LAKES OIL NL and INNOVATION AND SCIENCE AUSTRALIA (Taxation) - [2023] AATA 811

LAKES OIL NL and INNOVATION AND SCIENCE AUSTRALIA (Taxation) [2023] AATA 811 (14 April 2023)
Division:TAXATION AND COMMERCIAL DIVISION
File Number(s): 2018/2624
Re:LAKES OIL NL
APPLICANT

AndINNOVATION AND SCIENCE AUSTRALIA
RESPONDENT

DECISION
Tribunal:Deputy President Bernard J McCabe and Senior Member Dominique K Grigg
Date:14 APRIL 2023
Place:Sydney

The Tribunal affirms the decision under review.
.................................[SGD].......................................
Deputy President Bernard J McCabe
Senior Member Dominique K Grigg
CATCHWORDS
TAX – R&D Tax Incentive – whether activities undertaken by the applicant are eligible research and development activities under the Industry Research and Development Act 1986 (Cth) and Income Tax Assessment Act 1997 (Cth) – whether activities fall within an exclusion, namely the exclusion for exploring, prospecting or drilling stated in section 355.25(2) – meaning of “hypothesis” - where expert evidence challenged – where lack of internal records - decision under review affirmed
LEGISLATION
Acts Interpretation Act 1901 (Cth)
Administrative Appeals Tribunal Act 1975 (Cth)
Income Tax Assessment Act 1997 (Cth)
Industry Research and Development Act 1986 (Cth)
Petroleum Act 1988 (Vic)
CASES
Coal of Queensland Pty Ltd v Innovation and Science Australia [2021] FCAFC 54
Havilah Resources Ltd and Innovation and Science Australia (Taxation) [2020] AATA 933
Moreton Resources Limited v Innovation and Science Australia [2019] FCAFC 120
Stevens v Kabushiki Kaisha Sony Computer Entertainment and Others (2005) 224 CLR 193
SECONDARY MATERIALS
Explanatory Memorandum, Tax Laws Amendment (Research and Development) Bill 2010 (Cth)
REASONS FOR DECISION
Deputy President Bernard J McCabe and Senior Member Dominque K Grigg
14 April 2023
Contents
Introduction
BACKGROUND
Chronology - Summary
Legislative Background
What is a “core R&D activity” and “supporting R&D activity”?
Section 355.25 - Core R&D activities
Section 355.30 - Supporting R&D activities
What are “experimental activities” (section 355.25)

LAKES OIL’s APPLICATION/REGISTRATION PROCESS
Claimed Activities - Overview
2013-2014
2014-2015

ISA’S REVIEW OF THE CLAIMED ACTIVITIES
Outcome of meetings with ISA

Issues for the Tribunal
CONTENTIONS - SUMMARY
Lakes Oil’s Contentions
Lakes Oil’s Witnesses
Mr O’Brien
Professor Johnson

ISA’s contentions
ISA’s Witness
Professor Bedrikovetsky

Challenge to Professor Bedrikovetsky’s Evidence
THE PROJECT (Summary)
Definitions
Permeability
Contingent Resources

Resource Classification of Wombat 4
Timeline
2014/2015

CONSIDERATION
Is Lakes Oil an “R & D Entity”?
Project 1: LAK2006 Hydraulic Fracturing Technology for Gippsland Tight Gas
Claimed Core Activities
Claimed Supporting Activities
Was Lakes Oil involved in exploration activities?

Did the Claimed Activities Occur?
Are the claimed activities core or supporting R & D activities?
Was there an “Hypothesis”
Are the claimed activities “experimental activities”?
Was the outcome of the claimed activity only able to be determined by a systematic progression of work?
Evidence of observation and evaluation?
Was the claimed activity undertaken for the purpose of generating new knowledge?

Project 2: Lak2016 New Gas Extraction Technologies
Conclusion
Decision
INTRODUCTION

The applicant, Lakes Oil NL (now known as Lakes Blue Energy NL) (“Lakes Oil”), is the oldest oil company in Australia.[1] Lakes Oil contends that since 2006 it has engaged in eligible research and development activities as defined by the Industry Research and Development Act 1986 (Cth) (IR & D Act).[2]
[1] Exhibit 2, Witness statement of Timothy O’Brien, 27 November 2018, 2 [14] (“O’Brien Statement”).
[2] Ibid 3-4, [20].
This matter concerns the eligibility of Lakes Oil to claim a research and development tax offset under the Income Tax Assessment Act 1997 (ITAA 1997) in relation to activities claimed in the 2013/14 and 2014/15 financial years (“Relevant Years”).
The respondent, Innovation and Science Australia (“ISA”), has determined Lakes Oil has not engaged in eligible research and development activities. In the course of these proceedings, ISA argues Lakes Oil’s endeavours did not meet the definition of ‘experimental activities’. ISA also says the activities fell within an excluded category of activities that included exploring, prospecting or drilling.
We are satisfied the activities in question fall within the exclusion, so Lakes Oil cannot succeed. We are also satisfied the activities in question in the relevant years do not answer the definition of ‘experimental activities’ in the legislation. We explain our reasons for those conclusions below.
In the time period under review here, Lakes Oil was primarily involved in hydrocarbon exploration and investment in the Gippsland and Otway Basin areas in Victoria (see Image 1 below[3]).[4] Lakes Oil had been granted petroleum exploration and retention licences for oil and gas in adjacent gas fields known as “Wombat” and “Trifon”,[5] and had constructed a number of gas wells in those fields.
Image 1
[3] Exhibit 1, Tribunal Documents, T11, 158 (“T Docs”).
[4] Ibid 156.
[5] O’Brien Statement (n 1) 3 [16].
Pursuant to the retention licences, Lakes Oil was authorised:[6]
(a) to carry out petroleum exploration in the lease area; and
(b) to do any thing in the lease area that was necessary for, or incidental to, that purpose; and
(c) to retain a right to apply for a production licence in respect of the lease area under Division 2 of Part 5 without complying with any requirement that there might otherwise be under this Act to carry out a work program in respect of the area.
[6] Petroleum Act 1988 (Vic) s 37.
If Lakes Oil wanted to “produce” gas in the Wombat Field, it would have to apply for a different licence.[7]
[7] Transcript of Proceedings, 89 [1]-[3].
The Wombat Field is located in area PRL2 (see Image 1 above). “PRL” stands for “petroleum resource licence”. The reference to “PEP” in Image 1 refers to the “petroleum exploration permit” held by Lakes Oil.
BACKGROUND
The Wombat Field is what is referred to in the industry as a “tight gas” accumulation. It is located within the Strzelecki Formation which is made up of non-marine Lower Cretaceous sedimentary rocks (see Image 3). Lakes Oil has drilled four wells in the Wombat Field. The location of Lakes Oil’s wells in the Wombat Field is identified in Images 2 and 3 below:[8]
Image 2 – Well Location Map
Image 3
[8] T Docs (n 3) T237, 2908
Chronology - Summary
In 2003 to 2004 Lakes Oil embarked on exploration of the Wombat Field searching for the presence of hydrocarbons. A number of vertical wells were drilled for this purpose – referred to as Wombat 1, Wombat 2, and Wombat 3 (refer to Image 3 above).[9] Gas wells were also drilled in the Trifon Field area in 2004.[10]
[9]O’Brien Statement (n 1) 2 [8]-[12], paras 7-8; Transcript of Proceedings, 101 [19]-[20].
[10] O’Brien Statement (n 1) 2 [11].
In 2005 Lakes Oil engaged Halliburton, an international product and service provider to the energy industry, to develop a one-dimensional, mechanical earth model, stress modelling for the purpose of drilling a fourth well (which would be known as “Wombat 4”), using previous well data from Wombat 2).[11]
[11] Exhibit 3, Supplementary Witness Statement of Timothy O’Brien, 8 February 2019, 1 [7] (“O’Brien Supplementary Statement”); Tab 5 of T0-2 to Exhibit 3 (Landmark Halliburton, Gippsland Basin Stimulation Report, Observations and Recommendations, Landmark C&S Ref: CO-UGS-AP-Lakes Oil 11-02-2004, 30 Sept 2005).
In October 2008, Gaffney, Cline and Associates (GCA), a global petroleum consulting group, prepared a contingent resource estimate (i.e., an estimate of the volume of gas in place)[12] for the proposed Wombat 4 well based on the results from drilling Wombat 1, Wombat 2 and Wombat 3. GCA also took into account the fracture stimulation modelling of Wombat 4 prepared by Halliburton (“GCA 2008”).[13]
[12] See definition of “contingent resource” in paragraph 95.
[13] Transcript of Proceedings 103 [3]-[5]; Exhibit 5, Independent Technical Assessment Report on Wombat Field, Victoria, October 2008.
In December 2009 the Wombat 4 well was drilled.
In June 2010 GCA re-assessed the potential of the Wombat Field(“GCA 2010”).[14] GCA’s low estimate of the Wombat Field’s contingent resource was 258 billion cubic feet of gas,[15] worth potentially billions of dollars.[16]
[14] T Docs (n 3) T206, 2627-2673.
[15] Ibid 2660.
[16] O’Brien Statement (n 1) 3 [18].
In 2011 Lakes Oil had identified drillable prospects in PEP 169 and PEP 166.[17] Hydrocarbons, “tight gas”, had been located in an area known as the Strzelecki Formation (see Image 4).
Image 4 – PEP166 and PRL2
[17] T Docs (n 3) T11, 158.
The challenge facing Lakes Oil was how to extract the gas economically to make it a commercially viable enterprise. One of the techniques being considered to extract the gas from this “tight” location was hydraulic fraccing (sometimes referred to as “fracing” or “fracking”). Fraccing is an extraction technique that had garnered some success in the United States.
The CSIRO describes the hydraulic fracturing process as follows:[18]
Hydraulic fracturing typically involves injecting fluid made up of water, sand and chemical additives under high pressure into [a] cased well. The pressure caused by the injection typically creates a fracture in the coal seam where the well is perforated. For a large CSG [coal seam gas] treatment, the fracture might typically extend to a distance of 200 to 300 meters from the well. The fractures grow slowly.
[18] Ibid T78, 1942.
Hydraulic fracturing connects a well to a sufficient surface area of rock to initiate commercial flow.[19] The fracture is propped open by a suitable proppant, often sand.
[19] O’Brien Statement (n 1) 6, [39].
In order to assess how fracture simulations might perform in Wombat 4, Lakes Oil Lakes Oil engaged Schlumberger Data and Consulting Services ("Schlumberger") in 2013 to conduct stress modelling using previous well data (i.e. data from Wombat 2).[20] Lakes Oil says it used the Schlumberger results as the “basis for future experimentation designs (i.e. Wombat 4)).[21]
[20] T Docs (n 3) T237, 2903-2968, O’Brien Supplementary Statement (n 11) 1, [7].
[21] O’Brien Statement (n 1) 18 [91.1]; O’Brien Supplementary Statement (n 11), 1 [7]; T Docs (n 3) T237, 2989-3027; Tab 6 of TO-2 to O’Brien Supplementary Statement (n 11).
Lakes Oil describes its overall exploration/research timeline in the Gippsland Basin between 1999 and 2015 is set out in Image 5 below.[22]
Image 5 – Exploration/Research Timeline
[22] T Docs (n 3) T139, 2313; See also, O’Brien Statement (n 1) 9-11, [52].
Lakes Oil says the purpose of the activities subject to review in these proceedings (in the 2013/14 and 2014/15 financial years) was not to identify additional oil and gas resources or to determine the location of already identified resources. Rather:[23]
The purpose of Lakes Oil's research program in the 2000s was to develop new technologies and techniques adapted to the unique geological features of the Gippsland region for extracting and achieving economic flows of the identified land accessed gas and oil resources
[23] O’Brien Statement (n 1) 3, [19].
The hearing was conducted over six days by video conference in late 2020. Due to considerable challenges with the technology, the technical terms used and audio quality, the parties were unable to resolve disputes concerning the transcript until March 2022.
The applicant was represented by Mr C Peadon of Counsel and the respondent was represented by Ms T Wong SC and Ms C Trahanas, both of Counsel.
We are grateful to all parties for their patience and assistance in dealing with the technical issues and finalising the transcript which was in excess of 400 pages. The combined Tribunal book ran to in excess of 10,000 pages.
Lakes Oil relied on the following witnesses:
(a)Mr Timothy O’Brien, Operations Manager of Lakes Oil; and
(b)Professor Raymond J Johnson Jnr (expert witness).
ISA relied on the evidence of Professor Pavel Bedrikovetsky (expert witness).
All the witnesses provided witness statements. They appeared at the hearing via video-link and were cross-examined.
LEGISLATIVE BACKGROUND
IR & D Act
The object of the IR & D Act, as stated in section 3 “is to position Australia as a leading innovation nation by:
(a) facilitating the provision of independent strategic advice about investment in industry, innovation, science and research; and
(b) supporting and encouraging collaboration in the development and delivery of programs relating to industry, innovation, science and research; and
(c) authorising spending on programs relating to industry, innovation, science and research; and
(d) promoting the development, and improving the efficiency and international competitiveness, of Australian industry by encouraging R&D activities, innovation and science activities and venture capital activities
Pursuant to the IR & D Act, entities can register research and development activities with ISA. If those research and development activities are eligible, a tax offset may be claimed.
ISA:
(a)administers the registration of entities and their research and development activities; and
(b)assesses registered entities’ eligibility to claim an R & D Tax Offset under Division 355 of the ITAA 1997 for the activities.
Pursuant to section 27A of the IR & D Act, an entity may apply to be registered for a particular financial year for “core R&D activities” and “supporting R&D activities”.
Section 4 of the IR & D Act provides the terms “core R&D activities” and “supporting R&D activities” have the same meaning as in the ITAA 1997 (see paragraph 42 below).
ISA may examine an R&D entity’s registration on its own initiative (s 27F(2)) and may then make one or more of the following findings under section 27J(1):
(a) that all or part of a registered activity was a core R&D activity conducted during the registration year;
(b) that all or part of a registered activity was not an activity of a kind covered by paragraph(a);
(c) that all or part of a registered activity was a supporting R&D activity conducted during the registration year and in relation to:
(i) one or more specified registered core R&D activities; or
(ii) one or more specified core R&D activities for which the entity has been registered in an earlier income year; or
(iii) one or more specified core R&D activities yet to be conducted for which the entity could be registered in the registration year if those activities were conducted during the registration year; or
(iv) several specified core R&D activities, each covered by subparagraph(i), (ii) or (iii);
(d) that all or part of a registered activity was not an activity of a kind covered by paragraph(c).
ISA’s section 27J findings are then communicated to the R&D entity (s 27K). Section 27J findings are binding on the Commissioner of Taxation (see section 355-705, ITAA 1997) for the purposes of the ITAA 1997.
Findings made under section 27J(1) are “reviewable decisions” (s 30A).
An entity may request an internal review of a reviewable decision (s 30C(1)), following which an entity may apply for a review to the Administrative Appeals Tribunal (s 30E).
ITAA 1997
Provisions concerning research and development are set out in Division 355 of the ITAA 1997.
Section 355-1 of the ITAA 1997 provides an “R&D entity” may be entitled to a tax offset for “R&D activities”.
Section 355-5 sets out the object of the Division as follows:
(1) The object of this Division is to encourage industry to conduct research and development activities that might otherwise not be conducted because of an uncertain return from the activities, in cases where the knowledge gained is likely to benefit the wider Australian economy.
(2) This object is to be achieved by providing a tax incentive for industry to conduct, in a scientific way, experimental activities for the purpose of generating new knowledge or information in either a general or applied form (including new knowledge in the form of new or improved materials, products, devices, processes or services).
(emphasis added)
An “R & D entity” includes a body corporate incorporated under Australian law (s 355-35).
“R & D Activities” are “core R&D activities or “supporting R&D activities” (s 355-20).
What is a “core R&D activity” and “supporting R&D activity”?
“Core R & D activities” and “supporting R & D activities” are defined in the ITAA 1997 as follows:
Section 355.25 - Core R&D activities
(1) Core R&D activities are experimental activities:
(a) whose outcome cannot be known or determined in advance on the basis of current knowledge, information or experience, but can only be determined by applying a systematic progression of work that:
(i) is based on principles of established science; and
(ii) proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions; and
(b) that are conducted for the purpose of generating new knowledge (including new knowledge in the form of new or improved materials, products, devices, processes or services).
(emphasis added)
Section 355.30 - Supporting R&D activities
(1) Supporting R&D activities are activities directly related to * core R&D activities.
(2) However, if an activity:
(a) is an activity referred to in subsection 355-25(2); or
(b) produces goods or services; or
(c) is directly related to producing goods or services;
the activity is a supporting R&D activity only if it is undertaken for the dominant purpose of supporting * core R&D activities.
What are “experimental activities” (section 355.25)
The Full Court in Moreton Resources Limited v Innovation and Science Australia [2019] FCAFC 120 (Moreton Resources) determined (at [148]):
·the words “experimental activities” in the opening line of section 355.25(1) of the ITAA 1997 are merely activities that meet the descriptions in sub-paragraphs (a) and (b);
·Activities must meet the descriptions in both paragraphs to satisfy the defined expression “core R&D activities”.
·Given the detail and content of the description in paragraphs (a) and (b), it is difficult to envisage activities that would meet the description in paragraphs (a) and (b) but would not be considered “experimental activities”.
·“the word “experimental” in the opening line of the subsection is … at least, descriptive of the types of activities that are described in paragraphs (a) and (b).
The key elements which must be satisfied under section 355.25 are:
(a)The activities in question must be experimental activities
(b)The outcome of the activity in question cannot be known or determined in advance;
(c)The outcome of the activity in question can only be determined by a systematic progression of work;
(d)That progression of work must be
(i)based on principles of established science; and
(ii)proceed from hypothesis to experiment, observation, and evaluation, and leads to logical conclusions; and
(e)the work must be conducted for the purpose of generating new knowledge.
LAKES OIL’S APPLICATION/REGISTRATION PROCESS
The project under scrutiny here is entitled “Project 1 – LAK2006 ‘Hydraulic Fracturing Technology for Gippsland Tight Gas’” (“the Project”).
Lakes Oil has purportedly been engaged in research and development in relation to the Project since 2006.[24] In this matter only the Relevant Years (2013-14/2014-15 financial years) are under consideration.
[24] Ibid; Tab 1 of Exhibit TO-1 to O’Brien Statement (n 1).
The Full Federal Court recently made it clear in Coal of Queensland Pty Ltd v Innovation and Science Australia [2021] FCAFC 54 (at [131]) that whether the overall purpose of the activities should, or more importantly can, be taken into account in assessing whether registered activities in the relevant financial years are R&D activities, regard is not to be had to the whole project for the purpose of section 27J of the IR & D Act, and activities which occur outside the years under consideration are only relevant if they shed light on the matters under consideration.

For the Relevant Years, Lakes Oil registered its activities with ISA, pursuant to sections 27A and 27D of the IR & D Act as “research and development activities” (“R&D Applications”).[25] The claimed R&D Activities were made up of activities defined as “core activities” and “supporting activities” (refer to definitions set out in paragraph 42 above).
[25] T docs (n 3) T57, 1307-1318, T115, 2150-2161.
Lakes Oil says it research program was intended to “develop new technologies and techniques adapted to the unique geological features of the Gippsland region for extracting and achieving economic flows of the identified land accessed gas and oil resources”.[26]
[26] Applicant Statement of Facts, Issues, and Contentions, dated 14 August 2018, 2 [7].
Mr O’Brien says that as at the Relevant Years, the oil and gas resource potential in the Wombat Field had already been identified and assessed by GCA in June 2010.[27]
[27] O’Brien Statement (n 1) 3, [19]; T Docs (n 3) T208, 2627-2673.
ISA informed Lakes Oil registration of the claimed activities does not equate to a determination those activities are eligible or comply with the R & D Tax Incentive requirements.[28]
[28] T Docs (n 3) T58, 1319.
Claimed Activities - Overview
A broad description of Lakes Oil activities is set out in Image 5 above. A summary of the activities is set out in the tables below:[29]
[29] Ibid T188, 2562.
2013-2014
The 2013/2014 research was described as follows: [30]
[30] Ibid T139, 2320.
The activities claimed in this registration year are in respect of PRL2 (see Image 1 above) which includes the Wombat Field[31] and included geological, geophysical and geochemical surveys.[32]
[31] Transcript of Proceedings, 86, [41]-[45].
[32] Ibid 89, [25]-[28].
In its Application for the 2013-14 financial year Lakes Oil described the objective of the Project as follows:[33]
During the financial year 2013/14 Lakes continues its research program into establishing the appropriate engineering and chemical formulae that will result in reliable and reproducible fracturing technologies applicable to the unique geological formation under the Gippsland and Otway regions of Victoria. It has extended these experiments to the three fields allowing comparisons of results across geological formations. It has also introduced experimental preparation for multidirectional drilling techniques as another experimental variation. There are vast proven reserves of gas and oil that extend from the Bass Strait oil fields and under the Victorian mainland. These resources extend through very different geological conditions and have proven extremely difficult to release from the rock strata that binds them. Proven technologies introduced from overseas have completely failed in past trials and this has led to the Lakes program of research over the past six years. The research stage conducted in 2014 was extended to take formulations created so far in the program and attempt to reproduce results in three specific regions intended for intensive productions these test programs allow successful refinement of the engineering and chemistry developed to dat. With a stop to our current productions program our full team of engineers and geologists have been applied to the research program allowing more intensive an investigative effort on our current database.
[33] T Docs (n 3) T57,1312.
The claimed “core activities” and “supporting activities” for the 2013-14 financial year were described by Lakes Oil as follows:[34]
[34] Ibid T57, 1313-1314
Core Activity 1.1 – Fracturing beyond one hundred metres
Fracturing experimentation involves engineering and chemical processes and the creation of new technologies that will allow the opening and maintenance of access paths in deep rock structures so as to release the hydrocarbons trapped there. Lakes Oil has progressed its technological success in achieving sustainable resource producing fractures in the difficult Gippsland strata to around 50 metres penetration and is now aiming to push this toward 100 metres. State government intervention has caused the process of fracing to be delayed until restrictions are lifted so the focus of the program has shifted to look at opportunities to use various directional drilling methods to be introduced. This would have happened later in the program but the intervention has made it opportune to reschedule the experimental program. Economic viability demands a certain exposure to potential oil and gas and the rock hardness limits this access. Experimentation involves trial with combinations of pressure, solvent mix, clogging control methodologies and proppant experimentation. The Proppant (sic) is the physical blocking agent that is pumped into the new crevasse that stops it from closing but still allows gas and oil to pass through. Directional drilling methods are aimed at adding to the exposure effectiveness. With restrictions placed upon our production program, we have now moved most staff onto the analysis and new concept construction for our research program. This has allowed considerable new effort in the interrogation of our extensive accumulated database of experimental results.
Supporting Activity 1.1.1 – Fraccing support activities
Core fracing and analysis activities are activity intensive and the support activities consist of transportation, monitoring, data gathering for the non core purposes such as environmental protections without which the research could not be completed.
Core Activity 1.2 – Prototype Test Preparation and Trials
A series of test site wells will be drilled into the economic yield territories available to Lakes Oil to refine and prove the specific engineering and chemical formulations required within specific geological formations. The research has now been extended to three primary test zones where the maximum expected success may be achievable using research results gained from the program so far. Current year research activity has continued to build the experimental wells and these are being put through the full range of fracing and directional drilling experimentation appropriate to finding the optimal formulae requires for a roll out into the production stage. We now aim to test the possibility of the formation to produce naturally from the weathered zone which has been the most productive zone in the vertical wells drilled through it to date. The theory was that if enough surface area of the weathered zone was connected to the well bore it should be able to flow at significantly greater rates than were achieved in the vertical wells.
Supporting Activity 1.2.1 – Prototype support
These activities are essential to ensure creation and maintenance of the prototype development stage but do not form part of the final prototype system.
2014-2015
The 2014/2015 research was described as follows:[35]
[35] Ibid T139, 2324.
The claimed activities were in relation to Wombat Field or PEP 167, 175.[36]
[36] Transcript of Proceedings, 91, [33]-[37].
In its Application for the 2014-15 financial year Lakes Oil described the objective of the Project was as follows:[37]
During the financial year 2013/13 Lakes ongoing research program that had focused upon the use of fracturing technology development was suspended in view of the indecisiveness of the Victorian government with respect to interim prohibitions on the technology. Under the original research program Lakes had commences to use it analytical efforts in establishing new engineering and chemical formulae that would result in reliable and reproducible technologies applicable to the unique geological formations under the Gippsland and Otway regions of Victoria. Lakes have decided to suspend the fracturing research and to refocus its growing intellectual property assets into refining data collections and analysis technologies, and using them to direct the adoption and development of alternative extractions technologies that are not politically sensitive and that will allow Lakes to proceed with its growth strategies in developing vast gas resources under its permit provinces. The economic opportunity for Lakes are increasing with the diminishing yield from offshore producers who have controlled the Victorian market for some decades but whose production cost are getting to the point where their economic position is becoming marginal. Lakes must now redirect its developed research findings to introduce new technological options that will provide suitable yields.
[37] T Docs (n 3) T115, 2156.
Lakes Oil stated its hypothesis was:[38]
We hypothesis that we can develop a highly reliable model based upon multiple variable inputs that will allow us to closely define “sweet spots” in the sub strata of our gas bearing permits where new directional drilling and innovative well development and management techniques can yield economic flows of unconventional gas that had originally been intended for capture through the use of earlier technologies.
[38] Ibid 2157.
The claimed “core activities” and “supporting activities” for the 2014-15 financial year were described by Lakes Oil as follows:[39]
Core Activity 1.1 – Multifactor Analysis
We hypothesise that we can develop a highly reliable model based upon multiple variable inputs that will allow us to closely define “sweet spots” in the sub strata of our gas bearing permits where new directional drilling and innovative well development and management techniques can yield economic flows of unconventional gas that had originally been intended for capture through the use of earlier technologies. Our research for FY2015 has continued progress into new analysis techniques and Lakes has performed a detailed seismic attribute & neural network chimney study, which is used to identify seismic attributes and direct hydrocarbon indicators (DIH’s) that are linked to conventional hydrocarbon accumulations, across the new permits using very recently developed aerial analysis techniques that have become feasible with the advent of drones. This study cross tabulated with existing seismic and other data across the permits and focused on three main attributes (RMS Energy, Frequency, Washout Ratio and Similarity) which are other known hydrocarbon indicators and these highlighted the areas which when overlaid with the highest potential areas suitable for our proposed new drilling technologies that will commence experimental phase in the coming year. Because of the uncertainties related to the identification of these tight, channelled reservoirs, development of the field poses unique challenges. Meandering reservoirs overlap to different extents and are interconnected to varying degrees. Our expertise in analytics will prove critical to being able to devise drilling technologies that will be effective technically but that is also sufficiently well directed to be economically viable and achievable in a time constrained manner.
Core Supporting Activity 1.1.1 Analysis support activities
We have conducted extensive support research in the effort to find existing solutions or lead research opportunities in allowing us to continue with our business development despite those restrictions placed upon us in the prior year to this research phase.
[39] Ibid T115, 2157.
ISA’S REVIEW OF THE CLAIMED ACTIVITIES
In 2016 ISA informed Lakes Oil it was conducting a review of the Claimed Activities for the Relevant Years to ensure those activities complied with the IR & D Act.[40] ISA requested particulars of the experiments undertaken and the hypothesis being tested.[41]
Core Activity 1.1 – Fracturing beyond one hundred metres
[40] Ibid T91, 2011 - 2015
[41] Ibid T91, 2012; T131, 2240.
In relation to Core Activity 1.1, Lakes Oil advised ISA, among other things:[42]
[42] Ibid T92, 2018 – 2023.
(a)They hypothesised that:
…there are measurable attributes within the prospective production fields that are the focus of our experimental program, that are predictive of our chances of success in applying our fracing technology as created to date.
…there are existing measurement technologies that can be adapted to our cause that will allow us to rapidly and economically build a knowledge base of these regional attributes.
…if we collect enough of the appropriate new data that we will be able to build a multi factor correlation model that we can apply to finding best yield development strategies meaning that we can achieve our target 100 metre fractures with a much greater and more predictable frequency than without research.
(emphasis added)
(b)the core activity undertaken was electro-seismic processing;
(c)the supporting activities were:
(i)Electro-seismic processing; and
(ii)Magnetotelluric survey.
Core Activity 1.2 – Prototype Test Preparation and Trials
In relation to Core Activity 1.2, Lakes Oil advised ISA, among other things:[43]
[43] Ibid T92, 2024 - 2025
(a)Re the experiment:
We have started the process of developing a prototype well experimenting with the new technologies. Along with a ban on fracing, the Victorian government has put a hold on all onshore drilling so the implementation of well construction has not been started, but a great deal of preparatory research is under way.
The Wombat-5 directional well has been designed to target the most productive part of the Strzelecki Formation by drilling directionally through the “weathered zone” that was identified in our fracing program and where the best natural flows have been achieved to date. The completion of the hole will utilise a never before tried (to this extent in Australia) open-hole completion technique which removes the need for fracture stimulation and minimises formation damage due to the completion not being required to be cemented in place.
Otway-1 vertical well has been designed to attempt to allow the gas to flow at commercial rates from the previously never produced Eumeralla Formation. The Eumeralla Formation (like the Strzelecki Formation in Gippsland) has always been regarded as economic basement but Lakes is attempting to disprove this theory.
Our research findings suggest that theWombat-5 directional well will flow up to 15 million standard cubic feet per day without the need for fraccing. We are continuing with research into optimising the completion design to ensure that formation damage to the reservoir is minimised to enable the highest flow rates and to guarantee environmental protection.
(b)The hypothesis was:
…if enough surface area of the weathered zone was connected to the well bore it should be able to flow at significantly greater rates than were achieved in the vertical wells. The difficulty with achieving this goal was avoiding reducing the ability of the formation to flow due to damage caused by the cementing process and connecting enough of the formation to the wellbore as it would not be possible to economically cement the casing in place and perforate enough section to allow all of the formation to flow unimpeded. We have hypothesised that we could run a swellable packer completion which could isolate 15 x 100m sections without the need for cementing and perforating and allow all of the sections to be opened up at once to contribute to the overall flow.
(c)the supporting activity undertaken was hyper-spectral modelling (GEOFLITE system):[44]
The GEOFLITE low altitude, multispectral, fracture detection method is used to generate high resolution data, to map both large and small scale, microfracture to mega fractures and large scale joint systems, and to plot high fracture density targets on the priority areas. This data is then used to define geochemical sampling locations to test for hydrocarbon related leakage into the soil, from these fracture systems. High rates of hydrocarbon leakage from fractures can indicate the most potentially productive oil and gas accumulations at depth, and help to delineate priority areas for future seismic studies and drilling.
[44] Ibid T92, 2026.
Outcome of meetings with ISA
Representatives of ISA met with Lakes Oil and considered the further information provided. As a result of these meetings Lakes Oil informed ISA it had engaged in the following activities and confirmed the R & D Applications were to be assessed against these activities.
ISA reported the following summaries provided by Lakes Oil of the activities undertaken:[45]
[45] Ibid T151, 2376 – 2386.
(a)During 2013-14 Lakes Oil had:
-    correlated previously acquired data with data from an electro-seismic study;
-    used computer modelling which incorporated fracture analysis, fluid sensitivity studies, mechanical earth modelling, regional stress studies and pumping studies;
-    work undertaken by Predrill Stresses International to review ‘the impact of stress, faults, fractures and bedding on the planned fraccing” (“Structural Review of Data Pre-Frac, Wombat-4 PRL2 Gippsland Basin”, August 2013)
-    performed electro-seismic processing and magnetotelluric survey as its supporting activities. The reprocessing of seismic data by Mr Hadi Nourollah occurred in February 2014.[46] Mr O’Brien explained Mr Nourollah “thought he had a processing technique that could process out the effect of the coals, and give us a better image of down below [that is the layers of different rock, and whether there was any natural fracturing], and so we thought we would give it a trial, but it didn’t work”.[47] No report from Mr Nourollah was ever prepared and no significant amount was ever paid to him by Lakes Oil[48];
-    reviewed new technologies and their potential applicability, including research into hyper-spectral modelling (the GEOFLITE method)
(b)During 2014-15 Lakes Oil had:
-    SRK Consulting perform a “seismic attribute and neural network chimney study” to “identify seismic attributes and direct hydrocarbon indicators… that are linked to conventional hydrocarbon accumulations, across the new permits using very recently developed aerial analysis techniques that have become feasible with the advent of drones. (in location of PEP169)
-    Focussed on how to extract the gas without using the fraccing technique by:
·the development of a model to identify sweet spots within reservoirs to allow for the experimentation of well path design through seismic attribute and neural network studies of the existing seismic datasets
·The design and drilling of a well through the weathered layer in the Wombat Field with a completion design that allows the well to be flowed naturally but also has the ability to be stimulated if necessary.
·The design and drilling of a well to target the gas discovered in the Port Campbell
[46] Transcript of Proceedings, 162, [42]-[43].
[47] Ibid 163, [4]-[7], 167, [2]-[4].
[48] Ibid 195, [38]-[42].
Following its review, ISA determined the Claimed R&D Activities for the Relevant Years were neither “core activities” nor “supporting activities”.[49] This meant ISA determined the Claimed Activities were ineligible for registration as R&D Activities.[50] (“s 27J Decision”).
[49] T Docs (n 3) T188, 2559-2570.
[50] Ibid T222, 2745 - 2783
A Certificate of Finding was provided to Lakes Oil on 28 February 2017.[51]
[51] Ibid T223, 2786 - 2794
Lakes Oil requested an internal review of the s 27J Decision on 22 March 2017.[52]
[52] S 27J decisions can be reviewed internally pursuant to section 30D, Act.
On 18 April 2018 ISA confirmed the s 27J Decision of the IR & D Act that none of the activities claimed by Lakes Oil in the Relevant Years satisfied the definition of “R&D activities (“Internal Review Decision”).[53]
[53] T Docs (n 3) T253, 3515-3527.
On 11 May 2018 Lakes Oil applied to this Tribunal for a review of the Internal Review Decision.[54]
[54] Ibid T1, 1-23.
The Tribunal has jurisdiction to review the Decision pursuant to section 25 of the Administrative Appeals Tribunal Act 1975 (Cth) (“AAT Act”) and section 30E of the IR & D Act.
ISSUES FOR THE TRIBUNAL
The issue before us is whether the Claimed R & D Activities meet the conditions for eligible core R & D Activity or eligible Supporting R & D Activities pursuant to Division 355 of the ITAA 1997.

This will involve a consideration of whether:
(a)any of the Claimed Activities:
(i)are an activity listed in s 355-25(2) of the ITAA Act;
(ii)are an experimental activity:
1. whose outcome could not be known or determined in advance on the basis of current knowledge, information or experience but could only be determined by applying a systematic progression of work based on principles of established science that proceeded from hypothesis to experiment, observation and evaluation, and led to logical conclusions as required by s 355-25(1)(a) of the ITA Act;
2. conducted for the purpose of generating new knowledge (including new knowledge in the form of new or improved materials, products, devices, processes or services) as required by s 355-25(1)(b) of the ITA Act; and
(b)any of the Claimed Supporting Activities are supporting R&D activities which were:
(i)directly related to an eligible core R&D activity; and
(ii)to the extent that the activity produced, or was directly related to producing, goods or services, or is an activity listed in s 355-25(2), undertaken for the dominant purpose of supporting core R&D activities
CONTENTIONS - SUMMARY
Lakes Oil’s Contentions
Lakes Oil contends the Claimed Activities are eligible core/supporting R & D activities.[55]
[55] Applicant’s Statement of Facts, Issues, and Contentions, 14 August 2018, 5, [31].
Lakes Oil’s Witnesses
Lakes Oil relied on the following evidence:
(a)Witness Statements of Timothy O’Brien dated 27 November 2018, 8 February 2019 and 30 October 2019 (accompanied by exhibit T0-1 – T0-4); and
(b)Expert reports of Professor Raymond Johnson dated 19 December 2018 and 30 October 2019.
Mr O’Brien[56]
[56] O’Brien Statement (n 1).
Mr O’Brien has worked in various roles at Lakes Oil during the entire period. He has a Master of Science majoring in Geology and Geophysics. Mr O’Brien became Operations Manager in 2004. He is the sole full-time employee of Lakes Oil.
Mr O’Brien states it was Lakes Oil’s belief the key to achieving economic flows of gas lay in the fraccing technique (a technique which had not been previously used in the Gippsland Basin).[57]
Professor Johnson[58]
[57] Ibid 5 [28], 6 [34].
[58] Exhibit 7, Expert Report of Professor Raymond L. Johnson Jr., 19 December 2018 (Johnson Report).
Professor Johnson has the following qualifications:
(a)PhD, Mining Engineering;
(b)Graduate Diploma, Information Technology, Queensland University of Technology, Brisbane, Australia (2007);
(c)M.Sc., Petroleum Engineering; and
(d)B.A., Chemistry.
Professor Johnson is currently the Professor of Well Engineering and Production Technology at the School of Chemical Engineering, University of Queensland.
ISA’s contentions
ISA contends:[59]
(a)the activities undertaken were not experimental activities;
(b)almost all of the activities fall within an exclusion, namely the exclusion for exploring, prospecting or drilling stated in section 355.25(2);
(c)there is insufficient evidence some of the claimed activities and the expenditure on those activities took place either within a registration year or at all.
ISA’s Witness
[59] Transcript of Proceedings, 59 [26]-[33].
Professor Bedrikovetsky
ISA relied on expert reports of Professor Bedrikovetsky dated 22 August 2019 and 6 October 2020.
Professor Bedrikovetsky has the following qualifications:
(d)Doctor of Sciences in Reservoir Engineering;
(e)PhD in Fluid Mechanics; and
(f)Master of Science in Applied Mathematics.
Professor Bedrikovetsky is currently the Chair of Petroleum Engineering, Australian School of Petroleum, University of Adelaide.
Challenge to Professor Bedrikovetsky’s Evidence
Lakes Oil objected to Professor Bedrikovetsky’s reports being admitted into evidence.
We do not propose to go through all the complaints made about Professor Bedrikovetsky’s reports. We are not bound by the rules of evidence which govern a proceeding in a Court and we may inform ourselves on any matter in such manner as we think appropriate: section 33(1)(c), AAT Act.
Evidence needs to be considered and discarded or followed based on considerations of its probative value and whether it has been adduced in a way that is procedurally fair. Many objections to evidence go to questions of weight, not admissibility. In relation to expert witnesses, only opinions based on their expertise are relevant. In a matter such as this where the issues are highly technical, experts in the field can assist the Tribunal to understand the mechanics of the industry, and relevant terms and processes. This helps the Tribunal understand the applicant’s activities. What experts are not permitted to do is stray outside their area of expertise. Questions of fact and matters of statutory construction are matters for the Tribunal.
The evidence of both Professor Johnson and Professor Bedrikovetsky will be considered considering the above general principles, and in conjunction with submissions made by the parties.
Lakes Oil did not put ISA on notice of its objection to Professor Bedrikovetsky’s until the day before his evidence was called. This is despite having had his primary reports for 12 months. To deny ISA the opportunity to present expert evidence would be contrary to procedural fairness principles and would have resulted in the hearing being adjourned while a further or new expert report was obtained. Such a course in this matter would have been contrary to the Tribunal’s statutory objective to provide an informal and fair mechanism of review (section 2A, AAT Act). Any concerns or objections should have been raised well in advance of the hearing. We can consider Professor Bedrikovetsky’s opinions keeping Lakes Oil’s criticisms in mind.
THE PROJECT (SUMMARY)
Definitions
The following are uncontroversial definitions of some technical terms used to aid the reader’s understanding.
Permeability
Schlumberger Oilfield Glossary defines permeability as:[60]
The ability, or measurement of a rock's ability, to transmit fluids, typically measured in darcies or millidarcies.
[60] T Docs (n 3) T176, 2505-2506.
Contingent Resources
The Petroleum Resources Management System (PRMS) provides definitions of key terms and a related classification system used internationally within the
petroleum industry.[61] The PRMS classifies recoverable resources into groups - Production, Reserves, Contingent Resources, and Prospective Resources (see Image 6).
Image 6
[61] Exhibit 10, Applicant’s Tender Bundle, A48, 1180-1228 (Applicant tender bundle).
The reference to “PIIP” refers to petroleum initially in place which is the total quantity of petroleum that is estimated to exist originally in naturally occurring reservoirs.[62] “EUR” refers to estimated ultimate recovery.
[62] Transcript of Proceedings, 153 [38]-[40].
“GIIP” stands for gas initially in place and is defined in the Schlumberger Oilfield Glossary as “the volume of gas in a reservoir before production”. A formula is used to calculate GIIP based on petrophysical characteristics of the reservoir (as was determined by GCA for Lakes Oil), gross rock volumes (GRV), porosity, and gas and water saturation.[63]
[63] Ibid 155-157, 243
“Contingent resources” are defined in the PRMS as:
quantities of petroleum estimated, as of a given
date, to be potentially recoverable from known accumulations, but the applied project(s) are not yet considered mature enough for commercial development due to one or more contingencies. Contingent Resources may include, for example, projects for which there are currently no viable markets, or where commercial recovery is dependent on technology under development, or where evaluation of the accumulation is insufficient to clearly assess commerciality. Contingent Resources are further categorized in accordance with the level of certainty associated with the estimates and may be sub-classified based on project maturity and/or characterized by their economic status.
(emphasis added)
The PRMS also provides “Estimated recoverable quantities within a discovered known accumulation shall be classified as contingent resources”.
PRMS advises where the risks and uncertainties are such that a project may not proceed, a separate project classified as contingent resources should be created indicating the chance of commerciality.[64]
[64] Applicant Tender Bundle (n 61), A48 1190.
Resource Classification of Wombat 4
Lakes Oil argues the gas resources that were the subject of Wombat 4 were a “contingent resource” where “commercial recovery [was] dependent on technology under development”, as per the definition in the PRMS. [65] That was because Wombat 4:
(g)had accumulations of hydrocarbons that were not recoverable as it did not yet have the “technology to produce commercial economic flows”.[66]
(h)was at the stage of determining the chance of commerciality (see Image 6 above). The reference to “P90” means there is a 90% probability that certain amounts will be recovered.
(i)An assessment of the resources within Wombat 4 had already been obtained from GCA.
[65] Transcript of Proceedings 17 [16]-[19].
[66] Ibid 18, [19]-[20].
Lakes Oil submitted its activities were “innovative” and it was “building on a known technique, building on scientific principles, …for the purpose of generating new information in the same way that the Court found in Moreton Resources”.[67]
[67] Ibid 27, ]32]-[35].
Timeline
In 2008 GCA prepared a report containing contingent resource estimates for the Wombat Field entitled “Independent Technical Assessment of the Wombat Field” (“GCA 2008”).[68]
[68] Exhibit 5, Independent Technical Assessment of the Wombat Field, October 2008.
The work done by Halliburton for Lakes Oil in 2009 identified 27 prospective gas zones within the Strzelecki section for possible hydraulic fracture tests. 8 intervals were identified as the best candidates to test. Lakes Oil intended to re-enter the Wombat 4 well (an appraisal well which was originally drilled in 2009) in 2010:[69]
The Wombat 4 well was drilled in the period to a total depth of 2,500 metres. This well was a tight gas discovery well. This well is also significant because it is the first time liquid
hydrocarbons have been recovered from the Latrobe Group in the onshore Gippsland
Basin. This well was drilled following 3D seismic which proved highly predictive. Four drill stem tests (DSTs) were conducted in the Strzelecki Group (primary target) and 3 DSTs in the overlying Latrobe Group (secondary target) and all zones flowed gas at indeterminate rates. Importantly, 27 prospective gas zones have been interpreted in the Strzelecki section with an estimated total potential production of 8.8 million cubic feet per day after fracturing. It is intended to re-enter this well later in 2010 to fracture stimulate …the best tight gas zones.
(emphasis added)
[69] T Docs (n 3) T6, 61.
The gas discovered in the Wombat Field is what is known as an unconventional gas reserve. Unconventional gas is “generally produced from complex geological systems that prevent or significantly limit the migration of gas and require innovative technological solutions for extraction”.[70]
[70] Ibid T80, 1945.
In 2010 GCA was engaged by Lakes Oil to update the contingent resource estimates for the Wombat Field based on drilling results from Wombat 4. GCA prepared a further report, “Technical GIIP and EUR Estimate Update Post Wombat #4: Wombat Field” (GCA 2010)[71] which contained updated contingent resource estimates for the Wombat Field based on drilling results from Wombat 4. GCA described Wombat 4 as follows:[72]
The Wombat-4 area is more complicated geologically than observed previously in the other Wombat wells, with several unconformities being identified and hundreds of metres of fluvial reworked volcanic sediments and coal intervals encountered above the Strzelecki zones.
[71] Ibid T206, 2627-2673.
[72] Ibid T206, 2633.
GCA noted a petrophysical study indicated the presence of hydrocarbons and that drill stem tests (“DSTs”) had proven gas down to the 1,800 meters. In preparing its report GCA considered fracture simulation modelling performed by Halliburton in 2009:[73]
Halliburton looked into a base case where the fracture half-length is 200 ft and ran different sensitivities for lengths between 50 ft and 500 ft. The drainage area assumed for the base case in all fracture intervals is 40 acres…
…Table 3.4 shows a summary of the main metrics used in Halliburton’s fracture modelling for the Wombat wells.
[73] Ibid T206, 2655 – 2656.
GCA also considered Schlumberger’s geomechanical study. GCA reported:
Schlumberger subsequently conducted a geological and geochemical study on the selected fracture intervals for Wombat-4 based on Wombat-2 and Wombat-4 log data to help with the design of the fracture jobs. The main outcome from this study were
-Higher stress regime observed in Wombat-4 in comparison with Wombat-2 which could limit the extension of the fractures into the formation; this corresponds to the structural setting at the Wombat-4 well as identified by the seismic data
-Minimum horizontal stress in Wombat-4 is lower in shales than in sands for the deepest sections, which could lead to the preferential fracturing of shales.
-The presence of faults and natural fractures near Wombat-4 could have a negative impact on the efficiency o the fracture job in the form of casing shear and loss of fracturing efficiency due to natural fractures leaking fracture fluid. However these faults have not shown an effect on flow towards the wells during testing.
GCA 2010 explains it was establishing “recovery factors required in the Contingent Resource Estimates”[74] and that “[r]ecovery factor is greatly dependent on the development plan for the field”.
[74] Ibid T206, 2633.
GCA estimated the tight gas discovery could produce 8.8 million cubic feet per day “if all zones were to be fracture simulated”.[75] The GCA P50 estimate of GIIP in the Wombat Field was 787 Bscf (see table and diagram below).[76]
[75] Ibid T7, 78.
[76] Ibid T7, 84, 90.
GCA reported the results of the Halliburton and Schlumberger studies meant it was important to run post-frac production tests to assess performance of the stimulated wells and to gain a better understanding of the stress regimes.[77]
[77] Ibid T206, 2655.
GCA’s summarised contingent gas resources in Wombat 4 as follows:
From GCA’s investigations, the Strzelecki zone “appeared to be gas saturated”. DSTs were conducted. GCA concluded “The 5 best zones identified from the StimLog could yield initial cumulative production rates of approx. 3.7 mmscf/d after fracture stimulation (with 200 ft frac length).[78]
[78] Ibid T7, 85.
As at 2010 Lakes Oil was yet to select the fracture zones. It was originally intended a company known as Beach Energy Ltd (“Beach Energy”) would fracture stimulate the “best zones” in 2011.[79] Lakes Oil entered what is known as a “farm-in” agreement with Beach Energy for the purpose of Beach Energy re-entering Wombat 4 to conduct the fracture stimulations.[80]
[79] Ibid T7, 78.
[80] O’Brien Statement (n 1) 13 [72].
Beach Energy’s objective was to:[81]
Design fracture treatments to effectively stimulate the Upper and Lower Strzelecki formations to maximise the hydrocarbon recovery.
[81] T Docs (n 3) T25, 628, T93, 2030.
The fracture designs were “based on information provided and previous fracture treatments of Wombat-2 well”. The proposed frac created was 176.9 m and frac length – propped was 139.84 m.[82]
[82] Ibid T25, 635.
In 2011 Beach Energy had refracced Wombat 2 out to approximately 90-120 ft.
In August 2012 the Victorian Government imposed a moratorium on hydraulic fraccing.[83] This meant the planned work to be conducted by Beach Energy in Wombat 4 had to be put on hold.
[83] Transcript of Proceedings, 82 [11]-[13].
In 2013, because of the moratorium Beach Energy “pulled out”.[84] As a result of the moratorium imposed, no drilling or fraccing activities were able to take place in the relevant years.[85]
[84] T Docs (n 3) T34, 743.
[85] Transcript of Proceedings, 84 [9]-[17].
In June 2013 Lakes Oil engaged Aquatronic Solutions to conduct an electro-seismic survey over the Wombat field to map aquifer systems and gross structures that had not been possible to map using conventional seimic methods.[86] Aquatronic Solutions provided the following geological site overview:[87]
[86] T Docs (n 3) T34, 751.
[87] Ibid T41, 906.
A factsheet prepared by Aardvark Process Technologies Pty Ltd describes electro-seismic surveying as follows:[88]
Electroseismic surveying is a remote sensing method of underground surveying, exploiting the electroseismic effect. A seismic impulse is applied to the ground, and a plot of the subsurface can be built using the electromagnetic response recorded at the surface.
Since the electroseismic effect is determined by the presence of a fluid, electroseismic surveying is particularly effective in locating regions of high liquid content and with high permeability. Other information obtainable includes fracture characteristics, interfacial information and fluid characteristics. This technology has been commercially proven in applications such as aquifer identification and characterisation, geothermal well mapping, locating water injection wells, oil and gas reserve identification, leachate and geotechnical investigations.
…
Electroseismic surveying technology has the potential to substantially assist the unconventional gas industry by allowing the better placement of wells. Higher producing wells results in fewer wells to service a given area – and that leads to massive savings. Electroseismic surveying has a well proven capability to identify regions of high permeability, hydraulic conductivity, and delineate aquifer boundaries. When applied to unconventional gas, these characteristics are important in selecting well sites with high flow potential – and understanding what geographical area is being drawn down by a particular well.
(emphasis added)
[88] Ibid T95, 2063-4.
Aquatronic Solutions concluded electro-seismic methods can be used to:[89]
(a)Define unconventional gas tight sand sites (geologically and hydrologically);
(b)Define hydrocarbons within fracture networks;
(c)Benefit understanding of a site’s geology and hydrogeology.
[89] Ibid T41, 924.
Mr O’Brien said Lakes Oil was “hoping [the Aquatronic activity] would provide more detailed information around the wells of where we had intercepted some water, and how to avoid those when we were trying to do the fracking for Wombat-4”.[90] He explained:
It was more - it’s a very cheap - compared to a normal seismic survey, it’s a much cheaper way of doing a large initial evaluation to then focus your seismic survey and everything onto them, and the fact that there’s a new technology, we’re trialling it to see whether it would be beneficial and cost effective for us to use it again[91]
Lakes hypothesised that electroseismic survey could detect areas of higher water flow.[92]
[90] Transcript of Proceedings, 174 [10]-[16].
[91] Ibid 175 [13]-[18].
[92] O’Brien Statement (n 1) 17 [90.4].
In 2013 Lakes Oil engaged Schlumberger to develop a one-dimensional, mechanical earth model (“MEM’) using previous well data from Wombat 2.[93]
[93] T Docs (n 3) T237, 2903-2968.
Mr O’Brien states the 1D MEM prepared by Halliburton in 2004 and Schlumberger in 2013 were used as a basis for future experimentation designs (i.e., Wombat 4).[94]
[94] Ibid T237, 2989-3027; Tab 6 of TO-2 to O’Brien Supplementary Statement (n 11).
Schlumberger reported the following differences in the conditions between Wombat 2 and Wombat 4:[95]
(a)significant increase in rock strength observed below 1940mMD (see diagram below);
(b)the azimuth of natural fractures changes from N400W to N700E below 1940 mMD, indicating a different tectonic activity in the lower part of the Strzelecki formation.
(c)the stress (Shmax, Shmin) in Wombat 4 is significantly higher than those observed in Wombat-2.
[95] T Docs (n 3) T237, 2913.

Mr O’Brien gave Schlumberger the 8 planned frac intervals.
In July 2013 Schlumberger provided Lakes Oil with a Wombat 4 Quick Look Frac Design and Production Forecast.[96] The forecast concluded more gas would be recovered if a greater length was used.[97]
[96] Ibid T237, 2999-3027.
[97] Ibid T237, 3008.
Mr O’Brien confirmed he had not communicated an objective to Schlumberger of achieving a frac length beyond 100 meters.[98]
[98] Transcript of Proceedings, 221 [10]-[12].
Halliburton conducted a SwiftLOOK report. SwiftLOOK is an interactive reservoir analysis tool which combines well log and stimulation data to predict well performance. Halliburton predicted Wombat 4 could generate a post-stimulation production rate of 8824 MSCF/day assuming an infinite fracture half-length of 200ft. 200 feet is approximately 60 metres. For example:[99]
[99] T Docs (n 3) T238, 3039.
2014/2015
In 2014 Lakes Oil reported the fraccing moratorium had been extended by the Victorian government and this meant its ability to conduct activities had been severely delayed.[100]
[100] Ibid T47, 982.
In July 2014 exploration permits PEP167 and PEP175 were acquired.[101]
[101] Exhibit 13, Respondent Tender Bundle, R5, 231 (Respondent Tender Bundle); Transcript of Proceeding, 90 [28]-[32].
Given the fraccing bans, Lakes Oil decided it would drill a new well, Wombat 5. It was intended this well would be a “horizontal” directional well[102] to target a section of the reservoir that would maximise the porosity and permeability of the reservoir.[103]
[102] T Docs (n 3) T47, 988.
[103] Transcript of Proceeding, 114 [15]-[17].
The proposed schematic for Wombat 5 is set out below. This well would require no fraccing and would travel through the weathered zone:[104]
[104] T Docs (n 3) T47, 988.
The well would pass through the weathered zone because this is where the best unfracced flows had been achieved.[105] GCA attributed 85% of recoverable gas estimates from this zone.
[105] Ibid T251, 3427.
In September 2014, the Victorian Government banned all gas exploration. This meant Lakes Oil could not proceed with drilling or testing wells. In December 2016 the Victorian Government announced it would permanently ban all fraccing.[106]
CONSIDERATION
[106] Ibid T211, 2714.
Is Lakes Oil an “R & D Entity”?
The criteria set out above that must be satisfied in the Relevant Years for Lakes Oil’s activities to be registered as “R & D activities” are:
(a)Lakes Oil must be an “R & D entity;” (ITAA1997, s 355-35(1); IRD Act, s 27A(1)))
(b)In the Relevant Years the claimed activities must be core or supporting R & D activities as described in section 355.25.
It is not in dispute that Lakes Oil is an R&D entity.[107]
Project 1: LAK2006 Hydraulic Fracturing Technology for Gippsland Tight Gas
[107] Transcript of Proceedings, 40 [39].
Claimed Core Activities
Mr O’Brien described the relevant claimed activities as set out in the following paragraphs.[108]
[108] O’Brien Statement (n 1), 17-8 [90].
Lakes Oil’s intention was to develop strategies to identify “sweet spots”. As part of this process Lakes Oil:
(a)arranged for GCA to reprocess 3D electro-seismic survey data prepared in 2008 with new methods.[109]
(b)Lakes Oil engaged Professor Bruce Moore to perform low altitude airborne multispectral image data acquisition to identify fracture sets that might enhance the success of any experimental locations within the Wombat Field based on fluid leakages (“Geoflite”).[110] Mr O’Brien says Professor Moore identified several areas of natural fracturing that would be unable to be identified by conventional seismic surveys.[111]
(c)Lakes Oil engaged Schlumberger to evaluate the stress modelling done previously by Stimulation Petrophysics Consulting LLC ("SPC")[112] and Halliburton prior to the Relevant Years. Schlumberger was requested to propose optimal hydraulic fracturing locations based on available stress data and employ a third-party reviewer, Ely & Associates, to review those locations.[113] Mr O’Brien says Lakes Oil had a hypothesis that implementing a fracture extending beyond 100 metres would provide an economic rate, based on modelling, to remove the contingency of GCA[114] to demonstrate an effective extractive technology for the Strzelecki formation. Mr O’Brien says these activities were not done as a means of exploration.
[109] T Docs (n 3) T240, 3119-3148.
[110] Ibid T240,3178-9.
[111] Ibid T240, 3179.
[112] Ibid T206, 2674-2676.
[113] Ibid T237, 2989-2998; Transcript of Proceedings, 148 [8]-[9].
[114] T Docs (n 3) T206,
Following the ban placed on fraccing by the Victorian Government, Lakes Oil researched a number of technologies that might be employable to achieve a lateral well in the desired section of the Strzelecki formation which specifically focused on drilling a well that had the ability to deploy hydraulic fracturing experiments at a later time.[115] The purpose was to advance an experimental lateral well targeting the Upper Strzelecki reservoir unit of highest known permeability and to potentially apply hydraulic fracturing experiments on a stage-by-stage basis along the lateral length.
[115] Ibid T240, 3155-3157.
Mr O’Brien says the issues to be solved through the experimental activities (emphasis added) were:[116]
(a)Gas ratios in fluids - fracture stimulation fluids [were] breaking into open fracture systems which allowed the pressure and velocity of the fluid to drop quickly which allowed the proppant to drop out of suspension and block up the created fracture system which prevented the fractures from continuing to grow. As a result of this the experimental process was altered to vary the N2 [fraccing fluid] content in subsequent campaigns to try and reduce the pressure drop and subsequent proppant drop out as the fluid encountered open natural fracturing. Because of the moratorium Lakes Oil was unable to continue with its experimentation.
(b)Fluid type and viscosity variations - another of the main variables which have been altered between experiments to try and achieve the desired results. Lakes Oil trialled different clay stabilising products and gels;
(c)Pump rate variations - another one of the main variables which effects the length of the frac and the concentration and size of proppant which can be placed in the generated fractures. The pump rates have been gradually increased over the experimental campaigns to try and achieve the greater effective frac length and ensure that the proppant placement is as modelled….the proposed fourth campaign was going to experiment with rates of up to 45bbs/min to test the effectiveness of the higher rate. This high rate combined with the slick water fluid was predicted to achieve a frac length of over 200m which would significantly increase the volume of formation in communication with the wellbore and therefore significantly increase the flow rate
(d)Fluid volume variations - Fluid volume greatly effects the size of the fracture network created from the fracture treatment. The volumes during the second experimental campaign were lowered (approx. 800bbls) to try and achieve a successful placement of the frac job. This was achieved but the total fracced volume of the formation was too small to achieve the desired flow rates from the formation. With the third campaign the fluid volume was increased and 1250bbls was successfully pumped and the desired fracture growth and proppant concentration of 100m was almost achieved with 96.58m being the calculated result. Whilst the job was successful performed it didn't result in the desired flow rate so the fourth experimental campaign was designed with double the fluid volume (just over 2500bbls) which the modelling indicated would create an effective fracture length of over 160m depending on the mix of other variables.
(e)Proppant size and concentration – the concentration and size of the proppant has been varied across the experimental campaigns to try and identify the best design to ensure the most effective placement, limit pressure leak off and minimise proppant embedment…Various volumes of proppant were modelled and the final design was going to utilise three different volumes to test for the most effective proppant volume to achieve the effective fracture length. Based on the previous results achieved from the first three experimental campaigns there was a high level of confidence that this round of experimental attempts would indicate the optimum proppant design for the formation.
(emphasis added)
[116] O’Brien Statement (n 1) 19-23 [96]-[112].
Claimed Supporting Activities
Lakes Oil claimed two supporting R & D Activities:[117]
(f)Activity 1.1, “Fracing support activities”
(g)Activity 1.2, “Prototype Support”.
[117] T Docs (n 3) T57, 1314-5
Was Lakes Oil involved in exploration activities?
Prospecting, exploring or drilling for minerals or petroleum for the purposes of one or more of discovering deposits, determining more precisely the location of deposits, and/or determining the size or quality of deposits is expressly excluded from the definition of “core activities”: section 355.25(2)(b), ITAA 1997. ISA says the activities under consideration in this case were directly associated with prospecting, exploring, or drilling to better determine the precise location of or size or quality of gas reservoirs, so the exclusion in s 325.30(2)(b) applies.
Mr O’Brien says the Project commenced in 2004. He says the drilling of Wombat 1, 2 and 3 and the facing of those wells were not included in the research and development applications because that was exploration activity undertaken to confirm the presence of hydrocarbons.[118]
[118] O’Brien Statement (n 1) 7 [44].
Lakes Oil contends the Claimed Activities are not exploration activities. We disagree for reasons we will explain.
Mr O’Brien explained the tight gas deposits are “trapped within very deep layers of sand and shale rock that has very low permeability”. As a result, it is difficult to extract. He says it is because of this feature of the Gippsland resources that extraction has to date been uneconomical. Lakes Oil set out with the goal of determining a technology that will increase the permeability of the tight sands which would make extraction of gas from the Wombat Field commercially viable.[119] This technique had some success in the United States of America.[120]
[119] Ibid 5-6 [31]-[33].
[120] Ibid 11 [53].
Project 1 had to be conducted over a number of income years (including the Relevant Years). Mr O’Brien said the activities undertaken were a continuation of prior years’ achievements, and “involved the refinement of the proposed fraccing experiment with the main inputs being optimised to ensure that the experiment would be as effective as possible”.[121]
[121] Ibid 17 [87]-[88].
Professor Johnson concluded (at 175):
Lakes’ activities are consistent with the objective of developing an effective extractive technology for tight gas at the Gippsland Basin. It would be applicable to other areas and contributes a body of knowledge about unconventional resource development. Unconventional resources such as tight gases is subject to ongoing research at several Australian and international universities and service company research groups. All these efforts are pointing towards the development of technologies that may lead to an effective extraction methodology for an indisputable large volume of contingent tight gas resources available in the basins of central and eastern Australia.
ISA contends Lakes Oil’s search for “sweet spots” was:[122]
…an attempt to look more closely, scrutinise or examine the geological conditions to determine the quality of the reservoir. Reservoir in the petroleum sense being synonymous with a deposit. That is, the high quality locations need to be found that will enable the applicant to achieve better production which thereby falls squarely within the words of the exemption.
[122] Transcript of Proceedings, 63 [39]-[44].
Mr O’Brien acknowledged the activities claimed in the 2013/14 registration year in respect of PRL2 included geological, geophysical and geochemical surveys.[123] The Petroleum Act 1998 provides (s 7) the meaning of “petroleum exploration”:
…is the carrying out of one or more of the following activities for the purpose of finding petroleum or reservoirs—
(a) conducting geological, geophysical and geochemical surveys;
(b) making wells;
(c) taking samples for the purposes of chemical or other analysis;
(d) extracting petroleum from land for the purpose of determining whether it will be viable to extract it commercially.
(emphasis added)
[123] Ibid 89 [25]-[28].
Mr O’Brien maintains these activities were not undertaken for exploration purposes.
Section 40-730 of ITAA 1997 provides a person can deduct expenditure for exploration and prospecting operations in certain circumstances. In sub-paragraph 4 it provides
Meaning of exploration or prospecting
(4) Exploration or prospecting includes:
(a) in the case of mining in general and quarrying:
(i) geological mapping, geophysical surveys, systematic search for
areas containing *minerals (other than *petroleum) or *quarry
materials, and search by drilling or other means for such
minerals or materials within those areas; and
(ii) search for ore within, or in the vicinity of, an ore-body or
search for *quarry materials by drives, shafts, cross-cuts,
winzes, rises and drilling; and
(b) for petroleum[124] mining:
(i) geological, geophysical and geochemical surveys; and
(ii) exploration drilling and appraisal drilling; and
(c) feasibility studies to evaluate the economic feasibility of mining minerals or quarry materials once they have been discovered; and
(d) obtaining * mining, quarrying or prospecting information associated with the search for, and evaluation of, areas containing minerals or quarry materials. (emphasis added)
[124] Which is defined to mean any naturally occurring hydrocarbon: s 40-730(6), ITAA 197.
Pursuant to section 40-730 of the ITAA 1997:
(5) “Minerals” includes * petroleum.
(6) Petroleummeans:
(a) any naturally occurring hydrocarbon or naturally occurring mixture of hydrocarbons, whether in a gaseous, liquid or solid state; or
(b) any naturally occurring mixture of:
(i) one or more hydrocarbons, whether in a gaseous, liquid or solid state; and
(ii) one or more of the following: hydrogen sulphide, nitrogen, helium or carbon dioxide;
whether or not that substance has been returned to a natural reservoir.
(7) Mining and quarrying operationsmeans:
(a) mining operations on a mining property for extracting * minerals (except * petroleum) from their natural site; or
(b) mining operations for the purpose of obtaining petroleum; or
(c) quarrying operations on a quarrying property for extracting quarry materials from their natural site;
for the * purpose of producing assessable income.
Professor Johnson disputes either project was conducted for exploration purposes. The gas had already been discovered in both Wombat 4 and Wombat 5; Lakes Oil was merely investigating an effective extractive technology.[125] Professor Johnson stated:
“the contingent resources in the Strzelecki Fm were discovered, well defined by conventional exploration activities prior to the 2004 hydraulic fracturing experiments”
[125] Transcript of Proceedings, 340 [36]-[39].
During cross-examination Professor Johnson accepted the stress profile and in particular readings and aspects of the stress profile, have a high correlation with the ability to achieve successful production at a particular interval of the well.[126] He also accepted there was information lacking in relation to Wombat-2, as there were only Diagnostic Fracture Injection Tests (DFITs) conducted at particular intervals and further DFITs would be required to frac Wombat 2 again.[127]
[126] Ibid 302 [34]-[37].
[127] Ibid 3023 [44]-[10].
Professor Johnson did not accept DFIT’s are exploratory or the fraccing, as occurred here, was exploratory fraccing. Professor Johnson was quite adamant Lakes Oil had a contingent resource, not a prospective resource, and were simply trying to develop an effective extractive technology.[128]
[128] Ibid 312 [5]-[12].
We note Lakes Oil had engaged consultants to prepare surveys and models with a view to gaining a better understanding of where to extract the most gas. Schlumberger was essentially engaged to prepare a feasibility study to determine what frac length was required to produce commercially viable enterprise.
In Professor Bedrikovetsky’s opinion the work undertaken to identify sweet spots, such as by Aquatronic Solutions, was exploration activity.[129] He explained:[130]
when we work with unconventional reservoirs, usually it’s information, the success or failure of project completely dependent on location of sweet spots, percentage of gas really which are accumulated in these areas, and physical hydro-dynamic of properties of these sweet spots.
(emphasis added)
[129] Ibid 376 [38]-[42].
[130] Ibid 377 [6]-[9].
In other words, a sweet spot is where large accumulations of gas are located.
Aquatronic described its own activities as being able to be used to define the deposit.
It was suggested Professor Bedrikovetsky agreed work done to identify sweet spots was not exploration because the reservoir had already been located and defined in reports, like the GCA 2010. However, as the Respondent points out:[131]
On the question of sweet spots, Professor Bedrikovetsky gave oral evidence that the purpose of identifying sweet spots was to determine the properties and quality of a reservoir. After repeating this view twice, Professor Bedrikovetsky was asked whether he agreed that “locating sweet spots in an identified and known resource is not about determining the size and quality of the deposit” and he responded “Yes, I do”. He then attempted to explain his answer but was not given the opportunity to do so in cross-examination. In re-examination, Professor Bedrikovetsky explained his evidence on sweet spots:
So my statement is that locating of sweet … spots is determining size or quality of deposits indeed, and I will explain you why.
…
I am very strongly convinced that determining positions of sweet spots is exactly activity on determining the size and quality of the deposit. …
Let us assume Gaffney and Cline … discovered for me the deposit and they precisely determined for me the location of this deposit and I got the overall gas initially in place. I would like to discuss two extreme cases. Case number one, all my gas is located in compact – localised sweet spots, which I know. So if I know them, I know where to drill my horizontal well and I will result in effective exploitation of this field. Let us assume that all my gas is more or less uniformly spread over the reservoir or properties of sweet spots does not very much change of the properties of the reservoir. In this case I will immediately abandon this reservoir because of this permeability, I will never achieve economical production rate. So I want to develop my reservoir economically. So I want to be in first position. I don’t want to fail. I shouldn’t be in the second position. So determining … where these sweet spots are determines … quality of deposit. I know then, I … did well. I don’t, I fail.
[131] Respondents Response to Applicant’s Supplementary Note, dated 23 July 2021, 3 [9].
It is true the reservoir itself had been located. It is not clear, however whether the extent and “best locations” of the deposit contained within the reservoir had been located and identified. The reports obtained by Lakes Oil all refer to estimates of volume. The activities engaged in are more akin to opportunity identification than research.
Professor Johnson agreed a sweet spot for hydraulic fracturing experiments was an area which has characteristics, amongst others, of high relative permeability, natural fracturing and optimum stress.[132]
[132] Transcript of Proceedings, 260 [33]-[36].

Professor Bedrikovetsky offered a more coherent understanding of what was expected of an hypothesis. In Professor Bedrikovetsky’s opinion:
247. … a hypothesis is a logical statement, which can be either right or wrong. The veracity of the hypothesis cannot be determined at the moment of its formulation. The hypothesis can be either confirmed or denied by timely observations or experimentation.
248. If a subject is in full control of achieving an objective, this objective is not a
hypothesis. The higher is the power of pumping and the higher is the injection
wellbore pressure, the longer will be the produced fracture. For any field, stress, and
related rock, there is always a pumping pressure and injection rate that will yield a
given fracture half-length.
…
251. The objective for Activity A1.1 hasn’t been substantiated by any research statements, so there is no reason to assume that the results of this activity can be extended to other Australian basins.
252. In addition, I have doubts as to where the 100 m fracture length aim has been
formulated from. Logically, it should be derived from the condition of economic
production and an optimisation exercise maximising the profit. The available
production forecasts, done by Schlumberger (See T237 2999-3027) and Halliburton (See T238), do not include the case for fracture half-lengths of 100 m. There is no evidence that analysis for this case has been done. On the contrary, the aim is backed by the claim that previously typical fracture half-lengths were 50 m. Yet, a 93 m halflength has been reported during the re-fracturing of the Wombat 2 well.
253. Since the economic and environmental considerations haven’t been included into the original formulation of the hypothesis A1.1, Lakes Oil’s 100m fracture (Core
Activity A1.1) is an aim, not a hypothesis.
(emphasis added)
Professor Bedrikovetsky went on to explain a hypothesis is:[165]
(a)a “statement which cannot be guessed or figured out in advance, and only can be verified while (sic) experimentation. These hypotheses cannot be just formulated out of intuition or out of common sense. It must be substantially professional”;
(b)more than speculative – it is a proposition which is evidence based – it must be substantiated. There must be material pointing towards a hypothesis that can provide a basis for the proposition which is then tested;
(c)a hypothesis cannot be verified prior to experimentation.
[165] Transcript of Proceedings, 371 [14]-[42].
We agree with Professor Bedrikovetsky that “fracturing above 100m” is not a hypothesis but an objective”[166].
[166] Bedrikovetsky Report (n 144) 17 [30].
Professor Bedrikovetsky explained in his oral evidence:[167]
I don’t think that implementing the fracture extending beyond 100 metres which would provide an economic rate, based on modelling, et cetera, is a valid hypothesis.
And can you please just elaborate on why you say it is not valid?‑‑‑There are two reasons. Number one, 100 metres or 99 metres or 101 metre cannot come from nowhere. I will give you an example how this – how it could be substantiated. For example, if to support the requirement of economic rate one could do report graph of cashflow versus half lengths of the fracture, and clearly see that above 100 metres it is positive, below 100 metres it is negative and so I substantiate the hypothesis that I needed to direct my experimental activity to reach this 100 metres limit. So this is – this could be evidence number one. Evidence number two of validity of this hypothesis could be something like this: I thought, based on MEM modelling or another Schlumberger forecast of fracture development, how a production rate would depend on how fractured the well, and I can see that exactly the threshold 100 metres, I can see significant increase of my rate. This will also substantiate the hypothesis of 100 metres. None of this has been presented in applicant’s evidence
[167] Transcript of Proceedings, 417 [21]-[39].
Professor Bedrikovetsky did not accept the GCA 2010 report was a logical basis for Lakes Oil developing its hypothesis because:
it doesn’t fall from Gaffney Cline’s report that one should direct efforts beyond 100 metres. It was not said there, it was not proven there. Only what I saw there is that one of options which they evaluated in their report is 300 feet, which is 100 metres[168]
…
Is the problem, from your perspective, that there is no calculation that shows the gas flow that would be achieved with a 100‑metre fracture?‑‑‑Yes, it is a problem.[169]
…
in my opinion a hypothesis is a logical statement which can be either wrong or right and in technical area can be – no, must be substantiated by technical information. So I would write here "which would be backed by technical information". Mr Peadon, I can only repeat – so you could rephrase it, but the term, I just can repeat my main statement. 100 metres was not substantiated. It was not proven; it was not backed.[170]
[168] Transcript of Proceedings, 422 [1]-[5].
[169] Ibid 427 [43]-[45].
[170] Ibid 429 [21]-[26].
Modelling relied on by GCA (Haliburton) predicted a post-stimulation production rate assuming an infinite fracture half-length of 200 feet. Professor Johnson explained “what they’re saying is an adequate frac length to make it a commercial rate” and an infinite fracture half-length is not directly analogous to fracture half-length.[171]
[171] Ibid 335 [16]-17], [22]-[23].
In his report Professor Bedrikovetsky states Schlumberger performed fracture modelling on 9 zones, derived from the analysis done by Halliburton and none of the predicted fracture half-lengths exceeded 100 m.[172]
[172] Bedrikovetsky Report (n 144) 85 [235].
We accept Professor Bedrikovetsky’s criticisms. There is no identified basis upon which the “hypothesis” (as represented in the R & D Applications) was founded. Without a valid basis, the claim is a mere desire aimed to achieve a commercial objective.
Lakes Oil already knew, from the Schlumberger and other analyses, that more gas could extracted if the frac was larger. The activities were not directed at proving that as such.
Lakes Oil objected to Professor Bedrikovetsky providing an opinion on what is meant by “hypothesis”. It is not in dispute that “hypothesis” is not defined in the Act and therefore takes it ordinary meaning. However, that is not the end of the matter, section 355.25 specifically provides experimental activities must not only proceed from hypothesis to experiment, but they must also be “based on principles of established science”.
Those provisions are enforced by section 355-5(2) which provides the object of the Act is to be achieved in a scientific way”.
The Explanatory Memorandum also provides guidance. It says the approach set out in section 355 is “generally known as the scientific method”. It also provides:
[2.15] … [l]ess rigorous knowledge discovery and problem solving techniques, such as trial and error’ alone, will not be sufficient to qualify as eligible experimentation”.
[2.18] The need to employ the scientific method also reflects the degree of novelty in the ideas being tested. That is, the knowledge being sought must go beyond validating a simple progression from what is already known and beyond merely implementing existing knowledge in a different context or location. Rather, the gap between existing knowledge and the hypothesis being investigated will be significant enough to require application of the scientific method.
[2.19] Core R&D activities are part of the eligible experiment, rather than being merely related to it. These are the activities whose outcome is being determined in the context of applying the scientific method. However, not all of the steps in the scientific method will constitute experimental activities. Nor will an activity fall within the scope of the experiment merely because the experiment cannot take place without it.
(emphasis added)
The Explanatory Memorandum provides numerous examples, referring to the hypothesis having a “scientific basis” (for example, para [2.40]). It is appropriate that we have regard to the explanatory memorandum in light of s 15AB of the Acts Interpretation Act 1901 (C’th) and the modern approach to statutory construction that has been explained in cases like Stevens v Kabushiki Kaisha Sony Computer Entertainment and Others(2005) 224 CLR 193 at 230 per McHugh J.
The emphasis on the centrality of concepts of science in the legislation means experts like Professor Bedrikovetsky are well-qualified to comment upon what is known in his world as an hypothesis and what is required to conduct a scientific experiment or investigation.[173] Of all the experts who gave evidence, Professor Bedrikovetsky offered the most intelligible and coherent explanation of those scientific concepts, and the analysis which follows is informed by his opinion.
[173] Transcript of Proceedings, 391 [40]-[45].
It is clear that an hypothesis must have a scientific basis. (If there is any doubt about that having regard to the text of the legislation, that doubt is resolved having regard to the Explanatory Memorandum, which includes an example at p 26.) ISA contends there is no scientific basis to the ‘hypothesis’ identified by the applicant, such as it is: ISA says the hypothesis is really a commercial aim or objective which does not satisfy the legislative requirements.[174]
[174] Ibid 61 [30]-[31].
ISA contends that, properly understood, an hypothesis must have the following features:[175]
(d)It must be directed to resolving an uncertainty of a technical or scientific nature; and
(e)It must be general and testable, with elements of focused experimentation such as experiments, observations and evaluation being tied back to the hypothesis.
[175] Respondent Submissions (n 151) 3 [14]-[15].
There was no dispute that the word “hypothesis” contained in section 355.25 should be given its ordinary meaning “in light of its context and purpose”.[176] Its context is within “principles of established science”.
[176] Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at 381 [69]; Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue[2009] HCA 41; (2009) 239 CLR 27 at 31 [4], 46-47 [47]; Federal Commissioner of Taxation v Consolidated Media Holdings Ltd[2012] HCA 55; (2012) 250 CLR 503 at 519 [39]; SZTAL v Minister for Immigration and Border Protection[2017] HCA 34; (2017) 262 CLR 362 at 368 [14].
We accept there is no “hypothesis” found in the material. What is stated are aims and objectives. There was no evidence of any scientific basis behind the hypotheses. Rather, Lakes Oil knew the best return on investment would occur if it could frac a half-length of 100m. This is not a hypothesis.
We are not satisfied the activities undertaken by Lakes Oil re hydraulic fraccing were based on principles of science as required by section 355-25(1)(a) of the Income Tax Assessment Act.
ARE THE CLAIMED ACTIVITIES “EXPERIMENTAL ACTIVITIES”?
Was the outcome of the claimed activity only able to be determined by a systematic progression of work?
It is uncontroversial that whether an outcome can only be determined through the application of systematic progression of work based on scientific principles involves s an objective determination from the perspective of a competent professional in the field.[177] The Explanatory Memorandum to the Tax Laws Amendment (Research and Development) Bill 2010 explains that:
[177] See 2010 R&D EM, paras 2.13 to 2.15; Ultimate Vision Inventions Pty Ltd and Innovation and Science Australia (Taxation) [2019] AATA 1633, at [37]-[38].
Core R&D activities
2.11 The existence of core R&D depends on establishing that an experiment (or set of related experiments) is taking place. An experiment entails investigating causal relationships among relevant variables to test a hypothesis or determine the efficacy of something previously untried. Experiments may take place in a range of settings, from a separate laboratory to an otherwise normal production run. [Schedule 1, item 1, subsection 355-25(1)]
2.12 To qualify as core R&D activities, experiments will not merely confirm what is already known, or have an outcome that can be known or determined in advance. Rather, they will be activities whose outcome can only be determined by employing a systematic progression of work based on scientific principles and using an approach that proceeds from hypothesis to experiment, observation and evaluation and leads to logical conclusions. This approach is generally known as the scientific method. [Schedule 1, item 1, paragraph 355-25(1)(a)]
2.13 The requirement for the scientific method establishes a threshold for the knowledge gap and the degree of uncertainty that an eligible experiment must seek to address. The threshold will not be met if the knowledge of whether something is scientifically or technologically possible, or how to achieve it in practice, is deducible by a competent professional in the field on the basis of current knowledge, information or experience.
2.14 Further, the nature of the eligible experiment is such that there will be a clear risk that the outcome of the experiment will not be the desired one. The potential for this risk to deter firms from undertaking knowledge-generating R&D underpins the rationale for the R&D tax incentive.
2.15 Less rigorous knowledge discovery and problem solving techniques, such as ‘trial and error’ alone will not be sufficient to qualify as eligible experimentation. However, trial and error may form part of an eligible experiment where the conditions for core R&D are met. Trial and error can also qualify as a supporting activity where it forms part of a decision to proceed to activities that qualify as core R&D.
2.16 Experimental activities that qualify as core R&D must be for the purpose of acquiring new knowledge or information. This requirement reflects the R&D tax incentive’s object of generating the knowledge benefits that arise from conducting R&D — rather than merely subsidising the application of the knowledge produced by R&D. This is particularly relevant where trials are repeated or prolonged, especially if carried out in a production context. The distinction between conducting R&D and applying the results of it (other than in further R&D) is a question of fact. ‘New knowledge’ in this context means knowledge not already available in the public arena at the time the activities are conducted, in the relevant technology, on a reasonably accessible world wide basis. [Schedule 1, item 1, paragraph 355-25(1)(b)]
2.17 The requirement can be met by the purpose of acquiring or generating knowledge in the practical form of knowledge or information about the creation of new or improved materials, products, devices, processes or services. Where experimental activities occur in the context of normal production activities, the experiments may entail the direct production or use of an actual material, product, device, process or service.
2.18 The need to employ the scientific method also reflects the degree of novelty in the ideas being tested. That is, the knowledge being sought must go beyond validating a simple progression from what is already known and beyond merely implementing existing knowledge in a different context or location. Rather, the gap between existing knowledge and the hypothesis being investigated will be significant enough to require application of the scientific method.
(emphasis added)
At the outset ISA claims there is insufficient evidence that Lakes Oil has been engaged in a systematic process. ISA referred to Rix’s Creek Pty Ltd; Bloomfield Collieries Pty Ltd and Innovation Australia[178] where it was explained:
[20] … Evidence must be available to satisfy this requirement and that a vague, generalised description of the claimed activities is not sufficient to establish that a hypothesis was formulated and that the activities claimed were carried out.
[21] …Documentary evidence is an expected feature of an activity that is systematic, investigative and experimental.
[178] [2017] AATA 645.
Professor Bedrikovetsky opined that Lakes Oil had not undertaken a systematic progression of work due to a lack of any internal documentation demonstrating decision making, observation, consideration, formulation of steps, evaluation and so on.[179] As noted by Professor Bedrikovetsky, the activities are simply a “set of independent reports”[180]…the sequence does not exist…the procession is not systematic”.[181] Professor Bedrikovetsky explained there is no evidence of any “active participation” by Lakes Oil.
[179] Transcript of Proceedings, 373-375; Bedrikovetsky Report (n 143) 17 [34], 104 [349]-[351].
[180] Ibid 448 [46].
[181] Ibid 449 [1]-[2].
ISA acknowledged there is no statutory requirement for documentation but there must be sufficient evidence to support a finding.[182] ISA pointed out there was very little in the way of internal documentation or documentation prepared by Lakes Oil at all regarding any of the claimed activities.
[182] Ibid 60 [35]-[45].
In Docklands Science Park Pty Ltd and Innovation Australia [2015] AATA 973 (‘Docklands’), the Tribunal found there was “scant documentation” of the applicant having conducted any activities. In that case the absence of documentation resulted in the applicant failing. SM Fice noted, at [63], “documents are required for the purpose of evidencing experimental activities”.
In a few other matters the Tribunal has found a lack of proper/relevant contemporaneous documents has been fatal to the application.[183]
[183] Docklands; Royal Wins Pty Ltd and Innovation and Science Australia [2020] AATA 4320, [37].
In Royal Wins Deputy President Molloy said (at [37]):
…it is an essential aspect of the systematic progression of research and development applications that there be adequate documentary evidence.
The Full Court in Coal of Queensland confirmed documentation is not a statutory requirement (referring to Rix’s Creek Pty Ltd at [21]). The Full Court noted in Rix Creek the point made by the Tribunal was “documentary evidence is an expected feature of an activity that is systematic, investigative and experimental” (at [21]). In those circumstances, it was appropriate for the Tribunal to take into account a lack of documentation “in reaching the conclusion the relevant parts of s 355.25(1) were not satisfied”.
Here, despite there being few internal records, there was substantial evidence provided by way of witness statement and orally from the applicant by way of Mr O’Brien.
During cross-examination Mr O’Brien acknowledged the only documentary evidence of the project that was intended to take place consists of the two Schlumberger reports, the Eli Standridge document and the SPC report. Mr O’Brien explained there were no other internal documents prepared by Lakes Oil in relation to that project:[184]
No. No, unfortunately it was one of Lakes’ weaknesses, the internal – because we’re a small company there was – it was done verbally.
[184] Transcript of Proceedings, 150 [45]-[47].
The witness’s concession that the absence of documentation was a ‘weakness’ points to a conclusion that more extensive documentation is an expected feature of the process in this case. The absence of that documentation suggests the requirements of the Act have not been satisfied.
Did the progression of work proceed from hypothesis to experiment, observation and evaluation, and lead to logical conclusions?
Evidence of observation and evaluation?
The evidence demonstrates there was observation and evaluation.
The specialist reports prepared by consultants engaged by the applicant, are complex and comprehensive. The respondent did not dispute this element was satisfied.
Was the claimed activity undertaken for the purpose of generating new knowledge?
In Professor Bedrikovetsky’s opinion the activities for project 1 did not generate new knowledge because, although there was a lot of modelling, the validity of the results was unable to be checked in the reservoir (no actual fraccing took place). It cannot be said whether there was success or not.[185] No conclusions were able to be reached.[186]
[185] Ibid 462 [5]-[14].
[186] Bedrikovetsky Report (n 144) 88 [259].

Professor Bedrikovetsky’s evidence is confusing on this point however because he later said new knowledge was generated:[187]
Professor. Professor, I’m trying to get to a fairly simple proposition. You agree that the activity of trying to identify a sweet spot by Lakes Oil produced information that Lakes Oil did not previously know. Is that correct?‑‑‑Yes.
And you agree that that information was not previously known by anybody else. Is that correct?‑‑‑Yes (indistinct).
[187] Transcript of Proceedings 4623 [42]-[2].
That brings us back to Lakes Oil’s purpose in carrying out the activity.
In Coal of Queensland Pty Ltd v Innovation and Science Australia [2021] FCAFC 54 at [121]). the Full Federal Court said it was:
“[A]rtificial to discard the nature of an activity and what it achieves when assessing its purpose” and that “the nature of the activity conducted and the novelty and predictability of the results of that activity may elucidate whether a substantial purpose of an activity is the generation of new knowledge.”
What is meant by “new knowledge”? The term “new knowledge” is not defined in the Act and therefore the ordinary meaning should be applied. The phrase “new knowledge” is found within the section concerned with experiments being conducted where the outcome could not be known in advance by a competent professional in the field (as outlined in the Explanatory Memorandum (see above). On that basis, it is reasonable to conclude “new knowledge” means not previously known by a competent professional in the field.
Coal of Queensland concerned activities to investigate the nature and economic viability of mining coal in the Bowen Basin area of Queensland. The characteristics of the area being mined meant it was costly and difficult to extract the coal using traditional extraction methods. As a result, Coal of Queensland investigated whether certain other activities would improve the commercial viability of the area. Those activities were registered with ISA as “R & D Activities”. On review the Tribunal found none of the registered activities were “core R&D activities” within the meaning of s 355-25(1) of the Income Tax Assessment Act 1997 (Cth).[188]
[188] Coal of Queensland Pty Ltd and Innovation and Science Australia [2020] AATA 126, [115]
On appeal, the Full Federal Court considered whether the Tribunal had applied a wrong legal standard in considering whether the applicant’s activities were of a kind “whose outcome cannot be known or determined in advance” within the meaning of s 355-25(1)(a) of the ITAA 1997. The Court drew a distinction between knowing the precise data of work undertaken as opposed to the outcome of an activity (at [101] and [104]).
Whether activities are conducted for the “purpose of generating new knowledge” as per section 355-25(1)(b) the Full Court held:
[121] …the nature of the activity conducted and the novelty and predictability of the results of that activity may elucidate whether a substantial purpose of an activity is the generation of new knowledge. It is artificial to discard the nature of an activity and what it achieves when assessing its purpose.
[122] We note for completeness that in Moreton the Full Court found at [151] that s 355-25(1)(b) is “capable of applying, depending on the circumstances, to activities that are conducted for the purpose of generating new knowledge with respect to the application of an existing technology at a new site” (emphasis added). The gravamen of the Full Court’s reasoning was that the generation of site specific knowledge by the application of the particular technology at issue in that case was capable of being “experimental activity” done for the “purpose of generating new knowledge” within the meaning of s 355-25(1). The facts of the present case are different from those in Moreton because the relevant activities did not involve applying existing technology to a new site for the purpose of generating new knowledge.
[135] An activity might be conducted for the purpose of generating new knowledge, but if the activity in question is prospecting, exploring or drilling for minerals and the new knowledge in question concerns the location, size or quality of deposits the exclusion in s 355-25(2)(b) may apply.
(emphasis added)
Referring to all of the evidence, the Full Court held (at [144]):
The Tribunal was not under a duty to refer to every piece of evidence and provide reasons in relation to every piece of evidence. It had to consider evidence critical to the issues in dispute: see generally Keith v Gal [2013] NSWCA 339 at [109]-[119] per Gleeson JA.
The purpose of the activity and Lakes Oil’s intention was to maximise the amount of gas that could be extracted from a tight gas reservoir. Its intention was not to generate new knowledge . Even if it was, the activities would be captured by the exclusion provision, as already discussed Further, no fraccing activities took place.
Having made those observations, we should deal with specific criticisms of activities that were undertaken.
Core Activity A1.2 Prototype test preparation trials (2013/14)
This activity concerned the Geoflite activity by which Professor Moore performed:[189]
..low altitude airborne multispectral image data acquisition to identify fracture sets that might enhance the success of any experimental locations within the Wombat Field [that is, the area covered by PRL 2] based on fluid leakages.
[189] O’Brien Statement (n 1) 17 [90.3]; Johnson Report (n 59)40 [133].
It is difficult to see how this activity could be described as experimental. What was the hypothesis? What was the evaluation and conclusion? The evidence before us is insufficient to enable us to draw any conclusions.
The activity appears to have been exploratory in nature in any case. ISA point to Professor Moore’s own description of the Geoflite:
1. GEOFLITE generates low altitude airborne multispectral image data in all wavelength bands from ultraviolet thru visible to infrared and thermal infrared, and computer processes it to map the leakage from the fractures to the ground surface, through soil or vegetation and thus map the fractures, as per the accompanying [sic] map. In this phase1 of the project only the most prominent joint fractures are mapped. 2. The importance of the fractures is paramount since it has been established that most of the fluid transport through rocks occurs along the fractures and microfractures [sic]. Also the most productive wells and reservoirs are found to be located on or near areas of highest fracture density and on fractures or intersections with the maximum leakage of geochemical hydrocarbon indicators..[190]
and
[an] exploration technique … to locate and evaluate potential buried hydrocarbon reservoirs. The unique method involves detailed mapping of natural joint fracture systems, using airborne multispectral data and measuring the fracture leakage of hydrocarbon related compounds, to evaluate priority exploration targets or ‘hot spots’, prior to drilling. … It was … proposed to use the GEOFLITE low altitude, multispectral, fracture detection method to acquire high resolution airborne data, to map natural rock microfractures in detail, and to plot high density targets. This data was then use (sic) to define geochemical sampling locations, to test for hydrocarbon related leakage into the soil, from these fracture systems. High rates of hydrocarbon related compound leakage from these fractures can indicate the most potentially productive oil and gas accumulations at depth, and help to delineate new exploration ‘hot spot’ areas and priority drilling targets.[191]
(emphasis added)
[190] T Docs (n 3) T240, 3178-3179; O’Brien Supplementary Statement (n 11) 4 [24].
[191] Respondent Submission (n 151) 32-3 [30].
It is also unclear when this activity took place. Mr O’Brien could not recall precisely when he received the Geoflite report but said it was within the 2014/15 financial year[192], with some preliminary work being undertaken in the previous year.[193]
[192] Transcript of Proceedings, 141 [44]-[45].
[193] Bedrikovetsky Supplementary Report, dated 6 October 2020, 3 [3(f)]].
In the circumstances we are not satisfied the prototype test activities are eligible activities.
Project 2: Lak2016 New Gas Extraction Technologies
In August 2013 Lakes Oil received a proposal from WellServ Australia Pty Ltd (WellServ) to design a horizontal direction well. In September 2013 Lakes Oil prepared an operations plan for Wombat 5 which was submitted to the Mines Department for approval to drill the well.[194] SPC was engaged to provide a production forecast in the 2013/14 year.[195]
[194] Transcript of Proceedings, 114-5 [44]-[2]; Applicant Tender Bundle (n 61) A40, 941-1017.
[195] Transcript of Proceedings, 115 [23]-[24].
Mr O’Brien said Lakes Oil was just looking for a volume of sand within the weathered zone. He said the intention and expectation was that the horizontal design of the Wombat 5 well would access sufficient gas sands of a quality to produce a commercial flow.[196] The objective was to intersect enough sands with the secondary porosity to achieve a commercial flow.[197]
[196]Ibid 115 [32]-[33].
[197]Ibid 123 [25]-[26].
In 2014 financial year Lakes Oil said it:
(a)undertook activities regarding investigating suitable options for swellable packers. Swellable packers are a device that enables a particular part of the well to be closed off or isolated from other parts of the well.[198] Mr O’Brien acknowledged that the swellable packers were not a means of improving reservoir flow;[199]
(b)continued to liaise with WellServ regarding drilling designs; [200] and
(c)investigated drilling contractors.[201]
[198]Ibid 113 [43]-[45].
[199]Ibid 114 [6]-[7].
[200]Ibid 115 [42]-[43].
[201]Ibid 115 [45]-[46].
Lakes Oil’s strategy had to change given the Victorian Government’s position on fraccing so in 2014/15 it prepared an experimental program to extract the gas by non-fraccing means.[202]
[202] O’Brien Statement (n 1) 27 [136]-[138].
Mr O’Brien says the hypothesis was:[203]
… if the design of the wells was undertaken in a particular way this may release the gas resource from the underlying underground structure at economic levels as an alternative to fraccing which was the focus of Project 1.
(emphasis added)
[203] Ibid 28 [139]
The hypothesis for Activity A1.2 is:
"if enough surface area of the weathered zone was connected to the well bore it should
be able to flow at significantly greater rates than were achieved in the vertical wells."
Mr O’Brien said this activity involved:[204]
researching a number of technologies that might be employable to achieve a lateral in the desired section of the Strzelecki formation [which is the area covered by PRL 2] which specifically focused on drilling a well that had the ability to deploy hydraulic fracturing experiments at a later time.
[204]Ibid 18 [90.6].
Professor Bedrikovetsky opined:
270. The production forecast made by SPC (TO-3 Tab 3) allowed the applicant to claim sustainable production rates from the proposed Wombat 5 well (T251).
Although Lakes Oil advanced Project 2 (the activity was designed to prove the hypothesis, the equipment had been contracted or purchased, approvals sought and all relevant interests dealt with) the actual work could not proceed because of the Government’s blanket ban on all gas activities.[205]
[205]Ibid 28 [141]-[142]; Transcript of Proceedings, 117 [42]-[44].
Mr O’Brien stated Lakes Oil relied on the same documents in support of the previous year’s activities.[206] That is:
(a)a presentation by Mr O’Brien and Ingrid Campbell, the Chief Geologist at the applicant, called “Proposed Wombat-5 Gas Production without Fraccing”, which was presented to the applicant’s board of directors on 15 May 2013 (Wombat-5 Presentation);[207]
(b)an Initial Design Proposal for Wombat-5 prepared by WellServ and dated 9 August 2013[208] (Wombat-5 Design Proposal) which “outline[d] methodology, equipment and potential encountered issues to drill Wombat-5”;[209]
(c)the Operations Plan – Drilling Proposal Wombat-5 Horizontal Appraisal Well in PRL 2 dated September 2013 and prepared by the applicant (Wombat-5 Operations Plan);[210]
(d)an undated Production Forecast for Wombat-5 prepared by SPC (Wombat-5 Production Forecast);[211] and
(e)emails from 23 May 2013 to 11 June 2014 (2013/14 Emails), which apparently evidence the applicant’s research into “technologies that might be employable to achieve a lateral in the desired section of the Strezelecki formation”.[212]
[206] O’Brien Supplementary Statement (n 11) 5 [31]-[32]; Respondent Submissions (n 151) 24 [95].
[207] T Docs (n 3) T250 3415, T251 3426-3442; O’Brien Supplementary Statement (n 11) 5 [31].
[208] Applicant Tender Bundle (n 61) A41, 1018-1044; O’Brien Supplementary Statement (n 11) 5 [32].
[209] Applicant Tender Bundle (n 61) A41, 1023.
[210] Applicant Tender Bundle (n 61) A40, 941-1017; O’Brien Supplementary Statement (n 11) 5 [32].
[211] Applicant Tender Bundle (n 61) A42, 1045-1050; O’Brien Supplementary Statement (n 11) 5 [32].
[212] O’Brien Statement (n 1) 18 [90.6]; O’Brien Supplementary Statement (n 11) 4 [26]; Johnson Report (n 58) 42 [142].
Mr O’Brien says the planning continued in the 2014/15 financial year as Lakes Oil was “expecting the bans to be lifted”.[213]
[213] Transcript of Proceedings, 119 [10]-[11].
At the hearing Mr O’Brien acknowledged no reports were prepared by any consultants in respect of Wombat-5 during that year.[214]
[214]Ibid 119 [17]-[19].
The Wombat 5 well is the activity described as prototype test preparation and trials. Mr O’Brien says the hypothesis was that they could “get a commercial flow without having to frack the well” from the Wombat 5 well design.[215]
[215]Ibid 125 [1]-[3].
The hypothesis was described as follows:[216]
if enough surface area of the weathered zone was connected to the well bore it should be able to flow at significantly greater rates than were achieved in the vertical wells.
[216] T Docs (n 3) T57 1315.
This statement lacks detail. What is enough surface area? What does significantly mean? How can an experiment be conducted in a “scientific way”? The only documents provided in support do not demonstrate a systematic progression of an experimental activity.
It was put to Mr O’Brien during cross-examination that such a proposition was obvious. The exchange went as follows:[217]
Now, it’s an obvious proposition, isn’t it, Mr O’Brien, that the longer the well or the more extensive the well, if you’re trying to produce it by natural means, the more likely you will have a higher gas flow rate?‑‑‑That’s correct.
So really the proposition, the hypothesis that you’re seeking – well, Lakes Oil was seeking to test with Wombat-5 was whether the highest quality section of the reservoir would be located in the same vicinity as the proposed well bore?‑‑‑No, we weren’t chasing highest quality – we weren’t concerned about the quality of it because we knew it was all gas saturated, we just needed the volume of the rock.
So you needed - because the well – the well had a – already had a fixed path, didn’t it, Mr O’Brien?‑‑‑That’s right. The well path was fixed before we start drilling, that’s correct.
[217] Transcript of Proceedings, 125-126 [45]-[11].
In other words, the outcome of the activities was known in advance, at least to experts in the field. The exchange continued:
Yes. So the well path was fixed. So the question is whether, having regard to that particular well path, you would encounter – or you would locate sufficient areas of highly productive gas sands?‑‑‑That’s correct.
Mr O’Brien did not agree the purpose of the Wombat 5 activities was to enable a further evaluation of the extent of the hydrocarbon deposits in the reservoir. He repeated the purpose was to determine the capability of the gas accumulation to flow at a commercial rate (the flow rate capability). During cross-examination Mr O’Brien also disputed that they did not know the precise location of the gas sands. Mr O’Brien stated the entire weathered zone was the gas sands and they:[218]
were just trying to encounter enough of that weathered zone to see if it would flow at a commercial rate. It wasn’t to find individual sands or reservoired sands, the whole section is a saturated gas zone
[218] Ibid 124 [14]-[16].
In any event, during cross-examination it was accepted there was no indication of any activities taking place in the 2014/15 financial year.[219]
[219] Ibid119-120 [33]-[8].
That brings us to the SRK report. The SRK Report was not paid for until after the registration period under examination.[220] The report was not finalised until December 2015. Mr O’Brien could not recall when the activity commenced but agreed it was likely to have taken place outside the registration period.[221] In these circumstances we cannot be satisfied on the balance of probabilities the activity was undertaken in the 2014/15 year. This is further supported by the fact the quarterly report for the Three Months Ended 31 September 2015 indicated this activity was engaged in the second half of 2015 outside the time under review.
[220] Ibid 134 [26]-[30].
[221] Ibid 136 [21]-[23].
We find the SRK activity was not an eligible R & D activity in the 2014/15 year.
Conclusion
The Claimed Activities are not core or supporting R & D activities.
DECISION
The Tribunal affirms the decision under review.

I certify that the preceding 260 (two-hundred and sixty) paragraphs are a true copy of the reasons for the decision herein of Deputy President Bernard J McCabe and Senior Member Dominique K Grigg

...........................[SGD]..........................................
Associate
Dated: 14 April 2023

Date/s of hearing:

19 - 23 October 2020 and 2 February 2021

Date reserved:

11 March 2022

Counsel for the Applicant:

Mr Chris Peadon (by videoconference)

Solicitors for the Applicant:

Piper Alderman Lawyers

Counsel for the Respondent:

Ms Tiffany Wong SC and Ms Christina Trahanas (by videoconference)

Solicitors for the Respondent:

Ashurst Lawyers

Date/s of hearing:	19 - 23 October 2020 and 2 February 2021
Date reserved:	11 March 2022
Counsel for the Applicant:	Mr Chris Peadon (by videoconference)
Solicitors for the Applicant:	Piper Alderman Lawyers
Counsel for the Respondent:	Ms Tiffany Wong SC and Ms Christina Trahanas (by videoconference)
Solicitors for the Respondent:	Ashurst Lawyers