I'm not sure -- I'm not
23 sure where -- what you can do. I mean, I'm simply
24 plotting up the historical data from Poland.
25 Q. And I'm not saying that there is more data that you
[Page 122]
12:32 1 could have. But my point is that if you don't have
2 similar data, again, you're not making a comparison with
3 similar things, are you?
4 A. Well, I don't think I agree.
5 Q. Wouldn't a more appropriate comparison [have been] to
6 have compared fields that were of the same size that
7 Mr Atkinson had been able to identify, and exclude the
8 smaller ones that have not been able to be mapped in
9 Slovakia?
10 A. Well, no, I don't think so, because then you're
11 arbitrarily selecting part of the data that's available.
12 Q. But aren't you arbitrarily making this comparison anyway
13 by including data from one set that simply doesn't exist
14 in another set?
15 A. Not in my opinion, no.
16 Q. As I mentioned, the vast majority of the Polish wells
17 are historical and date back over 150 years. Not all of
18 them that long, but over a span of 150 years. And so
19 the production of those wells would not be comparable to
20 what could be achieved today; would you agree?
21 A. I would expect that you would get some improvement using
22 modern technology, yes.
23 Q. And so, again, taking this Polish data, without taking
24 into account how old some of these wells may have been,
25 or that production may have been improved if they were
[Page 123]
12:33 1 more modern, is, again, not using the data in the
2 correct way to compare to what Mr Atkinson is estimating
3 as at today?
4 A. No. I don't think that follows. Because what he's
5 plotted here is what's been produced from fields. It's
6 not related to individual well performance, this chart.
7 It's field production.
8 Q. Can we please turn now to your second --
9 MR DRYMER: Pardon me, but on that point, wouldn't field
10 production change as a result of modern techniques as
11 well?
12 A. Well, not necessarily, no, just the number of wells that
13 you might need to produce the field.
14 MR DRYMER: I see.
15 A. If the field size is, let's say, a million barrels --
16 MR DRYMER: Got it.
17 A. Then if you have got old wells producing small volumes
18 there's only a million barrels to produce.
19 MR DRYMER: I see.
20 A. If you did modern ones then you would be able to do it
21 with less wells. But you're not going to change the
22 size of the field.
23 MR DRYMER: Not for another few million years, perhaps.
24 A. Well, maybe.
25 MR DRYMER: Maybe. But production from a field of a given
[Page 124]
12:35 1 size wouldn't increase?
2 A. It could, yes.
3 MR DRYMER: Yes.
4 A. But the production rate, but not the total volume.
5 MR DRYMER: That's what I mean, forgive me. Yes.
6 THE PRESIDENT: So it would take longer to extract all of
7 the oil from the field; yes?
8 A. Historically, yes.
9 MR NEWING: Thank you.
10 If we could turn now to your second report, please,
11 at page 16 in the PDF and 23 in your hard copy,
12 I think -- no, the other way around. 23 in the PDF and
13 16 in your hard copy. Sorry.
14 A. Yes.
15 Q. And this is a chart which I think you showed again in
16 your presentation earlier --
17 A. I did.
18 Q. -- which you say represents a comparison between the
19 average amount of oil recovered by well in the Polish
20 nappes we've been looking at, and those proposed by
21 Rockflow.
22 A. Yes.
23 Q. And you acknowledge in paragraph 66 that technology, as
24 you've just mentioned, would have improved well
25 performances, and in fact you assume that there may have
[Page 125]
12:36 1 been a four-fold technology driven improvement?
2 MR DRYMER: That's what I was looking for, thank you.
3 A. I do.
4 MR NEWING: But even with that you say your view is that
5 Rockflow's assumption are still inflated by 10 to 20
6 times?
7 A. Yes.
8 Q. And the data that you have used for this comparison is
9 contained in a very large spreadsheet which, don't
10 worry, I'm not going to ask you to bring up, but which
11 is at CDL-14 for the Tribunal's purpose?
12 A. Yes.
13 Q. And contains a list of over 4,000 wells that have been
14 drilled in Poland since 1850; correct?
15 A. Yes.
16 Q. And you've used the data from all of those wells to
17 perform this comparison, haven't you?
18 A. I've used the data from, yes, the set of wells that
19 reflected the oilfields, yes.
20 Q. You will have seen from Dr Moy's presentation this
21 morning that in his view many of the wells in that data
22 would be inappropriate to use, as they relate to
23 stratigraphic intervals which are too deep to be present
24 in the Slovakian licence areas; do you remember him
25 explaining that?
[Page 126]
12:37 1 A. I do. I do remember him saying that.
2 Q. Do you accept that those would be inappropriate to use
3 as a comparison?
4 A. No, I don't, because I think the mistake there is that
5 underneath the Silesian nappe you do have the older
6 stratigraphy, and I think the reference to the
7 stratigraphy in the well database is where the well
8 TD'd. So if it drills all the way through the Silesian
9 nappe, it then TDs in older formation. So I don't think
10 that the removal of those simply because they were a TD
11 in an older formation negates the use of those wells,
12 because they've drilled through all the shallower
13 formations in the Silesian nappe.
14 Q. But do you accept that the deeper you go, the greater
15 the production may be?
16 A. Not --
17 Q. The greater the pressure?
18 A. Not necessarily. Yes, the deeper you go, the higher the
19 pressure. But equally you may have, the deeper you go,
20 the reservoir will deteriorate, and so you've got
21 a balance between higher pressure and poorer reservoir
22 parameters often.
23 Q. But the data that you've used, which includes these
24 wells which go far deeper than would exist in the
25 Slovakian licence areas, do not actually give you the
[Page 127]
12:39 1 information to know whether the amounts have come from
2 those deeper parts or from the shallower parts?
3 A. Well, there's no production from the deeper
4 stratigraphy. So any production -- as I've tried to
5 explain, if you drill a well through the Silesian nappe
6 and you've got the deeper section in which the TD is, if
7 that well's produced any oil, then it's produced out of
8 the Silesian nappe section. There's no -- as far as
9 I'm aware, there's no production from the deeper
10 stratigraphy.
11 Q. And is that information that you've gained from that
12 dataset about the wells in Poland, or is that
13 information that you are assuming?
14 A. The dataset on wells doesn't, I don't think, identify
15 which the producing horizons are. But, as I say, as far
16 as I'm aware, there's no indication of deeper production
17 in Poland from the section below the Silesian nappe.
18 Q. Dr Moy made clear in his presentation this morning that
19 I think he said around 87% of the oil wells that have
20 been drilled were from before 1946. Do you recall that?
21 A. I do recall that.
22 Q. And that they were virtually all shallower wells?
23 A. The majority were shallow wells, yes.
24 Q. Yes, 96% or something, I think he said. And he
25 explained in his presentation that when you look at the
[Page 128]
12:40 1 amount of oil recovered in those pre-1946 shallower
2 wells, the average production in fact comes out at
3 something as 73,000 barrels per well, much higher than
4 the averages that you have included in your table?
5 A. But I think that's partly a function of the fact that he
6 has removed a lot of the wells from his comparison.
7 I think it's worth noting that even in the Claimant's
8 documentation, they have a list of wells in some of
9 their analogue fields that they've put in, and that list
10 of wells totals somewhere near 3,700 wells. So I think
11 reducing the number down to the number that Dr Moy was
12 reporting, there seems to be a mismatch somewhere.
13 Q. Would you accept, though, that if most of the production
14 has come from shallower wells, even in your larger
15 dataset -- I think that's what you were telling me just
16 now, because the production is still coming from the top
17 part -- that this should be compared to the shallower
18 wells' production that is being proposed by the
19 Claimant's experts?
20 A. You can compare against the shallower as well as the
21 deeper. The figure in this chart is actually the
22 average of all three levels. The three oilfields in the
23 Claimant's model are at different depths. So this
24 figure of 400 is an average. The range within that
25 model is from about 200-700.
[Page 129]
12:42 1 Q. I think Dr Moy explained in his presentation earlier,
2 and it's in his second report at table 3-4, that the
3 recovery estimated for wells that were at the shallower
4 depths is from 143 to 220,000 barrels.
5 A. And that equates to the -- broadly to the figure of 200
6 I just gave.
7 Q. Yes. But that's half of the 400 figure that you've
8 assumed in this chart.
9 A. At the low end, yes. But 700 is much bigger.
10 Q. But if we were only comparing the shallower wells, on
11 the basis that in Poland most of the oil has been
12 recovered from shallower wells.
13 A. Yes, if you want to go down that route. But 200 is
14 still significantly more than the analysis here.
15 Q. Yes. But assuming your four-fold production --
16 four-fold improvement, sorry, in production, it suddenly
17 becomes a lot less than you've suggested.
18 A. Sorry, it becomes a lot less?
19 Q. The increase, or the difference in the amount which
20 Rockflow have estimated, which you have suggested, when
21 it's 400, after taking into account a four-fold
22 technology-driven improvement, is inflated by 10-20
23 times, would be at least half that?
24 A. Well, it depends which nappe data you are taking.
25 I mean, if you took the whole of the Poland average,
[Page 130]
12:44 1 we've got 20 there. But again, the historical data from
2 the Dukla and the Magura gives you a figure of 8, if you
3 average that.
4 So, yes, the difference would be less for the
5 shallow wells.
6 Q. So, again -- once again, in conducting all of these
7 exercises, and I'm not suggesting you have done this,
8 but ultimately, depending on how you look at the data
9 and which bits of the data you want to use, will change
10 the result that you're looking at?
11 A. Well, I think that's always the case. I mean we are
12 looking at the data and taking all the data that we've
13 got and presenting it, and other people will take the
14 data and present it differently, as has been
15 demonstrated this morning.
16 Q. I'm going to look now at one of the documents that we
17 discussed with Mr Atkinson yesterday, which is the
18 RPS CPR report. This is referenced by you in your
19 second expert report at PDF page 12, and internal
20 page 5. Do you see that?
21 A. Yes.
22 Q. And if you go over the page, in fact, you have a summary
23 table that you have put together.
24 A. Yes.
25 Q. Which you say summarises in particular the geological
[Page 131]
12:46 1 chance of success; it's one of the points that you
2 summarise from the RPS report.
3 A. Yes.
4 Q. And this RPS report was issued in May 2012; correct?
5 A. 2012, I don't remember whether it was May, but I'll
6 accept it was May. Definitely 2012.
7 Q. And so this was before the processing and interpretation
8 of the seismic data had been completed by Discovery;
9 correct?
10 A. Yes.
11 Q. And before the MT data had even been acquired, let alone
12 processed and interpreted?
13 A. Yes.
14 Q. And even before the EGI study as well?
15 A. Yes.
16 Q. And yet RPS identified four prospects on the basis of
17 the data that they had available to them then?
18 A. They did, although as you can see in the description
19 below the table in the paragraphs, they were heavily
20 caveating what they had identified.
21 Q. But they did actually identify four prospects.
22 A. They carried four prospects in that report, yes.
23 Q. And two of the prospects are in the Smilno area;
24 correct?
25 A. They are.
[Page 132]
12:47 1 Q. And one of those would equate to the well that Discovery
2 was planning to drill?
3 A. Probably, yes.
4 Q. And the other, I think, equates to Mr Atkinson's BM04
5 well?
6 A. I don't know. I haven't compared those.
7 Q. I'm going to put it to you that that's what they equate
8 to.
9 Both of those, the Smilno well, the Discovery Smilno
10 well, which is Mr Atkinson's BM01, and Mr Atkinson's
11 BM04, are wells that, again, are two of the three that
12 you have discounted as not being prospects?
13 A. Correct.
14 Q. And so here we have a second independent report, which
15 has identified that those would be prospects that you
16 disagree with?
17 A. I do, but when you -- as I say, if you read the whole of
18 that report, they do make comment about the level of
19 data that they have available. But yes, they are
20 carried in that document.
21 Q. So looking at the geological chance of success, and the
22 table, and it's the right-hand column in this table,
23 where you've set out the figures from the RPS report.
24 A. I have.
25 Q. You say that based on this, the range calculated by RPS
[Page 133]
12:49 1 is between 6% and 12% with an average of 9%?
2 A. I do.
3 Q. And you say that that supports your calculation of 7.5%,
4 compared to Mr Atkinson's 20.6%?
5 A. Yes. I view that as being more comparable with my
6 analysis than Mr Atkinson's, yes.
7 Q. Just as a first point, your calculation of the GCOS is
8 a calculation of the GCOS from just the three gas
9 prospects that you have assessed, isn't it?
10 A. Sorry, my calc --
11 Q. Your own GCOS calculation of 7.5% comes from your
12 assessment of the three gas prospects out of the five
13 that have been assessed; correct?
14 A. Oh, what, you mean because I took two out?
15 Q. Yes.
16 A. Yes.
17 Q. And so it's not a calculation of the GCOS -- the average
18 GCOS for all gas prospects in the licence areas; only
19 those that you have looked at.
20 A. Yes. I've only calculated a GCOS for the leads that we
21 looked at in detail.
22 Q. And so your 7.5% GCOS is also not a calculation of the
23 GCOS of these particular Smilno prospects that RPS has
24 looked at here, let alone the Zborov ones, as you
25 discounted both of those Smilno ones?
[Page 134]
12:50 1 A. Well, they're different GCOS calculations for different
2 prospects, effectively, or different leads, the way
3 they've been evaluated. They may be in the same
4 geographic location. But, yes, I calculated the GCOS
5 for the three that I evaluated. RPS have calculated
6 chance of success for the four that they carried.
7 Q. Can we please turn to CDL-008, which is the RPS report.
8 And if we can go, please -- you will see there
9 it's May 2012, just to confirm the May date.
10 If we can go, please, to PDF page 91. And in the
11 table at the bottom, you will see this is the summary in
12 that report for the Zborov A prospect; correct?
13 A. It is, yes.
14 Q. And it shows that within that prospect there are three
15 individual reservoirs for which they have assigned
16 separate geological chance of success. In this they say
17 GPOS rather than GCOS, but it's the same thing?
18 A. It is, yes.
19 Q. And those three numbers, the 8, 6, 6, are the ones that
20 you have reproduced in your table?
21 A. Correct.
22 Q. But what this table also then shows is that the total
23 GCOS for the prospect is 16%; do you see that?
24 A. I see the number of 16. I disagree with your analysis
25 that that's the GCOS for the total prospect.
[Page 135]
12:52 1 Q. Okay. I'll come back to that in a moment.
2 So what they are saying this is here, this 16, is
3 the chance that at least one of the three reservoirs in
4 that prospect will be successful; do you agree with
5 that?
6 A. Yes, that's an analysis, on the basis that you have one
7 success.
8 Q. Yes. And it's higher because the chance of hitting one
9 out of those three is higher than hitting each one of
10 them individually?
11 A. Yes, that's what the analysis is designed to show, yes.
12 Q. And if we turn over the page, at the table on the next
13 page at the top, we see the same for the Zborov B
14 prospect, we see the title there; yes?
15 A. Yes.
16 Q. And this one has five individual reservoirs, and then
17 they've allocated a total of at least one success of
18 30%.
19 A. Yes.
20 Q. And so again I put it to you that the 30% is the chance
21 of success that they've identified for the Zborov B
22 prospect.
23 A. Well, these two prospects have got stacked different
24 reservoirs in them. So there's separate reservoirs
25 within the same prospect that they've put here. So each
[Page 136]
12:54 1 individual opportunity has a GCOS calculated. They've
2 then done a statistical analysis to look at the impact
3 of drilling and finding one of those five, or at least
4 one of those five reservoirs.
5 Q. Yes, so this is the chance of success of finding at
6 least something, at least one of those reservoirs, in
7 this prospect?
8 A. It is.
9 Q. So for the purpose of the prospect as a whole, this is
10 their chance of success of finding at least one of those
11 reservoirs?
12 A. That's the way they've assessed it, yes.
13 Q. And if you scroll down to the second table, you can see
14 that they summarise this by the four prospects,
15 Smilno A, Smilno B, Zborov A, Zborov B, and the figures
16 they use -- Smilno is not challenged here, but the
17 figures they use are the 16% and 30% figures; do you see
18 that?
19 A. I do.
20 Q. And yet you have not referenced those figures at all in
21 your table, have you?
22 A. I haven't, because there's a reason behind that, which
23 is that these, as I say, they're looking at -- what I've
24 put here is the chance of success for each individual
25 reservoir within the prospect. And that is a more
[Page 137]
12:55 1 direct comparison with what I'm looking at in assessing
2 the GCOS for the leads identified.
3 The leads identified by Mr Atkinson are not a series
4 of separate stacked reservoir. Each lead has one
5 target.
6 Q. But Mr Atkinson explained yesterday in his testimony
7 that they deliberately did not try to identify
8 individual reservoirs, but that doesn't mean that they
9 are not -- that they may not be stacked reservoirs.
10 They simply chose a more simple approach. Do you recall
11 him saying that?
12 A. These are -- I don't recall him saying that, but these
13 are individual separate targets within one prospect in
14 the RPS.
15 Q. But RPS itself has determined, as you can see from this
16 second table, that the chance of success for the
17 prospect as a whole is 16% and 30%, yet you make no
18 reference to those in your report at all; isn't that
19 misleading?
20 A. Not as far as I'm concerned, no. Because, as I say,
21 I've quoted the GCOS that RPS put forward for the
22 individual target within the prospect.
23 Q. Would you agree with me -- I appreciate you don't have
24 a calculator with you, but would you agree with me that
25 to work out the average of the GCOS with the prospects
[Page 138]
12:57 1 as set out in this table, you would add the four numbers
2 and divide by 4: 12 plus 12 plus 16 plus 30, and divide
3 by 4?
4 A. If you were taking those numbers.
5 Q. Yes?
6 A. You would. But as I've said, I haven't taken those
7 numbers.
8 Q. And that average -- you may be mathematically minded to
9 do it, but I'll put it to you that that average comes
10 out at 17.5%. That is in fact much closer to
11 Mr Atkinson's GCOS of 20.6% than to your 7.5%, isn't it?
12 A. If you do that analysis, you get that comparison. But,
13 as I say, I don't agree with that analysis.
14 Q. In respect of oil, the other document that you seek to
15 rely on is a draft 51-101 report, which is a Canadian
16 regulatory filing that governs the disclosure of oil and
17 gas activities for security purposes; correct?
18 A. Yes.
19 Q. And you deal with this in your second report at
20 paragraph 32, which is on PDF page 14, and hard copy
21 page 17. And following; it goes on from there.
22 And the draft document was prepared in 2014;
23 correct? I think you say that somewhere. I can pull it
24 up. It's the footnote at the end.
25 A. Yes, December '14.
[Page 139]
12:58 1 Q. You say at paragraph 33 on the next page that:
2 "The scope of the evaluation was '... to
3 determine the prospective resources in the two committed
4 wells in the Ol'ka and Stromy areas."
5 So they were only looking at those two wells and did
6 not undertake an evaluation of the rest of the licence
7 areas, did they?
8 A. They looked at the area around those two wells.
9 Q. But not the entirety of the licence areas?
10 A. No.
11 Q. And you also note in that paragraph that although they
12 had 12 seismic lines available, they only interpreted
13 five of them.
14 A. I think that was a reference they made, yes.
15 Q. Would you agree that that's a very limited basis on
16 which to perform an analysis?
17 A. Well, it depends what you mean by the analysis. If
18 those five lines cover the area that they were charged
19 with reviewing, then fine. If the rest of the lines
20 were outside the area they were charged with looking at,
21 you know.
22 Q. Well, you yourself seemed to note that they had 12
23 seismic lines available to them.
24 A. Well, I think that's stated in the report.
25 Q. And in the report it doesn't appear that they considered
[Page 140]
12:59 1 the surface geology, does it?
2 A. I don't remember.
3 Q. But would you agree that this is a very preliminary
4 assessment of a limited area of the licence areas?
5 A. Well, I don't know about the word "preliminary". It's
6 a specific focus that they have been charged with, yes.
7 Q. And they did not specifically undertake assessment of
8 the geological chance of success or chance of
9 development because -- and you set this out at
10 paragraph 35 -- they were not yet considered to be
11 prospects; correct?
12 A. Yes.
13 Q. But all this means at the time is that they personally
14 did not consider that there was sufficient data that
15 those who might want to drill here would consider them
16 prospects.
17 A. Sorry?
18 Q. All that means is that they do not consider them to have
19 had sufficient data that would enable them to consider
20 that someone who wanted to drill there would consider it
21 a prospect?
22 A. Sorry, I'm still not quite sure where you're ... I mean,
23 they simply state that they don't have the level to --
24 in their opinion, to calculate a chance of success.
25 (Pause).
[Page 141]
13:01 1 MR NEWING: Sorry, one moment. (Pause).
2 No further questions.
3 THE PRESIDENT: Thank you.
4 Any questions in re-direct?
5 MR PILAWA: I have no questions on re-direct,
6 Madam President.
7 THE PRESIDENT: Do my colleagues have questions for
8 Mr Longman?
9 (1.02 pm)
10 Questions from THE TRIBUNAL
11 MR DRYMER: Doctor, thank you for your evidence. As with
12 your friends, Messrs Atkinson, Moy and Howard, I believe
13 I understand the details of your analysis, but
14 I sometimes like to zoom out and ask a more conceptual
15 question, to be sure I don't miss the forest for the
16 trees.
17 Could you elaborate briefly on the notion that
18 prospectivity is in part a function of a developer's
19 willingness to drill? Did I understand that aspect of
20 your evidence, of your testimony earlier correctly? Or
21 no?
22 A. That's an interesting question.
23 MR DRYMER: Well, I'm not trying to put words in your mouth.
24 A. No, no. In the ideal world, I think you want to have,
25 obviously, as much comfort as you can get on
[Page 142]
13:03 1 understanding what you're targeting. But you've got to
2 work with the information that is available, and
3 I suppose it comes down to a perception of risk in the
4 end as to what individual companies are going to see as
5 being an appropriate opportunity to follow.
6 MR DRYMER: That sounds, in a very, very gross sense,
7 subjective. Is that the case? And doesn't that cut
8 both ways?
9 A. Yes, exploration is a risk and reward game. So there's
10 always going to be an element of objectivity, to the
11 extent that you can have that, and subjectivity, to the
12 extent that you're going to make a decision at some
13 stage.
14 MR DRYMER: But even if two individuals, companies, whatever
15 it may be, agree on all of the objective measurable and
16 verifiable data, so to speak, there still might be
17 a difference in their perception of risk and reward?
18 A. Absolutely. Absolutely.
19 MR DRYMER: Yes, and -- well, I guess it's not an overly
20 controversial proposition, then, that whether a site is
21 called prospective or not may come down to simply the
22 willingness of the developer to take the risk or not?
23 A. Yes.
24 MR DRYMER: Right. Okay. I thought -- I just wanted to be
25 sure I understood that.
[Page 143]
13:05 1 Does that -- you obviously assume that or take that
2 into account in your work. Phrasing it this way, does
3 it change in any way your conclusions here, in terms of
4 prospectivity?
5 A. No, because I think regardless of whether the developer
6 or the explorer is willing to take the risk, you've
7 still got to have a view of what might be there.
8 MR DRYMER: Yes.
9 A. So what the individual company might do I don't think
10 changes your view of what you would assess might be
11 there in the first place.
12 MR DRYMER: I understand. I understand. Alright, that's
13 good. Thank you very much.
14 THE PRESIDENT: I have no further questions, Dr Longman. So
15 that concludes your examination.
16 DR LONGMAN: Thank you.
17 THE PRESIDENT: Thank you very much.
18 So this is a good time for a lunch break. Should we
19 resume at 2.15?
20 Let me ask, how much time do you envisage for the
21 next cross?
22 MR NEWING: Probably a similar amount of time. I'm not
23 entirely sure how much time I took then. But probably
24 similar, no more than an hour and a half, I would
25 imagine.
[Page 144]
13:07 1 THE PRESIDENT: An hour and a half.
2 MR NEWING: In fact, I was a lot less than I thought I was,
3 but certainly no more than an hour and a half.
4 THE PRESIDENT: I think then we have plenty of time this
5 afternoon. We need to have ...
6 So we'll resume at 2.15.
7 MR NEWING: Thank you.
8 MR PILAWA: See you then.
9 (1.07 pm)
10 (Adjourned until 2.15 pm)
11 (2.18 pm)
12 THE PRESIDENT: Fine, we're ready to start.
13 You are both ready? Good.
14 DR TIAGO DUARTE-SILVA (called)
15 MR RICHARD ACKLAM (called)
16 THE PRESIDENT: Sir, you are Tiago Duarte-Silva?
17 DR DUARTE-SILVA: That's right.
18 THE PRESIDENT: And you are Richard Acklam?
19 MR ACKLAM: That is correct.
20 THE PRESIDENT: You are both from Charles River Associates.
21 MR ACKLAM: That's correct.
22 THE PRESIDENT: You have submitted two expert reports,
23 31 March 2023 and 14 December 2023.
24 DR DUARTE-SILVA: Yes.
25 MR ACKLAM: Correct.
[Page 145]
14:20 1 THE PRESIDENT: You will be heard as expert witnesses. As
2 expert witnesses you have a duty to make statements in
3 accordance with your sincere belief. Can you please,
4 one after the other, read the expert declaration.
5 MR ACKLAM: I solemnly declare upon my honour and conscience
6 that my statement will be in accordance with my sincere
7 belief.
8 DR DUARTE-SILVA: I solemnly declare upon my honour and
9 conscience that my statement will be in accordance with
10 my sincere belief.
11 THE PRESIDENT: Before you start with the presentation, when
12 you get questions, will one of you take the lead and
13 either answer or delegate to the other? Have you
14 clearly allocated portions of the reports that go to the
15 one or the other, or how are you organised?
16 DR DUARTE-SILVA: The report is the joint opinion of both of
17 us. When we get a question, what we can say is one of
18 us will answer, not two of us will answer.
19 I can make that judgment, if that's okay with the
20 Tribunal.
21 THE PRESIDENT: Good. The idea is simply that it is not one
22 who starts and the other then who corrects, or whatever.
23 DR DUARTE-SILVA: Of course.
24 THE PRESIDENT: One person per question, and you will decide
25 how to allocate.
[Page 146]
14:21 1 DR DUARTE-SILVA: Yes.
2 THE PRESIDENT: Good. Fine. So you may start. As you
3 know, you have 15 minutes.
4 DR DUARTE-SILVA: Yes, good afternoon to all members of the
5 Tribunal.
6 Before we start we just need to make two very minor
7 corrections in our second report. Specifically,
8 footnote 53 should have cited to a different document.
9 It should have cited to CRA-63, page 64.
10 THE PRESIDENT: That's your second report?
11 DR DUARTE-SILVA: That's right.
12 THE PRESIDENT: Thank you.
13 DR DUARTE-SILVA: Which is San Leon's 2015 annual report.
14 Also, footnote 103 should read
15 1,577,000,000 barrels. I'll repeat that.
16 1,577,000,000 barrels of prospective resources. Instead
17 of the 1,414,000,000 barrels of prospective resources.
18 So we will now start, if that's alright?
19 THE PRESIDENT: Yes please.
20 (2.22 pm)
21 Presentation by DR DUARTE-SILVA and MR ACKLAM
22 DR DUARTE-SILVA: So at the Tribunal's instruction, we have
23 focused our slides on the market approach and the sunk
24 costs approach. However, because we had already
25 prepared slides on the income approach, we have moved
[Page 147]
14:22 1 them to an appendix to this slide show.
2 (Slide 1) So what we will talk about today is in the
3 market approach we will show that if it is based on past
4 transactions, you will reach a but-for fair market value
5 below $2 million. We will also show that based on
6 companies that were deemed comparable by the Claimant
7 itself, that fair market value is below $1.1 million.
8 We will then show that the Claimant's sunk cost
9 claim is unreliable; the lost opportunity claim is
10 unsubstantiated, and then we will provide comments on
11 the appropriate rate of interest from an economic
12 standpoint.
13 Now I'll turn to my colleague.
14 MR ACKLAM: So when it first invested in the project, the
15 Claimant granted an overriding royalty of 3.5% of
16 revenues from the licences to San Leon. (Slide 2) That
17 was in March 2014. San Leon then sold the ORR
18 in January 2015 for £120,000, and that corresponds to
19 $5.15 million for 100% of the revenues from the
20 licences, or $1.29 million for the Claimant's share.
21 Now, it's necessary to move these numbers from the
22 transaction date of January 2015 to both the ex-ante and
23 ex-post valuation dates. To do this we used the
24 FTSE 350 Oil & Gas stock price index, which results in
25 but-for fair market values of $1.82 million and
[Page 148]
14:24 1 $1.66 million respectively.
2 Now, this royalty is based on revenues only, so
3 therefore the values are biased upwards compared to the
4 true fair market value, which is affected by costs,
5 taxes and other deductions which do not come into play
6 in the royalty.
7 This transaction --
8 DR DUARTE-SILVA: We're having trouble flipping the slides,
9 I am sorry.
10 MR ACKLAM: Could we go to the next slide, please (Slide 3).
11 This transaction is representative of market value.
12 The seller was not compelled to sell the royalty. The
13 stream of revenues could, for example, have been
14 converted into financing collateralised by those
15 revenues. It was not part of a fire sale. San Leon
16 does not appear to have been in a "dire financial
17 situation". It had alternative sources of funding
18 available to it at the time of the ORR sale and it was
19 paying its directors significant amounts over this
20 period. And we saw some new arguments raised by
21 Mr Howard today, and in our opinion those are invalid
22 and contradicted by other evidence available.
23 Furthermore, the seller was well informed about the
24 sale. San Leon was better positioned than almost any
25 other buyer to know the ORR's true value, given its
[Page 149]
14:25 1 historic ownership of the project. And San Leon would
2 not have left such a significant amount of money on the
3 table when it sold the ORR for £120,000.
4 Just to compare, Mr Howard's discounted cash flow
5 model implies that these revenues were worth $61 million
6 in undiscounted terms.
7 (Slide 4) There was also an attempted transaction
8 that is consistent with the fair market value implied by
9 this ORR transaction, and that is the agreement by Akard
10 to provide $3.7 million of funding to the Claimant
11 in October 2015. Now, if the Akard agreement had been
12 for purchasing 50% of the proceeds of the Claimant's
13 share in the licences, that would mean a fair market
14 value of 3.7 million for the Claimant's 25% share. And,
15 again, moving this fair market value from the
16 transaction date to the ex-ante and ex-post valuation
17 dates, using the same index as with the ORR, results in
18 but-for fair market values of $5.7 million and
19 $5.2 million respectively.
20 However, in fact, Akard actually purchased more than
21 50% of the proceeds of the Claimant's share of the
22 licences for that $3.7 million. So initially Akard
23 would have received 80% of the proceeds until it had
24 been paid four times its initial investment. That would
25 have then switched to Akard receiving 65% of the
[Page 150]
14:27 1 proceeds until it had received five times its original
2 investment, before finally reverting to a 50/50 share
3 between Akard and the Claimant.
4 As a result, Akard had purchased more than 50% of
5 the proceeds, and therefore the project is worth less
6 than the ex-ante and ex-post fair market values
7 indicated on this slide.
8 (Slide 5) So I've spoken there about value implied
9 by historic transactions. I'll now speak a little bit
10 about fair market value implied by comparable companies.
11 (Slide 6) So in the market approach we need to
12 select firstly comparable companies, and then a metric
13 by which to compare them. We note that the project did
14 not have reserves at the ex-ante valuation date, only
15 prospective resources. The Claimant itself had selected
16 eight companies which it deemed to be comparable to
17 Discovery; however, at the ex-ante valuation date, only
18 ADX Energy of these eight did not have any reserves.
19 Therefore, we use ADX Energy on an ex-ante basis to
20 imply a valuation for the Claimant's share of the
21 licences.
22 The metric we use is the ratio of enterprise value
23 to estimated resources, and based on ADX Energy's
24 enterprise value and expected resources at the ex-ante
25 valuation date, each barrel of those resources is worth
[Page 151]
14:28 1 0.6 cents.
2 (Slide 7) The result of this is that the fair market
3 value of the Claimant's share of the licences at the
4 ex-ante valuation date is $40,000. However, ADX
5 Energy's enterprise value, that 8 million, includes the
6 value of both contingent and prospective resources,
7 because ADX Energy had both contingent and prospective
8 at that time, whereas the project only had prospective
9 resources.
10 Generally, contingent resources are valued more, or
11 higher per barrel than prospective resources.
12 Therefore, this value is biased high relative to the
13 project.
14 We also note the calculation by Mr Howard of
15 36 million at the ex-ante valuation date. This uses
16 a metric of EV per 2P reserves, despite the fact that
17 the project did not have reserves at the ex-ante
18 valuation date.
19 Furthermore, Mr Howard used a weighted average of EV
20 per 2P ratios across the comparable companies, although
21 he described it in his report as a notional line of best
22 fit. The value that he calculated for this was $4.375
23 per barrel, and he then multiplied this by the reserves
24 which Mr Howard considered the project to have at the
25 ex-ante valuation date to reach the $36 million
[Page 152]
14:30 1 valuation.
2 (Slide 8) On an ex-post perspective, we analysed the
3 same eight companies deemed comparable by the Claimant,
4 with two adjustments. We removed Cub Energy, which by
5 the ex-post date had sold all of its oil and gas assets,
6 and as with Mr Howard, we also removed JKX.
7 At the ex-post date all the remaining six comparable
8 companies all had 2P reserves; therefore on an ex-post
9 analysis we use the ratio of enterprise value to 2P
10 reserves, as opposed to resources. And, again, using
11 Mr Howard's approach of calculating a weighted average
12 of EV to 2P, this results in a value for those reserves
13 of $1.44 per barrel.
14 Now, the result of this, if the Claimant had
15 reserves in the but-for, ex-post scenario, would be
16 a valuation of $11.9 million, so that's that 1.44 per
17 barrel, multiplied by Mr Howard's estimation of the
18 Claimant's reserves at the ex-post date. However,
19 according to Dr Longman, the project would have only had
20 prospective resources at the ex-post valuation date and
21 not reserves, and generally, petroleum evaluation
22 engineers value undeveloped prospective resources at
23 5-10% of reserves.
24 Therefore, if a project only had prospective
25 resources at the but-for, ex-post valuation date, that
[Page 153]
14:31 1 implies a fair market value of between 0.5 and
2 $1.1 million.
3 I'll now pass back to my colleague.
4 DR DUARTE-SILVA: Thank you.
5 (Slide 10) So we have seen two ways to look at the
6 market approach on an ex-ante and ex-post basis, and if
7 you look at the globality of them we are talking at
8 under $2 million of but-for fair market value.
9 I will now talk about the sunk cost claim, which is
10 the next slide (11).
11 Generally we can say that sunk costs are not a good
12 measure of the project's fair market value, and one
13 clear example of this is that the owner of the project
14 before San Leon had invested $7.6 million into the
15 project by January 2013, and then San Leon sold to the
16 Claimant for just €153,000. So just investing capital
17 doesn't mean necessarily that it is worth at least that
18 capital.
19 In any case, let's examine what the Claimant's sunk
20 cost claim is, and it is the sum of these three amounts:
21 the amount paid to acquire Aurelian Oil & Gas Slovakia
22 for €153,000; the amount paid to buy the ORR in January
23 2015 of £120,000; and the bulk of it, AOG's, in this
24 case Alpine, Alpine's share of the exploration
25 expenditures incurred on the project between 2014 and
[Page 154]
14:33 1 2020.
2 However, when we examined the sunk cost calculation
3 of €2.8 million in Fraser's statement 2, we find it
4 quite unreliable.
5 First, the annual reports submitted in evidence are
6 not audited, and that is acknowledged by Mr Fraser in
7 his second statement, paragraph 52.
8 Also, there's no invoices attached to the annual
9 reports. There are just some summaries, in some of
10 them.
11 So these numbers are just not reliable. There's
12 also no evidence that these claimed amounts were ever
13 disbursed, because just being charged something by
14 a supplier doesn't mean ever that you necessarily paid
15 for them. There's no indication of proofs of payment or
16 anything of that sort.
17 Mr Fraser also applies interest to these alleged
18 costs, but, even if they were disbursed, their timing is
19 still unknown, so we don't know when they were
20 disbursed, if they were disbursed, so we don't know
21 what's the start date for that interest.
22 The Claimants also make an argument about a lost
23 opportunity claim (Slide 13) and this lost opportunity
24 claim was shown in their Reply Memorial to be between
25 Mr Howard's DCF model of 133 million, and 40% of that
[Page 155]
14:34 1 value, 53 million.
2 But, until the start of this hearing we were unaware
3 of why 40%, so we didn't respond to it. When 40% was
4 shown, there was no explanation of why 40%. We learned
5 that elsewhere in the Memorial, the Claimant cite to
6 Sapphire v NIOC, and we learned on the first day of the
7 hearing that the argument for 40% is 2 out of 5 million
8 in claimed lost profits. 2 out of 5, that's 40%.
9 There's no explanation in the award of what those
10 lost profits represent or how much they were already
11 reduced by uncertainty. Were they as reduced by
12 uncertainty, more reduced by uncertainty than
13 Mr Howard's DCF model? It's impossible to know.
14 But we see, for example, and I'm not saying this is
15 the right way to do it, but we see, for example, that
16 the same award talks about receiving a net income of
17 $46 million if everything goes as well as possible. In
18 that case, 2 million would be 4% of 46 million. And
19 again, just as an illustration: if you were to apply 4%
20 to 133 million, you will get $5 million.
21 (Slide 14) Finally, the Claimant's argument for its
22 rate of interest on damages lacks economic
23 substantiation. The Claimant argues for interest at
24 LIBOR plus 4% (Slide 15) arguing that's the approximate
25 borrowing costs which Discovery would have had to have
[Page 156]
14:36 1 pay. But this is wholly unsupported.
2 First, there's no reason to think that the Claimant
3 had to borrow. There is no evidence that the Claimant
4 borrowed any amounts. There's no evidence that such
5 hypothetical borrowing would have been at LIBOR plus 4%.
6 And the only Claimant's reference to a rate of LIBOR
7 plus 4% is to another case, another award,
8 Murphy v Ecuador II, which implies that they're
9 requesting interest based on those parties' borrowing
10 costs.
11 In contrast, the appropriate interest rate on
12 a US dollar claim should be at most the interest rate on
13 dollar-denominated Slovakian sovereign bonds, because
14 the only default risk that is relevant would be the risk
15 that Slovakia does not pay an award, and the Claimant
16 has not been exposed to business risks of the project.
17 (Slide 16) As I noted at the beginning of this
18 presentation, we also have an appendix here that can be
19 useful to you, that shows as I noted --
20 THE PRESIDENT: I should note that you are just reaching the
21 15 minutes.
22 DR DUARTE-SILVA: I'll stop there.
23 THE PRESIDENT: These are the appendices that you have?
24 DR DUARTE-SILVA: That is. That is right. And all, from A
25 to F, they are appendices just for your reference,
[Page 157]
14:37 1 guidance. They talk, for example, about the timeline of
2 the assets' ownership, that could be helpful to the
3 Tribunal. And the terms of transactions and so on.
4 THE PRESIDENT: Thank you.
5 DR DUARTE-SILVA: Of course.
6 THE PRESIDENT:
7 Mr Newing, your turn.
8 (2.37 pm)
9 Cross-examination by MR NEWING
10 Q. Thank you.
11 Good afternoon. My name is Neil Newing and I will
12 be asking you some questions on behalf of the Claimant.
13 A. (Mr Duarte-Silva) Thank you.
14 Q. We've heard you state, and we have read in your reports,
15 that you claim the appropriate valuation method to use
16 in this circumstance is a market-based approach;
17 correct?
18 A. (Mr Acklam) Correct.
19 Q. And that's based on looking at comparable transactions
20 or companies; yes?
21 A. (Mr Duarte-Silva) Yes.
22 Q. And do you accept that in looking to find comparable
23 transactions involving oil and gas assets, it's
24 important to look at the nature of the assets in
25 question?
[Page 158]
14:38 1 A. (Mr Duarte-Silva) Of course it is, and the company did
2 that for us, they selected eight comparable companies.
3 Q. So, just to pick you up on that, you have said that
4 a few times. At no point in any of the first expert
5 reports supplied by the Claimant did they conduct their
6 own market-based valuation, did they?
7 A. (Mr Duarte-Silva) The Claimant's experts to this date
8 have not submitted any claim for damages based on fair
9 market value, except for the income approach and the
10 $36 million that we discussed before. Other than that,
11 there's no claim for damages based on fair market value.
12 Q. So when you say the companies were chosen by Discovery
13 as comparable transactions for the purposes of this
14 market-based valuation, they were not chosen by
15 Discovery for that purpose, were they?
16 A. (Mr Duarte-Silva) For which purpose, I'm sorry? I don't
17 have a transcript.
18 Q. For the purposes of conducting a market-based comparable
19 transaction valuation?
20 A. (Mr Duarte-Silva) Those companies were selected by the
21 Claimant to perform a valuation of the project.
22 Q. But not a market-based valuation, which you are using
23 here
24 A. (Mr Duarte-Silva) I believe it was a market-based
25 valuation. They used it to calculate the fair market
[Page 159]
14:39 1 value.
2 Q. They used it, did they not, to work out the cost of
3 equity capital -- the cost of capital for the purposes
4 of the DCF model, which is a completely different
5 approach?
6 A. (Mr Duarte-Silva) Well, the way to calculate the
7 market-based approach based on comparables would be to
8 look at comparable companies. When the company looks --
9 when the Claimant looks at calculating the cost of
10 capital, they're naturally looking at comparable
11 companies. So they were deemed comparable by the
12 Claimant.
13 Q. Can I ask you to look at the second expert report of
14 Mr Howard, please, at page 94.
15 A. (Mr Duarte-Silva) I don't have it in front of me.
16 Q. It will come up on the screen in a moment.
17 In fact, page 95. And you will see at paragraph 362
18 Mr Howard refers to the fact that in your report you
19 have said he "does not disagree with this list of
20 comparable companies", but says this is "misleading",
21 because he has considered them comparable:
22 "... on the basis that they were small oil and gas
23 companies, operating in Eastern Europe, and therefore
24 would have similar WACCs to Discovery ..."
25 And then in the next paragraph he says:
[Page 160]
14:41 1 "At no point did I state that the companies had
2 assets comparable to those of Discovery ..."
3 And explains why; do you see that?
4 A. (Mr Duarte-Silva) I see that's Mr Howard's opinion.
5 Q. And you didn't respond to this opinion at all in your
6 second report, did you?
7 A. (Mr Duarte-Silva) I did, I said the company deemed them
8 comparable.
9 Q. But you didn't address the points that he had made here
10 as to why he said he did not consider them to be
11 comparable?
12 A. (Mr Duarte-Silva) I did. I said the company, which had
13 the best possible way to assess this, deemed them the
14 comparable. That's my response.
15 Q. Okay, so you basically don't accept Mr Howard's position
16 here that he did not consider them to be comparable.
17 A. (Mr Duarte-Silva) Could you repeat the question?
18 Q. You don't accept Mr Howard's position as stated in these
19 paragraphs that he did not consider those companies to
20 be comparable for the purpose of a market-based
21 valuation approach?
22 A. (Mr Duarte-Silva) I'm trying to answer your question.
23 I think I already answered, but I'll try again.
24 Mr Howard has a certain opinion of what is a comparable
25 company. I looked at what the company, the company
[Page 161]
14:42 1 itself, the Claimant, thought was comparable. I think
2 that's a better assessment than Mr Howard's assessment.
3 And the company did that before Mr Howard performed this
4 analysis.
5 Mr Howard also commented on this in his first
6 report, talked about this list of comparable companies,
7 and all he said was actually, in accordance of what we
8 do, is he grabbed those list of comparable companies and
9 said only one of them, Cub Energy, has prospective
10 resources. Which was a clerical mistake. It's not, as
11 we showed in our second report, Cub Energy was not in
12 that status. So we corrected that and we found the only
13 one that does have prospective resources is ADX. So we
14 basically followed his approach and corrected it for
15 a mistake he made.
16 So he did consider them comparable in the first
17 report.
18 Q. For a different purpose?
19 A. (Mr Duarte-Silva) I don't understand what you mean by
20 "a different purpose". We were calculating fair market
21 value, and whether you're calculating it to calculate
22 the cost of capital, or to use multiples, they're
23 comparable companies. It's common to use the same
24 comparable companies to calculate the cost of capital
25 and to calculate multiples.
[Page 162]
14:44 1 Q. But you would accept that Mr Howard has a different view
2 to you on that?
3 A. (Mr Duarte-Silva) Yes, Mr Howard's opinions differ from
4 mine.
5 Q. Thank you. So you first look in your report, and you've
6 discussed today, the prior transactions on the assets;
7 correct?
8 A. (Mr Duarte-Silva) Yes.
9 Q. And there are three transactions that you look at: the
10 San Leon ORR, Gulf Shores and Akard, although you didn't
11 mention Gulf Shores at all today.
12 A. (Mr Acklam) Correct.
13 Q. And all of those three transactions took place in 2015;
14 yes?
15 A. (Mr Acklam) Correct.
16 A. (Mr Duarte-Silva) Can I correct that? There's one
17 transaction and two attempted completed transactions.
18 Q. All of the three items that were prior -- what you call
19 prior transactions, took place in 2015.
20 A. (Mr Duarte-Silva) Again, there's one transaction in 2015
21 and there's two attempted transactions as well, in that
22 year.
23 Q. Which -- well, I accept that the Gulf Shores was not
24 completed, but the other two were.
25 A. (Mr Duarte-Silva) I don't believe the Akard agreement
[Page 163]
14:45 1 was completed. I believe that Akard did not fulfil the
2 full agreement.
3 Q. But the agreement itself was signed and accepted at the
4 end of 2015, there was a default later, but the
5 agreement was completed in essence in 2015 at that time.
6 And the value that was placed -- that you are placing on
7 it is based on the transaction that was agreed in 2015?
8 A. (Mr Duarte-Silva) I believe that's true. However, the
9 fact that the cash flows were not exchanged hampers the
10 ability to rely on that transaction.
11 Q. Is it your understanding that no money was paid under
12 that transaction at all?
13 A. (Mr Acklam) No. We understand some money was paid but
14 not the full agreement.
15 Q. Okay. Before looking at those -- I'm going to call them
16 "transactions" for simplicity, but I take your point
17 about the Gulf Shores one in particular not having been
18 completed.
19 But before we look at those further, do you accept
20 that any view of value that may have been expressed over
21 nine years ago is potentially out of date and things may
22 have changed in the meantime?
23 A. (Mr Duarte-Silva) I think your question needs
24 a clarification whether we are talking about the actual
25 or the but-for world. Until then I don't think I can
[Page 164]
14:46 1 answer it.
2 Q. I'm making a general point that if you are looking at
3 a transaction that took place nine years ago in order to
4 ascertain a value of something today, you would need to
5 take into account that there may have been changes or
6 events in those nine years that would affect that
7 valuation?
8 A. (Mr Duarte-Silva) Yes. We account for that using the
9 FTSE index.
10 Q. And do you accept, now looking at this case, that if
11 further analysis had taken place on the licence areas,
12 which had resulted -- and I'm talking hypothetically --
13 in the prospects being better defined, this would be of
14 interest to someone who was looking to buy this today?
15 A. (Mr Acklam) Sorry. Could you repeat that question?
16 Q. Would you accept that if any further analysis on the
17 licence areas had taken place in the meantime, and which
18 had resulted in the prospects being better defined, that
19 would be of interest to someone who was looking to buy
20 it today?
21 A. (Mr Acklam) Yes. Do you have -- which specific analysis
22 are you talking about, please?
23 Q. I was talking hypothetically, if that had happened.
24 A. (Mr Acklam) Correct.
25 Q. Now talking specifically, do you accept that if further
[Page 165]
14:48 1 processing and interpretation of seismic data had taken
2 place, that that would potentially affect the position
3 of someone looking to buy it today?
4 A. (Mr Duarte-Silva) It depends on whether such further
5 analysis and reprocessing has led to increased value or
6 not. We heard from Mr Longman that what happened in
7 this property was actually not increasing value.
8 Q. So your position: that the work that may have been
9 undertaken since 2015 or since each of these
10 transactions took place added no further value is based
11 on Dr Longman's assessment?
12 A. (Mr Duarte-Silva) Not just that. There was also,
13 I think, a shrinkage of licence area, for example.
14 Q. Yes. But otherwise, your view as to whether the data
15 itself, or the further analysis, sorry, that's taken
16 place has added any value, is based on Dr Longman's
17 assessment that it did not?
18 A. (Mr Acklam) I don't believe we've seen any testimony,
19 Dr Longman or Mr Howard or anywhere else, that indicates
20 any reprocessing added value to the asset after these
21 transactions.
22 Q. Well, I think Mr Lewis' testimony suggests otherwise,
23 but I am not going to take that there for the moment.
24 But would you accept that as a starting point, any
25 view on value which was expressed nine years ago must be
[Page 166]
14:50 1 treated with some caution until you have been able to
2 ascertain whether any events or analyses that have taken
3 place have added any additional value?
4 A. (Mr Duarte-Silva) I agree that anything that would add
5 value should be considered. I don't agree that we've
6 seen any evidence that there was such addition of value.
7 And also, I mean we -- I think today was the first time
8 we saw a table, or yesterday, a table with subsequent
9 events that happened and were summarised in that table.
10 Q. But that table, just to confirm, you're talking about
11 Exhibit CD-10, which sets out the source of almost all
12 that information, is either Mr Lewis' testimony or
13 exhibits that have been submitted by the Claimant. So
14 that information has been available to you.
15 A. (Mr Duarte-Silva) I mean in the context of any purported
16 increase in value. It's the first time I'm hearing that
17 articulated.
18 Q. And are you aware that the oil price had collapsed
19 significantly between June 2014 and early 2016?
20 A. (Mr Duarte-Silva) I don't have those numbers in front of
21 me.
22 Q. Okay. Could we bring up C-41, please.
23 So this is an exhibit, I don't know if you have seen
24 this before, which shows the oil prices from 2012 to
25 2022; have you seen that before?
[Page 167]
14:51 1 A. (Mr Duarte-Silva) Yes.
2 Q. And you will see there the rather dramatic drop that
3 occurs at the end of 2014 and into 2016?
4 A. (Mr Duarte-Silva) Yes.
5 Q. And so would you agree that this is another reason why
6 a valuation that may have taken place in particularly
7 early 2015 coming off such a large drop may be cautious?
8 A. (Mr Duarte-Silva) I don't agree with that. That is the
9 market value at the time, and we accounted for the
10 passage of time and oil prices using the FTSE index from
11 the time of the transaction until the ex-ante date,
12 until the ex-post date. So this is fully reflected in
13 our analysis and doesn't require more caution.
14 Q. But would you accept that somebody who was buying or
15 selling an asset at that date may have a different view
16 on it, in light of the fact that the price had crashed
17 so significantly at that time?
18 A. (Mr Duarte-Silva) People are allowed to have different
19 views. This is the objective, unbiased view of all
20 market participants. And it shows the price was low.
21 And I recall, I mean, at the time, there was a lot
22 of discussion that oil prices are going to be low for
23 a long time.
24 Q. So if we turn to the first transaction, the San Leon
25 ORR, and you've explained already that this was
[Page 168]
14:52 1 purchased back by Discovery in January 2015 for
2 £120,000; yes?
3 A. (Mr Duarte-Silva) That's right.
4 Q. And you understand that it's the Claimant's position
5 that this was not a fair market value transaction, which
6 I will come to shortly, but assume for a moment that it
7 was.
8 San Leon sold AOG to Discovery in March 2014; right?
9 A. (Mr Duarte-Silva) Yes.
10 A. (Mr Acklam) Correct.
11 Q. And there is no reason to believe that they would have
12 been aware of or in possession of any additional
13 analysis work that had taken place by AOG since they
14 sold it, is there?
15 A. (Mr Acklam) I'm not aware of what San Leon would have
16 had at their disposal when they were evaluating the ORR
17 transaction.
18 Q. But for the purposes of considering what they may have
19 thought as to value, would you agree it's likely to have
20 been based at most on the knowledge they had when they
21 sold AOG in March 2014?
22 A. (Mr Acklam) That knowledge being seven years of
23 institutional knowledge at Aurelian Oil & Gas, yes.
24 Q. Yes, although San Leon had not been the owner of
25 Aurelian for that entire period, had it?
[Page 169]
14:54 1 A. (Mr Acklam) No, although Aurelian was still part of San
2 Leon.
3 Q. Mr Lewis' evidence, which has not been challenged, is
4 that only initial processing and interpretation of the
5 seismic data had been carried out by the time that
6 Discovery bought AOG; are you aware of that?
7 A. (Mr Acklam) I'm not aware of the specifics of Mr Lewis'
8 testimony, but ...
9 Q. Okay. I'll bring this up. If we could look at
10 Mr Lewis' first witness statement, please, at page 9.
11 I'll just wait for that to come up on the screen.
12 If we could go to page 9, please. Yes, it's at
13 paragraph 24. You will see Mr Lewis states there that:
14 "After AOG was granted the rights to explore ...
15 770 km of ... seismic was acquired ... between 2008 and
16 2011 [that's when it was owned by Aurelian], with only
17 initial processing and interpretation of those data
18 carried out. After Discovery acquired AOG, we completed
19 the processing of these data, and commenced
20 interpretation in 2014 and 2015."
21 Do you see that?
22 A. (Mr Acklam) Yes.
23 Q. And Mr Lewis' evidence on that has not been challenged.
24 So on this basis, would you accept it's likely that
25 San Leon would not have been aware of this additional
[Page 170]
14:55 1 analysis work that had been carried out?
2 A. (Mr Acklam) It may not have been aware of this
3 additional analysis work. There's no indication here as
4 to whether or not the completion of processing, as
5 Mr Lewis states it, would have had any effect on the
6 value of the data that was in its possession.
7 Q. But you simply don't know?
8 A. (Mr Acklam) No.
9 Q. So we were talking just then on the basis that the sale
10 of the ORR was assumed to be a fair market value
11 transaction, but you understand the Claimant's position
12 is that it was not; yes?
13 A. (Mr Duarte-Silva) Yes, and that position, as we
14 understood from Mr Howard's expert reports, was based
15 solely on an alleged compulsion to sell based on being
16 a fire sale. We are hearing now there might have been
17 other things.
18 Q. So if we look at the second witness statement of
19 Mr Lewis. It's at paragraph 50, which is on page 14.
20 Paragraph 50. I'm not going to ask you to read the
21 whole thing, I know you've read it before, but Mr Lewis
22 explains here about San Leon's petition, and in the
23 middle of the paragraph sets out:
24 "By the end of 2014, San Leon was in a dire
25 financial position."
[Page 171]
14:57 1 And you've seen that before, yes?
2 A. (Mr Duarte-Silva) Yes, we see that.
3 Q. And he goes on in paragraph 52, on the next page, to say
4 that in respect of the price, you have the figure of
5 £120,000, and just after that:
6 "This price was not based on any valuation of the
7 royalty at the time and it did not represent its real
8 value in the open market. It was, in a sense, a fire
9 sale, and they had no one else they could possibly sell
10 it to."
11 Do you see that?
12 A. (Mr Duarte-Silva) Yes.
13 A. (Mr Acklam) Yes.
14 Q. Now Mr Lewis' evidence in this regard was also not
15 challenged in his cross-examination, were you aware of
16 that?
17 A. (Mr Duarte-Silva) No.
18 Q. But there is no basis other than what you have set out
19 in your second report, which I will come to in a moment,
20 for saying that what Mr Lewis has described about the
21 circumstances of that sale are wrong, is there?
22 A. (Mr Duarte-Silva) We are here to answer about our
23 opinions, but if you are asking us what happened in this
24 hearing, I think we're not the best people to tell you.
25 Q. But if the Tribunal accepts that what Mr Lewis has said
[Page 172]
14:58 1 about the circumstances of that transaction is true,
2 would you agree that this would then not be
3 an appropriate transaction for purposes of
4 a market-based valuation?
5 A. (Mr Duarte-Silva) Fair market value assessment needs to
6 be between a willing buyer and a willing seller, under
7 no compulsion to sell. If the Tribunal believes there
8 was a compulsion to sell, then it's not a fair market
9 value transaction.
10 Q. Thank you. And to confirm, you had no involvement in
11 that transaction at the time, did you?
12 A. (Mr Duarte-Silva) I did not.
13 Q. And you have had no evidence about that transaction
14 since, other than what Mr Lewis has set out in his
15 witness statement, have you?
16 A. (Mr Duarte-Silva) I'm not sure what you mean by
17 "evidence about that transaction". The evidence we have
18 about that transaction has been listed in our expert
19 reports.
20 Q. But you have not had any evidence from anyone else that
21 was involved in that transaction at the time, other than
22 what Mr Lewis has said, have you?
23 A. (Mr Duarte-Silva) No, but we have actual data and
24 evidence that we rely on. That is also evidence about
25 that transaction.
[Page 173]
14:59 1 Q. And you do not know what San Leon's CEO, Mr Fanning,
2 with whom the deal was negotiated and agreed at the
3 time, believed when he entered into this transaction, do
4 you?
5 A. (Mr Duarte-Silva) I believe that is it is fair to assume
6 that Mr Fanning is a rational economic actor and would
7 try to sell it for the highest value possible. And even
8 if they were in a dire financial situation, which we
9 dispute, and show they were not, then they could still
10 try to sell it to other people. They don't have to sell
11 it to Mr Lewis' company.
12 Q. But these are assumptions you are making on what you
13 think a rational businessman would have done. You don't
14 actually know what Mr Fanning thought at the time?
15 A. (Mr Duarte-Silva) I believe that Mr Fanning is rational.
16 Q. But you have no evidence on which to base that, other
17 than the fact that he is a businessman?
18 A. (Mr Duarte-Silva) Yes. He's a rational human being and
19 he is an executive of a company.
20 Q. You said just now and you say in your report as well
21 that you don't accept that the company was in a dire
22 financial position, and you give a number of reasons for
23 this in your second report. One of the reasons is that
24 directors' salaries totalled €2.8 million across 2014
25 and 2015; correct?
[Page 174]
15:01 1 Α. (Mr Duarte-Silva) Yes, we say that.
2 Q. Do you know who those salaries were paid to?
3 A. (Mr Duarte-Silva) I don't recall. But you can show me,
4 if you want.
5 Q. Can we look at Exhibit C-259, please. And if we could
6 turn to page 24 of the PDF. On the left side of the
7 screen there you have the table of the directors'
8 salaries. And so you have at the top Mr Fanning, who
9 was the executive chairman of San Leon; right?
10 A. Yes.
11 Q. And then second you have Paul Sullivan, who was the
12 managing director?
13 A. (Mr Duarte-Silva) Yes.
14 Q. And do you agree that the bulk of the salary payments
15 were paid to those two individuals?
16 A. (Mr Duarte-Silva) Yes.
17 Q. So would you agree that these high salaries do not
18 necessarily reflect a thriving company, but simply the
19 heads of the business paying themselves very large sums?
20 A. (Mr Duarte-Silva) Are you implying that they're paying
21 themselves too much? I'm not sure what your question
22 is.
23 Q. Well, you have relied on the fact that large amounts
24 were paid to the directors as an indication that the
25 company was therefore financially stable.
[Page 175]
15:02 1 I'm suggesting to you that all this shows is that the
2 directors were paying -- these two individuals were
3 paying themselves large amounts of money.
4 A. (Mr Duarte-Silva) Well, it's not that simple. So first,
5 there's a number of reasons that we can go over why the
6 company was not in a dire financial situation, instead
7 of just focusing on this one. If --
8 Q. Well, we'll come to some other reasons in a moment.
9 A. (Mr Duarte-Silva) If you want to focus on this one,
10 I will tell you that these numbers that you are pointing
11 here are correct, as to my best understanding, and that
12 I imagine that as a publicly listed company, there are
13 checks and balances and that there is probably
14 a compensation committee, that I actually read about,
15 I think, a compensation committee of the board of
16 directors that examines this and pays them the amounts
17 that it deems fair, just like in any other publicly
18 traded company.
19 Q. One of the other --
20 A. (Mr Duarte-Silva) So if your question is whether it's
21 excessive, I have no reason to believe it's excessive.
22 MR DRYMER: I think the question is strictly whether
23 compensation is an indication of the solvency and the
24 financial situation of the company?
25 A. (Mr Duarte-Silva) It is certainly consistent with
[Page 176]
15:03 1 a company that is not in dire straits. And if we're
2 talking about £120,000 that the company was desperate to
3 get, according to the Claimant, so much that it sold it
4 for just £120,000, that is contrasting highly with these
5 amounts being paid in the other points that we made,
6 such as the €30 million that they had in loan
7 facilities, the £30 million that they raised from
8 investors in 2015. I mean, those -- that's a real
9 market indication that the company was not in dire
10 financial straits. I mean, the company raised
11 £30 million -- £29 million five months after the
12 transaction of the ORR. Just by investors for new
13 shareholders.
14 MR NEWING: Well, let's look at some more numbers. You note
15 in your report, which I note doesn't mention the
16 position you just stated, but you note in your report as
17 another indication of company solvency that it had taken
18 out loans of €5.8 million in 2014. And my understanding
19 is you suggest that this indicates that it was a stable
20 enough business to be able to obtain that financing;
21 correct?
22 A. (Mr Duarte-Silva) It's one of the reasons, as well as,
23 for example, the line of credit that was, I think,
24 €30 million. One of the reasons.
25 Q. Okay, but if you look at page 45 of the PDF. So this
[Page 177]
15:05 1 sets out on the top left the loans and borrowings. And
2 you will see the first was a €3.3 million loan from --
3 in fact it was $3.2 million, it says in the note -- from
4 YA Global Masters SPV Limited; do you see that?
5 A. (Mr Duarte-Silva) Yes.
6 Q. And the note to this says that this had an arrangement
7 fee of $800,000, so 25% of the loan value. That's
8 a very steep arrangement fee, isn't it?
9 A. (Mr Duarte-Silva) It's what -- the arrangement fee it
10 had.
11 Q. But does this not indicate that in fact it was not easy
12 for it to obtain financing, if it had to resort to
13 seeking loans on such steep terms?
14 A. (Mr Duarte-Silva) It's the first time I'm hearing this.
15 I would have to analyse this. I don't know if it's
16 a high arrangement fee or not.
17 And you have to remember, this is an oil exploration
18 company. It's a company that, it's not surprising,
19 that's going through, like, these arrangement fees and
20 so on, and ...
21 Q. You said this is the first time you're hearing this.
22 But is it not the case that it is your second expert
23 report which sets out the fact that the company had
24 €5.8 million in loans? So surely you must have looked
25 at this in order to get those figures?
[Page 178]
15:06 1 A. (Mr Duarte-Silva) Yes, we looked at this. Yes.
2 Q. But you simply ignored the fact that --
3 A. (Mr Duarte-Silva) I'm making the point that saying the
4 arrangement fee is too high, it's the first time
5 I'm hearing it.
6 Q. So you just didn't consider that point at all when you
7 looked at this before?
8 THE PRESIDENT: Well, do you think it's a high fee --
9 A. (Mr Duarte-Silva) I have no opinion of this.
10 THE PRESIDENT: -- to pay 800,000 to get 3.2, a loan of 3.2?
11 A. (Mr Duarte-Silva) I would have to know the terms of
12 that. I mean, it's a considerable percentage. Now,
13 whether it's high or low depends really on the market
14 conditions at the time.
15 And, I mean, it seems like a high -- I would say it
16 is a somewhat high arrangement fee, but I'm sure it was
17 negotiated -- not "I'm sure". We can make a default
18 assumption that it was fairly negotiated. And so
19 reflects the conditions of those loans and the
20 conditions of an oil and gas exploration company.
21 MR NEWING: The second loan is listed as being from
22 a company called Palomar Holdings Limited, which was
23 San Leon's business partner in relation to some of the
24 projects at that time. And the note says it was repaid
25 post year end; correct?
[Page 179]
15:07 1 A. (Mr Duarte-Silva) Yes.
2 Q. Alright. Now I would like to turn up CRA-63, which is
3 the 2015 annual report. And if we can go to page 78,
4 please. So we have ... You can scroll down ... (Pause)
5 So we can see the loans here in 2015, and so we see
6 the same YA Global Masters loan is still there, that's
7 not been repaid. The Palomar loan has been repaid and
8 we have a new loan from LPL Finance, and then other;
9 correct?
10 A. Yes.
11 Q. And you will see in the note number 3 that in relation
12 to the new loan from LPL Finance, it says that
13 Mr Fanning has personally guaranteed that loan; do you
14 see that?
15 A. (Mr Duarte-Silva) I see that.
16 Q. So doesn't this again suggest that the company was not
17 able to obtain financing without Mr Fanning himself
18 personally guaranteeing that financing?
19 A. (Mr Duarte-Silva) I disagree with that. They had a line
20 of credit of €30 million.
21 Q. If we could now turn --
22 A. (Mr Duarte-Silva) And also they raised £29 million from
23 external shareholders.
24 MR DRYMER: So what, if anything, does this indicate, in
25 your opinion? If you were asked to guarantee personally
[Page 180]
15:09 1 a loan taken out by your company?
2 A. (Mr Duarte-Silva) It doesn't indicate much to me because
3 it's a quite small amount really in the grand scheme of
4 things. It doesn't show at all that the company was in
5 a dire financial situation. I would have to know more
6 about this loan. There's nothing here about it.
7 MR NEWING: So if we turn to page 83, please. And under
8 item 29 you will see just under the table, the second
9 paragraph it says:
10 "Mr Fanning had personally guaranteed the loan from
11 Palomar Holdings ... which was repaid during the
12 year..."
13 So the other loan of $3 million was also personally
14 guaranteed by Mr Fanning; right?
15 A. (Mr Duarte-Silva) I believe so, from what I'm reading.
16 Q. So from the loans taken out, we have seen that two were
17 personally guaranteed by Mr Fanning and the other one
18 had a 25% arrangement fee. Correct?
19 A. (Mr Duarte-Silva) That's what you're telling me, that's
20 what I read, yes. I still would need to know more about
21 these loans. I mean often these loans are, for example,
22 assessed, are attached to a specific asset, and so they
23 might have specific conditions that require the personal
24 guarantee. It's not really a reflection of the company
25 as a whole.
[Page 181]
15:11 1 Q. But it was in your second report that you put forward
2 the fact it was able to obtain financing as a suggestion
3 that this was an indication of the company's financial
4 performance.
5 A. (Mr Duarte-Silva) And the company was able to obtain
6 financing, as I've been telling you, through the line of
7 credit, and through even raising almost £30 million from
8 external shareholders. So yes, they were able to. And
9 you're pointing me to some personal guarantees in
10 a small loan of, I don't know, $2 million or something.
11 Q. Okay, let's turn to page 34 of the PDF. While that's
12 happening, you've placed a lot of emphasis this
13 afternoon on the fact that there was this line of
14 credit. Why was that not raised in your second report
15 as the main reason, or any reason, as to why you didn't
16 believe San Leon was in a dire financial position?
17 A. (Mr Duarte-Silva) I would have to check that in my
18 second report, if you would like.
19 Q. We can go to it in a moment, but it is not mentioned at
20 all in there. Is there a reason why?
21 A. (Mr Duarte-Silva) I thought it was mentioned. I'd have
22 to look. There's no reason why it wouldn't be
23 mentioned.
24 Q. If we look at this page now on the right-hand side, if
25 we can scroll up a little bit, there's an item called
[Page 182]
15:12 1 "Going concern risk"; do you see that? And it says:
2 "There are a number of assumptions underlying the
3 group's cash flow projections which indicate the
4 existence of a material uncertainty which may cast
5 significant doubt on the group and the company's ability
6 to continue as a going concern."
7 That's a serious statement about the risk of the
8 company's ability to operate and pay its debts, isn't
9 it?
10 A. (Mr Duarte-Silva) It's -- well, a few things. So one
11 is, again, this is an oil and gas exploration company.
12 They often get these going concerns risks that are --
13 that are issued. This is, I believe, as of -- here in
14 2015, right, I think that's what we're talking about?
15 Q. Yes.
16 A. (Mr Duarte-Silva) Okay. So the ORR transaction we are
17 always talking about was in January 2015, right? So
18 we're talking about the beginning of the year and the
19 end of the same year.
20 If you look at year-end 2014, I don't believe you
21 see any such going concern. So a month prior to the
22 transaction, I believe you see no such going concern.
23 So you're talking to me about something that happened
24 a year later.
25 The other point is, the proof whether it's going to
[Page 183]
15:13 1 be a going concern, really, is in its market value and
2 willingness to invest in the company and so on. And
3 we've seen that they could raise almost £30 million from
4 external shareholders, residual claimants. They have no
5 claim, no collateral, nothing, and have just invested
6 £30 million into this company, in the middle of the
7 year. And you're telling me that at the end of the
8 year, there was a going concern? I find that wholly
9 irrelevant to whether, at the time of the ORR
10 transaction, they were in dire financial straits.
11 And, even if they were, they could have shopped
12 around.
13 Q. So your position is the fact that they may have been
14 able to raise money in the middle of the year, but
15 six months later or so they are facing a going concern
16 risk, is irrelevant to the question of whether the
17 company was in a good or bad financial position?
18 A. (Mr Duarte-Silva) If the company was in such dire
19 straits, I find it hard to believe that they would have
20 been able to raise that amount from external
21 shareholders, a few -- five months later.
22 Q. I think, would you agree, however, that the fact that
23 we're having all of these discussions -- and as you have
24 yourself acknowledged, you would need to know more about
25 a lot of these things, and presumably we would need to
[Page 184]
15:15 1 also know more about exactly the circumstances in which
2 that funding was raised that you refer to -- that we
3 simply cannot, today, know for sure what position San
4 Leon really was in at that time?
5 A. (Mr Duarte-Silva) We don't need to know more. The
6 shareholders that invested in the company are the proof.
7 They looked at the company and they showed us that the
8 company was worth investing in. And you're pointing out
9 to me to that the going concern appeared a year later?
10 I don't think that's relevant at all. You're pointing
11 me to a loan that was personally guaranteed for
12 $1 million or $2 million?
13 And this is all -- I need to remind the Tribunal,
14 this is all in comparison to supposedly the company
15 being so desperate for cash that they need to sell the
16 licence for £120,000 when according to Mr Howard's DCF
17 it would be worth at least $60 million. It just defies
18 credulity.
19 Q. And to confirm, I'm not pointing you to loans or
20 anything because those are the things that I think are
21 relevant; I'm pointing to them because they were the
22 things that you said were relevant in your second
23 report.
24 A. (Mr Duarte-Silva) I showed them as evidence that the
25 company was not in dire financial straits.
[Page 185]
15:16 1 Q. In asserting a value based on this -- I'm going to move
2 on from these accounts if you had a question?
3 MR DRYMER: I just want to be clear. I understand your
4 point about dire financial straits. You're treating
5 this as though it's a binary question: dire/not dire.
6 I think the suggestion is -- well, I don't know what
7 counsel will tell us the suggestion is in due course,
8 but let me put it to you that the suggestion is that the
9 company was in less than ideal financial straits, or was
10 facing certain financial difficulty, something a lot
11 more nuanced than dire or not dire, and that these
12 factors that counsel is pointing up are indications of
13 these somewhat difficult financial straits.
14 Do you accept that more nuanced description, or
15 would you still say it's not relevant to a consideration
16 of the financial strength of the company at the time of
17 the sale of the royalty?
18 A. (Mr Duarte-Silva) I believe it's more nuanced than just
19 binary. I believe that I am putting the emphasis in
20 that term because in that extreme condition we could
21 think of a company selling such a valuable asset,
22 according to the Claimant, for just £130,000. That's
23 why I'm putting the emphasis there, because only in that
24 situation could we start to think of that.
25 MR DRYMER: That's the point. Only in what you -- in a dire
[Page 186]
15:18 1 financial circumstance could you conceive of a fire sale
2 of the magnitude that is being suggested; is that
3 accurate?
4 A. (Mr Duarte-Silva) That's right.
5 MR DRYMER: Very good.
6 A. (Mr Duarte-Silva) and there's evidence against those
7 dire financial straits -- I apologise for repeating that
8 term.
9 MR DRYMER: No, don't apologise.
10 A. (Mr Duarte-Silva) I keep talking about, we don't need to
11 be assessing every point here --
12 MR DRYMER: I understand.
13 A. (Mr Duarte-Silva) -- because shareholders a few months
14 later just invested that money. And at the month prior,
15 at the end of 2014, there's no going concern opinion.
16 MR DRYMER: Very good. Thank you.
17 MR NEWING: At the time of the San Leon ORR sale, Discovery
18 had a 50% share in the licence areas; correct?
19 A. (Mr Acklam) Correct.
20 Q. But for the valuation you've taken a 25% share on the
21 basis, as I understand it from your second report, that
22 in the but-for scenario, Discovery would have only had
23 the 25% share; correct?
24 A. (Mr Acklam) That's correct, yes. Based on the
25 Claimant's experts' instructions that in the but-for
[Page 187]
15:19 1 scenario the Claimant would have owned 25%.
2 Q. Yes, and that's on the basis that a transaction such as
3 Gulf Shores or Akard or something equivalent would have
4 resulted in a 25% share to Discovery?
5 A. (Mr Acklam) I believe the wording was that some
6 investment would have been available and the Claimant's
7 share would have been 25%.
8 Q. But at the time of the ORR sale it's accepted that that
9 hadn't yet happened. They still had a 50% share.
10 A. (Mr Acklam) At the time of the ORR sale the Claimant
11 owned 50%. But our valuation is not at the date of the
12 ORR sale. The relevant valuation dates for our analysis
13 are at the ex-ante valuation date in June 2018, and at
14 the ex-post valuation date, which our latest ex-post
15 valuation date is October 2023. On both of those dates
16 in the but-for situation the Claimant only owns 25%.
17 Q. And so if you are assessing value based on that 25%
18 share on those two dates, would it not be more
19 appropriate to use a transaction that took place after,
20 or at least resulted in Discovery reducing its interests
21 in that way, rather than one prior to it?
22 A. (Mr Acklam) I don't believe the adjustment from 50% to
23 25% is controversial. So I don't believe it makes
24 a difference, all else being equal.
25 Q. In respect of the other two transactions, Gulf Shores
[Page 188]
15:20 1 and Akard, these took place in March and October 2015;
2 right?
3 A. (Mr Acklam) Correct. The attempted transactions.
4 Q. Well, the attempted Gulf Shores transaction and the
5 completion of the agreement with Akard in October 2015
6 took place in March and then October 2015.
7 A. (Mr Acklam) I'm not fully up to date on the legal
8 position of the Akard agreement. But from what
9 I recollect from the evidence, there was actually no
10 agreement that was ever signed between Akard and
11 Discovery.
12 Q. Well, that's actually incorrect. I can take you to it
13 if you need to, but I don't think -- it's not been
14 something that I think is challenged. There is
15 an agreement which has been signed and is on the record.
16 A. (Mr Acklam) From memory there was an initial agreement
17 which was intended to be translated into a full final
18 agreement, which never actually occurred.
19 Q. That is correct. That is correct. But there was
20 an initial investment agreement. And, again, both of
21 those took place in 2015, so some nine years or so ago.
22 Or --
23 A. (Mr Acklam) Yes, or three years prior to the ex-ante
24 valuation date.
25 Q. And, again, if the analyses that had taken place after
[Page 189]
15:22 1 that date have added value, which I appreciate you do
2 not accept, based on Dr Longman's assessment, it is
3 likely that if those had added value, that those
4 transactions would no longer be appropriate; is that
5 correct?
6 A. (Mr Acklam) I don't think that's correct, no. I don't
7 think "no longer appropriate" is a correct analysis for
8 that.
9 Q. So if the analyses that took place after those
10 transactions added value to the licence areas, you
11 consider it would still be appropriate to use the
12 transactions before that date which had a lower value?
13 A. (Mr Acklam) The transactions before that date could
14 potentially still indicate a fair market value after
15 that date, if there was any evidence or quantification
16 as to whether or not any value had been added.
17 So it would be possible to adjust those transactions
18 if it were the case that any value had been added by
19 work done.
20 Q. Could we please turn to Exhibit C-247. This is
21 a Macquarie Equities Research briefing paper on Aurelian
22 published in April 2010; do you see that?
23 A. (Mr Duarte-Silva) Yes.
24 Q. If we turn to page 2, at figure 1 there is a breakdown
25 of the price per share attributable to different assets;
[Page 190]
15:23 1 do you see that?
2 A. (Mr Duarte-Silva) I do.
3 Q. And you will see that 19p per share has been attributed
4 to the Smilno prospect; yes? I know it's quite small,
5 but...
6 A. (Mr Duarte-Silva) It's called exploration upside, 19
7 pennies.
8 Q. 19 pence?
9 A. (Mr Duarte-Silva) Yes.
10 Q. You will also see on the left-hand side if we scroll up
11 a little bit that there were at that time 339.5 million
12 shares issued; do you see that?
13 A. (Mr Duarte-Silva) I do.
14 Q. Would you agree, therefore, that this could be used to
15 imply a potential valuation of the Smilno prospect at
16 that time, by multiplying the 19p per shares by the
17 number of shares?
18 A. (Mr Duarte-Silva) No, of course not. Of course not.
19 This is -- I mean, just look at the result on the
20 right-hand side. 156, right?
21 Q. Yes.
22 A. (Mr Duarte-Silva) Okay. How does that compare to the
23 price up there, 44 pence? On the left you have the fair
24 market value of this company, up there, 44 pence. On
25 the right, down there, you have what this analyst quite
[Page 191]
15:25 1 optimistically thinks this is always worth, and the
2 market is telling him: you're wrong, you're dead wrong.
3 Q. But isn't this, as you say, an estimate of what the
4 person who is looking at this thinks this would be worth
5 at the time?
6 A. (Mr Duarte-Silva) Yes. This person is wrong. The
7 market is telling them: you're wrong.
8 Q. But you make no reference to this valuation in your
9 report, do you?
10 A. (Mr Duarte-Silva) To which valuation?
11 Q. Or, rather, to this briefing profile?
12 A. (Mr Duarte-Silva) I didn't think it was relevant at all.
13 I don't see how this would be relevant to our opinion.
14 Q. If we turn now to look at the alternative valuations
15 based on what you've described as comparable companies,
16 you've conducted this on an ex-ante basis using your
17 ex-ante date of 7 June 2018, and an ex-post basis of the
18 date of the award, although, as you mentioned in your
19 second report, at the moment that is 31 October 2023;
20 yes?
21 So if we could turn up your first report, please, at
22 paragraph 64. That's on page 20. (Pause)
23 You say here that you considered eight potential
24 companies for your valuations, yes?
25 A. (Mr Duarte-Silva) Yes.
[Page 192]
15:26 1 Q. And then you proceed to consider the ex-ante approach
2 and then two pages over, page 22, you have a graph which
3 sets out the position for seven of those companies;
4 correct?
5 A. (Mr Acklam) Correct.
6 Q. But you don't use any of those companies on the ex-ante
7 basis, on the basis that you have assumed that as at
8 7 June 2018, which is your ex-ante date, AOG would not
9 have had any reserves; correct?
10 A. (Mr Acklam) That's not our assumption. That's
11 Dr Longman's assumption that as of the ex-ante dates the
12 project would only have prospective resources.
13 I believe that's also the opinion of Dr Moy and
14 Mr Howard.
15 Q. Well, I'll come to that. The ex-ante date that we're
16 talking about here is 7 June 2018, which is one you've
17 been instructed to use, or chosen? I'm not sure.
18 A. (Mr Acklam) We were instructed to use that date.
19 Q. But it's not a date that the Claimant has used, is it?
20 A. (Mr Acklam) I'm not aware of whether or not the Claimant
21 uses that date.
22 Q. And you understand that the but-for scenario in which
23 the Claimant's experts have prepared their analysis is
24 that drilling would have commenced by 1 January 2017?
25 A. (Mr Acklam) Yes.
[Page 193]
15:27 1 Q. And so you understand that in the but-for scenario,
2 drilling would have been taking place for 18 months by
3 the time of reaching your ex-ante date of 7 June 2018?
4 A. (Mr Acklam) And based on Dr Longman's testimony the
5 project would have prospective resources at that date.
6 Q. Yes. I think the position you've stated in terms of
7 what Mr Howard and Dr Moy have said is that at that date
8 when it actually happened, because no drilling had taken
9 place, there were prospective resources. But in the
10 but-for scenario, their position is that drilling would
11 have taken place and a discovery would have been made;
12 do you understand that?
13 A. (Mr Acklam) I don't remember the exact quotation, but
14 I believe there was somewhere in Mr Howard's report
15 where he said it would be absurd to assume that there
16 would be anything other than prospective resources on
17 an ex-ante basis.
18 Q. But that's on the basis of his ex-ante, which was before
19 the but-for scenario. He's not using your date of
20 7 June 2018, is he?
21 A. (Mr Acklam) I'm not aware of what ex-ante date Mr Howard
22 is using.
23 Q. But if that was in his first expert report, that was
24 prior to you having set out your date of 7 June 2018?
25 A. (Mr Acklam) Yes -- well, potentially, although I don't
[Page 194]
15:29 1 think I've actually seen the ex-ante date which
2 Mr Howard is using to make that assumption.
3 Q. So, in fact, when you're making a comparison and saying
4 you believe Mr Howard has said that there would only be
5 prospective resources on an ex-ante basis, you're making
6 an assumption that that is the same thing as your date,
7 but you in fact don't know?
8 A. (Mr Acklam) Again, Mr Howard uses the terminology on
9 an ex-ante basis. I don't know the ex-ante date that
10 he's using in his analysis.
11 Q. But you accept that in the but-for scenario, by the time
12 of your ex-ante date, drilling would have been taking
13 place for at least 18 months?
14 A. (Mr Acklam) And the project would still have prospective
15 resources, yes.
16 Q. Well, that's Dr Longman's assessment. Yes?
17 A. (Mr Acklam) Yes. Correct. Yes.
18 Q. And so on that basis you have compared AOG with only one
19 company at that date, ADX Energy.
20 A. (Mr Acklam) That's correct, yes. All the other
21 companies in the Claimant's list of comparable companies
22 had 2P reserves by that date.
23 Q. And you maintain your reliance on that one company only
24 in your second report; right?
25 A. (Mr Acklam) That's correct.
[Page 195]
15:30 1 Q. And so in using just one company in this way, would you
2 agree that it's even more important to ensure that the
3 assets themselves are actually comparable?
4 A. (Mr Duarte-Silva) They were deemed comparable by the
5 company itself.
6 Q. Well, the group of companies that you're referring to
7 may have been deemed comparable for a particular
8 purpose, but if we're looking here at comparing one
9 company only, surely it is important to ensure that the
10 assets of that company are actually comparable, isn't
11 it?
12 A. (Mr Duarte-Silva) The company defined each of those
13 eight companies as comparable, and then we used the one
14 that had prospective resources in the reserves. Just
15 like Mr Howard defended should be done. Except he made
16 a mistake with Cub Energy, instead of ADX.
17 Q. And you've calculated a dollar per boe value based on
18 the unrisked volumes that ADX had of prospective
19 resources; correct?
20 A. (Mr Acklam) We've calculated a dollar per barrel value
21 on the prospective and contingent resources.
22 Q. But the prospective resources would have been unrisked;
23 correct?
24 A. (Mr Acklam) I can't recall off the top of my head, I am
25 afraid.
[Page 196]
15:31 1 Q. So is it the case that you don't know what you have used
2 to perform your calculation?
3 A. (Mr Acklam) I can't recall this. In the weeds of the
4 exhibits, I am afraid.
5 Q. Would you agree that the calculation should be performed
6 on risked volumes?
7 A. (Mr Acklam) The calculation should be performed on the
8 basis of prospective or, in the case of ADX, contingent
9 resources, on the resources that it has compared to the
10 resources of the project.
11 Q. But with unrisked volumes, you simply do not know how
12 much of that will be recoverable, do you, as you don't
13 know what the geological chance of success is, do you,
14 or anything like that?
15 A. (Mr Acklam) I think it's correct to say with prospective
16 resources full stop, you don't know how much of that
17 will be recoverable.
18 Q. And that is why all of the other calculations are done
19 on the basis of risked volumes which have taken into
20 account the geological chance of success, isn't it?
21 A. (Mr Acklam) Sorry, what do you mean by "all the other
22 calculations"?
23 Q. The other companies. The other seven companies which
24 have reserves and that you have not used, those are
25 based on risked volumes?
[Page 197]
15:33 1 A. (Mr Acklam) They're based on reserves.
2 Q. Which have obviously taken into account, because they've
3 been found, the geological chance of success?
4 A. (Mr Duarte-Silva) You keep raising whether they were
5 risked or not risked, and the very fact that there isn't
6 an explicit source that shows they're risked or unrisked
7 should tell you about the speculative value of
8 prospective resources. It should tell you that -- and
9 that's also consistent with the fact that, as mentioned
10 earlier, the Australian Stock Exchange doesn't even
11 allow financial forecast if it's of prospective
12 resources. Risked, unrisked, it doesn't really matter.
13 They don't even allow it.
14 Q. But you would agree that if they are unrisked, and the
15 calculations you've performed are on unrisked volumes,
16 then the appropriate calculation to make using the
17 Claimant's volumes would be also against its unrisked
18 volumes?
19 A. (Mr Duarte-Silva) Look, it has to be apples to apples,
20 right? So even if we did relative to unrisked, or
21 risked, we get to a result shown in our slide 7 of
22 $40,000.
23 Q. But that's on the basis that you have taken the
24 Claimant's risked volumes?
25 A. (Mr Duarte-Silva) Even if we are wrong by ten times,
[Page 198]
15:34 1 you're talking about $400,000. Even if it's ten times
2 higher.
3 Q. But that is on the assumption that ADX has comparable
4 assets?
5 A. (Mr Duarte-Silva) It's not an assumption. The company
6 defined it as comparable. Mr Howard looked at the
7 companies and selected one of them based, "I'll find the
8 one that has prospective resources", which is what we
9 did after correction -- after performing that
10 correction.
11 Q. But Mr Howard's opinion is that ADX does not have
12 comparable assets; do you agree? Do you accept that's
13 his opinion?
14 A. (Mr Duarte-Silva) It has contingent and prospective
15 resources. So we're comparing prospective to
16 prospective. Further, ADX also has contingent. So
17 that's an even higher value.
18 And again, even if we're wrong by a factor of 10,
19 you are talking about $400,000 in value.
20 Q. Well, there are two factors of 10 we're talking about
21 here. There's a factor of 10 of risked and unrisked,
22 and there's a factor of 10 you refer to in your second
23 report of if the prospective resources are of a nature
24 which makes them more valuable because they are of
25 a different asset and easier to extract. So in fact, in
[Page 199]
15:35 1 that scenario, you would be up to 4 million already?
2 A. (Mr Duarte-Silva) I don't think so. I would dispute
3 that. And as an audit we have introduced this. And the
4 only -- as I noted at the end of our presentation, --
5 Mr Howard had plenty of opportunity to calculate the
6 valuation based on market approach, and the only thing
7 we've heard of is $36 million based on ex-ante multiple
8 and ex-post reserves. So there was ample chance to
9 that, and so we're here to comment on the claims being
10 made, but there's no claims being made, and now we're
11 just explaining what we did. But there's nothing for us
12 to rebut here.
13 Q. In your presentation earlier, you mentioned that in the
14 ex-post scenario, the valuation that you had carried out
15 would come initially to 11.1 million; correct? I think
16 that was the number.
17 A. (Mr Acklam) Could you remind me of the slide, please?
18 Q. I am afraid your slides didn't have numbers, so I can't
19 remember.
20 A. (Mr Duarte-Silva) They were on the left-side.
21 A. (Mr Acklam) On the bottom right.
22 Q. I didn't see them, sorry.
23 MR DRYMER: I think it might be 9. Maybe I'm wrong.
24 MR NEWING: Correct. Yes, it was too small on my screen.
25 Number 9, yes.
[Page 200]
15:36 1 A. (Mr Acklam) Was it the 11.9 million?
2 Q. It was the 11.9 million, sorry, 11.9 million. It was
3 the 1.1 million that confused me.
4 And then what you have done is you've discounted
5 that down to 5-10% of that value; correct?
6 A. (Mr Acklam) Correct.
7 Q. And this is on the basis again that in your view, based
8 on Dr Longman's assessment, they would still be
9 prospective resources and so should be discounted to
10 take that into account; correct?
11 A. (Mr Acklam) Because those prospective resources are
12 worth less than reserves, correct.
13 Q. Would you agree, however, that if the Tribunal has found
14 that in the but-for scenario a discovery has been made,
15 such an adjustment would not be appropriate?
16 A. (Mr Acklam) If there are reserves in the but-for
17 scenario then the $1.44 per barrel is based on a ratio
18 of enterprise value to reserves. So yes, in that case
19 no adjustment would be required.
20 Q. But isn't it the case that an adjustment is not
21 appropriate anyway if the valuation is being carried out
22 on risked volumes where a discount has already been
23 applied to them by way of the geological chance of
24 success?
25 A. (Mr Acklam) They are still prospective resources in that
[Page 201]
15:38 1 scenario, so they're still worth less than reserves.
2 Q. But if they've already been discounted to take into
3 account the geological chance of success, aren't you
4 applying a double discount to then also discount them
5 further, because they've already been taken into account
6 that they are prospective resources?
7 A. (Mr Duarte-Silva) That requires examining the discount
8 that we're applying to determine if that discount is
9 double-counting or not. What we have seen is we have
10 applied a 5-10% discount, based on the SPE paper that we
11 cite.
12 Q. But that's a 5-10% discount that you've applied after
13 the geological chance of success has already been
14 applied. So you are applying two levels of discount
15 here. You haven't applied the first, that's been
16 applied to the volumes that are used, but you are then
17 applying a second discount?
18 A. (Mr Duarte-Silva) That's your view.
19 Q. Can we turn, please, to the second report of Mr Howard.
20 On page 26.
21 So here Mr Howard has shown in his table that in
22 fact, taking into account the GCOS that has already been
23 applied in the P50 scenario is the equivalent of having
24 applied a 9% RAF factor, i.e. a discount of over 90%; do
25 you see that? It says at the bottom:
[Page 202]
15:39 1 "RAF equivalent (P50 Scenario)".
2 A. (Mr Acklam) Sorry, could you expand a little bit on what
3 we're looking at here?
4 Q. So here in his second report, Mr Howard sought to
5 explain why a further discount was not necessary, and
6 showed that in fact by already having taken into account
7 the geological chance of success, this was the
8 equivalent to having already applied a reserve
9 adjustment factor of 9.19%.
10 A. (Mr Acklam) There's a lot of numbers here and I'm not
11 following where they match up or -- or exactly the
12 calculation.
13 Q. So you did not review this for the purposes of your
14 second report?
15 A. (Mr Duarte-Silva) I just don't recall these numbers
16 right now, but ...
17 Q. But you didn't comment on this at all in your second
18 report?
19 A. (Mr Duarte-Silva) On these particular numbers, no. We
20 applied a 5-10% discount based on the SPE paper. And
21 also the fact that even that is conservatively high.
22 Q. So even though Mr Howard had an entire section in his
23 report challenging the use of that factor and explaining
24 why it was not relevant, you did not review or comment
25 on that to explain why you disagreed with him?
[Page 203]
15:41 1 A. (Mr Duarte-Silva) We didn't have to. We have the SPE
2 paper instead of Mr Howard's calculations. And like
3 I said, even that is conservatively high if you consider
4 that the Australian Stock Exchange doesn't allow even
5 forecasting based on it.
6 We presented to Mr Howard an academic paper showing
7 that they're not even factored in market valuations of
8 oil companies. You can even look on an ex-ante basis.
9 Look at the ADX multiple, just on contingent and
10 prospective, and compare it to the multiple on the other
11 companies that have reserves. It's less than 5%.
12 So these things are highly uncertain. There's very
13 little value. We're applying a 5-10% discount. That's
14 not really pessimistic.
15 Q. Well, I put it to you that that is a double discount and
16 is inappropriate. I understand you don't accept that,
17 but I'll put it to you that that's what you've done.
18 I'd like to look now, finally, at the Claimant's
19 alternative claim for sunk costs. And paragraph 70 of
20 your second expert report, please, this is on page 23.
21 So you state here that:
22 "... the evidence used to substantiate this claim...
23 is unreliable."
24 As you mentioned in your presentation earlier.
25 And you state:
[Page 204]
15:43 1 "... we understand that the annual reports submitted
2 in evidence are not audited, but simply sent to the
3 Ministry of Environment."
4 Do you see that?
5 A. (Mr Duarte-Silva) I do.
6 Q. So this is your reference to the reports which AOG sent
7 to the Ministry of Environment, setting out what it had
8 incurred. And your basis that it's unreliable is that
9 those reports were unaudited; correct?
10 A. (Mr Duarte-Silva) They were unaudited.
11 Q. You don't make any reference in this paragraph to AOG'S
12 own financial statements, do you?
13 A. (Mr Duarte-Silva) No.
14 Q. Mr Fraser's evidence is that the amounts in the Ministry
15 reports correspond with those financial statements; do
16 you recall that?
17 A. (Mr Duarte-Silva) I recall that, yes.
18 Q. Did you review those financial statements?
19 A. (Mr Duarte-Silva) I looked through them.
20 Q. Mr Fraser states that those were prepared by Baker Tilly
21 initially and Grant Thornton latterly. They are both
22 reputable accounting companies, aren't they?
23 A. (Mr Duarte-Silva) I'm not going to comment on whether
24 they're reputable, but I will tell you that Mr Fraser
25 said they are unaudited.
[Page 205]
15:44 1 Q. But you would have no reason to believe that those
2 financial statements, which had been prepared by
3 external accountants, of those firms would be incorrect,
4 do you?
5 A. (Mr Duarte-Silva) Without auditing, there's no guarantee
6 that those companies did anything but organise the
7 numbers that they received and put them into a financial
8 statement. They just put the numbers together. There's
9 no signing at the end: this is audited. Meaning there's
10 no verification these numbers are accurate.
11 MR NEWING: No further questions. Thank you.
12 MR DRYMER: Is there any indication that they're inaccurate?
13 A. (Mr Duarte-Silva) No. They just received the numbers
14 and put them together.
15 MR DRYMER: And when you say that the calculation is
16 unreliable, remind me, please, what the standard for
17 reliability is that you apply, that you use?
18 A. (Mr Duarte-Silva) For sunk costs to have been incurred
19 there should have been disbursement of amounts. There's
20 no indication they were disbursed.
21 I would expect, if the evidence is going to be based
22 on financial statements, for those financial statements
23 to be audited. They are not audited. Meaning they're
24 not verified for accuracy.
25 MR DRYMER: You know this as well as anybody; this is the
[Page 206]
15:45 1 sort of argument that occurs regularly in this sort of
2 context.
3 Is there a standard for reliability or
4 unreliability? I don't know the answer to that
5 question. I'm asking you as an expert.
6 A. (Mr Duarte-Silva) In almost all cases where in
7 arbitrations a claimant makes a claim for costs
8 incurred, we expect to see proofs of payment of those.
9 And I've worked in numerous arbitrations where actually
10 the bulk of the work was checking the proofs of payment.
11 And there is no proof of payment here.
12 MR DRYMER: So is it that one is unable to determine the
13 reliability, or that it is unreliable? Maybe that's
14 a lawyer's question, not a financial expert's question,
15 but I put it to you anyways, as somebody who has been in
16 this situation many times before.
17 A. (Mr Duarte-Silva) I'm going to hesitate now to use the
18 word "reliable" based on that question. But I would say
19 I look at these numbers and I don't know if they're true
20 or not.
21 MR DRYMER: Very good.
22 A. (Mr Duarte-Silva) And I don't know, if for example they
23 were invoiced for a thousand dollars, did they actually
24 pay those thousand dollars, or are they just trying to
25 get those thousands now.
[Page 207]
15:46 1 MR DRYMER: There's just no back-up?
2 A. (Mr Duarte-Silva) There's no back-up, yes.
3 MR DRYMER: Thank you.
4 MR NEWING: I have no further questions, thank you.
5 (3.47 pm)
6 Re-direct examination by MR PILAWA
7 Q. I just have one question on re-direct, and this is to
8 Mr Acklam.
9 You were being asked questions about a part of
10 Mr Howard's second expert report about prospective
11 resources and ex-ante; do you remember that?
12 A. (Mr Acklam) I do, yes.
13 Q. Okay. Can we pull up Mr Howard's second expert report,
14 and if we can go to page 16, paragraph 62.
15 Mr Acklam, is paragraph 62 what you were trying to
16 recall?
17 A. (Mr Acklam) Yes, it is.
18 MR PILAWA: Thank you.
19 No further questions from me, Madam President.
20 THE PRESIDENT: Thank you.
21 (3.48 pm)
22 Questions from THE TRIBUNAL
23 THE PRESIDENT: I have questions, which in large part have
24 been asked, about the sunk cost reliability. There's
25 three categories of sunk costs claimed, right: there is
[Page 208]
15:48 1 the amount paid to acquire AOG. That is not disputed.
2 Or is that disputed?
3 A. (Mr Duarte-Silva) We are not disputing that.
4 THE PRESIDENT: No. Then the second one is the payment for
5 the royalty in January 2015. That is not disputed
6 either, or is it?
7 A. (Mr Duarte-Silva) We're not disputing it.
8 THE PRESIDENT: So what you have said about the lack of
9 reliability is about the third category. That is the
10 expenditures. Do I understand this correctly?
11 A. (Mr Duarte-Silva) Yes, that is correct. And slide 11
12 perhaps explains that more clearly than the report
13 itself. It says:
14 "The sunk cost calculation of 2.8 million ... is
15 unreliable."
16 So it's that third category.
17 THE PRESIDENT: Good. And I think you've explained why you
18 consider it unreliable, so I will not belabour that.
19 So that leads us, then, to the end of your
20 examination, gentlemen. Thank you.
21 DR DUARTE-SILVA: Thank you.
22 MR ACKLAM: Thank you.
23 THE PRESIDENT: So today we were extremely -- you were
24 extremely efficient, I would say. We could barely
25 follow the pace.
[Page 209]
15:50 1 No, so I think we need to briefly discuss now what
2 we do tomorrow. There's a few points that the Tribunal
3 would like, indications that the Tribunal would like to
4 give you.
5 First, there's a question and it's a simple question
6 for the Respondent, but it's a clarification: your
7 request for relief, paragraph 737 of the Rejoinder, says
8 simply dismiss the claims. Do you mean dismiss the
9 claims as a matter of merit? I understand that you also
10 seek a declaration that there is no jurisdiction. It's
11 just to have clarity on what the requests are.
12 MR ANWAY: Is that a question that you would like us to put
13 on the agenda for tomorrow?
14 THE PRESIDENT: You could say "Yes" now, if that's right.
15 Or if it requires an explanation, then you will give the
16 explanation tomorrow.
17 MR ANWAY: To be clear, we request dismissal of the claim on
18 jurisdictional grounds. We also request that the claim
19 be denied on the merits. Even if there is jurisdiction
20 and liability found, we request that it be denied on
21 causation. And even if that were all wrong, we still
22 request that the claim be rejected because there have
23 been no damages.
24 THE PRESIDENT: Fine.
25 MR ANWAY: In addition, of course, to our request for costs.
[Page 210]
15:51 1 THE PRESIDENT: That is in your request for relief.
2 Absolutely.
3 Fine, so that is clarified, and we now have it in
4 the transcript.
5 For the rest we have asked ourselves on whether
6 we have specific questions, and we don't think we have
7 specific questions because you covered the ground quite
8 well in your written submissions and in the course of
9 the hearing.
10 But we have a number of areas on which it would be
11 helpful for us if you would like to focus on those
12 areas. We do not expect you to address -- it's not
13 a prohibition, but it's an indication that we think
14 we have what we need to rule on these points: no
15 specific interest in jurisdiction; none in issues of
16 attribution, and; none in issues of technical and
17 quantum evidence.
18 Now, where it may be helpful that you address us
19 would be -- and I take the list of measures that we were
20 presented in opening, there's a chart that will be well
21 known. We would appreciate if you could summarise your
22 positions, including of course by adding what is new as
23 a result of the evidence on the measures numbered 8, 9
24 and 10, which is: the MoA's failure to approve the lease
25 extension, the refusal by the MoE to grant the
[Page 211]
15:53 1 compulsory access order under Article 29 of the Geology
2 Act, and then; the suspension of the Article 29
3 proceedings. That is one topic.
4 Another topic is the EIA, and that covers measures
5 11-14, and there we have been struck by two aspects on
6 which you may want to give us more clarification, but of
7 course you may have other aspects about the EIA that you
8 wish to stress. On the one hand Mr Lewis explained in
9 his oral evidence that the EIA issue was, I think you
10 said the nail in the coffin or the death blow, or
11 however you want to call it. And on the other, we have
12 also heard that the Claimant made a voluntary offer to
13 conduct preliminary EIAs, and how can we fit this
14 together, we are not certain about that.
15 And the third and last point is the Smilno -- now
16 I've covered Krivá Ol'ka, and then the EIA which covered
17 everything, and now I'm going to Smilno -- is the road
18 issue. We have heard a lot about the road issue this
19 week, so you don't have to repeat all of what we heard.
20 However, we noted that the courts have ruled on this
21 issue. The Claimant's legal expert -- both experts have
22 given their views on the road characterisation. But
23 we've also noted that the Claimant's legal expert said
24 there is no reason to doubt the independence of the
25 courts in making these decisions. We're not here to
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15:56 1 decide on the domestic law issue of what type of a road
2 this is. We're here to decide whether whatever the
3 state did was a breach of an international standard.
4 And so how do we bring these issues together with the
5 international standard; what exactly is being
6 challenged, and obviously what is disputed on the other
7 side.
8 I think that is all we had to say in terms of
9 substance, and we can discuss how we proceed. But let
10 me just turn to my co-arbitrators to make sure I have
11 covered the discussion we had over lunch.
12 PROFESSOR SANDS: You have indeed, Madam President.
13 For both parties, just in relation to the last
14 point, it's Day 4 of the transcript, page 34, in which
15 Mr Fogaš says at lines 24 and 25 onwards in relation to
16 the question of the status of this thing -- I'm not
17 going to call it anything myself: it is one of several
18 questions to which there is no clear answer.
19 On the basis of --
20 THE PRESIDENT: This is, of course, the Respondent's expert.
21 PROFESSOR SANDS: Yes, the Respondent's expert, Mr Fogaš,
22 I think it was.
23 On the basis of that answer, what's the theory of
24 the case on the side of the Respondent in relation to
25 that issue -- and obviously for -- sorry, what is the
[Page 213]
15:58 1 Claimant's view on that, on the theory of the case; how
2 do you make a case, that being the evidence? And it
3 would be good also obviously to hear from the Respondent
4 on the same point.
5 THE PRESIDENT: And of course the Claimant will also include
6 the evidence of the Claimant's expert on this issue.
7 Professor Števcek was the --
8 PROFESSOR SANDS: Yes.
9 THE PRESIDENT: Good.
10 So we had said an hour. That has been reserved for
11 tomorrow. Maybe you don't need an hour. It's up to
12 you. And as we mentioned already yesterday, we don't
13 look for slide presentations. If it's helpful to you to
14 have a few slides, of course you're not barred from
15 doing it.
16 Should we start at 9.30, as we had scheduled, then
17 first hear the Claimant, and then hear the Respondent,
18 and then wrap up with procedural issues?
19 And I can say that what you have mentioned this
20 morning about no procedural -- no post-hearing briefs is
21 fine with the Tribunal. And the deadlines for the
22 corrections of the transcript and the marking
23 confidential of the recording and the transcript is, of
24 course, fine, and costs statement as well. We didn't
25 see any other point with respect to further process that
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16:00 1 we need to address.
2 So that would be the programme for tomorrow. If
3 there's anything that you would like to raise now, or
4 any clarification that you need.
5 PROFESSOR SANDS: Just to come in on this issue, it was
6 Professor Števcek who made that statement, my mistake,
7 not Professor Fogaš. It was the Claimant's expert.
8 THE PRESIDENT: So your reference was Števcek.
9 PROFESSOR SANDS: Števcek, yes, Day 4, pages 33-35.
10 My apologies.
11 MR DRYMER: Is the hour total, or half hour each?
12 THE PRESIDENT: We had said an hour each.
13 MR DRYMER: Okay.
14 THE PRESIDENT: So maybe we stick to the rules that we have
15 set, unless you want to change them, and that's by
16 agreement.
17 MR NEWING: I don't intend to change that rule, and this is
18 something I haven't yet had a chance to raise with the
19 other side. But on the basis that we're not having
20 post-hearing briefs, we were wondering whether we might
21 be able to start a little later tomorrow, to just give
22 ourselves a bit more time in the morning to finalise any
23 preparation, on the basis that it's only an hour each
24 anyway?
25 THE PRESIDENT: Yes. 10.00, 10.30?
[Page 215]
16:01 1 MR NEWING: 10.30 would be good with us.
2 MR ANWAY: I promise we won't be preparing slides, but yes,
3 I think 10.30 would be helpful. A little extra time.
4 THE PRESIDENT: That's fine.
5 MR NEWING: Thank you very much.
6 THE PRESIDENT: No objection from this side.
7 Good. Is there anything else that you wish to
8 raise?
9 MR NEWING: No, not from my side. Sorry, Mr Tushingham is
10 sitting behind me so just making sure I have taken his
11 view.
12 MR ANWAY: Nothing from Respondent.
13 THE PRESIDENT: Nothing from your side.
14 Then I wish everyone a good evening and we'll see
15 each other tomorrow at 10.30.
16 MR NEWING: Thank you very much.
17 THE PRESIDENT: Thank you.
18 (4.02 pm)
19 (The hearing adjourned until 10.30 am the following day)
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