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Interview

with David Casey, Managing Director, Eastern Star Gas

18.02.2011 / Energyboardroom

Eastern Star Gas was formed in 2000 and listed in 2001. You joined the company in 2005. How have things come together over the last ten years and how would you describe the company today to our readers?

Eastern Star Gas is a totally different company today than when it began. All companies go through a development phase. Eastern Star started out principally as a company focused on conventional oil and gas, and my predecessors identified the Coonarah gas field, which gave rise to a small power station being constructed. The failure of that field to deliver the expected gas volumes led the company to look at alternatives, with coal seam gas being the stand out opportunity. I was brought on board in September 2005 as Chief Operating Officer to really ramp up the company’s coal seam gas involvement. My background is coal seam gas: that’s been my primarily focus since 1991.

We started off with a modest programme of vertical wells. The results from that, whilst not ideal, gave us enough encouragement to move forward and look at alternative completion methodologies. We are now using horizontal drilling techniques. The challenge and the opportunity for us is the depth of our reservoir. It poses some unique problems associated with drilling, but big opportunity in terms of the size of resource.
One of the benefits of me stepping up to the role of MD in 2007 was the technical and senior management team that we were able to put in place. It was really at that point that the company took a large step forward in its technical capabilities, and this was the stage at which we went down the path of horizontal wells, really unlocking the potential of our reservoir. We have quite a unique coal, that has a series of inherent vertical fractures, and we needed to find a way to connect those up. Horizontal drilling does that more effectively than any other methodology, and the fact that we have found a way to do it at the depth we are at, has unlocked the potential that you now see with some of the better gas and water production rates of any coal seam gas project on the east coast.

Eastern Star Gas was the first company to begin operations in the Gunnedah basin. Today we have the largest acreage position on the east coast, and the largest reserve and resource position in New South Wales.

The industry is developing quickly in Queensland: how is the situation for coal seam gas in New South Wales, and why did the company choose the state as a base?

The fact that we are in New South Wales could be considered fortuitous or serendipitous. We are here as a consequence of the founders of the company having access to assets in New South Wales, and specifically assets in the Gunnedah basin. Initially that was a challenge, and for a long time New South Wales was regarded as the poor cousin, and we have been behind. There have been some challenges in New South Wales that were not present in Queensland. The coals are essentially the same, but there was more activity in Queensland and more traction as a consequence.

Being in New South Wales is a function of our history. Having said that, the company made the move into CSG at the right time, in the right way, with the right personnel. Being in New South Wales now is becoming more and more strategic for a number of reasons.

First, unlike Queensland (and some of the Queensland players would probably debate this) we have quite a few more domestic marketing opportunities, primarily for power stations and electricity generation, and in that context we have three MoUs for in excess of 1700 petajoules. I am not saying all of those will be concurrent, but nonetheless there is that domestic market, and that is an important differentiator.

We do not have to look to LNG to commercialise our resources, unlike a lot of the Queensland players. In our case, we are looking at LNG because of the size and materiality of the reserve and resource that we are dealing with. We cannot only deliver into the New South Wales market, but we can also genuinely look at LNG, in our case out of Newcastle, where we have just acquired land and completed a feasibility study with Hitachi and Toyo, looking at smaller scale, modular LNG trains. We are now considering the feasibility study in the context of marketing, and doing that with a view to progressing to FEED sometime early in 2011.

For us, there are a number of advantages. Because we are in New South Wales and have been involved in the industry for as long as we have, we are at the forefront of the industry. We have definitely got first mover advantage as far as an LNG project is concerned out of Newcastle, particularly as we have acquired the land and are progressing down the path from a feasibility perspective.

We have a joint venture partner in Santos, who definitely has a lot of credibility in this space, and has progressed the GLNG project: we put a lot of value on having a financially and technically strong partner..

Do you believe that Eastern Star Gas has the potential to become the first operator to export LNG from the east coast?

I appreciate that this might appear to be quite a stretch, and today we have quite a lot of work to do to catch up to our peers in Queensland, but we would argue that because we are looking at smaller-scale trains and a modular design, it does enable us to reduce the timeframes considerably. It is a possibility, and no doubt a challenge, but a definite possibility.

Partnerships are very important for any company at this stage. How would you describe your partnering strategy?

We have been looking at LNG for quite a bit longer than many people are aware, and we looked at coal seam gas as the feedstock for LNG. The challenges from a CSG perspective were produceability: the fact that unlike a conventional reservoir you do not get maximum production on day one. Looking at those challenges, we realised that you cannot change how a CSG field can be developed, so we decided to look at how to liquefy it, and not necessarily at the liquefaction process itself, but rather the size and scaleability, and that is why we were attracted to Hitachi, one of the largest manufacturers of LNG compressors in the world but also one of the largest manufacturers of electric motor drives, and that is the key in this process because it gives us that flexibility.

The company has also built other relationships, and the key to making sure that these are successful is identifying strengths that others have that can complement Eastern Star Gas’ skill sets. We have a relationship with the APA Group, one of the largest owners of pipeline infrastructure on the east coast. You have got to have a technical programme that indentifies the reserves, but all of that doesn’t count for anything unless you get the gas to market and that comes through aligning with the APA Group.

Eastern Star has also announced recently an MoU with Marubeni, looking at marketing and trying to put all the pieces of the puzzle together. It is more about identifying strengths that others have. We see our skill set as being an E&P company: we don’t necessarily see our skills as being a pipeliner or someone who can build and operate an LNG facility. Aligning with groups who add to the project is how we have approached the challenge.

What is the plan for the development and eventual operation of Eastern Star’s LNG plant?

Financing is a part of getting partners involved in the process, and will influence the final operational details of the plant: whether our financing partners want a stake in the upstream, or to participate in the LNG project itself, or simply through project financing. Our model at this point in time is to remain flexible. We are focusing on the upstream – that is Eastern Star’s skill set. We are moving through the approvals processes for pipelining, project development and the LNG facility itself. We will own the process and the approvals, but there are groups more experienced in the downstream development and operational side of things, so if the model or the outcome is better for us not participating in the LNG project, then so be it. We are not tying ourselves to any specific structure at this point in time because it is, and will be, driven by the various partners that we bring into the project, and how they want to participate, either upstream or with the LNG project.

You have a history with Molopo and your own consultancy. What was it that attracted you to come to Eastern Star Gas when the job was offered to you?

I was incredibly happy at Molopo and I had worked with Steven Mitchell at Molopo for a long time. I worked with Steve on the very first coal bed methane joint venture signed in China in 1993. But I suppose for me, the attractiveness with Eastern Star was the fact that it was an operator of what had the potential to become one of the largest projects on the east coast, and had the materiality to realistically consider what we are doing now: looking at LNG and a 3P resource reserve number in excess of 9000 petajoules. There are not too many projects that could deliver that sort of potential or materiality, let alone being strategically located in NSW.

How would you describe your mission as Managing Director, and how has it changed over the last few years?

Our vision is to be the largest producer of gas in New South Wales. That still is the underlying mission for the company, but it is to do it in a way that delivers on the various MoUs that we have: not only looking at LNG and international markets, but to be the premier gas company for a number of markets in this state.

When I get asked what I am most proud of, it is the people that work for this company. I think, given our size, we are highly regarded, and outside the mission of being a gas producer, I want people who work for us to be proud of the achievements that they have contributed to in the time they have worked with us.

Your experience has obviously put you in the right place at the right time. How have your experiences come together to help you in this role that you have now?

They often say that the coal seam gas industry in Australia has been ‘an overnight success’ but it was really a nineteen-year overnight success, which has been a bit of a rollercoaster ride. I have ridden that rollercoaster: being involved in an industry in the good times and the tough times gives you an appreciation of what the challenges are. It also gives you confidence and comfort that continuing to do what you do and doing it well, and learning as you go, things do change. You learn to be persistent, and to appreciate that if you are not persistent, and do not learn from your mistakes then you will continue to make them, either as an individual or as a company or an industry. There is a learning curve in this industry that cannot be avoided. It can be shortened, but it cannot be avoided.

You have got an interesting period coming up over the next couple of years with Eastern Star: how would you describe your strategy, plans, focus and attention?

It may seem strange but this industry is driven by people and technology. Eastern Star is at the forefront of technology in this space, and I think most people would acknowledge that. And to a large extent, that is what attracts the people –we have got, but the key challenge is to make sure we keep those people and keep them enthusiastic.,

For us, the secret is providing a company platform that sets up a structure that people want to work for. I see it as one of the biggest challenges going forward. I think we are well placed: we try to involve our staff in as much of the decision making process as possible, which empowers them. If people have a sense of ownership, it goes a long way to inspiring them to remain with the company.

At an operational level, the focus is to progress with the various approvals and the challenges that will be associated with a relatively new industry: despite what is happening in Queensland, we are in New South Wales and there will be some challenges associated with that. I think we can learn from Queensland, but we will also need to address problems specific to this state, so that is also going to be something that will take some of our attention.

Eastern Star has chosen a somewhat unique path in the way that you have placed the company, especially in terms of developing this mid-sized LNG facility.

Small scale has been done elsewhere – what hasn’t been done is looking at a large project using small-scale technology: genuinely looking at a project that could deliver four million tonnes, but doing it in half million tonne increments. We are probably in a unique position of being a company that could consider that as an option: our size and our project development allows us to do it, but we genuinely have the reserves and resources to look beyond that, and that is one of the attractive qualities for Hitachi and Toyo in dealing with Eastern Star: to prove that their technology and their skill sets can actually match world-scale projects, only with smaller trains. As I said, the more we look at it the more we get excited by the prospects and the benefits of using smaller scale technology.

What is the long-term ambition for Eastern Star Gas? If we were to come back and see you in ten years, where would you like the company to be?

We would be selling four million tonnes of LNG a year, if not more. The site we have got at Newcastle will do four million tonnes. I would like to see us delivering into at least one power station, but I dare say it will be more than that. This state will run short on generating capacity before too long, and with all due respect to renewables and clean coal technology, in the short to medium term the solution really has to be gas. If you look at the timeframes involved, that makes Eastern Star quite a large company in its own right, regardless of what may or may not happen with partners and the like.

When do you see the defining year for Eastern Star Gas? When will be the time that the company will achieve what it set out to do?

I think it will be sooner rather than later. The easy answer would be to say that our aims will have been achieved once we are delivering gas to an LNG project, but I think for us it is when we move to FID, which will require the requisite approvals to be in place, an offtake, and will be an indication that field development and production profiles are something we can meet. With that in mind, we are looking to go to FEED early 2011, and looking to FID at the end of 2011 or the start of 2012.

It’s sooner than a lot of people would think: to get to that point the company will have to have answered a lot of questions about the commerciality of projects concerned, and I think we have answered most of them to date. We are very comfortable that there is a market for our gas, and because we are smaller scale we can chase a lot of different markets, but that first offtake will be important for us: it is the missing part in FID. That has been the challenge for the Queensland projects, but in our case we are not looking to place 4 million tonnes: we have aspirations to get there, but we are not looking to place them on day one and that gives us the flexibility that is important for a company of our size.

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