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with David Johnson, Managing Director, Metgasco

20.05.2010 / Energyboardroom

With coal seam gas (CSG) grabbing many of Australian oil and gas headlines recently, Metgasco seems well positioned in the right place and the right time. What do you consider the main drivers behind Metgasco’s favorable positioning in CSG?

A lot of the determinants of our key positioning relate to our location, specifically our location in what we consider an underexplored basin. In geological parlance we operate in the Clarence Moreton Basin next to the Surat basin in southeast Queensland where companies have been very active in CSG. A number of fellow geologists and I concluded several years ago that for various reasons, the basin had been overlooked but probably held considerable potential that had not been recognized. In particular we felt that it had potential for CSG in the Walloon Coal Measures. We managed to get our acreage position set at a time before the Walloon Coal Measures boom.

We also believed the basin to have potential for conventional accumulations of hydrocarbons as it had been lightly explored. To put it in scope, there were only 10 wells drilled in an area of approximately 16,000 square kilometers. By comparison, an equivalent Jurassic to Cretaceous era basin in the US would have 150-200 wells.

The location of the basin is also close to the southeast Queensland markets. We considered that if we were able to identify and extract gas, we would have a viable market to sell it in. Our positioning is therefore a confluence of those three factors. Other important factors stem from our knowledge of how people have gone about CSG exploration in the US, particularly groups such as Evergreen Resources where with a significant acreage position they were able to drill many wells and achieve economies of scale. Looking towards that model was helped in putting together our acreage and development work today.

Can you put in perspective the CSG assets that Metgasco is sitting atop in relation to the larger Surat Basin?

The Walloon Coal Measures that we are looking at were deposited at the same minute of the same day of the same week of the same year as the coal measure in the Surat Basin. They have broadly similar technical characteristics although we use different drilling methods to produce. In terms of acreage, for a broad comparison, our acreage position is similar to that of Queensland Gas Company at the time it was taken over by BG. We have identified a gas in place figure of approx five tcf just over one of our tenements. Our current 3P CSG reserves are 2.2 Tcf and our current 2P CSG reserves are 381 Bcf, just from our original PEL 16 tenement area and covering about 10% of our total acreage.
Translating gas in place to reserves and extracting gas commercially is an ongoing process that we are now in the middle of. but in terms of basic exploration potential, the Clarence Moreton Basin is just as significant as the Surat Basin. We think it is additionally significant because it has largely untested conventional hydrocarbon potential. We made our first serious conventional discovery in December of last year. We have opened up a new horizon in terms of conventional potential whereas the Surat has been looked at quite extensively over the past 20 years. There is plenty of potential and plenty of upside.

With all of this potential is this southeast Queensland, northeast New South Wales region the new energy corridor of Australia?

For on-shore east coast activities I would say it is. Clearly in the case of Western Australia, their key energy corridor is the offshore Carnarvon-Browse Basins. But onshore, the Bowen-Surat-Clarence Moreton system is looking to be a major gas producing province for some considerable period of time.

What are Metgasco’s timetables for exploration and eventual production for this wealth of potential?

Our timetables are a function of a number of different factors. Without oversimplifying things we see ourselves as having three different businesses. We have a CSG business, a conventional gas business, and an infrastructure business.

We have to get gas to markets. The infrastructure we have to build is proportional to the volumes of gas we want to get to markets. From an electricity perspective, we can quite readily begin generating or turning gas to electricity to sell to local and regional markets. For us to begin tapping into broader markets we have to bring on additional infrastructure such as building pipelines to the Brisbane interconnect. To begin delivering large volumes of gas we have to contemplate larger scale field development. There are plenty of opportunities and plenty of markets available.

The question for us is being able to do so on an incremental and sensible basis. Looking at some of the proposals in Queensland at the moment, some are being funded by very large companies that have balance sheets and cash flows that can support a $3-4 billion investment. We have a market capitalization of $150 million. We need to walk before we can run and so for us it is a matter of working through our immediate projects on hand. We are building a power station that will take gas from some fields where we are currently engaged in trial production. Once that is up and running it will generate cash flows and demonstrate that we can consistently drill and complete wells on a positive net present value basis. That, in turn, will give us the knowledge on how to upscale things.

In terms of specific timelines we see ourselves as having a very significant window of opportunity if we can get gas to what we call the Roma to Brisbane pipeline by 2014. That will allow us to potentially participate in the liquefied natural gas (LNG) market via swaps out of Brisbane. The Brisbane market is also a significant and valuable market in itself. A lot of our activities at the moment are quite focused on the incremental approach to getting confidence in our field delivery; confidence in our ability to put in infrastructure; and confidence in providing larger gas volumes to markets.

Of the three business segments which is the largest and most important in Metgasco’s total portfolio?

Most of our activities to date have been on the CSG side of things and is where we have now identified substantial reserves. . We have reached a point where we know how to drill and complete wells on a commercial basis. We are now beginning to put together field development plans for our CSG operations.

The conventional discovery we recently made is interesting to the extent that the sum total of our conventional gas resources may not be as large as the sum total of our CSG resources, but conventional gas has the benefit of offering flexible supply to customers. Most of the demand for gas is for electricity generation through open or closed cycle combined gas-fired turbines. Consumers like to turn on their hot water system at 7am and by 10pm the power load decreases. Power generators like to take flexible gas supply. Having conventional resources offers an ability to do that whereas it is difficult with CSG. Customers will pay for the benefit of being able to turn production up and down. Conventional gas also makes water management systems easier than if dealing with broad scale CSG production. We see having conventional gas as a complementary benefit to our CSG resources and the combination of the two is very important. We would like to sensibly progress both at the same time. However, it is challenging because it requires different skill sets within the organization. But if we can have CSG which delivers a fuel supply over 20-30 years supplemented by a conventional gas load, we offer a very compelling business case.

Our infrastructure business is a means of getting gas to markets. In another time and at another place we would be happy to connect to an existing pipeline business that might exist close to our acreage. But that does not currently exist where we are. It is a necessary part of our business but at the end of the day is a mechanism rather than a driver.

What types of partnerships whether through investment or technological know-how could Metgasco partake in if it wanted to accelerate its incremental approach to its businesses?

There are several answers to that. First is where and how do we access technological know-how and if we want to access it to allow us to move forward. Clearly, the US is still home to most of the innovation and engineering practice when it comes to CSG and conventional gas. Tight gas, for instance, supplies 40% of US gas requirements but does not really exist in Australia as a business practice. If you want a lot of technological know-how you go to the US. We do have ongoing and significant contact with consultants, advisors, and companies in the US who provide us with a lot of technical information and advice.

Being able to apply and commercialize the technology is another answer in terms of where and what you need. That is very much a function of what other players exist in the market that see that you have something to add, how it can be of benefit to them, and where and how you can contribute. Clearly at the moment in Australia the two big opportunities are being able to participate in the gas-fired power market or being able to sell gas as gas, be it going through the domestic market or the LNG market. We have a fair bit of contact with a wide variety of people looking to source gas and who could perhaps help us get to that point.

How has Metgasco been able to establish a successful exploration track record in a capital intensive industry as a debt free company?

A lot of that can be traced to the experience of the directors. We tend to think that exploration companies should shy away from project debt until they have reached final investment decision on a project. At that point they can assume project debt and go through to development. That is not always the case in North America but my experience and the experience of other directors is such that until we get to the point of a final investment decision on a number of projects we would stay away from debt.

Our capital structure is reasonably simple. We have approximately 250 million shares on issue which are ordinary equity. The vendors and directors own a large component of the company. We like to think that the interests of directors and management are aligned with the interests of shareholders as a whole.

How do you see the future of Metgasco unfolding as gas, particularly CSG, becomes an increasingly attractive fuel supply and consequently an important geo-political resource?

There is a worldwide shift to cleaner fuels and certainly gas is one of those. We like to think that is the case; that in the long term there will be strong demand for gas supply out of Southeast Asia. We do observe that there is a shortage of gas supply in the Asia-Pacific region. The three logical supply markets that can satisfy demand are Australia, Sakhalin in the far eastern Soviet Union and Qatar. If that assumption is true, yes, the significant owners of gas reserves should be able to produce a product for which there is a ready market. There are some questions about the nature and extent of supply and demand in the medium term in Southeast Asia. That is a function of one’s personal views. You can add up as many facts as you want about shipments out of Qatar versus likely contracts available for sale out of China, but the answer is fraught with uncertainty. The best thing to look at is a 10-15 year view rather than a 2-5 year view.

If you hold all of those considerations and wind that back to where we are today, the important thing for us is sensible development of our reservoirs; identifying our prospects and leads; ranking them; doing the right amount of work on them; drilling the ones we think are attractive; and understanding where and what our reservoirs’ likely performance will be. Similarly with CSG our priorities are on understanding what our fairways are; what sort of foreseeable production we can see out of those areas; and putting those together to develop sensible production profiles to understand what our capital requirements are and what our likely returns are going to be.

That is easier said than done but that is where our focus will be. If there is this growth that people are talking about then so be it. That will be good for us and we can participate in it. For now, our focus is on our assets and making them perform.

Is the business and investment climate in Metgasco’s operating markets conducive for making those assets perform?

Generally speaking, yes. But it has taken us five years of operations as a listed company to know how to operate with some of our acreage and their technical characteristics. We have spent years understanding the community we operate in such as the local stakeholders, landowners, and existing regulators. It has been a complex process understanding the way the state of New South Wales operates compared to, for example, Queensland. That familiarization is quite an upfront hurdle. But we have now been working in the state of New South Wales for a sufficiently long period making us confident that we know how to operate in a commercially sensible manner. To that extent, while there is always room for improvement with regulations, we know how to deal on specific issues and progress our activities on a satisfactory manner.

As CSG increases the interaction between industry and the local community what type of reputation is Metgasco striving to establish for itself amongst stakeholders?

I think there are a number of critical areas. We see ourselves as being an accepted part of the community in which we operate at a production level. We need and would like the community to accept our activities on the land where we operate. In Australia, the crown owns the right to minerals. That means co-existing with the surface title holders. So having good relationships with landowners is essential. Similarly, having positive relationships with regulators is of tremendous importance because, like it or not, oil and gas is a complicated business that requires balanced regulation. Having those are necessary pre-conditions to drill and complete wells, put in infrastructure, and take gas to markets It also goes without saying that you need the right personnel to do that properly. Having done that, you need to demonstrate to your shareholders that you are a worthwhile investment and can generate returns.

With its abundant reserves, proximity to markets, and prudent management, where will Metgasco be in 10 years?

We would like to be a substantial producer. We like to think we are going through a metamorphosis from an exploration company to a development and production company generating strong positive cashflows and demonstrating significant value creation.



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