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Stephen Keenihan – Managing Director, Transerv Energy, Australia

The managing director of Transerv Energy, Stephen Keenihan describes the pivotal advancements they have made in developing the Warro Gas Field, one of the largest undeveloped onshore fields in Australia, and highlights several of the challenges the company has overcome since initiating the project. He also elaborates on the nation’s changing unconventionals landscape and details how Transerv, together with JV partner Alcoa, is best positioned to drive value and deliver shareholder returns in the current pricing environment.

With Warro 6 recently demonstrating substantial initial flow rates, it seems the company’s journey from explorer to producer is well on its way. In light of the tremendous development upside, why has there been so much difficulty previously in exploiting the Warro Gas Field?

Warro has had a rather checkered history going back to the 1970s when it was first drilled by West Australian Petroleum (WAPET), or Chevron Australia as its known today. We first thought that we could apply the same concepts and technologies from the US, but every field is unique, so we’ve since had to experiment and tailor those techniques to suit the Warro field. It’s a constant learning process, and after drilling four wells, we’ve made steadfast progress. Obviously we’ve still got a lot to learn, but we’ve received encouraging results, and we’re optimistic that those trends will continue and eventually amount to something of commercial value.

The challenge is not regarding the presence of the gas, but whether or not we can economically extract from the ground.

Looking back to the creation of Latent Petroleum, what factors or favorable indications ultimately led you to initially pursue this play – especially when so many others have tried and failed?

I’ve had some history with Warro. Previously, I was the exploration manager for Apache, and I had known of the Warro opportunity from a previous reincarnation with a different company. I noticed that it was languishing with no one really displaying any interest in advancing the play – even from the rights owner at the time. When I left Apache it was time to pounce.

We thought there was going to be an increased demand for gas in Western Australian and that supply would be tight, thus placing someone with substantial onshore resources in a favorable position. We didn’t foresee that there would be such an explosion in gas prices and demand at the time – with prices sharply rising from $2 to $12 when we acquired the acreage. Though, this singularity had actually helped us bring in a very important partner, Alcoa, the largest consumer of gas in Western Australia.

The focus is now commercializing the Warro fields. It’s a huge resource base, and the challenge is not regarding the presence of the gas, but whether or not we can economically extract from the ground.

Will the downturn in commodity prices jeopardize the company’s ability to monetize the field?

I would be foolish to say it won’t as it could affect the gas price and the size of the market. The glory days of gas prices going for $8 – $12 a gigajoule are probably behind us now. And it’s rather hard to grasp the true value of gas when the majority of negotiations are performed on a long-term contractual basis, behind closed doors. But the small amount of public information that’s available suggests that current price levels for gas in Western Australia are still relatively robust – especially by American standards. There are also a lot of government publications and notices indicating that prices are hovering around $5 or more, and pushing towards the $6 -$9 range in the long-term. Essentially, commercial viability is not particularly under threat, but there are other more technical factors that warrant more concern.

Pricing factors aside, what characteristics ultimately depict this project as such an appealing play from an investor standpoint?

Regardless of geographic location, the viability of effectively developing a tight gas field depends on multiple factors including deliverability, well costs, proximity to infrastructure, market availability, and a supportive community that endorses a license to operate. Especially where we are in the Perth Basin, the Warro field ticks all those boxes. Gas prices are acceptable, the market is there, infrastructure is established and close-by, we’re well engaged with our community and have a lot of support from them. The only area requiring further determination is the well deliverability – how much gas will the well put up. If I spent $50 million drilling and fracking a well it would be sure to produce large volumes of gas, but I would never be able to generate any profit. So, it’s a constant balance between well costs and reserves. Given our current circumstances, we’re looking at a threshold of roughly 3-5bcf for commercial output.

There are also advantages of being located in Western Australia. It’s an isolated market, so the supply and demand equation is not influenced by developments on the East Coast. There is, however, an element of international exposure with regards to LNG and the role the LNG producers could play in the local market.

Within this state, there’s a large amount of offshore gas, which is currently dominated by LNG players spearheaded by the likes of Woodside, Chevron, Shell, and Exxon. Whether there will ever be enough appeal and value for those players to shift their focus to the domestic market is questionable.

There is, however, a domestic gas reservation policy that mandates at least 15% of production to service the domestic market, which creates an interesting opportunity for us to be potentially acquired by one of these large companies to fulfill that obligation, especially for those looking at using floating LNG systems

How has the company benefited from its strategic partnership with Alcoa?

From a Transerv point of view, Alcoa is the ideal partner to have, as they’re the largest consumer of gas in Western Australia and well established in the business community. Alcoa views Western Australia as a pivotal component of the company’s global footprint, with their core bauxite and alumina excavation activities residing in this state. With upwards of 100 years of reserves remaining, the consistent and reliable supply of gas to fuel production operations remains a recurrent risk.

They’re at a crossover point where many of the long-term contracts signed with the North West Shelf associated with the building of the Dampier-Bunbury pipeline are expiring, and they’re now looking to resupply themselves with gas. That’s why Alcoa has entered into deals with us and others to add an extra layer of supply security and diversity. They’ve recognized the risk in solely depending on one gas source, prompting a more balanced portfolio through such partnerships. The Perth Basin will never be able to supply all their needs, or Western Australia’s needs, but it can act as a consistent and reliable source for part of WA’s gas supplies.

At this stage, we’re confident that our arrangement with Alcoa will allow us to effectively move forward. What is great for us, and the project, is having a participant that is also one of the major consumers of gas.

What is the development timeline looking like from this point forward?

It will depend on how definitive the well results are. Assuming they are positive, we would look to have first gas coming out of this project by late 2018 or early 2019. We expect to start with a pilot project and build from there.

Unlike an offshore project where massive capital expenditures are committed upfront, and therefore producing at maximum output from day one, onshore projects have a degree of flexibility when it comes to tailoring investments to meet corresponding market demands. Though, obviously we’ll need to have this type of discussion with Alcoa first when we reach that phase of development to optimize both parties’ investments.

From a Transerv point of view, Alcoa is the ideal partner to have, as they’re the largest consumer of gas in Western Australia and well established in the business community.

What type of challenges do you anticipate in achieving this schedule?

Aside from gas deliverability and well costs, Western Australian is quite isolated from a geographic standpoint, so we only have one rig operating onshore. One of the impediments for any onshore project is thus gaining access to a drilling rig at a competitive price level.

Additionally, the comprehensive regulatory approvals process can also lead to unexpected delays. We already have two facets of the process resolved. Our native title and pipeline license have both been granted. Having the pipeline license enables us to establish a temporary plant to start things off, while our production license application is processed.

Furthermore, in a world where oil and gas is out of favor, and fracking is often denounced, we need to continue to be particularly diligent in keeping our community informed and aligned with us.

Has the Western Australian government generally been supportive of establishing the onshore tight gas industry?

The WA government is quite progressive when it comes to development. Though, I would still say they lag behind South Australia, which has been the most forthcoming in supporting the industry and addressing its concerns – Western Australia is a close second. But, overall, I believe this type of support is inherent in states that have long been exposed to the oil and gas industry – yielding the proper systems, processes, channels, and mindset to effectively cooperate and communicate with industry stakeholders. This is especially beneficial when it comes to regulating relatively unfamiliar frontiers such as unconventionals and the methods employed to exploit these types of resources. Though, public pressure, as seen in places such as New South Wales and Victoria, inevitably dictate a degree of caution when it comes to regulators facilitating approvals. This in turn, impacts the speed at which the regulators’ decisions are made and can delay projects.

When the company was first putting together the project, it had struggled with the absence of readily available equipment and adequate technical insight in Western Australia. Now a couple years later, has the local landscape for effectively exploiting unconventional gas changed?

There are two components of this process: people and equipment. We’ve never had trouble with people, as we’ve been quite successful in sourcing talent from abroad. For example, when working on Warro 5 and 6, we flew in several people from the US to provide specialist services.

In terms of equipment, there is availability in Australia, but it’s much more restricted than other parts of the world. For instance, it’s hard to create competitive tension in tenders when there’s only one rig provider available. There’s been an ample amount of fracking crews and evaluation and testing services, but that’s gradually changing on a day-by-day basis in response to the downturn. Merely a year ago, I had a plethora of contractors to choose from; now, the landscape has completely changed, with many struggling to secure new work opportunities.

With a project like Warro, in conjunction with others in the area like AWE, we’re hoping that the Perth Basin will develop to a scale that can sustain a viable service industry—particularly geared towards unconventional development.

Perth Basin is certainly ahead of most other areas, but this need also extends to places like Queensland and the Cooper Basin, which also have significant unconventional resources. The remaining areas would struggle with various challenges such as logistics costs, lack of infrastructure, and market access.  Much of Australia’s touted unconventional reserve potential is located in quite remote areas. The three locations that I mentioned present the most favorable development upside, while the others might follow at some point or another when more economies of scale are achieved.

Back when we last met, you were a big proponent of the company’s privately held status. Now managing a public company, how have you gone about mitigating shortsighted pressure from investors, while building up long-term capabilities?

Being a public company entails an added responsibility of frequently communicating with investors. Especially for those stakeholders that aren’t as in tune with the intricacies of our business and strategy, it’s important that we distill our prospective actions and underlying logic down to clear and concise information—effectively ensuring that they truly understand the value in every single step we take. It’s not exactly the best time for publicly listed companies, given the current downturn and lack of investment appetite. But, despite that, we’re currently well positioned to progress our operations.

Compared to your peers in the market, how is Transerv Energy best structured to capitalize on its position and deliver shareholder value?

In the short-term, presenting a viable commercial proposition for the Warro field will be the biggest value that we can bring shareholders.  In the long-term, we’d like to use our expertise and knowledge to expand our footprint within the Perth Basin—especially given the diminishing presence of other players such as Origin. The Perth Basin is very prospective with an abundance of good assets that could be catalysts for growth, and I’m confident that Transerv can be one of the trailblazers.

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