ASX Announcement

Release Date: 6 June 2007 (ASX: PEA)

Significant acquisition of interest in a 46MW biomass fuelled renewable energy project

The Directors of Pacific Energy Limited (Pacific Energy or Company) are pleased to announce that the Company has acquired a 50% interest in SpiritWest Bioenergy Pty Limited (SpiritWest) from Perth Bioeneray Holdinas Pty Limited (PBH). SpiritWest was established to develop a 46MW biomass fuelled renewable energy power station to be located approximately 30km North of the Perth CBD, Western Australia (Project).

The Project is significantly advanced and was short listed by Synergy (WA Government owned energy retailer) to tender for the sale of the renewable electricity generated and environmental rights to be created by the Project. The remaining 50% interest in SpiritWest is held by entities owned by Perpetual Limited as responsible entities for Perpetual's Diversified Infrastructure Funds (Perpetual).

Pacific Energy will manage the ongoing development and operation of the Project and fund further development costs.

The consideration for the 50% interest in SpiritWest comprises the immediate payment of \$0.4M in cash and the issue of 5.80M fully paid ordinary shares in Pacific Energy on deferred terms on the achievement of three Project development milestones as follows:

• 1.32M shares upon the achievement of Financial Close;
• 1.57M shares upon the achievement of EPC Construction Contract Completion; and
• 2.91M shares upon the achievement of Bank Completion. $\bullet$

Pacific Energy's Managing Director, Mr Adam Boyd said, "The Perth Bioenergy Project and the 50/50 partnering alliance with Perpetual, one of Australia's most respected fund managers, is an exciting "beach head" opportunity for Pacific Energy and significantly extends the Company's existing footprint in the rapidly evolving climate change sector.

The acquisition is aligned with the Company's growth strategy and will enhance shareholder value by leveraging management's project development experience and the progress made on our 30MW biomass power station development at the Company's Mt Hope property in the United States. The recent WA government climate change policy announcements require a substantial increase in the renewable energy generation capacity of WA's electricity infrastructure. This project is ideally placed to facilitate the achievement of the WA Governments new renewable energy targets and has numerous other benefits for the State."

Enquiries to Mr Adam Boyd - Managing Director

Introduction

Pacific Energy has been pursuing a number of renewable energy opportunities and this acquisition of a 50% interest in SpiritWest is the first of these opportunities to achieve completion. When constructed, the Project is expected to be the third largest renewable energy project in Western Australia and the largest power station in Australia solely fuelled by timber plantation and other timber residue (Residue).

Project Description

SpiritWest proposes to construct and operate a biomass fuelled, steam turbine power station of up to 46MW gross capacity and located at the Neerabup Industrial Estate approximately 30km North of the Perth CBD, Western Australia. The Project has a reserved site and will be connected to the South West Interconnected Transmission System (SWIS) reticulating electricity throughout the greater Perth region and south west of the State.

In May 2007, the Western Australian Government announced a "ground breaking" Climate Change Action Statement inclusive of increased renewable energy targets for the SWIS of 15% by 2020 and 20% by 2025. Pacific Energy has estimated that this target equates to the installation of a new base load renewable electricity generation project of the size of the Project every 18-20 months to 2025.

Renewable energy fuel for the Project will comprise Residue. SpiritWest holds the rights to all Residue generated by the Forest Products Commission (State Government owned corporation) within a 100km radial distance of the Perth CBD (FPC Residue). These Residue rights include harvest residues from the Pinjar, Yanchep and Gnangara Pinus Pinaster plantations which are located within a 40km distance from the Project. The timber from these plantations is committed pursuant to a WA Government State Agreement ensuring the supply of timber to a laminated veneer lumber facility located adjacent to the Project site for a period in excess of 25-years. SpiritWest is in discussions with other parties within close proximity to the Site to secure additional Residue for the Project.

SpiritWest has commenced and is continuing negotiations with preferred EPC construction, operating and maintenance, other necessary sub-contractors and senior debt project financiers for the construction, operation and financing of the Project for a 20-year period.

SpiritWest completed a response to an expression of interest request issued by Synergy and was short-listed to tender for the sale of up to 50MW of renewable energy and related environmental rights under a long term power purchase agreement. A tender was submitted by SpiritWest on 16 May 2007 pursuant to this Synergy procurement process.

SpiritWest has secured Environmental Works approval for the development of the Project from the Department of Environment and Conservation.

Perpetual "Free Carry" Funding Potential

Post Financial Close, Pacific Energy's 50% interest may include a "free carried" component in the Project of up to 15%. The shareholder arrangements require Perpetual to "free carry" fund up to 15% of Pacific Energy's 50% equity investment required at Project Financial Close to the extent a forecast investment performance threshold is exceeded by SpiritWest.

Consideration

The consideration for the acquisition of the 50% interest in SpiritWest from PBH is detailed in the table below and comprises upfront payments on completion of this acquisition and deferred payments upon the achievement of Project milestones.

As part of the overall acquisition, SpiritWest streamlined the pre-existing Project related rights held for the benefit of the Project. To facilitate these arrangements Pacific Energy has undertaken to make certain payments to and on behalf of SpiritWest which will be reimbursed by SpiritWest on the achievement of Project milestones. These are reflected below.

Upfront Consideration

The upfront consideration for the purchase by Pacific Energy of the 50% interest in SpiritWest is nominal. Pacific Energy has paid \$0.4M for project management rights and the reimbursement of certain development costs incurred by PBH. This payment is to be reimbursed to Pacific Energy by SpiritWest on the achievement of Project Financial Close by SpiritWest.

Deferred Consideration - 50% of SpiritWest

Pacific Energy has agreed to purchase PBH's 50% interest in SpiritWest through the issue fully paid ordinary shares in Pacific Energy upon the achievement of three Project development milestones. These arrangements are summarised in the table below:

Deferred Consideration - SpiritWest Restructure

The overall transaction required the acquisition of certain critical Project rights by SpiritWest from entities associated with the vendor, PBH. Pacific Energy has agreed to issue fully paid ordinary shares in Pacific Energy on a deferred basis, again on the achievement of future Project development milestones. SpiritWest has undertaken to reimburse Pacific Energy a total of \$1.1M in cash at the same time as the three Project development milestones for the issue of Pacific Energy shares are achieved

Paid by Pacific Energy on completion of this acquisition and reimbursed by SpiritWest at Project Financial Close.

To be reimbursed to Pacific Energy on a 'back to back' basis by SpiritWest. $\mathcal{I}$ .

Project Management

Pacific Energy will manage the remaining development activities and operation of the Project and fund further development costs.

Consortium

SpiritWest has established a consortium of experienced industry participants as subcontractors to execute the construction and operation of the Project. Further negotiations are required to conclude these arrangements. The consortium participants provided supporting documentation and technical input for submission with the SpiritWest Tender.

WA Government Policy

A recent Climate Change Action Statement by the Premier of WA in May 2007has increased the renewable energy target requirements for the SWIS from 6% by 2010 to 15% by 2020 and 20% by 2025. Pacific Energy has estimated that this will require the installation of a project equivalent to the electricity output of the Project every 18-20 months to achieve the 2025 target. The Pacific Energy Board is encouraged by this initiative of the WA Carpenter government and considers this recent policy change puts the Project in an enhanced position for its future development.