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Interview

with Mark Macfarlane, CEO, Gladstone Liquefied Natural Gas

25.02.2011 / Energyboardroom

Final investment decision (FID) for Gladstone LNG was announced on January 13, 2011. How would you characterize the mood of the organization and the project team as it stands today?

There is a huge amount of excitement around the organization. Last year could be characterized as one of anticipation – getting to the starting gate. Now that we are there we have the enthusiasm to get after things and to start building this world class facility for Queensland and Australia. It is a privilege for everyone in this organization to be working on this project. It is a world class coal seam gas (CSG)-to-liquefied natural gas (LNG) project that will put Gladstone and Queensland on the world LNG stage. It is a project of great significance for Queensland and all of Australia. Putting it all together, there is tremendous excitement, enthusiasm, and a palpable drive.

In the build up to FID there was a torrid pace of activity to get over the finish line and piece the decision together: Kogas committed to a project equity stake in December; Santos issued new shares to secure more capital; and Santos even cut a dividend for extra financial insurance. Was there anything that proved to be particularly difficult in finalizing or unexpected from the original planning?

Santos has done an outstanding job in pulling all of this together and teaming up three world class players to augment Santos’s skills. Santos is the largest onshore domestic gas producer in Australia. It has been around for more than 40 years and knows how to do the upstream development better than anyone in Australia. Complementing those skills are: Total, the world’s 5th largest publicly traded oil and gas company; Petronas of Malaysia, the 2nd largest LNG exporting country in the world and home of the world’s largest LNG fleet; and Kogas from Korea, the world’s largest purchaser of LNG. To bring the strength of those four companies together to deliver this project does not happen by accident. Was it surprising? No, this is something that has been in the planning for a good three years. When I was in a different part of Santos I was part of that “kernel of idea” realizing that we have a massive resource in Queensland and assessing the best way to bring it to market. Gas is the cleanest fossil fuel energy source. We are helping the environment and doing good business at the same time. Who would not want to be a part of that?

Three other major CSG-to-LNG projects are going on in Queensland, all operated by the heavyweights in the industry. What do you think pulled these three companies into Santos’s orbit?

It is because of Santos’s strength and knowledge of how to execute the upstream. We are a new market here in Australia with a very stable geopolitical environment and transparency in how business is done. If I were an external company looking to understand where to invest in clean energy in an area that has yet to be tapped, I think working with an operator like Santos who has unrivaled expertise ticks off all the boxes.

Finality of investment decision also marks the beginning of a new phase of the project. What are the targets and timetables that you are most mindful of now that you have crossed the FID threshold?

We have a very detailed and integrated project planned that looks at upstream, midstream, and downstream components. We are very focused on making sure that we produce our first cargo in 2015. Between now and then we have very key milestones. We had our secondary and tertiary environmental permits approved which allowed us to start work on the mainland. Over the next six weeks we will get approval for the commencement of work on Curtis Island and will start seeing the island take shape in terms of an LNG facility probably very early in the second quarter of this year. Having already mobilized our upstream contractor we have our key milestone of mobilizing pipeline contractors towards the end of the year.

Throughout the program when we hit our key milestones it will be cause for celebration; perhaps the most proximate one being when we see that first slab of concrete laid. It is all very much focused on delivering first gas by 2015.

Mini-targets and milestones must be essential when considering that in the grand scheme of things, first gas is still years away…

That’s right. We are very focused on the first six months. In any mega-project like this, getting off to a good start is important. Last year we got our environmental impact statement (EIS) approval of 1,200 conditions from the state and federal government. There are still a lot of secondary and tertiary environmental approvals to be achieved. Our lead upstream contractors are now starting to sub-contract their work. Those are all the mini-milestones that we are very much focused on for the first six months. If we hit those first six months of our milestones, then we are up and away.

Gladstone LNG’s FID carries a much greater weight and significance for the CSG industry at-large. CSG-to-LNG had – and perhaps still does have – doubters of its technical feasibility and industry growth potential. What do the recent FIDs of Gladstone LNG and Queensland Curtis LNG say to the critics?

I think it demonstrates that it will work. Companies with the technical depth of know-how to run upstream businesses like Santos do not frivolously invest. Companies like Total and Petronas are very astute investors who went through extraordinarily prudent due diligence regimes as they looked into the project and were convinced that CSG-to-LNG would work. I do not think that there is any doubt that producing CSG at sufficient rates into an LNG plant will work. If you want to see why it will work just look at how much CSG is produced in the United States day in and day out. They just have a different market with a pipeline system for domestic gas. Thirty years ago the US did not think that CSG production was feasible, but it has since become a staple of US domestic gas consumption.

In five years time, when we are producing LNG out of Gladstone, CSG-to-LNG will be working.

Do you place any particular emphasis on wanting or having to be the first of the big four projects to reach first gas?

This actually is not a competition. It has been very important for us to go through our internal procedures to make sure that we have a solid financial investment decision. What was important was that we got our EIS and that we negotiated our indigenous land use agreements – 42 in total making it the largest ever number for a project – to ensure that we had that very important stakeholder group on site. We have had numerous meetings with community people across the pipeline in the upstream arena and in Gladstone to make sure that we understand their concerns and that we go through the right processes to put this project on foot.

When it came to securing the gas off-take agreements, the market in 2009 and 2010 was softening a little bit, so Santos did an outstanding job of negotiating them. We need to make sure that we put our building blocks in place. Another important milestone is contractors and making sure that we have world class lead EPC contractors to give us the certainty of delivery that we need. We got that on January 13 when we made our financial investment decision. We have our plan that we will execute against to deliver gas in 2015.

If British Gas is a month earlier or later, it doesn’t matter. What is important is that we execute our plan. We have our milestones, schedule, and financial targets which we need to hit on. We need to execute flawlessly and most importantly not hurt anyone in the process. We will take the time to make sure that we do not hurt anyone.

Gladstone LNG has its purchase agreements already in place for its cargo. But if we can look please at the long-term LNG global market. When considering the voracious growth and energy demands of Asia and the new LNG projects coming on stream from Russia to the Middle East, do you see the long-term LNG landscape as being a buyer’s market or a seller’s market?

It really does depend on your view of energy demand growth. One sure thing is that in our lifetime we are not making new hydrocarbons. Energy is going to be a more precious commodity as each year goes by. I personally think that gas will become a more precious commodity because of the fact that carbon is becoming more and more important in today’s world. Being cleaner burning, there is a lot more appeal to generate energy from gas than coal.

It is true to say that through the global financial crisis the market did soften. It did, however, pick up a bit in 2010. In the environment of getting LNG contracts in place, Santos has done an extraordinary job in securing Petronas and Kogas – Korea being the world’s largest importer of gas currently at 30 million tons per annum. Is there a gut of gas? Other projects are coming online, no doubt about it. But Frank Chapman, chief executive of BG, as recently as today in the press says that he does not believe there is a glut of gas. Where is it going to come from? There is certainly shale gas in place in the US but there will be a cost to extract it.

Mega-projects bring gas in lump sum and mismatches in supply and demand necessarily arise. Do you hold the view that everything ultimately balances in the long-term?

In a classic supply and demand market that is exactly what happens. You need to give market signals to invest and those market signals come from demand outstripping supply. For our projects we have our gas contracts. We need to deliver into those contracts in 2015.

You have referenced Australia’s transparent business landscape and safe environment for investment. To what extent are you weighed down by the lack of definitive certainty in the fiscal regime as it stands right now?

We have made our investment decision. There is certainly a lot of debate that is being led by federal government in terms of royalty and resource rent tax regime for onshore Australia. What I can say is that this is a robust project.

Another “above the ground risk” is the obvious shortage of labor in Australia’s resource sector. 5,000 jobs are projected for each of the Curtis Island projects; and then of course there is Western Australian LNG. Labor shortages have the potential to blow out fixed project costs. How does one go about modeling and forecasting for this inflationary cycle?

The 5,000 people you speak of refers to the construction jobs generated across upstream, midstream, and downstream. That is one of the reasons why this project is good for Australia and good for the region – it will create jobs for people. Gladstone itself is an outstanding place to do business. It is an industrial city that wants to benefit from the industries that it welcomes in. We have world-class contractors in Bechtel who have been doing a lot of planning work for us. This type of planning is something that has been in the works for the past 12-18 months in terms of understanding how we are going to execute. We have been working with Energy Skills Queensland to understand what and where the labor shortages will be and what type of training we can put in place for our local communities to allow them to step up into bigger jobs.

Construction Skills Queensland has done a very good study detailing where they believe the skills shortages will be. It has helped us target what we need to train people.

It is going to be easy? No.

Is there a well thought out plan to minimize the impact on the project? Absolutely.

What have the nature of your conversations been like with state and local government leaders in Queensland in the aftermath of the floods? Is there concern of overlapping demands for human resources to meet both reconstruction and Gladstone LNG needs?

Like all Queenslanders, we are saddened by what has happened with the floods. The loss of life, the devastation, and the need to rebuild will certainly be a competing priority. Some of the skill sets will be different. The reconstruction effort in Queensland does not need drillers or special material welders, for example. Yes, there is going to be a bit of an overlap. But we think that the state of Queensland has the ability to redirect resources and that the talent pool here will be sufficient to do both our project in Gladstone as well as the necessary reconstruction around the state.

You have described your position as a “once-in-a-career opportunity.” What could possibly be next for you?

Right now it is difficult to say what can be better than this. My background is in operations, subsurface planning, and construction for major projects, although nothing certainly as big as this. Gladstone LNG has pulled all of this together. Right now with a $16 billion project and the ability to create a new legacy business in Queensland and Australia I need to focus on delivering that before I think about what the next big opportunity for me is.

In addition to promoting Gladstone LNG and Queensland, we are out to promote Australia. Do you think Australia LNG “Inc.” can make it to the #2 exporter in the world?

When our project comes online in 2015 and BG’s project begins to produce we will be in excess of 15 million tons of export capacity. It will make Queensland the 2nd largest export state in Australia. Coupled with Pluto and Gorgon coming online, by 2015-2016 we will be the 2nd largest exporter as a country. Vast resources of conventional and unconventional reserves mixed with geopolitical stability should mean that we will stay there as well.

Any chance of overtaking Qatar?

Never say never.

As a final message, what is the picture that you can paint for our readers in terms of the injection of economic development that Gladstone LNG brings to the country and the role that this project will play in helping Australia reach that “#2” spot?

It is important to keep in mind that while this right now is a project, it actually is a business. This is a 20+ year legacy business that we are creating for our shareholders. But it is also a 20 year relationship that we will have with the communities along the way. We want to be seen as the CSG-to-LNG business of choice. We aim to have employees who want to work with us; communities who welcome us; and customers who welcome purchasing LNG from us. We are in a sustainable position where we can be the second largest exporter in the world and people can come to us because of our operating expertise, safety record, and credibility.

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