Eastern Star Gas MD Discusses Narrabri CSG Project Progress (Australia)

Eastern Star Gas Managing Director David Casey Discussed Narrabri CSG Project progress with Openbriefing.com:

Eastern Star Gas Limited has five production pilots in operation across the Narrabri CSG Project. These include the Tintsfield pilot, which commenced operation in April, targeting the Hoskissons coal seam. What is the importance of this for your gas reserves upgrade programme, and when do you expect to have production results for Tintsfield?

MD David Casey

The Tintsfield lateral pilot is an important part of our reserves upgrade program, as it’s our first pilot tapping the Hoskissons coal seam, which to date has not been included in our gas reserves assessments. While it is ultimately up to our independent certifiers, we expect unforeseen circumstances aside, that by end of June we should have sufficient data from Tintsfield to form a view on its production performance and reserve potential.

This timeframe will also tie in with an expected period of continuous production from our other pilots to also feed data into our next reserves upgrade. In addition, following successful workovers on the Bibblewindi shield wells and with electric submersible pumps coming on line, we will be able to accelerate de-watering of the pilot and consequently ramp up gas production.

You’ve previously commented on wet weather causing some problems in the field. Field reserves upgrades aside, how long do the pilots need to run to demonstrate the project’s production capability?

MD David Casey

While the main reason for delays in achieving consistent production has been ongoing wet weather conditions, we have also been frustrated by the time taken to secure approvals for routine work, in some cases on established sites.

However, there’s no doubt we’ve cracked the technical solution for the field. We have seen strong water flows, in some cases accompanied by earlier-than-expected gas flows, and when we’ve compared actual results with modelled predictions, the news is all very positive. Ongoing production testing isn’t about proving we can produce at commercial rates – we’ve already done that. It’s about perfecting design and operation techniques for the transition to development and delivery of gas into sales contracts. For example, our prime target coal is deeper than that targeted by other coal seam gas producers along the east coast. This brings benefits, particularly in terms of high gas content, but also challenges. We have encountered water rates that are higher than those generally encountered at this depth. In response, we’ve had to fine tune pump control algorithms to handle variable loads on a pump without breaking the kilometre-long shaft that drives it.

Certified 2P reserves currently stand at 1520 PJ (of which ESG’s net interest is 988 PJ) and were last upgraded in December 2009. When do you expect to announce a reserves upgrade?

MD David Casey

Our key focus has been on addressing technical issues affecting sustained production from our pilots, and we have done this during a period of restricted field access caused by repeated wet weather. We are now well placed to achieve extended, steady production from all pilots.

We are also drilling a series of coreholes previously delayed by access issues, to further delineate the extent of coal deposition and confirm our view that it extends beyond what has been previously assumed for reserve and resource estimate work.

Given we expect to have sufficient and meaningful data at 30 June to use as a basis for interpreting the Tintsfield results, a sensible target for a reserves review, subject to certifier availability, would be around August 2011.

You mentioned delays you have experienced due to the time taken to secure approvals. There has been some public debate about making approval processes more rigorous. Can you comment on the need for this?

MD David Casey

There has been some media coverage regarding the approvals regime’s perceived lack of rigour, along with suggestions that having an exploration licence gives the go-ahead to do work and to access land. Nothing is further from the truth, and it’s about time the debate focused on facts rather than mistruths.

New South Wales, like other states, has a long-established and rigorous system for reviewing and approving everything we do, from seismic and coreholes through to production wells and development. In all cases we have to complete environmental assessments, covering flora, fauna, cultural heritage and so on. We also have to negotiate with landholders access to any land required for field work.

The new State Government has signalled changes to approval processes. This is not about what we are required to provide for our proposal to be assessed, which is already rigorous. These reforms relate to the way the assessment is undertaken and are designed to ensure probity. While process changes are to be made, with our approvals well advanced within the NSW planning system we do not anticipate that these changes are likely to affect the assessment of our project in any significant way.

We are hopeful that, in addition to ensuring approvals processes operate efficiently, the new State Government will cultivate an environment where businesses like ours can get on with investing in infrastructure. This is required not only to keep the lights on in this state, but also to create new sources of jobs and income that will strengthen state and, importantly, regional economies. This can all be achieved without compromising due process, but it needs the right attitude from the top.

At what stage are you in the approval process for development of the Narrabri Gas Project? When do you expect to complete these processes and receive the necessary approvals?

MD David Casey

Planning for development of our project has been in train for some time. We lodged an initial Concept Plan, covering the project from field development through to the LNG Newcastle project, back in November 2009. Lack of direction under the previous State Government resulted in that particular plan not progressing. Nonetheless, we have pushed on with more detailed work and are now well advanced with approvals processes for each of the individual components of the project.

We have also lodged Referral of Proposed Action documents under the Environment Protection and Biodiversity Conservation Act for each separate project component. As expected, and consistent with the ecological studies done to date, the Federal Government has confirmed that we are required to submit an Environmental Impact Statement for the Narrabri gas field development, the Narrabri to Wellington pipeline and the Newcastle pipeline. We anticipate that we will receive similar confirmation in relation to the LNG Newcastle project in due course.

We continue to monitor opportunities and development pathways with a view to ensuring early commercialisation of the project for the benefit of shareholders. Currently, our best estimate is that Federal and NSW regulatory approvals will be in place in time for FID in early 2012.

What further gas exploration and appraisal work is planned for PEL 238 and how is this expected to increase your understanding of the Narrabri gas field?

MD David Casey

We are now well advanced in appraisal of the Narrabri gas field, with our 65 percent interest in PEL 238 providing us with enough gas for the first 1 million tonne per annum train of the LNG Newcastle Project.

We’ve settled on lateral wells as the building block for field development, so each pilot we drill now is about optimising the precise application of that design. We’re drilling the Hoskissons seam at Tintsfield, and a natural evolution of the lateral well design is to drill a “stacked lateral” – with a series of horizontal wells in each well set, one in each target coal seam.

We are also planning to drill additional wells at our Bibblewindi multi-lateral pilot. Progressive expansion of a pilot, particularly one like Bibblewindi where we have a coal seam more than 20 metres thick, is routine practice. Additional wells at Bibblewindi will make up for some lost time by assisting the dewatering process and will shed more light on the optimal spacing between our well sets for full field development.

There’s also the potential for reserves growth in new areas, including some where potential target coal seams, particularly the Hoskissons, contain elevated carbon dioxide levels as a result of historical volcanic activity. Our future work plans include demonstrating well performance in these areas, where we expect production from multiple zones and control of well operating pressure will ensure methane is preferentially desorbed and a lot of the carbon dioxide left behind.

You are currently pursuing domestic gas sale opportunities for the Narrabri Gas Project, including engaging in ongoing discussions with ERM Power regarding gas sales to the proposed gas fuelled power station at Wellington that will use 20 PJ/a from 2013. At what stage are these discussions?

MD David Casey

Negotiations with ERM Power regarding most of the terms and conditions of a gas sale agreement are complete. Uncertainty remains, however, in relation to electricity pricing, given the lack of clarity surrounding the proposed carbon tax, and its potential to materially affect the attractiveness and pricing of gas.

Essentially, we’re waiting for the right price signals in the electricity market before we execute a deal. In the meantime, we continue to move forward on the approvals process for the pipeline from Narrabri to Wellington. That’s going to plan, although sometimes we ponder why, under the previous State Government’s assessment process, the power station was considered critical infrastructure and enjoyed an expedited process but the pipeline was not, despite the clear need for a pipeline to deliver gas for the power station to run!

We note with interest public comments made by the Greens in Canberra that gas will need to play a critical role in the shift away from coal-fired power stations. This is a very positive public signal for the natural gas sector that reinforces the importance of projects like the proposed power station at Wellington.

When it comes to marketing decisions, we won’t rush. We have time available to undertake a careful and deliberate process that secures the best options. We will continue to consider other opportunities that are net present value attractive and of benefit to shareholders. Time will give greater clarity and confidence around matters including approvals, electricity market outlook, the need for new electricity generation and the nature of any future carbon regime. When we identify that the time is ripe to act, we are positioned to do so quickly.

You are also examining export LNG sale opportunities, including sales through Queensland. What factors will underpin your decision and the timing of any such decision on gas sales to the export market?

MD David Casey

While we are progressing our LNG Newcastle project and are confident of success, it is not lost on us that the Queensland LNG industry is more advanced and has greater certainty, having enjoyed strong government support and with approvals in place. On the other hand, it is a greater distance from our Narrabri gas fields than Newcastle is, so the netback gas price we potentially achieve and, in turn return to shareholders, is lower. It is clear that the medium and long term demand for gas, both domestically and internationally, will be strong. We continue to weigh up the risk-return equation as we evaluate options but all else being equal, there is presently a lower risk for gas sales made through Queensland but also a lower price. The LNG Newcastle Project is the stand-out development opportunity, not only for us but also for NSW.

Ultimately, the decision to commit to an LNG sale will be made by balancing the netback price achievable, the gas sale volumes that can be contracted and the timing of those sales, all weighted according to any differences in the overall probability that any remaining hurdles can be surmounted and a value-accreting deal delivered.

In short, the base case, and our preference, for export sales remains through LNG Newcastle, but we retain a watching brief on other options. A commitment will be made when the optimal outcome for de-risking is reached. We will be making these assessments in a favourable market environment driven by strong global demand.

Feasibility Study has commenced on the Narrabri CSG Project, to be completed around mid year, and to be followed by front end engineering and design work (FEED). When do you expect a final investment decision on the Narrabri Project?

MD David Casey

A commitment to development of the Narrabri CSG Project requires many components be brought together including the upstream gas field development, midstream or pipeline infrastructure and firm gas offtake agreements along with the necessary financing and approvals. Obtaining the required project approvals is currently the critical path item. On the basis of all necessary statutory approvals being secured by early 2012, FID is forecast to occur shortly thereafter.

You recently announced the first independent assessment of coal seam gas resources totalling 4637.2 PJ for PEL6 (ESG: 77%), PEL 427 (ESG: 50%) and PEL 428 (ESG: 40%), of which you are operator. What are your priorities and plans for these licences?

MD David Casey

As operator of these licences, we are currently preparing a work program which we will put to our joint venture partners in due course. While there are opportunities to commercialise these licences separately from the Narrabri CSG Project, there are clearly synergies in a joint development.

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Source: Eastern Star Gas, May 25, 2011;