Batoka Pty Ltd v ConocoPhillips WA*248 Pty Ltd

[2006] WASCA 44

JURISDICTION     :   SUPREME COURT OF WESTERN AUSTRALIA

TITLE OF COURT :   THE COURT OF APPEAL (WA)

CITATION:   BATOKA PTY LTD -v- CONOCOPHILLIPS WA­248 PTY LTD [2006] WASCA 44

CORAM:   STEYTLER P

MCLURE JA
MURRAY AJA

HEARD:   8 DECEMBER 2005

DELIVERED          :   21 MARCH 2006

FILE NO/S:   CACV 106 of 2005

BETWEEN:   BATOKA PTY LTD (ACN 002 904 930)

Appellant

AND

CONOCOPHILLIPS WA­248 PTY LTD (ABN 86 081 089 241)
Respondent

ON APPEAL FROM:

Jurisdiction              :  SUPREME COURT OF WESTERN AUSTRALIA

Coram  :TEMPLEMAN J

Citation  :CONOCOPHILLIPS WA-248 PTY LTD - v - BATOKA PTY LTD [2005] WASC 184

File No  :COR 322 of 2003

Catchwords:

Corporations - Compulsory acquisition of shares - Expert's report assessing fair value of shares - Construction of s 667A Corporations Act 2001 (Cth) - Whether acquirer must fix final acquisition price before receiving expert's report - Whether expert's report properly and independently arrived at a fair value for shares - Whether expert's report gave adequate reasons for arriving at fair value for shares - Whether primary Judge properly approved acquisition of shares at a fair value

Legislation:

Corporations Act 2001 (Cth), s 664AA, s 664C, s664F, s 667A, s 667AA, s 667C

Evidence Act 1906 (WA), s 79C(2a)

Result:

Appeal dismissed

Category:    A

Representation:

Counsel:

Appellant:     Mr N A Cotman SC

Respondent:     Mr C L Zelestis QC & Ms A Gotjamanos

Solicitors:

Appellant:     Tydde & Co

Respondent:     Freehills

Case(s) referred to in judgment(s):

Bromley Investments Pty Ltd v Elkington (2003) 47 ACSR 273

Capricorn Diamonds Investments Pty Ltd v Catto (2002) 5 VR 61

ConocoPhillips WA‑248 Pty Ltd v Batoka Pty Ltd (2005) 54 ACSR 646

Dolby Australia Pty Ltd v Catto (2004) 52 ACSR 204

HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640

Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705

R v Jenkins; Ex parte Morrison [1949] VLR 277

Secretary of State for Foreign Affairs v Charlesworth, Pilling & Co [1901] AC 373

Case(s) also cited:

Bwllfa & Merthyr Dare Steam Collieries (1891) Ltd v Pontypridd Waterworks Co [1903] AC 426

Cannane & Wisbeck Pty Ltd v Official Trustee (1996) 65 FCR 453

De Ieso v Commissioner of Highways (No 2) (1982) 30 SASR 289

Duffy v Minister for Planning (2003) 129 LGERA 271

Flotilla Nominees Pty Ltd v Western Australian Land Authority (2003) 28 WAR 95

Holtman v Sampson [1985] 2 Qd R 472

Kizbeau Pty Ltd v WG & B Pty Ltd (1995) 184 CLR 281

McCathie v Federal Commissioner of Taxation (1944) 69 CLR 1

Pancontinental Goldmining Areas Pty Ltd v Minister for Mines [1989] WAR 169

Pauls Ltd v Dwyer [2004] 2 Qd R 176

Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355

Re Goodyear Australia Ltd (2002) 167 FLR 1

Spencer v Commonwealth (1907) 5 CLR 418

Victoria v Commonwealth (1975) 134 CLR 81

Western Australian Planning Commission v Arcus Shopfitters Pty Ltd [2003] WASCA 295

Winpar Holdings Ltd v Austrim Nylex Ltd (2005) 54 ACSR 562

Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd (2000) 157 FLR 59

Yates Property v Darling Harbour Authority (1991) 24 NSWLR 156

1. STEYTLER P: On 10 October 2003 the respondent applied, under s 664F(1) of the Corporations Act 2001 (Cth) ("Act"), for the approval of the compulsory acquisition of shares in a company, Petroz NL ("Petroz"). The respondent was then the owner of more than 90 per cent of the shares in Petroz. It wished to acquire the remaining shares, some of which were held by the appellant. It had issued a compulsory acquisition notice, pursuant to s 664C(1) of the Act. As was required by that section, the notice set out the cash sum for which the respondent proposed to acquire the shares, being a price of 89 cents per share. The notice was accompanied by an expert's report prepared pursuant to s 667A of the Act. The report ("GSA Report") was prepared by Mr Stephen Cooper, a chartered accountant and director of Grant Samuel & Associates Pty Ltd ("GSA"). GSA had been nominated, pursuant to s 667AA of the Act, by the Australian Securities & Investments Commission ("ASIC"). The GSA Report concluded that the terms proposed by the respondent in the compulsory acquisition notice gave fair value for the Petroz shares. However, the appellant objected to the acquisition of its shares at the stipulated price. The respondent consequently brought its application under s 664F(1).

2. Section 664F(3) requires the Court to approve the acquisition on the stipulated terms if the 90 per cent holder establishes that they give fair value for the securities. Otherwise it must confirm that the acquisition will not take place. Section 667C(1) provides that, to determine what is fair value for securities there must, first, be an assessment of the value of the company as a whole and then (in a case such as this where there is only one class of issued securities) allocate that value pro rata among the securities. Relying on the GSA Report, the primary Judge concluded that the offer price gave fair value for the securities and approved the acquisition of the shares at that price: ConocoPhillips WA‑248 Pty Ltd v Batoka Pty Ltd (2005) 54 ACSR 646. The appellant appeals against that decision.

The Bayu‑Undan field

1. The largest project in which Petroz was involved was one for the exploitation of the Bayu‑Undan gas and condensate field located in the Timor Sea between the north of Australia and the Democratic Republic of Timor‑Leste ("Timor‑Leste").  Petroz held what was effectively an 8.25 per cent interest in that field.  The field had been fully appraised and contained proved and probable reserves of approximately 256 million barrels ("MMbbl") of condensate, 182 MMbbl of liquefied petroleum gas ("LPG") and 3.25 million standard cubic feet ("tcf") of natural gas.  The field was part of an area which had been designated by Australia and Timor‑Leste as a Joint Petroleum Developments Area ("JPDA").  It had been subject to sovereign claims by both nations, but, as a result of a treaty signed by each on 20 May 2002 and subsequently ratified, a "Timor Sea Designated Authority" was established in order to provide for the cooperative development of petroleum resources in the JPDA.

2. The project consisted of two principal components.  These were described by the primary Judge as the "gas recycle" and "gas export" components.  He said (and his findings in this respect are unchallenged) that the gas recycling component involved the production and export of condensate (a form of light crude oil) and LPG by tanker from the JPDA and the reinjection of gas into the Bayu‑Undan reservoir.  The necessary facilities for this component included a well‑head platform, drilling, production and processing platforms, a compression, utilities and living quarters platform and a floating, storage and offloading vessel.  The gas export component involved the construction of a 500 kilometre pipeline from the Bayu‑Undan field to a plant to be constructed at Darwin for the production of liquefied natural gas ("LNG").  Facilities were also to be constructed for storing LNG and loading it into tankers for shipping to Japan.  The LNG was to be sold to Japanese purchasers over a 17‑year period commencing in 2006.

3. The primary Judge said that, as at June 2003, the gas recycle project was well advanced.  He went on to say (at [20]) (and again these findings are unchallenged):

   "The production wells had been drilled, together with four wells for gas re-injection and one for water disposal.  The offshore facilities had been constructed and commissioning was in progress.  The June 2003 monthly report for the gas recycle component disclosed that some US$1.3 billion had been spent, out of an approved budget of US$1.7 billion.  Production was due to commence in February 2004."

4. The gas export component was described by the primary Judge as less advanced, having regard to the proposed commencement of production in 2006.  However, contracts had been signed for the construction of the pipeline and the LNG plant at Darwin and construction of the plant had commenced on 24 June 2003.

Preparation of the GSA Report

1. In preparing its report, GSA elected to value the oil and gas assets of Petroz by having regard to a discounted cashflow analysis for each asset.  As the primary Judge found (at [25]), this is a standard basis for valuing an income producing asset.  It involves estimating future cashflows and then discounting them (having regard to the fact that the income will be earned over a long period) in order to arrive at the present capital value of the future income stream.  The primary Judge said, of this process (at [26] ‑ [27]):

   "It is usual for the calculations used in performing a discounted cashflow analysis to be carried out by computer.  The algorithms (or equations) which form the basis of the calculation may well be complex.  A set of such equations is commonly described as a 'model' of the subject of the analysis.  Where, as here, a discounted cashflow analysis is to be carried out in relation to a producing oil and gas well, the model will be required to bring into account such matters as the expected production rates and the income generated by the sales of the product.  It will also be necessary to have regard to the operating and capital costs of the project.  Thus, the present day value of the projected cashflow will depend on future oil and gas prices, inflation rates, exchange rates and taxation matters.

   Clearly, the accuracy of an economic model of this kind depends on the accuracy of the assumptions or predictions made in relation to these variables.  However, the underlying algorithms, being mathematically based, are independent of such considerations."

2. Because GSA needed advice from a technical specialist, it appointed PetroVal Australasia Pty Ltd ("PetroVal") to undertake that role.  PetroVal was asked to review estimates of reserves, capital costs, production rates and operating costs and to advise GSA whether those estimates were reasonable for valuation purposes.  The scope of the review included the following:

   "Review of cashflow models and advice as to whether the future production plans are reasonable based on current reserve estimates, having regard to existing production capacities and future capital plans."

   PetroVal was asked to advise, in particular, whether the projected production volumes, operating costs and capital costs were reasonable.

3. The work assigned to PetroVal was primarily undertaken by Mr Ian Northcott, one of its directors.  He had spent some 23 years as an independent consultant in the oil and gas industry.  After gathering information from the respondent for the purpose of fulfilling the tasks assigned to him, Mr Northcott prepared an economic model of the Bayu‑Undan project.  Because he considered it important to have his model checked for mathematical accuracy, Mr Northcott sent a copy of it to GSA and also to Mr Joe Kotarski, an employee of the respondent who had earlier prepared an economic model of the project on behalf of the respondent.  Mr Kotarski was unable to carry out a thorough assessment of the inputs to Mr Northcott's model, but he did suggest some corrections.

4. Once the PetroVal model had been finalised, it was used by GSA, in conjunction with PetroVal, to calculate net present values for the Bayu‑Undan project in respect of a number of different development or production scenarios.  These values were then adjusted by Mr Cooper as part of the process of the valuation of the Petroz assets (at [49] of the primary Judge's reasons).

Relevant timing issues

1. Once Mr Cooper had prepared a draft of the GSA Report, he thought it prudent to have its factual content verified by the respondent.  On 15 July 2003 he sent to the respondent a draft of those sections of the report which contained material which needed to be verified.  However he did not disclose his valuation methodology (apart from the fact that it was based on a discounted cashflow analysis) or his tentative conclusions as regards the value of Petroz.  An updated draft of the factual sections of the report was sent to the respondent on 25 July 2003. 

2. Because the respondent had not yet nominated the price at which it intended to acquire the balance of the Petroz shares, Mr Cooper ensured that the respondent was told that a draft of the valuation section of the report would not be provided until such time as the respondent had nominated the proposed compulsory acquisition price.  In response, Mr Stephen Brand, one of the respondent's directors, wrote to GSA on 25 July 2003 informing it that the price "under consideration" was 78 cents per share.  Not surprisingly, Mr Cooper did not regard this statement as sufficient.  Mr Brand consequently sent a further letter to GSA on 29 July 2003.  That letter confirmed that the price at which the respondent intended to acquire the remaining Petroz shares was the sum of 78 cents per share.

3. Once it had received this letter, GSA provided the respondent with a draft of its complete report.  This draft, dated 30 July 2003, set out a valuation range of between 61 cents and 86 cents per share and expressed the opinion that the intended offer price of 78 cents per share represented a fair value.  However, between that time and the time of the preparation of the final draft of the report on 4 August 2003 there had been a decline in the exchange rate between Australia and the United States and GSA had been informed by Petroz that an intra‑group debt of US$9 million owed by Petroz to the respondent should be taken into account in calculating Petroz' net debt as at 30 June 2003.  GSA consequently increased its valuation to a range of 63 to 89 cents per share.

4. Once the respondent became aware of the higher valuation, it increased the price which it proposed to pay for the acquisition of the outstanding shares to an amount of 89 cents per share.  It sent out a compulsory acquisition notice accordingly, together with the GSA Report, on 8 August 2003.

Evidence given in the primary proceedings

1. The respondent's application for approval of its compulsory acquisition at the stipulated price came on for hearing in May and June 2005.  Evidence was led from a number of witnesses.  These included Mr Cooper.  The GSA Report was tendered in evidence.  Evidence was also led, on behalf of the appellant, from Mr Russell Langusch, an independent energy research consultant who had some 17 years' experience in financial analysis and corporate advisory work in the resources sector.  He had prepared a report dated 17 February 2005 ("Langusch Report") in which he took issue with aspects of the GSA Report.  He considered that a higher valuation should have been arrived at.

2. For present purposes, the two most significant distinctions in approach as between Mr Cooper, on the one hand, and Mr Langusch, on the other, related to oil price forecasts and the choice of scenarios used in respect of the likely development of the Bayu‑Undan gas field.

3. Mr Langusch considered that Mr Cooper had chosen, in the GSA Report, "an unreasonably low and unrealistic oil price forecast" which, he said, "did not reflect market conditions at the time of the valuation".  He contended that there was no basis for GSA adopting its own assumptions "when widely‑accepted, market determined futures prices indicated that the future trend of oil prices was likely to be significantly higher than those assumed by GSA".

4. So far as the development scenarios were concerned, Mr Langusch contended that the four scenarios which were mentioned in the GSA Report unreasonably biased calculated valuations towards the low side.  He suggested that the first two of the four scenarios used by GSA were "lowside" and that the other two were "midpoint" and that no "value contribution" had been attributed to any "highside"case.  He said that, in the absence of any "highside" case being included, he would prefer to base the valuation upon the results of the two "midpoint" scenarios used by Mr Cooper.

5. Mr Langusch arrived at an adjusted valuation of Petroz' interest in the Bayu‑Undan project which reflected a range of US$240 million to US$260 million, somewhat higher than that which had been arrived at by GSA, being a range of between US$200 million and US$230 million.

The material issues in the primary Court and the primary Judge's conclusions in respect of them

1. The appellant raised 10 contentions, in the course of the proceedings before the primary Judge, in support of its objection to approval of the share acquisition.  Only five of these are relevant to the appeal, being contentions 2A, 3, 5, 8 and 9.  I will deal with each in turn.

2. Contention 2A was that the GSA Report was not a report for the purposes of s 667A of the Act because GSA had supplied a copy of it to the respondent before it had fixed the price which was specified in the notice of compulsory acquisition sent out on 8 August 2003. The primary Judge found (at [64] of his reasons) that the sections of the draft report which had been provided to the respondent before it nominated a price contained only factual information and that it was both important and appropriate that the respondent should have an opportunity to check the accuracy of that information. Moreover, he said, a procedure of that kind was contemplated by ASIC Practice Note 42 of 8 December 1993. He also said that, because the statutory scheme for compulsory acquisition required only that the independent report accompany the compulsory acquisition notice, provided that there was no association between the expert and the offeror, he could see no objection to the expert embarking on the process of valuation before the client had nominated the acquisition price (at [67] of his reasons).

3. Then, the primary Judge dealt with an objection to the effect that the respondent had increased its proposed acquisition price from 78 cents to 89 cents after being informed of the GSA valuation.  He saw no merit in this objection, saying that he could see nothing in the legislative scheme relating to compulsory acquisition which would have prevented the respondent's conduct.  He went on to say (at [69] of his reasons) that he did not consider that the respondent's conduct had been contrary to the spirit of the legislation.  He noted that it had resulted in a more generous proposal.

4. Contention 3 was that, in breach of s 667A(1)(c) of the Act, the GSA Report did not set out the reasons for forming the opinions stated in it, in particular, the reasons for adopting a value for Petroz' share in the Bayu‑Undan project of US$200 million to US$230 million. The primary Judge, having summarised the logic in the report, and the criticisms which had been made of it, considered that it had adequately disclosed the reasons upon which the ultimate opinion was based.

5. Contention 5 was that GSA should not have based its valuation on its own estimates of oil prices and that it should have used "objective market futures prices", which were higher than the forecasts used by GSA.

6. The primary Judge said, in this respect, that the valuation range in the GSA report had been based on a consideration of oil prices which included futures contract prices (at [131] of his reasons).  After mentioning the appellant's contention that GSA ought to have based its valuation exclusively on futures prices, and after referring to the Langusch Report (and saying that, while he was prepared to admit the report into evidence, he would place no weight on parts of it which involved hindsight), the trial Judge went on to compare aspects of the evidence which had been given by Mr Cooper and Mr Langusch respectively.  He said that Mr Cooper had not accepted Mr Langusch's view as to the utility of using futures prices to predict spot prices and referred (at [134]) to a graph which Mr Cooper had produced which showed spot prices over the period June 1995 to June 2003 for West Texas Intermediate crude oil ("WTI"), regarded as the benchmark price for crude oil, free on board at Cushing, Oklahoma, in the United States.  On that graph, Mr Cooper had superimposed the futures prices on about 25 different dates.  There was very little coincidence between futures prices and spot prices.  Moreover, where the futures graph intersected the spot price graph, the movement of the spot price in the intervening period bore little resemblance to that of the futures prices.  The futures graphs tended to curve gently in an upwards or downwards direction whereas the spot prices reflected a number of significant peaks and troughs.

1. Having considered that evidence (at [134] - [135]), the primary Judge turned to the cross‑examination of Mr Langusch concerning the significance of these graphs.  He said, in this respect:

   "… [Mr Langusch] pointed out that the futures market trades five‑days per week.  That being so, Mr Langusch said, it would really be necessary to depict every day's futures trading on the graph to obtain a proper comparison between futures prices and spot prices.  However, Mr Langusch said he was not suggesting that the graph produced by Mr Cooper was unrepresentative.  The following exchange then took place:

   'Q -  … generally speaking the futures market tends to predict, at best, a direction or trend, doesn't it, rather than the actual volatile movements, day by day or month, in the spot price?

   A -     No, I don't think anything can predict that.

   Q - Well, you are agreeing then that the futures doesn't predict it if nothing can predict it.

   A -     I believe it's good as any predicting.' (TS428)"

2. Having considered this evidence, the trial Judge concluded that there was not, in the end, a great deal of difference between Mr Langusch and Mr Cooper.  He went on to say (at [137] ‑ [140]):

   "In par 3.1.5 of the Grant Samuel report, Mr Cooper discussed actual and likely movements of world oil prices.  He included a graph showing historical and futures prices for WTI.  The Grant Samuel report contained the statement that:

   'The Light Sweet Crude Oil futures contracts traded on the New York Mercantile Exchange provide some evidence as to the expected future WTI spot price.  Historically, the futures prices has shown less volatility than the oil price and appears to be indicative of the trend for long-term prices.'

   Mr Cooper based his spot price predictions on forecasts provided by four major brokers: Merrill Lynch, ABN Amro, Deutsche Bank, and Citigroup SSB.  Although all four brokers forecast the 2003 and 2004 spot prices, only three forecast the spot prices for 2005; and only one forecast the spot price for 2006 and beyond.

   As Mr Cooper said in his evidence, and as I accept, when the Grant Samuel report was written there was substantial uncertainty in the market generally about the future oil price.  That is why, Mr Cooper said, he also had regard to oil futures prices: and why his analysis of the value of the Bayu‑Undan Project was based on both spot and futures prices.  However, as Mr Cooper observed, futures prices are not intended to be predictors of future spot prices.

   For these reasons, I am satisfied that there is no substance to contention 5."

3. Contention 8 was that the payment of 89 cents per share did not give a fair value because:

   "(a)the value of Petroz NL's share in the Bayu-Undan Project is more than the US$200 to US$230 million ascribed to it by GSA in its expert report;

   (b)since August 2000 and November 2000, when GSA valued Petroz NL shares in the ranges $0.51 to $0.69 and $0.58 to $0.74 respectively, the extent of mitigation of risks surrounding the gas recycling project, gas pipeline and LNG plant comprising the Bayu-Undan Project is such that the present valuation range of $0.63 to $0.89 is inadequate."

4. The primary Judge said (at [146]), of (a), that " … it is not for the Court to determine the value of Petroz's share in the Bayu‑Undan Project.  The Court is required to determine whether 89 cents per share represents a fair value.  Contention 8(a) does not, therefore, arise for consideration."

5. He said (at [147]), as regards contention (b), that this was cast somewhat differently, but nevertheless invited the Court to conduct a valuation and was consequently inappropriate.  He went on to say that it was clear that, as the project had progressed, the risks associated with it had diminished.  He added that Mr Cooper had identified and assessed the risks, both general and specific, as he perceived them to be when carrying out his valuation.  The primary Judge said that it was not for him to make an independent assessment of those risks.

6. Contention 9 was that the payment of 89 cents per share did not give a fair value "because of the delay occasioned by the … [respondent] in vacating the trial dates of 26, 27 and 28 October 2004 and the … [respondent] thereby obtaining the benefit of not paying such amounts until after the date of the delayed hearing and the … [appellant] suffering a corresponding detriment".

7. The primary Judge said of this contention (at [149]) that, while the delay had been regrettable, it was not the respondent's fault that the hearing dates in October had been vacated.  He added (at [150] - [151]) that the statutory scheme inevitably involved some delay and that he could see no warrant for implying into that scheme any basis for disapproval of a compulsory acquisition other than a failure by the acquirer to prove that the proposed price gave a fair value.

Grounds of appeal and Notice of Contention

1. Following amendment, the appellant raises eight grounds of appeal.  They commence with ground 2 and read as follows:

   "2.His Honour erred in failing to find that that the respondent's offer price was not the price considered by Grant Samuel & Associates Pty Ltd Limited (hereafter 'GSA') in its report to shareholders, in breach of s.667A by reason of:

   (a)GSA being commissioned to prepare its report, and substantially completing its report, before the proposed compulsory acquisition price was formulated;

   (b)GSA providing a draft of the valuation section of its report to the Respondent before the Respondent had nominated its final compulsory acquisition price; and

   (c)the Respondent fixing a purported offer price and GSA then delivering its final report and valuation opinion;

   (d)the Respondent fixing the actual offer price subsequent to the receipt of the GSA report.

   3.His Honour erred by not holding that a failure to set out in the GSA report to shareholders or in the evidence in the trial a vital step in the valuation reasoning is (a) a material failure to comply with sec 667A; and (b) fatal to the success of an application under s.664F of the Corporations Act 2001, and in particular by not holding that:

   (a)how the opinion was formed that the valuation range of US$200 million to US$230 million for Petroz NL's interest in the Bayu‑Undan Project was derived from the range of valuations obtained from the valuation scenarios considered by GSA, being US$186 million to US$267 million; and

   (b)why GSA adopted a 2006 predicted oil price of US$20-US$21 valuing [sic] in the Bayu‑Undan Project and why and whether GSA considered that was reasonable; and

   (c)why GSA did not use a futures price for oil delivered in 2006, being $24 or $26 bbl [barrel] in valuing the Bayu‑Undan Project,

   were vital steps necessary to enable a reader of GSA's report to evaluate the validity of GSA's conclusions, and that the failure to set out those matters in GSA's report was a failure to comply with the requirement in s.667A(1)(c) of the Corporations Act 2001 to set out the reasons for forming the opinions stated in the report and was not properly opinion evidence as to the question of value on which the Court could act.

   3A.His Honour erred in relying on Mr Cooper's evidence contained in the GSA report and his affidavit and oral evidence as to value of the Bayu‑Undan project when there was no consideration in the report or his evidence of why a forecast price of US$21 per barrel in 2006 was used in the report, other than as an adoption of otherwise untested and untestable statements as to expected prices by brokers (not themselves witnesses in the proceedings) and absent any independent analysis of either GSA's opinion on the matter (if any), the brokers' view or opinion or any attempt to reconcile that view or opinion with prices observed in the futures market in relation to 2006 delivered oil, which prices were materially higher and would materially affect the valuation.

   4.His Honour erred by accepting the adoption by GSA as its own estimates of oil prices, spot price predictions:

   (a)for 2003 and 2004, by four brokers;

   (b)for 2005, by three brokers; and

   (c)for 2006, by one broker

   without those brokers giving evidence as to their estimates, and further, by accepting GSA estimates as to oil prices after 2006 without any independent basis for such estimates, and further by not finding that GSA should have adopted market determined oil future prices instead of using broker estimates.

   5.His Honour, having correctly identified at [14] that the value of Petroz NL's interest in the Bayu‑Undan Project was in contention, erred in holding at [146] that it was not for the Court to satisfy itself as to the value of that interest and determine whether the value of that interest was more than the US$200 million to US$230 million ascribed to it by the Respondent's expert and erred further by failing to consider and not accepting Mr Langusch's opinion that the value of that interest was substantially more than US$200 million to US$230 million.

   6.His Honour erred by accepting the opinion of GSA that the impact of considering oil futures contract prices, instead of the oil price of US$20 ‑ US$21 per barrel used by GSA, was approximately US$10 million, instead of a range of US$9 million (at US$24 per barrel) to US$22 million (at US$26 per barrel), as evidenced by the Appellant's expert, Mr Langusch having regard to observed futures prices.

   7.His Honour erred in failing to take into account the effect of the delay occasioned by the Respondent in vacating the trial dates of 26, 27 and 28 October 2004 on the determination of whether the price offered by the Respondent of $0.89 per Petroz NL share represented fair value.

   8.His Honour erred by finding that $0.89 represented a fair value for each share in Petroz NL."

2. The respondent has filed an amended notice of contention by which it contends that the decision of the primary Judge should be varied and affirmed on grounds other than those relied upon by him.  There are two such grounds.  The first asserts that the primary Judge erred in a finding which he had made that there had been a conflict of interest between the respondent, through Mr Kotarski, and GSA, through PetroVal.  Given that no issue is now pursued by the appellant in that respect, it is unnecessary to give further attention to this ground.  The second is that the Court should have held that Mr Langusch's evidence was not a reliable indication of the value of Petroz or of the correct approach to such a valuation in that Mr Langusch had made no independent valuation of his own, had "made an NPV [net present value] calculation with impermissible use of hindsight and without taking account of considerations and risks relevant to proper valuation" and had given "evasive and unsatisfactory evidence concerning the supposed importance of oil futures prices".  The respondent has specified a number of pages of transcript from the evidence and closing submissions in the primary proceedings and a number of exhibits which are said to support these contentions.

3. Adopting the procedure which was largely followed by the parties during the hearing of the appeal, I propose to deal with grounds 3(b), 3(c) 3A and 4 together, and also with grounds 3(a), 5, 6 and 8 of the grounds of appeal and ground 2 of the notice of contention together, but to deal separately with each of grounds 2 and 7.  I will start with ground 2.

Ground 2

1. As this ground was limited in the course of oral submissions, the appellant raises only the contention that GSA, as the independent expert, should have reported on an acquisition price which had been fixed by the respondent but, instead, the respondent fixed its acquisition price of 89 cents per share as a consequence of what it read in the GSA Report, completed on 4 August 2003. This process was said to have been contrary to, and indeed to have reversed, the process contemplated by s 667A(1) of the Act, which reads as follows:

   "667A(1) [Requirements of report]

   An expert's report under section … 664C … must:

   (a)be prepared by a person nominated by ASIC under section 667AA; and

   (b)state whether, in the expert's opinion, the terms proposed in the notice give a fair value for the securities concerned; and

   (c)set out the reasons for forming that opinion."

2. The contention is that the expert's report must express an opinion on the terms proposed in the notice and that the term as to price cannot be altered by reference to an expert's report once it has been received.  Counsel for the appellant submitted that the legislative intention is that the offeror should stipulate its "best" and final price (which might be greater than the figure arrived at by an expert) and that the expert should then express an opinion whether it reflects a fair value for the securities concerned.  He suggested that, if the position were otherwise, the legislature could very simply have provided that the shares could be acquired at a price to be nominated by the expert.

3. On this construction, if the price stipulated by the acquirer was less than that contemplated as fair value by the expert, the acquirer would be unable to increase its price, leaving it with little prospect of gaining the Court's approval. Alternatively, the acquirer could only increase the price by commencing the acquisition process afresh, fixing a new price and obtaining a fresh expert's report (which, it seems, would inevitably be from the same expert ‑ who might be expected to do no more than adopt the earlier report, perhaps updated ‑ ASIC being highly unlikely to nominate any different expert), if that could be done within the period of six months fixed by s 664AA(b) of the Act or if an exemption from or variation of the time limit could be obtained from ASIC pursuant to s 669(1) of the Act.

4. This construction seems to me to have little to commend it. No doubt, it is true that, if the price fixed by the acquirer can be revised after receipt of the expert's report, the acquirer has some incentive initially to specify a lower price, knowing that it will have the option of increasing it should the valuation come in higher. However, the scheme of the legislation seems to me to have the object only of ensuring that the shares are acquired at a fair value. That is the effect of s 664F(3), which requires the Court to approve the acquisition if the terms set out in the compulsory acquisition notice give "a fair value" for the securities, and s 667A(1)(b), which requires the expert to express an opinion on the question whether those terms give "a fair value". That object is achieved if the price ultimately fixed is that which the independent expert considers to be fair and which has been approved by the Court.

5. That this was the object of the legislation is supported by the contents of the Explanatory Memorandum to the Corporate Law Economic Reform Program Bill 1998 which, in par 4.4 ("Takeovers"), records that an aim of the reforms was to "make it easier for majority shareholders to obtain the benefits of 100 per cent ownership" and, in par 7.2 ("Compulsory acquisitions"), that extending the power to compulsorily acquire securities will "discourage minority shareholders from demanding a price for their securities that is above a fair value (often referred to as 'greenmailing')".  In Capricorn Diamonds Investments Pty Ltd v Catto (2002) 5 VR 61 at 69, Warren J (as her Honour then was), having considered the Explanatory Memorandum, said (at [28]):

   "In particular, it is evident from the explanatory memorandum … that the legislature was seeking to balance the interests of the two groups of parties, that is, the interests of facilitating changes in corporate ownership with the need to protect the rights of the minority shareholders.  Part of the process was the discouragement of minority shareholders from demanding a price for their securities that is above a fair value, the practice of greenmailing.  The explanatory memorandum … [par 7.2] shows that part of the objective of the legislative scheme was to remove that potential, that is, to remove the matters that would otherwise operate to force a price above fair value were there to be the ordinary commercial bargaining context in which consent of both parties is required before a transaction can be concluded."

6. Given the limited object of the legislation and what, in my opinion, are the undesirable consequences of the construction contended for by the appellant, I am not persuaded that there is substance to it.  Rather, it seems to me that there is nothing in the legislation which should be read as precluding the course of events which took place in this case.  I would not uphold ground 2.

Grounds 3(b), 3(c), 3A and 4

1. Grounds 3(b), 3(c), 3A and 4 essentially raise two issues.

2. The first ("oil price issue") is whether the trial Judge erred in unquestioningly accepting Mr Cooper's evidence, in the form of the GSA Report and otherwise, as to the value of the Bayu‑Undan project when Mr Cooper had given no independent consideration to the question whether it was appropriate to use the forecasts of oil prices used by him, having merely adopted "untested and untestable statements as to expected [spot] prices by brokers" when he could, and should, have adopted "market determined oil future prices" (grounds 3A and 4). 

3. The second ("reasons issue") is whether the trial Judge should have held that the GSA Report:

   (a)failed to disclose any or adequate reasons for adopting as reasonable "a 2006 predicted oil price of US$20-US$21" in valuing the Bayu‑Undan project and for not using "a futures price for oil delivered in 2006, being [US] $24 or $26 bbl"; and

   (b)could consequently not be relied upon as opinion evidence and did not comply with s 667A(1)(c) of the Act.

   (Grounds 3(b) and (c)).

The oil price issue

1. In dealing with the oil price issue I propose, first, to set out what was said of it by Mr Cooper in the GSA Report and by Mr Langusch in the Langusch Report.  I will then touch upon other evidence given by each of Mr Cooper and Mr Langusch, before turning to the submissions which were made in respect of this evidence.

2. The body of the GSA Report, not including its three appendices, runs to some 51 pages. 

3. Part 2 of the report sets out its scope, including the basis of the report, the basis of evaluation and sources of information.  The latter were said to include publicly available information, including recent broker reports on the oil and gas industry. 

4. Part 3 of the report consists of an overview of the Australian oil and gas industry, including an analysis of world oil and gas markets.  That analysis encompasses natural gas, LNG (LNG prices were said to be generally linked to oil prices, based on the relative energy content of the two fuels), LPG (which was said to have generally been priced, in recent years, at 82‑85 per cent of the WTI price), condensate and oil.

5. Section 3.1.5 of the report contains a reasonably detailed analysis of historical and futures WTI prices.  The historical prices are analysed between June 1993 and June 2003 and the futures prices are estimated between June 2003 and June 2010.  The analysis includes the following paragraphs (the first of which has earlier been quoted by me when dealing with the judgment of the primary Judge):

   "The Light Sweet Crude Oil futures contracts traded on the New York Mercantile Exchange provide some evidence as to the expected future WTI spot price.  Historically the futures price has shown less volatility than the oil price and appears to be indicative of the trend for long‑term prices.

   The futures contract price in the long‑term (to 2010) is approximately US$24.00.  Historically, oil inventories have been an important indicator for future oil prices.  Oil inventories are currently significantly below average, and are expected to take some time to rebuild.  The oil price is currently impacted by the considerable uncertainty remaining with respect to the timing of meaningful Iraqi oil exports.  In addition, although Venezuela and Nigeria have recommenced oil production after strikes earlier this year, production has failed to meet expected production capacity.  Due to these uncertainties, oil prices are expected to remain high and volatile in the short term."

1. Part 4 of the report contains a profile of Petroz.  Included within it is a comment to the effect that Petroz' oil sales were denominated in US dollars but that the company was currently unhedged in relation to both oil price and currency, with the consequence that it was receiving the benefit of the strong oil price but incurring the cost of the strong Australian dollar.  

2. Then, in Pt 5, the report contains a profile of Petroz' assets, including, in particular, the Bayu‑Undan project, the essential futures of which have been mentioned above.  I have earlier said that the Bayu‑Undan field contains proved and probable reserves of approximately 256 MMbbl of condensate, 182 MMbbl of LPG and 3.25 tcf of natural gas.  The report mentions (s 5.1.3) that the LNG facility had a guaranteed minimum capacity of 3.00 million tonnes per annum ("MMtpa") on an annualised basis and that two Japanese utilities, Tokyo Electric and Tokyo Gas,  had signed contracts for the purchase of the entire LNG production of 3.00 MMtpa, with the first cargo scheduled for the first quarter of 2006 and a flat price per cargo having been negotiated for 24 per cent of volumes, with the balance indexed to the price of a basket of crude oil prices.

3. Part 6 of the report deals with the valuation of Petroz.  Section 6.1 records that the value of Petroz has been assessed by aggregating the estimated fair market value of its oil and gas interests and other assets and deducting net debt and the capitalised value of corporate overheads.  It also records that the valuation was made on the basis of fair market value, defined as the maximum price that could be realised in an open market over a reasonable period of time, assuming potential buyers had full information.  As I have earlier mentioned, the primary methodology that was used to value Petroz' interests in producing oil and gas fields and development projects was that of discounting projected cashflows.  The report mentioned, in that respect (s 6.1), that this approach involved calculating the net present value of expected future cashflows and then discounting those cashflows using a discount rate that reflected the time value of money and the risks associated with the cashflow stream.  I will return to this issue below, when dealing with grounds 3(a), 5, 6 and 8.

4. Section 6.3 of the report sets out a number of key assumptions.  Section 6.3.1 reads as follows:

   "6.3.1  Oil Prices

   Forecasts of crude oil prices are fundamental to the financial models used to value the producing oil interests and development projects of Petroz.  Oil prices are volatile and cannot be predicted with accuracy.

   Oil prices are currently at historically high levels but in the medium term are widely expected to decline to lower levels.  For the purposes of this report WTI oil prices are assumed to progressively decline to US$20.00 to US$21.00 per bbl by 2006 and to increase with inflation thereafter.

   The general pricing assumptions adopted in the discounted cashflow valuation analysis for the 2003 to 2007 calendar years are summarised in the following table:

WTI Price Assumptions
Year ending 31 December
2H 2003	2004	2005	2006	2007
WTI Oil Price (US/bbl)
US$20.00 in 2006	29.43	26.28	23.13	20.00	20.40
US$21.00 in 2006	29.58	26.72	23.86	21.00	21.42
Note: Nominal dollars

Oil price assumptions have been adopted having regard to the prices projected by a number of industry and market commentators and analysts, futures prices and the outlook for the oil market in general.  The WTI crude oil price is widely accepted in the industry as an international crude oil benchmark price.  Most crude oils and condensates produced in Australia are sold by reference to the Tapis crude oil benchmark in Asia.  Tapis crude has been assumed to trade at a discount of US$0.40 to WTI crude for the purposes of this analysis.  This is broadly consistent with the historical trading relationship between Tapis crude and WTI crude."

1. Section 6.4.2 of the report identifies four scenarios that were developed to assess the value of Petroz' interest in the Bayu‑Undan project.  These were developed on the basis of likely production profiles over an expected project life of 15 to 20 years.  Then, six alternative valuations were estimated for each scenario, depending upon the discount rate and oil price, as follows:

Petroz' Interest in Bayu-Undan – NPV Outcomes (US$million)
Case	Discount rate	Oil Price Scenarios (WTI benchmark)
US$20 in 2006	US$21 in 2006
Scenario 1	8.0%	180	191
8.5%	171	181
9.0%	162	172
Scenario 2	8.0%	216	227
8.5%	205	215
9.0%	194	204
Scenario 3	8.0%	234	246
8.5%	221	232
9.0%	209	220
Scenario 4	8.0%	245	255
8.5%	233	242
9.0%	222	231

1. Immediately under that chart, the following paragraphs appear:

   "Future oil prices are currently the subject of much uncertainty.  Oil inventories are currently significantly below average, and are expected to take some time to rebuild.  The oil price is currently impacted by the considerable uncertainty regarding the timing of resumption of meaningful Iraqi oil exports.  In addition, although Venezuela and Nigeria have recommenced oil production after strikes earlier this year, production has failed to meet expected production capacity.  As a result, brokers and market analysts are generally inconclusive with respect to future oil price expectations.

   Grant Samuel has considered the impact of using futures contract prices to calculate the NPVs for the Bayu‑Undan field.  The Light Sweet Crude Oil futures contracts traded on the New York Mercantile Exchange Futures decline from current levels to around US$24.00 in 2006 and remain at this level until 2010.  The following table summarises NPV outcomes for the Bayu‑Undan field assuming that futures contract prices prevail until 2010 and escalation with inflation for the remainder of the economic life of the field:

Petroz' Interest in Bayu-Undan NPV Outcomes from Using Alternative Oil Price Assumptions (US$million)
Case	Discount rate	NPV
Scenario 1	8.0%	205
8.5%	195
9.0%	186
Scenario 2	8.0%	236
8.5%	225
9.0%	214
Scenario 3	8.0%	255
8.5%	242
9.0%	229
Scenario 4	8.0%	267
8.5%	255
9.0%	243

The analysis indicates that oil price assumptions based on futures contract prices increase the NPV's by approximately US$10 million.

On the other hand, although it is possible for discount rates of 8.0-9.0% to be theoretically calculated using a WACC [weighted average cost of capital], there is an argument that potential purchasers would use higher discount rates to assess the price at which they would be willing to purchase Petroz' assets.  If discount rates of 9.0-10.0% were used in the analysis, the NPV's would decrease by around US$20 million.

Grant Samuel's valuation of Petroz' interest in Bayu-Undan in the range US$200.0 ‑ $230.0 million reflects the NPV scenario analysis and sensitivity analysis described above."

1. Section 6.4.2 then goes on to discuss additional factors that GSA had considered in valuing Petroz' interest in the Bayu-Undan field, including a number of development and operational risks associated with the project and the sovereign risk brought about by the project's location in the Timor Sea and uncertainties associated with the political situation in Timor‑Leste.

2. That brings me to the Langusch Report,  I have previously mentioned that the two principal differences in approach as between Mr Cooper, on the one hand and Mr Langusch, on the other, related to oil price forecasts and the choice of scenarios used in respect of the likely development of the Bayu‑Undan field.  Mr Langusch considered that Mr Cooper had chosen an unreasonably low and unrealistic oil price forecast because he had adopted oil price assumptions made by brokers and market analysts when "widely‑accepted, market determined futures prices indicated that the future trend of oil prices was likely to be significantly higher".  He referred to the so‑called "forward oil price strip or forward curve", being the series of futures contracts for delivery of oil at various monthly dates into the future and said that this strip represented "a snapshot at any point in time of the market's view of future price directions" and that its use removed "subjectivity which affects all other forecasting methods".

3. Mr Cooper touched upon this issue in an affidavit filed in the proceedings and dated 11 March 2005.  In that affidavit he said that, in his experience, real world buyers of oil and gas assets did not simply adopt oil futures prices in their assessments of value, but tended to incorporate long‑term oil price assumptions reflecting historical oil prices and expectations of long‑term marginal costs of production.  He said that the GSA Report was based on then current estimates of future oil prices made by four leading global securities and commodities brokers:  Merrill Lynch, ABN Amro, Deutsche Bank and Salomon Smith Barney.  Only one of these, ABN Amro, had forecast the price in 2006 and beyond, that forecast having been one of US$20.50.  After mentioning that the GSA Report had taken into account the results of its NPV analysis using the oil price assumptions adopted, a sensitivity analysis based on oil futures prices, consideration of the impact of using higher discount rates and a subjective assessment of the impact on value of project and development risks, he went on to say (par 8(f)):

   "Futures linked pricing is based on market conditions at a single point in time only, and futures pricing can, for a variety of reasons, move quite rapidly over short periods.  Futures trades, because they involve the sale and purchase of what are commonly called financial 'derivatives' (that is contracts which have a linkage to the pricing of a commodity, but no necessary reflection of actual supply and demand) may be influenced by a number of factors not affecting the supply of and demand for the underlying physical commodity and may represent a fraction of, or many times, the value and volume of trading in the underlying product.  They are, accordingly, only one of several guides to valuation."

4. In his oral evidence, Mr Cooper said that, at the time of the preparation of the GSA Report, there was substantial uncertainty in the market generally as regards the future oil price and that it was for that reason that he had done an analysis "based on two sets of numbers", being the oil price forecasts and the oil futures price (transcript 318).  Mr Cooper was asked (transcript 319) whether he had a view "as to the utility of the futures prices … [as a] predictor of the future spot price as opposed to trend".  He responded by saying that the oil futures price was not a forecast of the future spot price but was determined by the current spot price as adjusted to take into account other economic factors, including the risk‑free rate of return on capital and the "convenience yield", being a factor which allows for the utility in holding actual stocks of oil as opposed to purchasing it by means of a futures contract.

5. As will be apparent from what I have said when dealing with the primary Judge's reasons, Mr Cooper also referred to a graph which he had prepared in order to demonstrate how futures prices had corresponded to spot prices since June 1995.  He said that the graph revealed that futures prices had been a "remarkably poor predictor of trend" since about December 2001.  He added (transcript 322) that, at the time, "there was considerable uncertainty in the marketplace as to where prices were going and analysts and commentators weren't particularly confident" and, for that reason, he had considered futures prices as a potential additional source of information.  However, the trend line suggested by the futures information then available to him was "downwards".

6. Mr Cooper was asked why he had chosen the four brokers on whom he had relied in making his estimates of future oil prices.  He responded by saying (transcript 332):

   "At the time … there were an unusually low number of brokers who were producing forecasts and in part, I suspect, because there was substantial uncertainty about future oil prices but those were the four major international brokers that we could find and the reason that we chose to use international brokers was because oil … is fundamentally an international commodity with the prices established in international markets and so we wanted to get the views of brokers who talked both to buyers and producers of oil on a regular basis in those international markets and who will reflect in their judgements about future oil prices the views of market participants as to future oil price.  I suppose that's the first reason.  The second reason is in the same way that oil is fundamentally an international commodity oil and gas assets of the sort of Bayu‑Undan are the kinds which are required by … international market participants, so large multinational oil companies, and they will typically to the extent they don't develop their own internal views on the future oil price, they'll have regard to the views of international broking houses."

7. Mr Cooper also said (transcript 345) that, while only one broker had made a prediction for 2006 and following, two others had "forecast for a decline back to what they were seeing as a long-term oil price by 2005".  He said that he had no forecast beyond 2007.  He said (transcript 349):

   "The fact that we only had … [one broker] producing a forecast beyond a particular date would not in any sense have been relevant because we had a number of other brokers, all of whom were forecasting fairly rapid and fairly substantial reductions in oil prices towards much lower long‑term averages.  The fact that they chose not to extend their forecast beyond a certain date is neither here nor there."

8. In his oral evidence, Mr Langusch said that, in his opinion, the GSA valuation had "essentially" ignored the futures prices.

9. When asked whether the futures prices were a predictor of future spot prices, he responded:

   "They are one indicator.  It is a predictor of a trend.  It is a market view on which way oil prices are heading and its my contention that that’s an appropriate view of the future direction of oil prices.  They are not an accurate predictor, nor is any forecast an accurate predictor."

   However, he said (transcript 424) that he chose to use a futures curve because he believed that, on any particular day, it was "an informed view of the future direction of oil prices".  He agreed, in the course of cross‑examination (in an exchange which I have mentioned earlier when dealing with the judgment of the primary Judge), that nothing could predict the future spot price but said (transcript 428) that the futures price was "[as] good as any predicting".

10. Mr Langusch was asked whether, in his time as a broker working in brokers' houses and merchant banking houses, he had participated in making oil forecasts for those houses.  He said that he had done so and that the houses had formed their own judgements using a variety of methods, including future prices and spot prices (transcript 452).  He acknowledged that futures prices would not necessarily be the decisive consideration (transcript 454).  In that respect, the following exchange took place (transcript 455):

    "Purchasers in the oil and gas market will themselves take a view of future oil prices, won't they?---They may.  They may not.

    They will, won't they?---I can give an example where ‑ if we are looking at purchasing an asset, one will look at the futures price, particularly if you're borrowing against it because the banks will lend against a futures curve at the moment, and I can speak from personal experience where one is testing the value of an asset we use the futures curve to value that asset because we can actually lock in that oil price as of today and the only risks we run are the production.  Whether we make that production or not.

    That would be an unusual case, wouldn't it, for a purchaser to rely only upon that single piece of information?---It depends on what the purchaser's motive is and what the purchaser is but if we were looking to purchase an oil and gas asset, we actually can lock those prices in today.  It's a real market and we can sell oil five years out at $60 and that is bankable and that is a valuation that one may make.  Depends on the circumstances.

    But generally speaking in the market prospective purchasers will form their own view after consulting a range of information, won't they?---Yes, they should.

    One of the things that brokers and merchant banks try to do is to provide them with advice?---Yes.

    Absent value, not just pick up a number from a futures strip?‑‑‑Yes, I believe there's other areas that could add value.  That's not the only one.

    But they try to add value in that area too?---Yes, they have a view.  Yes.

    So as a matter of valuation approach it is entirely appropriate to have regard to a valuer's own view of future oil prices, isn't it?‑‑‑Yes."

11. As I understood him, counsel for the appellant made three submissions arising out of all of this evidence.  The first was that the GSA Report had merely accepted, in an uncritical fashion, untested assumptions made by brokers.  The second was that no use had been made by Mr Cooper of oil futures prices, which were a more reliable indicator of future oil prices.  The third was that it was counterintuitive to value an interest in an oil and gas project by reference to a broker's estimate of future oil prices when there were potential purchasers of that interest who would value it according to what were then higher prices currently being paid in the oil futures market.

12. As to the first of these submissions, Mr Cooper made it plain, in his evidence, that a "real world" purchaser, in assessing the price to be paid for an interest in an oil and gas project, would rely upon publicly available estimates made by brokers. If that was so, (and Mr Langusch appeared eventually to accept that some purchasers, at least, would form their own view after taking advice from brokers and merchant banks), then it was appropriate for Mr Cooper to rely upon those same sources, being, as I have said, well‑known international brokers. There was no need for Mr Cooper either to form his own opinion (other than that which he did form, to the effect that brokers of this calibre would be relied upon by potential purchasers in valuing an acquisition of this kind) or somehow to seek to test the opinion of these brokers (an issue to which I shall return below). While the submission was made, in counsel for the appellant's written submissions, that little or no weight should have been given to this evidence in circumstances in which the brokers whose predictions were relied upon were not called to give evidence, this was not pursued in the course of oral argument. I should say, in any event, that these predictions were proved, at the trial, by way of the tender of business records containing them pursuant to s 79C(2a) of the Evidence Act 1906 (WA) and, while an objection to that tender was foreshadowed, it was never pursued. It is consequently now too late to make an objection of that kind. I will return to the issue of weight below.

13. Before leaving this first submission, I should mention that counsel for the appellant's written submissions also included a submission (again not developed in oral argument) that, even if Mr Cooper was right in having regard to brokers' predictions, he erred by failing to take into account the contents of a report published in June 2003 by an independent government economic research agency, the Australian Bureau of Agricultural and Resource Economics ("ABARE"), which had made oil price predictions which were higher than those relied upon by Mr Cooper.  However, there was no support for this proposition in the evidence.  While Mr Langusch said, in his report, that the forecast prices in the GSA Report were substantially below the forecasts made by ABARE, he acknowledged, in his oral evidence, that it was not, in this case, appropriate to have regard to the ABARE report (transcript 421 ‑ 422).  Mr Cooper's oral evidence, too, was to the effect that it was not appropriate to have regard to this report in respect of international commodities (transcript 332 and 347).

1. As to the second proposition, it is plain that Mr Cooper did have regard for oil futures prices.  It is obvious both from his evidence and from the GSA Report itself.  As will be apparent from the paragraphs which I have quoted from the GSA Report in that respect, Mr Cooper performed an analysis of net present value using oil price assumptions based on futures contract prices, concluding that this would increase those values by approximately US$10 million.  However, (this is an aspect to which I shall return below), he considered that this increase in value, as compared with that derived from the brokers' estimates, was more than counter‑balanced by the prospect that potential purchasers would use higher discount rates than those which had been used in that analysis.

2. Next, as regards this second submission, Mr Cooper did not accept that oil futures prices were a more reliable indicator than the estimates used by him.  I have twice referred to Mr Cooper's evidence regarding the comparison between spot prices and futures prices and also to the evidence of Mr Langusch, in the course of which he accepted that the futures market was not a reliable predictor of the spot price.  In my opinion it was open to the trial Judge to find, as he did, that there was not, in the end, much difference between Mr Langusch and Mr Cooper in this respect and that, given the substantial uncertainty in the market generally about the future oil price, referred to by Mr Cooper in his report, it was reasonable for Mr Cooper to have relied on the brokers' estimates, bearing in mind, of course, that he did conduct an alternative analysis which depended upon the futures price.

3. As to the third submission, counsel for the appellant contended that it followed from Mr Langusch's evidence that a potential purchaser of an interest in an oil and gas project might elect to render its future income stream certain by entering into futures contracts for the sale of product, perhaps in order to satisfy a bank lending to it part or all of the purchase price.  If it did so, he submitted, it might be expected to value the interest to be acquired by it in accordance with that known income stream.  Alternatively, he said, even if, for some reason, the purchaser did not wish to enter into futures contracts, it was counterintuitive to expect it to value the income stream by reference to an estimate of price made by a broker or analyst when the existing futures price reflected the market consensus as to what the price was likely to be at various maturity dates.  He also submitted that, once it is accepted that some buyers, at least, would be prepared to acquire the asset at a value calculated by reference to the futures price, it was irrelevant that there might be others who would not do so, and who consequently would have arrived at a lower valuation.

4. The major difficulty with this proposition is that it was never put, in this form, to Mr Cooper. At no stage did cross‑examining counsel suggest to him that an aspiring purchaser would value the asset by reference to futures contracts to be entered into by it, whether at the urging of a bank or otherwise, and that the value so arrived at would, effectively, be the minimum price which might reasonably be anticipated to be received by the vendor.  Had that proposition been put, there might well have been a number of answers to it.  So, for example, there might be a number of factors which could make it inadvisable for the purchaser of an interest in a project, which had yet to commence production, from locking itself into futures contracts, bearing in mind that the project encompassed the production and sale of natural gas, LNG, LPG and condensate.  Moreover, as I have earlier mentioned, the GSA Report reveals that Petroz was currently unhedged in relation to both oil price and currency and was consequently receiving the benefit of the strong oil price and incurring the cost of the strong Australian dollar.  As was pointed out by counsel for the respondent, the issue of likely movements in currency exchanges might also have some influence on the question whether or not the owner of the project would or would not enter into oil futures contracts (bearing in mind, also, that all that was being valued was an interest in the project).  I have also mentioned that contracts had already been signed for the purchase of LNG.  The GSA Report revealed that a "flat price per cargo" had been negotiated "for 24 per cent of volumes, with the balance indexed to the price of a basket of crude oil prices", the "index basket" having been "the JCC [Japanese Customer Clearance] monthly weighted average price for crude oils imported into Japan".

5. Finally, in this respect, I should again stress that Mr Cooper, largely uncontradicted in this respect by Mr Langusch, did not consider that the futures prices were a reliable predictor of the spot price and also that he did, in fact, take the futures price into account in calculating the value at which he ultimately arrived.

6. I am consequently not persuaded that there is any substance in either of grounds 3A or 4.  In my opinion it was open to the trial Judge to rely upon Mr Cooper's evidence and on the GSA Report in the respects to which I have referred.

The reasons issue

1. The requirement, in s 667A(1)(c), that an expert's report under s 663B, s 664C or s 665B set out reasons for forming the opinion whether or not the terms proposed in the relevant notice give a fair value for the securities concerned is presumably designed to ensure that the recipient of the notice is able to understand, and evaluate, the opinion. While any valuation necessarily involves an element of judgement (Dolby Australia Pty Ltd v Catto (2004) 52 ACSR 204 at [63] per Campbell J), and while such judgements are not always susceptible to "an exact exposition of reasons for the conclusions arrived at" (Secretary of State for Foreign Affairs v Charlesworth, Pilling & Co [1901] AC 373 at 391), it is important that the shareholder concerned should know, generally, how the valuation has been arrived at and what factors have been taken into account as, otherwise, it would be impossible for the shareholder to know whether or not to lodge an objection. It would also be impossible for a judge hearing an application under s 664F of the Act to determine whether or not the price offered was fair. In each case, what is required is that the reader be furnished with an explanation of "the basis of theory or experience" upon which the expert's conclusions rest (R v Jenkins; Ex parte Morrison [1949] VLR 277 at 303 per Fullagar J), encompassing criteria enabling evaluation of the validity of the expert's conclusions (Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705 at 729 per Heydon JA). The authority, experience and qualifications of the expert may add weight to the opinions expressed, but cannot diminish the obligation to provide adequate reasons. If, at the end of the hearing, the report is so deficient as to make it impossible to determine whether or not the price offered was fair, then no reliance can be placed upon it. However, as was pointed out by Williams JA, with whom Jerrard JA and Holmes J agreed, in Bromley Investments Pty Ltd v Elkington (2003) 47 ACSR 273 at [18] (referred to and relied upon by the primary Judge at [87]), the existence of an obligation to provide adequate reasons does not mean that the report must be beyond criticism before a Judge may act on it and conclude that the price offered is fair.

2. As to ground 3(b), this wrongly assumes, as I read it, that only the price of US$20‑US$21 was adopted in valuing Petroz' interest in the Bayu‑Undan project.  As I have explained, the futures price of US$24 was also taken into account.  In any event, the GSA Report adequately explained why it was that the price of US$20‑US$21 was made use of and why this was considered to be reasonable.  As I have said, the report included a reasonably detailed review of oil prices encompassing historical spot prices as well as futures prices, taking into account the existing futures contract price in the long‑term and the fact that, historically, oil inventories, which were then significantly below average, had been an important indicator for future oil prices.  I have also said that the report noted that futures prices were generally less volatile than spot prices and appeared to be "indicative of the trend for long‑term prices", which seemed to be falling.  As will be apparent from the extracts from the report which I have earlier quoted, the report revealed that oil prices were currently at historically high levels but, in the medium term, were widely expected to decline to lower levels and were expected to remain there in the longer term.  The factors relied upon in reaching that view were identified in the report.  In my opinion, nothing more was required.

3. Counsel for the appellant also contended, in his written submissions (although not in his oral submissions) that the report was deficient in that it did not identify the brokers' predictions to which regard was had, or the reasons underpinning them, or any assessment by Mr Cooper of their validity.  As will be apparent from what I have already said, it seems to me to be plain, from the report, that Mr Cooper considered that potential purchasers would have regard to the fact of those predictions as opposed to the reasons which underpinned them, and that it was unnecessary for him to set out those reasons (or even to identify the brokers, other than by saying that they were industry and market commentators).  In any event, Mr Cooper did rely upon an analysis of the oil market.  I have earlier referred to the parts of the report which contained that analysis.

4. As to ground 3(c), it will be apparent from what I have already said that it is incorrect to suggest, as this ground does, that the GSA Report did not make use of a futures price for oil delivered in 2006.  An NPV assessment was made using oil futures prices.  However, as I have said, the report concluded that the impact of using these higher prices was more than counter‑balanced by the fact that the discount rates that were being applied in the NPV assessments might be regarded as too low, especially if considered together with the existence of development or operational and sovereign risks not comprehended within the discount rates.  The reasons for reaching that conclusion were sufficiently stated.

5. It follows that grounds 3(b) and (c) have not been made out.

Grounds 3(a), 5, 6 and 8 and notice of contention ground 2

1. These grounds raise three issues.  The first is whether the GSA Report is fatally deficient because it fails to disclose how the valuation range of US$200 million-US$230 million for Petroz' interest in the Bayu‑Undan project was derived from the four valuation scenarios considered by it (ground 3(a)).  The second is whether the trial Judge erred by accepting GSA's opinion that the impact of considering oil futures prices rather than a price of US$20‑US$21 per barrel was approximately US$10 million rather than the range of between US$9 million‑US$22 million estimated by Mr Langusch (grounds 6 and 8 and notice of contention ground 2).  The third is whether the trial Judge erred in holding that it was not for the Court to satisfy itself as to the value of Petroz' interest in the Bayu‑Undan project and by failing to consider and accept Mr Langusch's opinion in that regard (grounds 5 and 8 and notice of contention 2).

The first issue - derivation of the range of values

1. The four scenarios considered in the GSA Report were developed, in order to assess the value of Petroz' interest in the Bayu‑Undan project, on the basis of likely production profiles over an expected project life of 15 to 20 years.  They were as follows (s 6.4.2):

   "Scenario 1:

   Scenario 1 provides a sensitivity should the recycling project fail to achieve forecast liquids production and is based on ConocoPhillips' low estimate of reserves.  Therefore, lower production volumes are realised from the Bayu‑Undan field than currently budgeted by ConocoPhillips.  LNG sales to Tokyo Electric and Tokyo Gas are in accordance with the Heads of Agreement at 3.00 MMtpa to the extent of available reserves;

   Scenario 2:

   Development of the Bayu‑Undan field is based on proved reserves and the terms of the LNG sales contract.  Scenario 2 represents ConocoPhillips' budget for the Bayu‑Undan field.  LNG sales to Tokyo Electric and Tokyo Gas are in accordance with the Heads of Agreement at 3.00 MMtpa for the life of the field;

   Scenario 3:

   Development of the Bayu‑Undan field is based on proved and probable reserves.  Increased capital expenditure has been assumed to reflect the drilling requirements to develop the additional reserves.  LNG sales to Tokyo Electric and Tokyo Gas are in accordance with the Heads of Agreement at 3.00 MMtpa for the term of the contract.  The LNG production beyond the term of the Heads of Agreement is assumed to be sold at the contracted price, either to Tokyo Electric and Tokyo Gas or to an alternative buyer; and

   Scenario 4:

   Development of the Bayu‑Undan field is based on proved and probable reserves.  Increased capital expenditure has been assumed to reflect the drilling requirements to develop the additional reserves.  It is assumed that there is an accelerated ramp‑up of condensate production and that the LNG facility will surpass design specifications and achieve a consistent volume of LNG of 3.23 MMtpa.  The LNG production in excess of the 3.00 MMtpa sold under the Heads of Agreement is assumed to be sold at the contracted price, either to Tokyo Electric and Tokyo Gas or to an alternative buyer."

2. Each of those scenarios was described in more detail in the report, which specified the key assumptions which had been made for the gas recycling project in each case.  Then, in the charts which I have set out earlier in these reasons, the report calculated the various NPV "outcomes" depending upon the discount rate and oil price used.  I have also said that the GSA Report concluded that the analysis which used futures contract prices increased the NPVs by approximately US$10 million but that, because there was "an argument" that potential purchasers would use higher discount rates to assess the price at which they would be willing to purchase Petroz assets, this more than counter‑balanced the increase of US$10 million.

3. The selection, by GSA, of the discount rates is discussed, at some length, in Appendix 2 of the report.  The appendix reveals that the discount rates adopted were derived on the basis of a weighted average cost of capital, taking into account the cost of equity, the cost of debt and debt/equity mix and had been applied to nominal ungeared after‑tax cashflows denominated in US dollars.  The appendix also reveals that the selection of the appropriate discount rate was considered to be a matter of judgement, taking into account criteria which might be adopted by a "real world" purchaser.  The discount rates selected for the purpose of analysing the value of the Bayu‑Undan field were said to have been intended to reflect systematic risks only, specific risks relating to the project having been incorporated into the scenario analysis and the projected cashflows of each scenario.

4. In his affidavit dated 11 March 2005, Mr Cooper said that the selection of the cashflow scenarios for the valuation was based on the technical advice of PetroVal.  He said that PetroVal believed it appropriate to incorporate valuation scenarios 1 and 2, and not to include further upside scenarios, to reflect the drilling difficulties that the project had been experiencing and the relatively finite capacity of the project.  He mentioned that PetroVal and GSA had prepared and reviewed a fifth scenario, which provided for higher recoveries over a longer period of time but which had produced a lower NPV than scenario 4.  At the recommendation of PetroVal this had not been considered in the valuation analysis.  He said, as he had done in his report, that enhancements to recovery do not provide corresponding enhancements to project economics, because of additional profits taxes under the fiscal regime applicable to the project which imposed significant taxation costs on returns in excess of 16.5 per cent.

5. In his oral evidence, Mr Cooper was asked how he had used the valuation ranges in the two schedules prepared by him to reach the range ultimately specified by him, being US$200 million‑US$230 million.  He said, in response (transcript 327), that he had essentially discarded scenario 1 altogether because he was concerned "to just make sure that minorities manifestly get paid a fair price" and that the judgement ultimately arrived at was "in favour of high values, rather than low values", an outcome which could be achieved by excluding from the final assessment of value "the most conservative of the scenarios which had been developed by PetroVal".  He went on to say that, although he had not undertaken any mechanical process, he had, in a general sense, considered values calculated by means of the mid‑point of the valuation range, being the 8.5 per cent discount rate, so as "to shrink the range so it became somewhat more meaningful".  Next, he said that he had considered the NPVs calculated using the oil price assumptions at which he had arrived and also the futures price assumptions and then adjusted those "unrisked NPVs" to take into account the discount rate sensitivity (resulting in a reduction of around US$20 million) and also to take into account sovereign and development risk.  He went on to say (transcript 328):

   "They were adjustments downwards and whilst … this is not really … precise … at the bottom end of the range you've got to be more pessimistic about those kinds of adjustments.  So in total the adjustments, the unrisked values, would have been of the order of $40 million.  At the top end of the range perhaps of the order of $20 million.  So the total adjustment to the theoretical value would have been of the order of $20 million‑$40 million.  It's apparent with that in mind that in fact our ultimate range of values has essentially altered … scenario 2 because if you look at the discounted values set out in scenario 2, both for … our oil price scenario and the oil futures prices, at mid‑discount rates at the highest, there's a value of approximately $225 million.  So if you subtract $40 million from that, you would end up being well below the bottom end of our final valuation range."

6. Mr Cooper said that it followed from this that the valuation almost exclusively reflected scenarios 3 and 4.

7. Mr Cooper said that he also took into account the fact that an interest in the project had recently been sold and that the sale transaction "implied a value for an interest the same size as this interest, of [US]$178 million".  He went on to say (transcript 328):

   "So our final valuation range of $230 was reached at ‑ my conclusion was reached … in the knowledge that it was at the bottom end, 11 or 12 per cent higher than the transaction value and at the top end I think of the order of 35 per cent higher … In the circumstances again I was anxious to make sure that our final valuation conclusion, given that it would ultimately be a judgemental one, if it was going to err, it would err on the side of being too high a valuation rather than too low a valuation, and so I was happy with the final range of values which exceeded the transaction value."

8. As to ground 3(a), it is not immediately apparent from the GSA Report how the range of US$200 million‑$US230 million was derived from the two charts.  It would consequently have been of considerable assistance to the reader to have, in the report, the benefit of those explanations which were subsequently given by Mr Cooper in the course of his oral evidence.  However, it seems to me to have been plain enough to any reader of the report that the range ultimately arrived at by GSA effectively discounts scenario 1, at least.  That would be apparent from the fact that the lower end of the valuation range ultimately adopted (US$200 million) was higher than any of the figures derived from scenario 1 using the US$20‑US$21 price (a price of US$21 used with a discount rate of 8.5 per cent produced an NPV of US$181 million) and was at the top end of the range of figures derived from that scenario using the futures price (if a discount rate of 8.5 per cent was taken, this produced an NPV of US$195 million).  Moreover, given that the GSA Report, after setting its preferred range, goes on to mention that GSA has considered a number of other factors, including broader risks associated with the Bayu‑Undan project encompassing the absence of any production history (which meant that recoveries might differ from expectations) and the sovereign risk brought about by political uncertainties in the Timor‑Leste region, it seems to me that any reasonable reader would understand that the valuation range was weighted in favour of scenarios 3 and 4. 

1. It consequently seems to me that there is enough information in the report to enable a shareholder, and the Court, to know upon what basis the valuation was arrived at and what factors or criteria were taken into account (and why) and hence to evaluate the validity of the conclusions expressed in it (see Jenkins, above, at 303 and Makita, above, at 729). I am consequently not persuaded that there is any substance to ground 3(a).

The second and third issues

1. That brings me to the second and third issues, which might conveniently be dealt with together.

2. When considering them, it is important to appreciate that Mr Langusch did not, himself, conduct an independent valuation, as he acknowledged in the course of his oral evidence.  While he suggested, in his report, that a more realistic and fair valuation range would have been one of between US$240 million and US$260 million, this range was the product of re‑running the PetroVal model (which had been supplied to him) in respect of scenarios 3 and 4 only, using the oil futures price of US$24 bbl which had been current at 5 August 2003.  I have earlier mentioned that the two principal criticisms of the GSA Report (at least so far as those criticisms are relevant to this appeal) made in the Langusch Report were that in respect of the use of oil price forecasts, rather than futures prices (with which I have dealt) and that which related to the choice of scenarios.  However, a third criticism emerged in the course of Mr Langusch's oral evidence, being, in effect, that there had been no justification for the use, in the GSA Report, of a 9 per cent to 10 per cent discount rate when calculating NPVs for each scenario by reference to the oil futures price, when a discount rate of between 8 per cent and 9 per cent had been used when calculating NPVs by reference to the lower price range of US$20‑US$21.  This third criticism was considerably enlarged in the course of closing submissions by counsel for the appellant when he suggested, in addition, that there had been a double counting of the discount by GSA in the course of its report.  I propose to deal, first, with the criticism as regards the choice of scenarios (and also with what was said to be an error in evaluating the effect, on the calculation of the NPVs for each scenario, of the use of futures prices) then to deal with those relating to the discount rate and, finally, to deal with the primary Judge's approach to the question of value.

Choice of development scenarios and the impact of using futures prices

1. The Langusch report suggests that the selection of the four possible field development scenarios that were used for valuation purposes allowed for the potential of the project to underperform expectations but had not allowed for the possibility that it would outperform expectations.  I have said that Mr Langusch suggested that scenarios 1 and 2 were "lowside" scenarios and that scenarios 3 and 4 were "midpoint" scenarios but that no value contribution had been attributed to any "highside" case.  He contended that, in a fair market transaction between a willing seller and a willing buyer, it should be assumed that both parties would be aware of both the lowside and highside project outcomes.  Consequently, he said, he would prefer to base a valuation upon the results of scenarios 3 and 4 only, given that they represented "a balance between a lowside outcome and a highside outcome, or essentially the midpoint that an informed buyer and seller would reach in a fair transaction".

2. In his report, Mr Langusch compared the NPV outcomes which had been calculated in the GSA Report in respect of scenarios 3 and 4 using the US$20‑US$21 price with those calculated using the futures contract price.  This comparison disclosed that, in the latter case, the increased NPV would be somewhere between US$9 million and US$22 million, depending upon the discount rate and whether the US$20 or US$21 figure was used.  This, he said, demonstrated that the GSA Report was wrong in suggesting that GSA's analysis indicated that oil price assumptions based on the futures contract price increased the NPVs by only approximately US$10 million.

3. Reserves assessments of the Bayu‑Undan field made by the respondent were broadly in accordance with conventional assignments of probability.  As Mr Langusch pointed out, proved ("1P") reserves are conventionally assigned a 90 per cent probability of being produced or exceeded, proved and probable ("2P") reserves are ordinarily assigned a 50 per cent prospect of being produced or exceeded and proved, probable and possible ("3P") reserves are ordinarily assigned a 10 per cent chance of being produced or exceeded.  The PetroVal report provided 1P and 2P estimates and also an estimate (17 per cent higher than the 2P estimate) which Mr Langusch considered could be broadly equivalent to a 3P or "upside" case.  Mr Langusch said that scenario 1 was essentially a "low case" reserves estimate, that scenario 2 was based on the field's proven reserves and the respondent's budget case, that scenario 3 was based on proven and probable reserves estimates and that scenario 4, rather than being a 3P or upside case, was merely based upon an accelerated production version of scenario 3.

4. In the course of his oral evidence, Mr Langusch conceded that he had not run a model in order to see what NPV outcome would be produced by a 3P case.  He said that his belief that a 3P case would produce a higher NPV than scenario 4 was based on his experience in modelling cases of that kind.  He acknowledged that he could not form a detailed opinion of the NPV which would be derived from a 3P case without considering the capital costs of expanding the facilities, expansion being a requirement for that scenario.  He also acknowledged that there were other considerations which would be required to be taken into account if an accurate model was to be run.  He frankly acknowledged, in the course of cross‑examination (transcript 442 and 449), that he did not know whether the running of a 3P model would produce an NPV above that provided by scenario 4.

5. I have already said that the valuation ultimately arrived at by Mr Cooper in the GSA Report essentially discounted scenario 1 and relied, almost exclusively, on scenarios 3 and 4.  However, Mr Cooper said, in his oral evidence, that PetroVal had produced an additional field development model, described as field model 6, which was essentially based on 3P reserves.  He was asked, in the course of cross‑examination, why this model was not referred to in the GSA Report (transcript 378 ‑ 379).  He responded by saying that, based largely on a recommendation which had been made by PetroVal, he had decided that it was inappropriate to include it, essentially for two reasons.  The first was that PetroVal, as a technical specialist, considered that, "given where the project was at that time", the four cases which were considered provided "an appropriate balance between risk and upside".  The second was that, even if this additional scenario had been taken into account, it would have added very little to an assessment of value because, "on a risk‑adjusted basis, the numbers were of the order one to two million US dollars".  He said that it would consequently not have altered the conclusion at which he arrived with respect to the valuation.

6. Mr Cooper also said, in the course of cross‑examination, that it could not simply be assumed that additional facilities could be built in order to harvest additional reserves on a 3P case as, in the case of some of the facilities (he gave, as an example, the LNG project), massive increases in capital would be required which were not justified in "a practical world" (transcript 381).  He also said that, if the additional production was simply deferred until other reserves had been exhausted, those additional reserves would be harvested in some 18 to 25 years and revenues derived "in the distant future" had little present value.  He reiterated also that, to the extent that additional reserves generated a higher internal rate of return on the project, this would attract a higher income tax rate.

7. It seems to me that, when regard is had for the whole of this evidence, it was appropriate for the GSA Report to identify the four scenarios identified by it (and to rely particularly upon scenarios 2 and 3), without taking a 3P scenario into account, given the difficulties with a 3P scenario that were identified by Mr Cooper in his oral evidence.  I should add, in this last respect, that it seems to me to have been plain from his evidence that Mr Langusch was in no real position to controvert what was said by Mr Cooper in that regard. 

8. It consequently seems to me that, so far as grounds 5 and 8 rely upon the proposition that the GSA Report should have had regard to a 3P or "upside" case, those grounds have not been made out.

9. Before leaving this heading, I should deal with the remaining criticism concerning what was said to be the failure to have sufficient regard to futures contract prices in calculating the NPVs for each scenario.  This is the criticism (the subject of ground 6) to the effect that the trial Judge should have found that the impact of considering oil futures contract prices instead of the forecast prices was US$9 million to US$22 million and not the figure of US$10 million mentioned in the GSA Report.

10. In his report, Mr Langusch had calculated that the impact, on the NPV calculated for each of scenarios 2 and 3, of using futures contract prices rather than the forecast prices of US$20-US$21 was between US$9 million and US$22 million.  It is apparent from the Langusch Report that Mr Langusch arrived at this range by means of a simple mathematical calculation, deducting the NPVs calculated by Mr Cooper in the first of his charts (using the US$20‑US$21 figures) from those calculated in the second chart (using the futures contract prices).  However, as Mr Cooper explained in the course of his oral evidence, his figure of US$10 million was derived by deducting only the higher values set out in the first of his charts (those derived from the US$21 figure) from those in the second chart.  While the difference had in fact ranged between US$9 million and US$13 million, he had rounded the figure off to US$10 million.  There is consequently no significant difference between the GSA Report and the Langusch Report in this respect and it was consequently open to the trial Judge to find, as he did (at [123] of his reasons), that it appeared that, "based on futures contract prices, there is an increase in the net present value of … Petroz's interest in the Bayu‑Undan Project of approximately US$10 million". 

11. Ground 6 consequently fails.

The discount rate issues

1. In the course of cross‑examination, Mr Langusch was referred to what had been said in the GSA Report to the effect that, while it was possible for discount rates of 8-9 per cent to be "theoretically calculated using a WACC", there was an argument that potential purchasers would use higher discount rates to assess the price at which they would be willing to purchase Petroz' assets and, if discount rates of 9-10 per cent were used, the NPVs calculated for each scenario (using the futures contract prices) would decrease by around US$20 million.  He accepted that he had made no criticism of this in his report but said (transcript 429) that he "could not see the relevance" of quoting this 9‑10 per cent discount rate when all GSA's NPV calculations had been based on a discount rate of between 8-9 per cent.  As I have foreshadowed, it seems to me to be apparent from what was said in the GSA Report that Mr Cooper was saying no more than that, while he recognised that the use of futures contract prices increased the NPVs by approximately US$10 million, he considered that those NPVs might anyway be too high, given the prospect that higher discount rates would be used by potential purchasers, resulting in a reduction of more than double the increase brought about by the use of the futures contract prices.

2. The discount rate of 8-9 per cent had been derived from the application of the Capital Asset Pricing Model ("CAPM").  That model does not take into account specific risks applicable only to the project under consideration.  In his oral evidence, Mr Cooper described the CAPM as having "all kinds of practical shortcomings" (transcript 322).  He said (transcript 317) that one of its deficiencies was that it did not easily capture all of the risks associated with the project and, in particular, the development and sovereign risks which are discussed in s 6.4.2.  He said (transcript 317) that one solution was to use high discount rates and "otherwise to make some judgemental adjustments at the end of the process to the calculated NPV numbers".  He said that he believed that it was likely that a "real world acquirer" of this kind of asset would use higher rates (transcript 324).  He also said (transcript 328) that the adjustments should be "more pessimistic" at the bottom end of the range of valuations than at the top end and that, in total, the bottom end adjustment would be around US$40 million and that at the top end would be around US$20 million.  If, in fact, a discount of 10 per cent was applied to the values calculated by reference to the futures contract prices for each of scenarios 3 and 4, this would produce, on my calculations, figures of US$203 million and US$219 million respectively.  That is an amount of around US$40 million less than the 8.5 per cent figure of US$242 million calculated by Mr Cooper for scenario 3 and around US$36 million less than the 8.5 per cent figure of US$255 million calculated for scenario 4.  However, in arriving at his ultimate valuation range of US$200 million to US$230 million, Mr Cooper deducted only around US$25 million from the 8.5 per cent scenario 4 figure.

3. It was readily apparent from Mr Langusch's oral evidence that he had made no real investigation, whether in the Langusch Report or otherwise, into the question of what was the appropriate discount rate to use (transcript 430), although he said that he accepted that a discount rate of 8-9 per cent was reasonable.  He also acknowledged that it was appropriate, and a "valid technique", for GSA, having examined the outcome of NPV calculations on a range of scenarios, to then consider (as the GSA Report did) whether the discount produced by the CAPM was either low or high, having regard to market experience as well as the impact of a number of risks which were specific to this project.  While he persistently maintained a preference for the use of the 8-9 per cent figure, when asked if it was correct that, if he had himself brought these techniques to bear, he could not have adopted the valuation range mentioned in his report, he responded by saying that he could not answer that question as he had not brought the techniques to bear (transcript 436 and 437).  He reiterated, in this respect, that he had not been asked to undertake a detailed evaluation.  I should mention, in this last respect, that, in his affidavit dated 11 March 2005, Mr Cooper said that the Langusch Report appeared completely to ignore the issue of project development and sovereign risk.  He said that the project remained "risky" until a stable, long‑term production profile could be established from operations, "while the continuing claims of sovereignty from Timor‑Leste and the relatively new government with relatively immature institutions raised real questions of sovereign risk".

4. It consequently seems to me that, in circumstances in which Mr Langusch, unlike Mr Cooper, had given no real consideration to the issue of projects specific risks, or to the question of what discount rates would be used by potential purchasers of an interest in a project of that kind having regard to market experience, there was little or nothing to contradict Mr Cooper's evidence in that respect and no basis upon which the primary Judge could properly have rejected his evidence in that regard.

5. That leaves, so far as the discount rate issues are concerned, only the "double discounting" criticism which was raised for the first time in the course of oral submissions made by counsel for the appellant at the time of the hearing of the appeal.  He referred, in this respect, to two particular aspects of the GSA Report.  The first is found in s 6.3.2, dealing with the key assumptions which had been made with respect to discount rates.  The report acknowledges that it is "possible to derive discount rates from the strict application of theoretical models that are lower than 8.0-9.0%" but says that "valuation is an estimate of what real world buyers of assets would pay and must therefore reflect criteria that will be applied in practice".  The report goes on to say that GSA has accordingly "judgmentally selected discount rates that real world acquirers of similar assets would adopt".  Had nothing more been said, at that point, there would have been apparent substance to the suggestion that there had been a double discounting when, later in the report, a further allowance was made for the real world purchaser in raising the prospect of a 9‑10 per cent discount.  However, in the very next sentence in s 6.3.2, the report records GSA's view that "it is likely that discount rates of 8.0-9.0% are at the low end of the range of rates that would be used by potential acquirers of Petroz' assets".  It is consequently plain enough that the GSA Report has used the 8‑9 per cent figure, but later adjusted it in the way that I have explained so as to allow for this likelihood.

6. The second aspect of the GSA Report which is relied upon by counsel for the appellant in this respect is also found in s 6.3.2.  There, the report makes the comment that the discount rates are intended to reflect "systematic" risks only (risks that returns from a project will vary as a result of changes in overall market returns) and that specific project related risks "have been incorporated into the scenario analyses and the projected cashflows of each scenario".  Counsel for the appellant submitted that, if the project related risks had been so incorporated, there was no basis for again adjusting the valuation by reference to these risks later in the report.  He also pointed to the fact that, in Appendix 2 to the GSA Report where the selection of a discount rate is discussed, the comment is again made that specific risks related to the project have been incorporated into the scenario analysis and the projected cashflows of each scenario.  That Appendix also records that a risk premium of 6 per cent has been assumed and that a "beta factor", which is a measure of the expected volatility of an investment relative to the market as a whole, has been applied.

7. There are two difficulties with these contentions.  The first is that it is by no means clear that the "specific project related risks" referred to in s 6.3.2 of the GSA Report include, or fully include, the risks referred to in s 6.4 thereof.  Moreover, the clear impression which might be gleaned from Mr Cooper's oral evidence is that the development and sovereign risks to which he referred had not been incorporated, or at least sufficiently incorporated, into each scenario analysis.  Nor is there anything to say that these were included in either the risk premium or the beta factor discussed in Appendix 2.  The second, and more fundamental, difficulty is that it was never suggested to Mr Cooper, at any point in his evidence, that there had been any double discounting of the kind alleged, thereby denying him the opportunity of commenting on, and perhaps disposing of, this proposition.  Nor, for that matter, did Mr Langusch suggest that there had been any double discounting.  Indeed, as I have mentioned, he acknowledged that it was an appropriate and valid technique to take into account, after applying the discounts produced by the CAPM, market experience as to the appropriate discount rate and risks specific to the project.  I would consequently not be prepared to find that the GSA Report was deficient in that respect and that the trial Judge erred, for that reason, in relying upon it.

The primary Judge's approach to the question of value

1. That brings to the question, raised by ground 5, whether the primary Judge erred in holding that it was not for the Court to satisfy itself as to the value of Petroz' interest in the Bayu-Undan project and by failing to consider, and accept, Mr Languish's evidence in that regard.

2. I have earlier mentioned that, when dealing with contention 8(a) (being that the payment of 89 cents per share did not give a fair value because the value of Petroz' interest in the Bayu‑Undan project was more than that ascribed to it in the GSA Report), the primary Judge said that it was not for the Court to determine the value of Petroz' share in the Bayu‑Undan project, that the Court was required to determine only whether 89 cents per share represented a fair value for the securities to be acquired and that Contention 8(a) consequently did not arise for consideration.

3. While it is, no doubt, true that the ultimate question for the Court to decide, under s 664F(3), is whether or not the terms set out in the compulsory acquisition notice give fair value, at the time of the notice, for the securities acquired, that question could not be answered, in this case, without an assessment by the primary Judge of the competing evidence as regards the value of Petroz' principal asset, being its interest in the Bayu‑Undan project.

4. I have stressed that there were two principal differences in approach as between Mr Cooper and Mr Langusch, the first relating to the oil price used in calculating NPVs and the second relating to the choice of scenarios for that purpose. 

5. I have also said, as regards the first of those differences, that the primary Judge was satisfied that the GSA Report was based on a consideration of oil prices which included futures contract prices and that there was not, in the end, a great deal of difference between the two experts as regards the question whether futures prices were a reliable predictor of spot prices. As will be apparent from what I have said as regards these issues, those conclusions were undoubtedly open to the primary Judge and nothing that was said by Mr Langusch should have been sufficient to cast any doubt upon the reliability of the GSA Report and the oral evidence of Mr Cooper in that respect. I should add that the primary Judge was right, in my respectful opinion, to have rejected those parts of the Langusch Report which relied upon hindsight (the report made it plain that the oil spot price had in fact been a good deal higher than had been predicted in the GSA Report). The valuation had to be assessed as at the date at which the compulsory acquisition notice was given. What the report was required by s 667A to do was to express an opinion on the question whether the terms proposed in the notice give a fair value for the securities concerned. As Warren J pointed out in Capricorn Diamonds Investments at [88] ‑ [90], because the inquiry as to fair value is directed to the terms set out in the compulsory acquisition notice both in the case of the expert's report and in the case of the Court's determination, the time of the notice is the time at which the issue of "fair value" is to be tested (see also Dolby Australia at [4] ‑ [5] per Campbell J, and the authorities there cited). In HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640 at [44] the Court (Gleeson CJ, McHugh, Gummow, Kirby and Heydon JJ), speaking of a land valuation, said that it was to be conducted without knowledge of events which had not happened by the date at which the value was to be ascribed, even though they had happened by the date on which the valuation took place. They differentiated the task of a valuer, in that respect, from that of assessing loss, in which case hindsight may be made use of.

6. I have also said, as regards the second of the differences between the two experts, that it seems to me that the reliance, in the GSA Report, primarily upon scenarios 3 and 4 was reasonable and, for the reasons that I have given, that nothing said by Mr Langusch should have led to any different conclusion.  I have said that, so far as the "upside" or 3P case was concerned, Mr Langusch (unlike Mr Cooper) had made no real analysis of any such case and was consequently in no position to criticise the GSA Report by reference to it.

7. As to the discount rate issues, being the only other relevant criticisms which have been made of the GSA Report, there was, for the reasons I have given, no reliable basis upon which the primary Judge might have found that the GSA Report was in error or otherwise unreliable in the respects contended for, even if the issues to which I have referred had been raised before him in the same way as they were before us.

8. In these circumstances, and in circumstances in which Mr Langusch did not himself conduct any valuation of Petroz' interest in the

Bayu‑Undan project, it seems to me that the only evidence upon which reliance could properly be placed as regards the value of that interest was the GSA Report, as supplemented by the oral and affidavit evidence of Mr Cooper.  Consequently, if it be accepted that the primary Judge was in error in his conclusion that it was not for the Court to make any determination concerning that value, there was only one conclusion reasonably open to him on the available evidence, being that the value fell within the range arrived at in the GSA Report.  In that circumstance, and given that the price ultimately offered for the securities reflected the top end of the specified range, it seems to me to have been plain that that price gave what was then a fair value for the securities.  I would, to that extent, uphold ground 2 of the notice of contention.

Ground 7

1. That leaves only ground 7, raising what is said to have been the primary Judge's failure to take into account the effect of delay on the determination of the question whether the price offered represented fair value.  No written or oral submissions were advanced on behalf of the appellant in support of this ground.  It is enough for me to say, in that regard, that it seems to me that the primary Judge made no error in the conclusions at which he arrived in respect of this issue.

Conclusion

1. It follows that I would dismiss the appeal.

2. MCLURE JA:  I agree with Steytler P.

3. MURRAY AJA:  I have had the advantage of reading in draft the judgment of Steytler P.  It deals comprehensively with all the issues arising out of the grounds of appeal and the notice of contention and there is nothing I could usefully add.  I agree that the appeal should be dismissed.