Doc 268 Jpm Csg1

Asia Pacific Equity Research 30 November 2010

ESG and the Energy Sector

Water Concerns: QLD Coal Seam Gas Developments Report Summary

Australia Garry SherriffAC

(61-2) 9220-1502 [email protected]

Benjamin Wilson (61-2) 9220-1384 [email protected]

Jason Steed (61-2) 9220-1551 [email protected]

J.P. Morgan Securities Australia Limited

See page 28 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Water, Water Everywhere…Few Drops to Drink?

2


Garry Sherriff (61-2) 9220-1502 [email protected]

Table of Contents Executive Summary .................................................................3 Coal Seam Gas and Water Use ...............................................5 The Great Artesian Basin.........................................................8 Surat and Bowen Basins .........................................................9 Six Key Water Concerns ........................................................10 Potential Implications for CSG Companies..........................24 Penalties for Breaching Water Conditions...........................26

Tables Table 1: Water Types and Total Dissolved Solids.......................................................7 Table 2: Estimated Population - Surat and Bowen Basins...........................................9 Table 3: Summary of Key Water Risks and Risk Management Options ...................11 Table 4: Surat Basin – Type of Water Bores .............................................................13 Table 5: Bowen Basin – Type Water of Bores ..........................................................13 Table 6: Chemicals typically used in Australian CSG fraccing fluids.......................17 Table 7: Preferred Water Management Options – Queensland Government.............20 Table 8: Non-Preferred Water Management Options – Queensland Government.....21 Table 9: Salt and Brine Waste Management Preferences ..........................................21 Table 10: Analysis of Water Management Options ...................................................22 Table 11: Examples of Maximum Monetary Penalties from Water Breaches ...........26

Figures Figure 1: Typical CSG Extraction Process ..................................................................5 Figure 2: Estimated Number of QLD CSG Wells........................................................6 Figure 3: Estimated % Water Volumes Extracted .......................................................6 Figure 4: Water Extraction vs Gas Production ............................................................6 Figure 5: Aerial Photo of CSG Fields ..........................................................................7 Figure 6: The Great Artesian Basin .............................................................................8 Figure 7: Cross-Section of the Great Artesian Basin ...................................................8 Figure 8: Location of the Surat and Bowen Basins......................................................9 Figure 9: Key Water Concerns...................................................................................10 Figure 10: Potential Water Movement in Aquifers from Changes in Water Pressure12 Figure 11: Location of Existing Water Bores in the Surat Basin ...............................13 Figure 12: Water Bores in QCLNG Gas Fields .........................................................14 Figure 13: Condamine Alluvium May Drain into Underlying Coal Seam ................15 Figure 14: Example of Hydraulic Fracturing Process................................................16 Figure 15: Surat Basin ...............................................................................................18 Figure 16: Bowen Basin.............................................................................................18

3



Executive Summary The proposed coal seam gas (CSG) developments in Queensland’s Surat and Bowen Basins have sparked public debate regarding the potential water impacts from CSG drilling activities.

We identify the key water concerns raised by various groups and discuss the strategies the major CSG players (Santos, Origin, BG and Shell) have employed to address these concerns.

We spent two days visiting gas fields, irrigators, landowners and community groups in Queensland’s Surat Basin to gain on the ground insights into the area’s water concerns. As part of our research process we also spoke with the key CSG players, relevant State and Federal Government Departments, law firms and water experts.

Six Key Water Risks Our analysis identified the following key water risks associated with the proposed CSG development activities:

1. Risk of reduced water supply to landowners and regional townships.

2. Risk of reduced water quality from cross contamination of water tables.

3. Risk of reduced water quality from drilling chemicals contaminating water.

4. Risk of gas migrating from gas fields to existing water bore wells.

5. Risks on how to treat, store and dispose of saline water, brine and salt brought to the surface during CSG drilling activities.

6. Unknown cumulative water impacts from multiple CSG developments.

Potential Company Implications We highlight possible implications for CSG players should any of the key water risks we have identified above materialise and seriously impact public health, safety or the environment:

• Potential project cost increases

• Potential future Government intervention

• Potential changes to regulation over time

• Potential disruption to long term gas supply contracts

4



Key Proposed CSG Developments in Queensland Currently there are four major proposed CSG to LNG developments in Queensland which have been approved or are in the process of being approved:

• Origin Energy and ConocoPhillips’ Australia Pacific LNG Project (APLNG)

• Santos, Petronas and Total’s Gladstone LNG Project (GLNG)

• BG Group’s Queensland Curtis Island Project (QCLNG)

• Shell and PetroChina’s LNG Project (Arrow)

Each of the proposed CSG developments have been declared a ‘significant project’ by the Queensland Coordinator General for which an Environmental Impact Statement is required in accordance with the State Development and Public Works Organisation Act 1971 (Qld). The Commonwealth Government also requires an Environmental Impact Statement under the Environment Protection and Biodiversity Conservation Act 1999 (Cth).

The Environmental Impact Statement process occurs under a bilateral agreement and addresses matters on behalf of both the Queensland and Australian Commonwealth Governments. The process is coordinated by the Queensland Coordinator-General.

5



Coal Seam Gas and Water Use What is Coal Seam Gas? Coal Seam Gas (CSG) is a natural gas consisting of around 98% methane and is formed from the degradation of plant matter over millions of years. CSG is trapped by water and ground pressure against the surface of coal in underground coal seams and is also located within pores inside the coal. The spaces between the coal are known as fractures or cleats. Some of the fractures are interconnected and permeable which allows water and gas to move between the fractures.

How is CSG extracted? CSG is extracted via CSG wells that are drilled into the coal seams to release the gas trapped within the coal. For economic extraction of CSG, coals seams in Australia are generally between 200 metres – 1,000 metres deep. The CSG wells are cased with steel and cement to prevent loss of water from aquifers above the coal seam. An aquifer is a seam of permeable rock such as sandstone that holds water. In situations where coal seams are very deep and of low permeability, the use of hydraulic fracturing or ‘fraccing’ may be employed to increase permeability. This process involves pumping fluid comprising water, sand and other additives at high pressure down the cased CSG well and into the coal seam. This action fractures the coal seam and provides a pathway to facilitate gas flow through the coal. Why does underground water rise to the surface? To extract CSG requires the coal seams to be depressurised by releasing the gas and associated underground water in the fractures of the coal seams to the surface. The underground water is released as a byproduct of the CSG extraction process. The depressurisation process affects the water levels in coal seams and can potentially affect interconnected aquifers above (overlying) or below (underlying) the coal seam. This is a key reason for why CSG extraction can affect water supply to water bores in areas surrounding CSG extraction wells.

Figure 1: Typical CSG Extraction Process

Source: Queensland Department of Environment and Resource Management

Coal seam gas is primarily methane

Economic extraction of coal seam gas typically occurs at depths of 200m to 1,000m

Water flows to the surface unaided or is pumped out if the pressure within the coal seam is low

Gas and water in the coal seam is usually separated at the CSG well head

6



CSG Water Volumes and Gas Extraction Approximately 450 gigalitres of underground water is extracted from the entire Great Artesian Basin per year for domestic, agricultural and industrial purposes 1.The CSG activities in Queensland’s Surat and Bowen Basins alone are estimated to extract between 125 - 350 gigalitres of water per year over the coming 20 to 30 years2. This equates to an additional ~30% - 80% of current water volumes being extracted from the GAB per annum solely from CSG activities.

The water extraction volumes are based on an estimated 25,000 to 30,000 CSG wells in Queensland over the next 20 years to 30 years. Currently there are approximately 3,000 wells in Queensland. The estimated percentage of CSG water volumes over the next 20 to 30 years are approximately 60% for the Bowen Basin and 40% for the Surat Basin.

Figure 2: Estimated Number of QLD CSG Wells

3,000

30,000

-

10,000

20,000

30,000

40,000

Currently Estimated nex t 20 y ears


Figure 3: Estimated % Water Volumes Extracted

Bow en Basin60%

Surat Basin40%


An inverse relationship exists between water extracted and gas produced. As coal seams are dewatered, the volumes of water pumped to the surface generally decreases over time and gas flow production increases per Figure 4.

Figure 4: Water Extraction vs Gas Production

Source: Santos GLNG Water Management Strategies

1 Department of Environment and Resource Management 2 Department of Environment and Resource Management; Basin Sustainability Alliance

Between 125 and 350 gigalitres of water per year are expected to be extracted from the Surat and Bowen Basin’s from CSG activities over the next 20 to 30 years

60% of estimated future CSG water extraction volumes will be from the Bowen Basin with the remaining 40% from the Surat Basin

Higher volumes of water are released in the early stages of CSG extraction before tapering off over time

7



CSG Water Quality CSG water typically contains high concentrations of salts and naturally occurring minerals. CSG water generally has a high sodium adsorption ratio and could contain other contaminants. Due to the high saline content of CSG water it could cause environmental harm if released to soil or surface waters untreated. Table 1 shows the typical concentration levels of dissolved solids in various water sources.

Table 1: Water Types and Total Dissolved Solids Water Source Total Dissolved Solids Parts per Million Rainwater 15–22 Desalinated water 180 Brisbane tap water 240 Amended associated water 2,650 Saltwater swimming pool 6,000 Average CSG water 300–8,000 Seawater 35,000 Brine More 40,000

Source: Santos GLNG Water Management Strategies Queensland Department of Environment and Resource Management

Operation of CSG Fields CSG production wells are usually spaced approximately 500 metres to 1,000 metres apart in a matrix or grid pattern. Production wells are connected by underground water and gas pipelines known as ‘gathering systems’. The gas and water is piped to a processing facility where the gas is compressed at a central compressor station before being distributed to customers via a high-pressure pipeline. The water is usually stored in water storage reservoirs or containment ponds which are lined to prevent seepage. Water treatment plants utilising reverse osmosis technology are also used to treat some of the water and distribute for beneficial use. Figure 5: Aerial Photo of CSG Fields

Source: Basin Sustainability Alliance

CSG water typically contains high levels of salt which is unsuitable for drinking or irrigation purposes without treatment

8



The Great Artesian Basin Much of the CSG development activities lay above the Great Artesian Basin (GAB). The GAB is one of the largest underground water reservoirs in the world and covers most of inland Queensland, parts of New South Wales, South Australia and the Northern Territory per Figure 6.

The GAB covers an area of over 1.7 million square kilometres or ~22% of Australia’s land mass and is estimated to contain around 65 million gigalitres of water equivalent to around 130,000 Sydney Harbours or 26 billion Olympic sized swimming pools3.

The GAB consists of a series of alternating permeable sandstone layers and impermeable siltstone and mudstone layers. Water is trapped under great pressure within the permeable sandstone layers. The GAB is recharged with rainfall where permeable sandstone is exposed above ground and is mainly located along the western edge of the Great Dividing Range. The general flow of water in the GAB flows from east to south-west.

Water bores tap the aquifers in the GAB with average bore depth of around 500 metres, however some water bores are drilled to depths of 2,000 metres. Some water bores are free flowing while others require pumps to bring water to the surface. The aquifers of the GAB are an important underground water supply providing vital water to overlying regions for stock, domestic, urban and industrial use, often in areas where there is no alternate water supply source.

Figure 6: The Great Artesian Basin Figure 7: Cross-Section of the Great Artesian Basin


3 Water Matters – Issue 4, May 2009. Commonwealth Department of Sustainability, Environment, Water, Population and Communities.

The Great Artesian Basin covers over 20% of Australia’s land mass

Contains water volumes equivalent to around 130,000 Sydney Harbours

Recharge areas are mainly located around the western side of the Great Dividing Range

GAB aquifers are used as a source of water supply for agricultural, domestic and industrial purposes

9



Surat and Bowen Basins The CSG tenures and development activities in Queensland occur in the Surat and Bowen Basins. These areas currently have a population of ~140,000 people4.

Table 2: Estimated Population - Surat and Bowen Basins

Geographical Area Estimated Population Surat Basin 46,000 Bowen Basin 94,000 Total 140,000 Source: Queensland Department of Infrastructure and Planning; Office of Economic and Statistical Research

Surat Basin The Surat Basin in southern Queensland stretches from the Western Downs near Dalby and extends as far as Roma. Generally the coal seams in the Surat Basin are striated and not continuous. The aquifers of the Surat Basin are connected to the GAB. BG (QGC), Origin (APLNG), Santos (GLNG) and Shell (Arrow) have tenures for CSG developments in the Surat Basin area.

Bowen Basin The Bowen Basin stretches north of the Surat Basin beyond Roma into central Queensland up as far as Rockhampton. The Bundana coal seam is the main coal seam in the Bowen Basin and is a more continuous, solid seam of coal. The Bowen Basin lies below the GAB and is not connected to the major GAB aquifers (however the Bowen Basin does touch the precipe sandstone in some areas). Santos (GLNG), Origin (APLNG) and Shell (Arrow) have tenures for CSG developments in the Bowen Basin area.

Figure 8: Location of the Surat and Bowen Basins

Source: Origin APLNG

4 Queensland Department of Infrastructure and Planning; Queensland Office of Statistical Research.

Around 140,000 people live in the Surat and Bowen Basins

Some aquifers in the Surat Basin connect with the GAB

BG only operates in the Surat Basin while Santos, Origin and Arrow have tenures in both the Bowen and Surat basins

Most of the aquifers in the Bowen Basin do not connect with the GAB

10



Six Key Water Concerns Various groups including Government, agricultural landowners and community groups have raised concerns regarding potential water risks from CSG activities in Queensland. In this section we identify and discuss the six key water concerns regarding the proposed CSG developments in Queensland’s Surat and Bowen basins (Figure 9).

Figure 9: Key Water Concerns

Key Water Concerns

5. Treatment, storage and disposal of saline water,

brine and salt

3. Reduced water quality from drilling chemicals

contaminating water

1. Reduced water supply to

landowners and townships

4. Gas migration to

water bores

6. Cumulative water

impacts from multiple CSG developments

2. Reduced water quality

from water table cross contamination

Source: J.P. Morgan Research and Analysis

Site visit We spent two days visiting gas fields, irrigators, landowners and community groups to gain on the ground insights into the area’s water concerns. We met with various groups including the CEO of the Queensland Murray Darling Committee, the Chairman of the Central Downs Irrigators, the CEO of the Basin Sustainability Alliance, members of the Western Downs Alliance and agricultural property owners.

Multiple Data Sources We spoke with several Queensland Government Departments and reviewed numerous documents including the Environmental Impact Statements (EIS) submitted by the Santos, BG and Origin joint ventures; the Co-Coordinator General's EIS Evaluation Reports and the Federal Government’s environmental approvals and associated conditions. We also reviewed documents published by hydrologists, agricultural groups and the major CSG producers.

Water concerns from multiple stakeholders

We visited Queensland gas fields for two days to meet with agricultural landowners and community groups

Directly obtained information from CSG companies, Government Departments, water experts and agricultural groups

11



The predicted large volumes and variable quality of CSG water mean water management is critical. The amount of water extracted varies from basin to basin and also over the life of individual CSG production wells. Strategies for management and beneficial use are dictated by water quality and quantity at each CSG development site. Table 3 summarises the key water risks and management options based on our analysis.

Table 3: Summary of Key Water Risks and Risk Management Options

Key Water Risk Details Risk Management 1. Loss of water supply to

landowners and townships. As coal seams are dewatered, the change in water pressure may result in overlying aquifers draining over time into coal seams below. Water bores accessing water from these overlying aquifers may experience drops in water levels. Poorly constructed CSG wells which are not appropriately cased and sealed can also contribute to water loss.

• Steel cased CSG wells with concrete seals. • Regular groundwater testing and monitoring. • Groundwater modelling. • Reinjection of water back underground. • Make good arrangements.

2. Reduced water quality from water table cross contamination.

CSG drilling activities may result in a) one aquifer mixing with water from another aquifer or b) lower quality water in coal seams entering higher quality water aquifers. These events can occur from changes in water pressure from the dewatering process resulting in movement of water between aquifers/coal seams or from poorly constructed CSG wells which are not appropriately cased or sealed.

• Steel cased CSG wells with concrete seals. • Groundwater modelling. • Regular groundwater testing and monitoring. • Make good arrangements.

3. Reduced water quality from drilling chemicals contaminating water.

Risk of CSG drilling lubricants or fluids used during hydraulic fracturing of coals seams entering water sources. This can occur from either poorly constructed CSG wells or from poor disposal of produced water (eg not removing all the produced water from fracced wells or from spilling produced water onto land or surface waters).

• Steel cased CSG wells with concrete seals. • Regular groundwater testing and monitoring. • Treatment and disposal of water used during

drilling and hydraulic fracturing. • Make good arrangements.

4. Gas migration to water bores. Gas can migrate from coal seams to overlying aquifers where a pathway exits. The process of gas migration usually occurs in areas at a distance from the CSG well where depressurisation is lower. As such the gas does not flow at high pressure to the surface and instead migrates away from gas fields through natural geological pathways or via artificial conduits such as man-made water bore wells.

• Regular water bore testing and monitoring. • Appropriately constructed water bores. • Make good arrangements.

5. Treatment, disposal and storage of CSG water, brine and salt.

CSG water brought to the surface is typically highly saline and not suitable for agricultural or domestic purposes. The CSG water can be treated to produce high quality water however the residual waste, known as brine, is a highly concentrated saline mixture.

• Regular groundwater testing and monitoring. • Reverse osmosis treatment for beneficial use. • Reinjection of water back underground. • Containment ponds. • Licensed disposal facility. • Pipe to marine waters.

6. Cumulative impacts from multiple CSG developments.

Cumulative water impacts from multiple CSG developments occurring are currently difficult to accurately model.

• Development of a regional-scale groundwater flow model from both private and public sector sources.

Source: J.P. Morgan Research and Analysis

12



1. Reduced water supply to landowners and townships Landowners and townships within the development areas are concerned about the possible reduction of water supply and the impact on underground water resources as a result of CSG activities. Particular concern surrounds potential impacts on:

• Shallower, high quality groundwater reserves such as the Condamine Alluvium in the Western Downs located west of Toowoomba.

• Deep water aquifers forming part of the Greater Artesian Basin which sit below large areas of the proposed CSG development areas.

How could water supply be reduced? The water levels tapped by existing water bores could be reduced as a consequence of the depressurisation process as water is extracted during CSG activities. As coal seams are dewatered, the flows and the storage of water in aquifers could be affected by a reduction in hydrostatic pressure.

The risk is water pressure changes as coal seams are dewatered may result in overlying aquifers draining down into the coal seam. Thus water bores which tap water from overlying aquifers may experience a drop in water levels. Similarly water in underlying aquifers may move to coal seams above them over time. Figure 10 demonstrates how water could potentially move between aquifers and confining layers from changes in water pressure as groundwater is removed during CSG activities.

Figure 10: Potential Water Movement in Aquifers from Changes in Water Pressure

Source: Department of Environment and Resource Management

Poorly constructed CSG wells which are not steel cased or do not have appropriate concrete seals to prevent water from escaping into other aquifers or the coal seam can also contribute to water losses. The steel casing is cemented into place isolating the surrounding rock from the producing coal seams.

Changes in water pressure and the permeability of aquifers and confining layers can impact underground water sources

Poorly constructed CSG wells can also contribute to water supply losses

CSG wells

Arrows represent

water movement

13



How many water bores are there in the Surat and Bowen Basins? There are approximately 7,000 water bores in the Surat and Bowen Basins. The Surat Basin contains approximately 5,000 water bores and the Bowen basin contains approximately 2,000 water bores5. Water bore use The water bores in the Surat and Bowen Basins are mainly used for stock purposes such as for cattle, sheep, horses etc and for domestic household purposes. Stock intensive use refers to the use of feedlots such as cattle and dairy farming.

Table 4: Surat Basin – Type of Water Bores Type of Bore Percentage Stock and domestic 94% Stock intensive 3% Irrigation 1% Town water supply 1% Other (including mining) 1%


Table 5: Bowen Basin – Type Water of Bores Type of Bore Percentage Stock and domestic 97% Other 3%


Figure 11 shows existing water bore locations in the Surat Basin. Figure 11: Location of Existing Water Bores in the Surat Basin

Source: Origin APLNG

5 Department of Environment and Resource Management

There are currently a total of ~7,000 water bores in the Surat and Bowen Basins

Water bores used for agricultural, domestic and industrial use

14



How many water bores are within the proposed CSG development areas? We contacted each of the major CSG players to obtain estimates of how many water bores were within or near their Queensland CSG development areas. Only one of the four major CSG players responded to our information request at the time of publishing this report. Origin stated it has approximately 600 water bores within its Walloons development area. Although BG did not provide us with information, the location of water bores near its QCLNG gas fields are shown in Figure 12.

Figure 12: Water Bores in QCLNG Gas Fields

Source: BG QCLNG Environmental Impact Statement

15



2. Reduced water quality from aquifer cross contamination CSG drilling activities may result in aquifer cross contamination due to changes in water pressure from the coal seam dewatering process or from poorly constructed CSG wells. Examples of reduced water quality are where:

a) Water from one aquifer mixes with water from another aquifer or;

b) Lower quality water in coal seams enters higher quality water aquifers.

Lower quality water from coal seams entering aquifers There is a risk that lower quality water from coal seams may enter aquifers containing higher quality water. The primary cause of this event is from poorly constructed CSG wells. As lower quality coal seam water rises to the surface during CSG extraction the concern is that lower quality water could enter higher quality overlying aquifers. All the major CSG players have stated they use steel-cased CSG wells and the wells are appropriately sealed with concrete to prevent lower quality water from coal seams entering higher quality water aquifers. Therefore we believe the likelihood of this occurring is low.

Water from aquifers entering coal seams Water from higher quality aquifers may drain into coal seams due to changes in water pressure. The Condamine Alluvium in the Western Downs of Queensland is a shallow, high quality water resource used by irrigators for agricultural farming. From a water quality perspective this is less of a concern since the coal seams are receiving higher quality water (ie the water quality in the coal seams is improved).

The risk for CSG players from an operational viewpoint is that water draining down into the coal seams may affect gas flow production and reduce well productivity. This may add to the costs of CSG extraction depending on the frequency and severity of this event occurring.

Figure 13: Condamine Alluvium May Drain into Underlying Coal Seam


16



3. Reduced water quality from chemical contamination A particularly contentious issue in the community at present is the risk of chemical agents and fluids entering water sources. Drilling chemicals used in CSG activities and fluids used during hydraulic fracturing are the main causes of concern.

Drilling chemicals used during drilling CSG wells consist of lubricants and oils containing hydrocarbons. Traces of these chemicals can enter underground water sources during the drilling process. However, much of the recent concern regarding potential chemical contamination of water is about hydraulic fracturing.

Hydraulic Fracturing Hydraulic fracturing or “fraccing” is often used in coal seams which are very deep and of low permeability. Fraccing facilitates the flow of gas from the seam to the surface and involves pumping large volumes of fraccing fluid comprised of water, sand and chemical additives, under high pressure into the coal seam. This action fractures the coal seam creating pathways to facilitate increased gas flow. The sand holds the facture open to allow gas and water to flow to the gas well for extraction.

Fraccing occurs hundreds of metres underground and typically takes one to three days to complete. The majority of the fluids used in the fraccing process are brought back to the surface and either recycled for future fraccing treatments, disposed of in containment ponds or transported to water treatment facilities.

Figure 14: Example of Hydraulic Fracturing Process

Source: Wall Street Journal, Al Granberg, Chesapeake Energy

Risk drilling chemicals or fluids used in hydraulic fracturing may enter water sources

Hydraulic fracturing is typically used in coal seams with low permeability

Most of the fraccing fluid is brought back to the surface

Fraccing fluid is either recycled for future fracturing purposes, stored in containment ponds or taken to treatment plants

17



What chemicals are used in hydraulic fracturing fluid? In the United States BTEX chemicals have been used in fraccing fluids in the past. BTEX is an acronym for benzene, toluene, ethylbenzene and xylene compounds. BTEX are highly soluble organic compounds and are a common indicator of petroleum or gas contamination in groundwater. BTEX poses a risk to human health as some of the compounds are known carcinogens and have a tendency to migrate with groundwater to water supply wells6.

The Queensland Government has banned the use of BTEX and a major Australian petroleum and gas industry body7 stated that BTEX is not used in Australian CSG fraccing fluids. Table 6 lists chemicals typically used in fraccing fluids in Australia.

Table 6: Chemicals typically used in Australian CSG fraccing fluids Chemical Fraccing use Example of common use / found in household products 1-Propanol Complexor Solvent in the pharmaceutical industry 2-Butoxyethanol Reduces surface tension to aid gas flow Whiteboard cleaners, liquid soaps, cosmetics and lacquers Acetic Acid pH buffer Gives vinegar its taste Acrylic copolymer Lubricant Soil-repellent coating products in the building industry Ammonium persulfate Turns gel into water Hair bleach, blot gels and glass cleaning products Boric Acid Crosslinker to increase viscosity Antiseptic Boric Oxide Crosslinker to increase viscosity Used to produce high strength alloys, glasses and ceramics Carbonic acid Crosslinker to increase viscosity Soft drinks, champagne Carboxy-Methyl Hydroxy-Propyl Guar Thickens fluid to help suspend sand Food products Crystalline silica (cristobalite) Proppant – holds open fractures Sand and gravel Crystalline silica (quartz) Proppant – holds open fractures Sand and gravel Citric Acid Cleaning well bores before fraccing Orange juice Diammonium Peroxidisulphate Turns gel into water Hair bleach, blot gels and glass cleaning products Disodium Octaborate Tetrahydrate Gelling agent Fertiliser Gas oils (petroleum), hydrotreated light vacuum Guar liquefier Baby oil, coolant, thermal fluid, wood conditioner Fumaric acid pH buffer Food flavouring and to make bread Gelatine Corrosion inhibitor or gelling agent Jelly Guar Gum Thickens fluid to suspend sand Food thickening agent Hemicellulase Enzyme with Sodium Chloride Thickens fluid to suspend sand Commercial food processing of coffee Hydrochloric Acid Cleaning of the wellbore prior to fraccing Used to clean swimming pool filters Hydroxy-Ethyl Cellulose Thickens fluid to suspend sand Placebo in medical trials Hydroxy-Propyl Guar Thickens fluid to suspend sand Food products such as cheese and ice cream Magnesium silicate hydrate Gelling agent Talcum powder Methanol Reduces surface tension to aid gas flow Type of alcohol Mono ethanol amine Gelling agent Cosmetics, pharmaceuticals and emulsifiers Ethylene Glycol Monobutyl Ether Mutual solvent Household cleaners, fire fighting foam Muriatic Acid Used for cleaning the well bore Leather tanning and for cleaning Non-crystalline silica Proppant – holds open fractures Used to make glass Poly (oxy-1,2-ethanediyl) Proppant – holds open fractures Hair treatments and shampoo Polydimethyldiallylammonium chloride Clay control Waste water treatment Potassium Carbonate pH buffer Soap, wine, glass, dyes and as a fire suppressant Potassium Chloride Clay inhibitor Table salt substitute Quaternary Polyamines Clay control Waste water treatment Sodium Acetate pH buffer Primary flavouring in salt and vinegar potato chips Sodium Borate pH buffer Glass, pottery, and detergents Sodieum Bicarbonate pH buffer Cooking Sodium Carbonate (Soda Ash) pH buffer Used to neutralise acid Sodium Chloride Turns gel into water Table salt Sodium Hypochlorite with Sodium Hydroxide Antiseptic to eliminate bacteria in water Bleach for household cleaning and swimming pools Sodium Persulfate Turns gel into water Hair treatments and detergents Terpenes/terpenoids/sweet orange oil Reduces surface tension to aid gas flow Pharmaceuticals Tetrakis (hydroxymethyl) Phosphonium Sulfate Antiseptic to eliminate bacteria in water Antiseptic to eliminate bacteria in water and petroleum Tetramethyl ammonium chloride Clay control A type of salt Zirconium complex Crosslinker to increase viscosity Alloying agent in surgical appliances Source: Australian Petroleum Production & Exploration Association

6 U.S. Geological Survey 7 The Australian Petroleum Production and Exploration Association

BTEX in fraccing fluids are banned in Queensland

18



How many CSG wells are actually fracced in Queensland? Since 2000 approximately 5% of CSG wells drilled in Queensland have undergone hydraulic fracturing with an estimated 10%-40% of future Queensland CSG wells to undergo some form of hydraulic fracturing over the coming 20 to 30 years8.

Fraccing in the Bowen Basin is expected to occur more frequently due to the nature of the coal seams. Coal in the Bowen Basin is typically deeper underground and the geological formations of the coal seams are solid and densely packed in part due to the increased pressure from being deeper underground than the Surat Basin. This typically makes it more difficult for the gas to escape from coal seams in the Bowen Basin and is the primary reason why the Queensland Department of Environment and Resource Management is forecasting approximately 40% of CSG wells to be fracced in the Bowen Basin over the coming 20 years or so.

On the other hand the coal seams in the Surat Basin are forecast to only have approximately 5% of CSG wells fracced over the next 20+ years due to the varied geological formations of the coal seams. The Surat Basin coal seams are more striated meaning it is easier for the gas to move through the coal and thus fewer CSG wells are expected to require hydraulic fracturing.

Estimated Percentage of Fracced CSG Wells in Queensland over next 20+ years Figure 15: Surat Basin

Not Fracced

95%

Fracced 5%


Figure 16: Bowen Basin

Fracced 40%

Not Fracced

60%


8 Queensland Department of Environment and Resource Management

Around 5% of CSG wells in Queensland have undergone hydraulic fracturing to date

Around 40% of the Bowen Basin’s CSG wells are expected to be fracced over the coming 20+ years due to the lower permeability of coal in this area

Only 5% of the Surat Basin’s CSG wells are forecast to be fracced over the same period

19



Recent Water Contamination Precedents in Queensland There have been three recent precedents in Queensland relating to concerns about chemical contaminants entering water sources. The precedents involve companies undertaking coal seam gas extraction activities.

Origin Energy Australia Pacific LNG (APLNG) announced in October 2010 the discovery of BTEX traces in fluid samples in eight CSG exploration wells in the Surat Basin west of Miles. The samples were taken from exploration wells that had been stimulated by hydraulic fracturing.

APLNG stated that BTEX is not used in its fracture fluids and its supplier confirmed the fluids supplied do not contain BTEX. Although the concentration of BTEX identified was very low and restricted to eight wells, the traces found highlight the risk of chemicals and fluids entering underground water sources. Sampling conducted on surrounding landholder water bores did not identify unsafe levels of BTEX. A detailed investigation including comprehensive testing is ongoing at the time of publishing this report.

Arrow Energy Arrow Energy announced in November 2010 that traces of benzene were detected in three wells in its developments in the northern Bowen Basin. Traces of benzene were identified in two wells in Moranbah tenure and one in an adjoining exploration tenement. The traces are the equivalent of between one and three parts per billion. Arrow stated it has not used benzene or BTEX in its hydraulic fracturing fluids.

According to Arrow there are no registered water bores within five kilometres of the affected wells and the coal seam water is not used for feedstock. Independent testing is being undertaken to determine if the traces of benzene are naturally occurring or entered the water via other means. The company is also testing water bores closest to the affected wells.

Cougar Energy ASX listed Cougar Energy received an Environmental Protection Order from the Queensland Government in July 2010 to cease operations of its pilot underground coal gasification plant near Kingaroy (north of Toowoomba). The operation remains closed at the time of publication as the Queensland Government is still not satisfied that groundwater resources in the area are adequately protected. Although underground coal gasification is a different technology to the CSG developments being undertaken by the major CSG players in Queensland, this example highlights the risk of potential future Government intervention regarding water concerns.

20



4. Treatment, storage, disposal of saline water, brine, salt Once the water is brought to the surface, the next key concern is how to treat, store or dispose of CSG water and associated waste streams. The water brought to the surface is often high in salt and other minerals. Treatment of CSG water through desalination or reverse osmosis technologies produces higher quality water however a byproduct is the concentrated saline waste water known as brine. Brine is typically defined as saline water with a total dissolved concentration of more than 40,000 milligrams per litre (seawater is around 35,000 milligrams per litre). The Queensland Government released its CSG Water Management Policy in June 2010’s with the aim to:

• Maximise the beneficial use of CSG water

• Minimise the risk of environmental harm

Treatment and Disposal of CSG Water As part of the CSG Water Management Policy, the Queensland Government stipulates a list of preferred management options (Table 7) and non-preferred management options (Table 8). Table 7: Preferred Water Management Options – Queensland Government


Concentrated saline waste is known as brine

Aim is to maximise beneficial use and minimise the risk of environmental harm

Preferred Management Options Details Injection of water back underground (where no detrimental impact likely)

• Inject into deep, underlying aquifers • Water quality must be the same or better than the receiving aquifer • Pilot studies under way by some CSG players

Untreated water for beneficial use • Supplying untreated water for beneficial use (agricultural, mining, industrial, municipal purposes)

Treated water for beneficial use • Supplying treated water to approved quality standard for beneficial use (agricultural, mining, industrial, municipal purposes)

21



Table 8: Non-Preferred Water Management Options – Queensland Government


Treatment and Disposal of Brine and Solid Salt The Queensland Department of Environment and Resource Management suggest the following waste management hierarchy for treatment and disposal of brine and solid salt in Table 9.

Table 9: Salt and Brine Waste Management Preferences

Source: Department of Resource and Environmental Management

Non-Preferred Management Options

Details

Disposal via evaporation dams • Requires large surface areas for evaporation and risk that evaporation dams may seep, leak or overflow from heavy rain or flooding

• Last resort unless no other feasible alternative available

Injection of water back underground (where detrimental impact is likely)

• Injection of lower quality CSG water than the receiving target formation or surrounding environment

• Clearly not a preferred management option as likely to result in degradation of environment rather than protection or enhancement

Disposal to surface waters • Risk that CSG water quality and quantity may disrupt surface water flows and ecology

Disposal to land • Risk that CSG water quality and quantity may affect soil, vegetation and ecology

Waste Management Strategy Details Hierarchy 1. Waste reuse or recycling • Recycling by chemically treating brine or salt

residues to create useable/saleable products (eg soda ash, commercial salt)

Most Preferable

2. Inject brine underground • Inject brine into underground geologically isolated structure that does not contain water able to be used for drinking, agricultural or industrial purposes

3. Pipe brine to marine waters • Only if independent scientific analysis shows the marine waters will not be adversely affected

4. Solid salt to existing disposal facility

• Suitable existing licensed and regulated waste disposal facility

5. Solid salt to new disposal facility • Purpose built licensed and regulated waste disposal facility on land owned by CSG operator

Least Preferable

22



We provide a summary analysis of various CSG water management options in Table 10. Cost estimates are not provided as the selected water management options are highly dependent on site specific conditions.

Table 10: Analysis of Water Management Options Option Advantages Disadvantages Suitability Underground Injection Into coal seam • Repressurise coal seam × May impact gas flow if reinjected into

producing coal seams × Risk of reinjected CSG water moving to

surrounding aquifers

• More suited to coal seams that are no longer producing

• Dependent on ability to accept water as coal seams can undergo a one time compaction event once dewatered and may be unable to hold the same water volumes

Into aquifer • Recharges depleted aquifers × Poor quality water could contaminate aquifer

× Costs of treating water may make option unviable

• Appropriate only if water quality is of equal or better quality than the receiving aquifer

• If treatment required may limit economical suitability

Storage Containment ponds • Short term option × Relatively large land area required

× Risk of overtopping onto land or waters × Risk of seeping into land or waters × No beneficial use

• Suitable for short term requirements • Lining of ponds required to prevent seepage • Sufficient freeboard needed to prevent overtopping

Evaporation ponds • Short term option × Substantial land area required × Risk of overtopping onto land or waters × Risk of seeping into land or waters × No beneficial use

• Limited due to large surface areas required • Regulators prefer containment ponds (deep dams

with a small footprint) rather than evaporation ponds (shallow dams with a large surface area).

• Disposal of brine and other waste material required

Disposal facility • Risk transfers to licensed operator of disposal facility

× Transportation costs may be large × No beneficial use

• Suitable depending on proximity to production areas and economics

Agricultural Use Livestock watering • Beneficial use for regional

industry × May affect animal health and production if

water quality not suitable • Suitable for certain livestock depending on water

quality and proximity to production areas

Irrigation • Beneficial use for regional industry

× May affect soil structure and crop yield • Dependent on water quality • Treatment costs may outweigh agricultural benefits

Industrial Use Coal mine use • Beneficial use via dust

suppression, truck washing, haul and pit road water

• Transport costs may be shared

× Water transportation costs to coal operations


• Opportunity to share costs with coal operator

Water cooling tower • Beneficial use for regional industry

• Transport costs may be shared

× May require water treatment or capex for infrastructure conversion to accommodate lower water quality


Fire protection • Beneficial use for regional communities

× Requires storage facilities close to regional townships

• Suitable depending on proximity to CSG production areas and economics

Municipal Use • Beneficial use for local

communities × Treatment required × Limited longevity of supply (20 years) may

offset economic viability of investment

• Suitable depending on proximity to CSG production areas and economics

Surface Waters • Provides increased base flows

for water systems suffering depleting water flows

× Potential erosion of banks × Difficult to match to natural flow rates × May contaminate soil, water course and

ecology if not treated to appropriate level

• Limited due to sensitive nature of surface water systems

Source: JP Morgan Research Analysis; Parsons Brinckerhoff Coal Seam Gas Water Management Study August 2004

23



5. Potential gas migration to water bores Another key concern is the issue of gas migrating from gas fields to water bores and other surface vents as a consequence of CSG drilling and dewatering of coal seams. Gas can seep into overlying aquifers where there is a pathway between the coal seam and the overlying aquifer.

The process of gas migration usually occurs in areas at a distance from the CSG well where depressurisation is lower. As such the gas does not flow at high pressure to the surface and instead migrates away from the gas fields to outlets such as natural geographic surface vents or artificial conduits such as man-made water bore wells. Standard water bores are not designed to safely bring CSG to the surface. The build up of gas in water bores can result in large uncontrolled releases of gas which may pose a risk to public health and safety. The build up of gas can also damage water bore pumps.

Appropriately constructed CSG wells designed to maintain separation between aquifers and coals seams reduce the risk of gas migration.

6. Cumulative water impacts of multiple CSG developments The cumulative impacts of multiple CSG developments in the region are currently unknown according to an independent expert advising the Federal Government. Geoscience Australia assisted the Federal Government evaluate the EIS documents submitted by Santos, BG and Origin. In their advice to the Commonwealth Government, Geoscience Australia state:

“We have noted that the current groundwater modelling is inadequate in terms of scale and detail to identify the impacts of multiple CSG developments on groundwater interactions in the Great Artesian Basin (GAB) and hence on EPBC Act listed discharge springs communities in the GAB.”

Geoscience Australia. "Summary of Advice in Relation to the Potential Impacts of Coal Seam Gas Extraction in the Surat and Bowen Basins, Queensland”. 29 September 2010

The Geoscience Australia report recognises that Santos, BG and Origin have considered the short term local impacts of groundwater extraction on local users and proposed appropriate mitigation strategies which address most of the water issues. However, in terms of long term cumulative impacts, Geoscience Australia states that more data and sophisticated modelling are required.

Geoscience Australia advocates a comprehensive regional-scale groundwater flow model from private and public sector sources to better inform understanding of long term cumulative water impacts. Currently individual CSG players are unable to adequately model cumulative impacts due to the limited sharing of commercial-in-confidence data. The outcomes from the cumulative regional model are highly uncertain until more CSG production data becomes available.

Gas migrating to water bores could pose health and safety risks

Cumulative regional water impacts are currently unknown

Regional-scale groundwater flow model from private and public sector sources needed

24



Potential Implications for CSG Companies We highlight four possible implications for CSG players should any of the key water risks we have identified materialise and seriously impact public health, safety or the environment:

1. Potential project cost increases

2. Potential future Government intervention

3. Potential changes to regulation over time

4. Potential disruption to long term gas supply contracts

1. Potential Project Cost Increases The long term nature of these projects (20+ years) suggests that the issues regarding water will not dissipate. Although difficult to quantify, the ongoing costs for CSG players to comply with the Government's approval conditions and future uncertainty about cumulative water impacts mean costs are likely to be higher than the market currently anticipates.

We believe that despite the CSG companies employing water risk mitigation strategies, the inherent uncertainty regarding these risks and the unknown cumulative water impacts may result in higher ongoing capex and opex costs for the CSG players than currently planned. Capex costs may include additional or improved infrastructure to store and treat water such as water treatment plants and brine storage facilities. Opex costs may include water transportation costs, clean up costs to remediate affected areas or potential future legal liabilities from aggrieved landowners, irrigators or graziers.

The Queensland Department Environment and of Resource Management also requires financial assurance (security deposit, cash or a bank guarantee) from CSG players to cover potential costs of rehabilitating areas significantly disturbed by gas activities. The financial assurance remains until the regulator is satisfied that no claim on the assurance is likely. Any amendment to a project means the financial assurance must be regularly recalculated and updated throughout the project’s life.

25



2. Potential Future Government Intervention CSG project operations may be affected depending on the severity of a future water incident(s). In the event that public health, safety or the environment is seriously impacted, Government will be compelled to act swiftly and has powers to intervene and suspend company operations via Environmental Protection Orders.

A recent example of Government intervention regarding water issues in Queensland involved ASX listed Cougar Energy receiving an Environmental Protection order in July 2010 to cease operations of the company’s pilot underground coal gasification plant near Kingaroy. The plant remains closed at the time of publication as the Queensland Government is not satisfied that groundwater resources in the area are protected.

Although underground coal gasification used by Cougar Energy is a different technology to the coal seam gas developments being undertaken by the major CSG players in Queensland, this example highlights potential future Government intervention from water issues.

3. Potential Changes in Government Regulation Over Time Government has a history of encouraging large investment projects to stimulate economic activity through large capital expenditure programs, employment and the associated tax revenues generated by the projects. However precedents exist where Government has ‘changed the rules’ over time in order to address emerging social or environmental impacts.

The gaming industry is an example where upfront investments in poker machines by clubs and pubs was encouraged by State Government’s eager to generate tax revenues from poker machine licenses. Over time however the social costs to the community became more prevalent and in response more onerous gambling regulation was enacted.

Due to the large upfront capex required for these long life CSG developments, once the infrastructure is built (pipelines, LNG facilities etc) the CSG players are in effect 'locked in' for a 20+ year period. We believe this situation and the potential of more stringent government regulation presents a risk to CSG players over the medium term.

4. Potential Disruption to Long Term Gas Supply Contracts The major CSG players operating in Queensland have secured or are in the process of securing long term gas supply contracts with domestic and international customers. Due to the confidential nature of customer gas supply contracts we do not know whether gas supply contracts with the major CSG players contain clauses regarding Government intervention or changes to Government regulation.

In the event that a CSG player is obliged under contract conditions to fulfill its gas commitments to customers under a Government intervention or regulatory change scenario, the CSG player may be legally obliged to find alternative gas supply sources or obtain gas on the spot market for its customers.

26



Penalties for Breaching Water Conditions Monetary Penalties Both State and Federal legislation imposes monetary penalties on CSG producers for breaching water conditions associated with CSG activities. An example of monetary penalties available to regulators is the Queensland parliamentary Bill recently passed in late November 2010. The Water and Other Legislation Amendment Bill 2010 (Qld) contains numerous monetary penalties for water breaches by CSG players. Examples of water breaches and maximum penalties under the Bill are listed in Table 11.

Table 11: Examples of Maximum Monetary Penalties from Water Breaches

Source: Water and Other Legislation Amendment Bill 2010, Queensland Government. (1) Maximum Monetary Penalties applies to bodies corporate (companies).

Financial Assurance The Queensland Department of Environment and Resource Management also requires financial assurance (security deposit, cash or bank guarantee) from CSG players to cover potential costs of rehabilitating areas significantly disturbed by CSG activities. The financial assurance remains until the regulator is satisfied that no claim on the assurance is likely. Any amendment to a project means the financial assurance must be recalculated and regularly updated throughout the life of the project.

We contacted each of the major CSG players to determine the financial assurance provided to the Queensland Government and also enquired about any environmental insurances that the companies may have regarding their CSG activities in Queensland. We did not receive a response to either of these questions from the companies at the time of publishing this report.

Environmental Protection Orders Under the Environmental Protection Act 1994 (Qld) the Queensland Government has the authority to issue Environmental Protection Orders which can include the suspension of company operations. ASX-listed Cougar Energy received an Environmental Protection Order from the Queensland Government in July 2010 to cease operations of its pilot underground coal gasification plant near Kingaroy. The operation remains closed at the time of publication as the Queensland Government is still not satisfied that groundwater resources in the area are adequately protected.

Under the Act the Queensland Government can also issue Clean-Up Notices and Cost Recovery Notices in the event of a water contamination incident. The cost of complying with these notices can be substantial depending on the severity of the water contamination.

Breach Max Penalty Units Max Monetary Penalties1 Failure to provide underground water impact report 1,665 A$832,500 Failure to comply with an underground water impact report 1,665 A$832,500 Failure to prepare baseline assessment plan 500 A$250,000 Failure to undertake a baseline assessment of a water bore 500 A$250,000

27



28



Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.

Important Disclosures

Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] J.P. Morgan Cazenove’s UK Small/Mid-Cap dedicated research analysts use the same rating categories; however, each stock’s expected total return is compared to the expected total return of the FTSE All Share Index, not to those analysts’ coverage universe. A list of these analysts is available on request. The analyst or analyst’s team’s coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.

J.P. Morgan Equity Research Ratings Distribution, as of September 30, 2010

Overweight (buy)

Neutral (hold)

Underweight (sell)

J.P. Morgan Global Equity Research Coverage

46% 43% 12%

IB clients* 49% 45% 33% JPMS Equity Research Coverage 43% 48% 8% IB clients* 69% 60% 50%

*Percentage of investment banking clients in each rating category. For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category.

Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks on any securities recommended herein. Research is available at http://www.morganmarkets.com , or you can contact the analyst named on the front of this note or your J.P. Morgan representative.

Analysts’ Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Institutional Equities and Investment Banking.

Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of non-US affiliates of JPMS, are not registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of JPMS, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account.

Other Disclosures

J.P. Morgan ("JPM") is the global brand name for J.P. Morgan Securities LLC ("JPMS") and its affiliates worldwide. J.P. Morgan Cazenove is a marketing name for the U.K. investment banking businesses and EMEA cash equities and equity research businesses of JPMorgan Chase & Co. and its subsidiaries.

Options related research: If the information contained herein regards options related research, such information is available only to persons who have received the proper option risk disclosure documents. For a copy of the Option Clearing Corporation’s Characteristics and Risks of Standardized Options, please contact your J.P. Morgan Representative or visit the OCC’s website at http://www.optionsclearing.com/publications/risks/riskstoc.pdf.

http://www.morganmarkets.com/

29



Legal Entities Disclosures U.S.: JPMS is a member of NYSE, FINRA and SIPC. J.P. Morgan Futures Inc. is a member of the NFA. JPMorgan Chase Bank, N.A. is a member of FDIC and is authorized and regulated in the UK by the Financial Services Authority. U.K.: J.P. Morgan Securities Ltd. (JPMSL) is a member of the London Stock Exchange and is authorized and regulated by the Financial Services Authority. Registered in England & Wales No. 2711006. Registered Office 125 London Wall, London EC2Y 5AJ. South Africa: J.P. Morgan Equities Limited is a member of the Johannesburg Securities Exchange and is regulated by the FSB. Hong Kong: J.P. Morgan Securities (Asia Pacific) Limited (CE number AAJ321) is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission in Hong Kong. Korea: J.P. Morgan Securities (Far East) Ltd, Seoul Branch, is regulated by the Korea Financial Supervisory Service. Australia: J.P. Morgan Australia Limited (ABN 52 002 888 011/AFS Licence No: 238188) is regulated by ASIC and J.P. Morgan Securities Australia Limited (ABN 61 003 245 234/AFS Licence No: 238066) is a Market Participant with the ASX and regulated by ASIC. Taiwan: J.P.Morgan Securities (Taiwan) Limited is a participant of the Taiwan Stock Exchange (company-type) and regulated by the Taiwan Securities and Futures Bureau. India: J.P. Morgan India Private Limited is a member of the National Stock Exchange of India Limited and Bombay Stock Exchange Limited and is regulated by the Securities and Exchange Board of India. Thailand: JPMorgan Securities (Thailand) Limited is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and Exchange Commission. Indonesia: PT J.P. Morgan Securities Indonesia is a member of the Indonesia Stock Exchange and is regulated by the BAPEPAM LK. Philippines: J.P. Morgan Securities Philippines Inc. is a member of the Philippine Stock Exchange and is regulated by the Securities and Exchange Commission. Brazil: Banco J.P. Morgan S.A. is regulated by the Comissao de Valores Mobiliarios (CVM) and by the Central Bank of Brazil. Mexico: J.P. Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan Grupo Financiero is a member of the Mexican Stock Exchange and authorized to act as a broker dealer by the National Banking and Securities Exchange Commission. Singapore: This material is issued and distributed in Singapore by J.P. Morgan Securities Singapore Private Limited (JPMSS) [MICA (P) 020/01/2010 and Co. Reg. No.: 199405335R] which is a member of the Singapore Exchange Securities Trading Limited and is regulated by the Monetary Authority of Singapore (MAS) and/or JPMorgan Chase Bank, N.A., Singapore branch (JPMCB Singapore) which is regulated by the MAS. Malaysia: This material is issued and distributed in Malaysia by JPMorgan Securities (Malaysia) Sdn Bhd (18146-X) which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets Services License issued by the Securities Commission in Malaysia. Pakistan: J. P. Morgan Pakistan Broking (Pvt.) Ltd is a member of the Karachi Stock Exchange and regulated by the Securities and Exchange Commission of Pakistan. Saudi Arabia: J.P. Morgan Saudi Arabia Ltd. is authorized by the Capital Market Authority of the Kingdom of Saudi Arabia (CMA) to carry out dealing as an agent, arranging, advising and custody, with respect to securities business under licence number 35-07079 and its registered address is at 8th Floor, Al-Faisaliyah Tower, King Fahad Road, P.O. Box 51907, Riyadh 11553, Kingdom of Saudi Arabia. Dubai: JPMorgan Chase Bank, N.A., Dubai Branch is regulated by the Dubai Financial Services Authority (DFSA) and its registered address is Dubai International Financial Centre - Building 3, Level 7, PO Box 506551, Dubai, UAE.

Country and Region Specific Disclosures U.K. and European Economic Area (EEA): Unless specified to the contrary, issued and approved for distribution in the U.K. and the EEA by JPMSL. Investment research issued by JPMSL has been prepared in accordance with JPMSL's policies for managing conflicts of interest arising as a result of publication and distribution of investment research. Many European regulators require a firm to establish, implement and maintain such a policy. This report has been issued in the U.K. only to persons of a kind described in Article 19 (5), 38, 47 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (all such persons being referred to as "relevant persons"). This document must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this document relates is only available to relevant persons and will be engaged in only with relevant persons. In other EEA countries, the report has been issued to persons regarded as professional investors (or equivalent) in their home jurisdiction. Australia: This material is issued and distributed by JPMSAL in Australia to “wholesale clients” only. JPMSAL does not issue or distribute this material to “retail clients.” The recipient of this material must not distribute it to any third party or outside Australia without the prior written consent of JPMSAL. For the purposes of this paragraph the terms “wholesale client” and “retail client” have the meanings given to them in section 761G of the Corporations Act 2001. Germany: This material is distributed in Germany by J.P. Morgan Securities Ltd., Frankfurt Branch and J.P.Morgan Chase Bank, N.A., Frankfurt Branch which are regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht. Hong Kong: The 1% ownership disclosure as of the previous month end satisfies the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission. (For research published within the first ten days of the month, the disclosure may be based on the month end data from two months’ prior.) J.P. Morgan Broking (Hong Kong) Limited is the liquidity provider for derivative warrants issued by J.P. Morgan Structured Products B.V. and listed on the Stock Exchange of Hong Kong Limited. An updated list can be found on HKEx website: http://www.hkex.com.hk/prod/dw/Lp.htm. Japan: There is a risk that a loss may occur due to a change in the price of the shares in the case of share trading, and that a loss may occur due to the exchange rate in the case of foreign share trading. In the case of share trading, JPMorgan Securities Japan Co., Ltd., will be receiving a brokerage fee and consumption tax (shouhizei) calculated by multiplying the executed price by the commission rate which was individually agreed between JPMorgan Securities Japan Co., Ltd., and the customer in advance. Financial Instruments Firms: JPMorgan Securities Japan Co., Ltd., Kanto Local Finance Bureau (kinsho) No. 82 Participating Association / Japan Securities Dealers Association, The Financial Futures Association of Japan. Korea: This report may have been edited or contributed to from time to time by affiliates of J.P. Morgan Securities (Far East) Ltd, Seoul Branch. Singapore: JPMSS and/or its affiliates may have a holding in any of the securities discussed in this report; for securities where the holding is 1% or greater, the specific holding is disclosed in the Important Disclosures section above. India: For private circulation only, not for sale. Pakistan: For private circulation only, not for sale. New Zealand: This material is issued and distributed by JPMSAL in New Zealand only to persons whose principal business is the investment of money or who, in the course of and for the purposes of their business, habitually invest money. JPMSAL does not issue or distribute this material to members of "the public" as determined in accordance with section 3 of the Securities Act 1978. The recipient of this material must not distribute it to any third party or outside New Zealand without the prior written consent of JPMSAL. Canada: The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only

30



by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offence. Dubai: This report has been issued to persons regarded as professional clients as defined under the DFSA rules.

General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to JPMS and/or its affiliates and the analyst’s involvement with the issuer that is the subject of the research. All pricing is as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. JPMS distributes in the U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.

“Other Disclosures” last revised September 1, 2010.

Copyright 2010 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan.#$J&098$#*P

Doc 268 Jpm Csg1

Documents

Transcript of Doc 268 Jpm Csg1