with Tor McCaul, Managing Director, Comet Ridge
How would you present Comet Ridge to our readers today? What have you achieved this year, and what would you point to as the highlights for the company in its recent history?
Comet Ridge is a leading junior explorer in an industry which is just beginning to gain recognition for its significant potential. We have had a very successful year to date achieving our major objective, which was to book gas resources, and now we are working to convert those resources to reserves. In October we had a contingent resource booking on our Mahalo block in Queensland’s Bowen Basin, which for us was quite exciting because it was the first one for the company. A month later we achieved another major milestone with a contingent resource booking for our Galilee Basin block in Queensland. This was the first resource booking which was based on drill results to be achieved in the Galilee by any explorer, so that was very significant for us and for the coal seam gas industry.
Although we are achieving our goals, 2010 has not been a stellar year for coal seam gas industry in Queensland or Eastern Australia, and part of that is simply because of the massive run up in values that occurred in 2008-2009. Part of it is also just the slower than expected speed at which the LNG projects planned for Gladstone have reached FID (final investment decision). Industry opinion early in 2010 was that the first project would be sanctioned in the first quarter and the second in the second quarter. For a variety of reasons, this did not happen. This was partly due to the delay in federal environmental approvals, partly due to the proposed super profits tax which has now been watered down by the re-elected Federal Government, but also due to some external factors.
The market has taken a ‘wait and see’ approach, but in the coming months I fully expect to see a change in market perspective on CSG; when people can go to Gladstone and see tanks being built and the channel being dredged, it will make a big difference. To see a company like BG Group building a big project there helps to show that things are finally happening.
Whatever shape the industry finally takes, whether there is one LNG plant in Gladstone or whether there are two or three, it will start to become clearer over the next few months. But for Comet Ridge at this point it really doesn’t matter, our priorities are to get resources booked and then converted to reserves and position ourselves so that at the appropriate time we’ve got the gas that’s needed.
You used to be at Chartwell, and since the company’s merger with Comet Ridge you have come on board as managing director. What were the factors behind the merger?
The former managing director and former chairman of Sunshine Gas put together Chartwell to explore for coal seam gas in New Zealand. In early 2009 the company had three New Zealand CSG blocks including a petroleum-mining permit, which was the first CSG mining permit in New Zealand. On top of this, the company had around $9 million AUD in cash, a small staff of three or four and were just starting to grow as a company. At the same time Comet Ridge was looking to move its headquarters from Denver, Colorado and refocus as a Brisbane-based CSG company, and had some interesting Queensland and New South Wales assets.
The combination of the Chartwell assets, as well as a board with some good solid CSG experience from Sunshine Gas, and some capital, fitted well together with the Galilee, Mahalo and Gunnedah assets of Comet Ridge. At the time it seemed as if one plus one would equal three: the merger gave Chartwell a bit more critical mass, it injected some capital, and meant we could go forward with a bigger footprint.
Today Comet Ridge has eight blocks in East Australia and New Zealand. We operate five of those eight. Those five are 100% owned by the company, and our team has grown to fourteen people now, with a geologist based in Wellington in New Zealand, and everyone else in Brisbane.
At the time we put the merger together, we had four main areas of interest in this part of the world: Galilee, Mahalo, Gunnedah and New Zealand. Comet Ridge also has a share of an oil production business in the US.
In the past year, we’ve gone on and done a lot of technical work on all of the company’s assets. In particular we’ve looked at Gunnedah in New South Wales, having done some work on the asset and understood it better technically, we’ve realised it has potential to grow substantially.
We decided that we needed to take each of these assets forward at their own speed. Our view on Gunnedah has changed dramatically in the past twelve months: the basin is no longer the poor cousin of coal seam gas in East Australia that it was two or three years ago, with increasingly larger volumes of gas being booked there. Our impression is that the gas will find its way to LNG. We recently bought another 20% of PEL-428 in the basin, doubling our equity there, which is a vote of confidence in where New South Wales CSG is heading.
Is it a stretch to be focused on all of your assets at once with a team of fourteen?
The company has managed the task incredibly well. At the start of this year Comet Ridge had two rigs running, one in New Zealand and one in Galilee. With a small team, we were very busy, but we managed it, and once we were through that time things quietened down a little.
Comet Ridge today has more critical mass in terms of people, which definitely helps. This year we hired a very experienced CFO, a chief commercial officer and an engineering and operations manager with a lot of experience. At this point we moved from being a small company with lots of consultants doing most things to a point where, as we built momentum, we needed senior people on staff. It gives us a little bit more depth and means we have coverage when people are travelling. But obviously its not something you do the day after the merger – as you grow, you bring these positions on at the right times.
What will be your focus in the short term? Will you look to grow the company’s assets further?
Comet Ridge is always on the lookout for good quality opportunities and part of staffing up this year has been to give us that capability to do more new business, both inside the basins we are already working, but also in other areas. But in any new business, in my experience, for every ten or fifteen things you look at one works out, so it’s a lot of work sometimes, and you go through periods where you don’t quite get the result you want, or things aren’t at the right price, and then, as you work hard, you find that you start to get results.
Time always matters, but with the scale of work being done in Queensland at the moment, getting your timing right to have your reserves booked as these LNG projects come online is crucial. How have you approached that issue over the last couple of years, and what is your opinion on it today?
We will have to wait and see exactly how many LNG plants are actually built in Gladstone and how all the commercial elements fit together, but really it’s a time for Comet Ridge to book resources and get our ducks in a row so that when the fun starts we’ll be a big part of it.
The timing point is a good one. Our previous managing director, who is now based in Denver running the US business, went into Queensland Mines Department in 2004 with a map under his arm, laid it out on the table and said ‘I’d like to go exploring in the Galilee Basin’. That highlights to me what timing means. He had a vision on Galilee long before a lot of people did. He was not the first: others have been drilling oil and gas wells there since the early 1960s, but he had a sense of the potential of the Queensland CSG industry. He walked in off the street, applied for a couple of blocks, and was awarded 3.2 million acres, which is 0.7% of Queensland’s total land area. In 2008 when the government went to competitive bidding in that area, there were an enormous number of bids and a lot of blocks were bid on by more than five or six companies. It’s amazing what a few years does. People’s perceptions over the past five years have changed dramatically – from 2005 when there was no real industry interest, to 2008 and competitive bidding.
How successful has Comet Ridge been at raising capital since the merger, and where have these funds been allocated?
In the middle of 2009, Comet Ridge raised around $21.3 million AUD through a placement and an entitlement issue, which was not too long after the merger. This provided funding for the company’s exploration activities. In the past 18 months the company has contributed to a total of nine wells and eight of those Comet Ridge has operated, and through Galilee and our New Zealand mining block, a lot of those operated wells have been at 100% equity.
This is a slightly different risk reward profile to other juniors, it is higher cost in the sense that you are not sharing the capital expenditure with anybody, but it also comes with bigger rewards. I have worked for companies before that have had a strategy of investing in stakes of between 20% and 40% in order to manage their risk. It let them spread their fingers out a bit wider but it didn’t give them a firm grip on any particular project. 100% gives Comet Ridge’s shareholders better exposure to rewards, and it also allows the company to control its own destiny by making operational decisions a lot more quickly.
We made a decision this year on one well location, Gunn 1 in Galilee, where we had originally intended to drill further south. We changed our mind and went north, and from the time we put the mark on the map to when we started to move the rig onto the location was four and a half days, simply because we didn’t have to go through joint venture approval processes and we were able to get quick approval from the landowner. We make a decision and we can act on it.
At the right time, this high equity strategy also gives the company scope to be able to farm down should we have a resource or a reserve that we want to develop: one of the ways the company might fund such a development could be to farm down to a bigger company who can come in, spend some capital and earn some equity. If we start at 20-30% equity in a block, it is difficult to do that.
We’ve heard mixed opinions about the future of the coal seam gas and the LNG industry here, something you alluded to earlier. What are your expectations for these projects?
My LNG experience comes from Bontang in Indonesia. My experience has been that for LNG, big is beautiful. I worked at Bontang from 2000 to 2004, so my LNG experience is probably starting to get a little bit out of date, but the LNG plant at Bontang processed about nine times Queensland’s daily gas production, and because of that did it at a very low unit cost. However today, LNG technology is changing, and as this happens there is a case for looking at smaller plant sizes than the world has traditionally seen.
I believe that ultimately Queensland will end up with one or two successful LNG projects. The only place in the world where there are two LNG plants side by side is the North Field in Qatar, and one of the reasons for that is that the North Field is quoted at about 1000tcf recoverable.. Ultimately it doesn’t make sense to me to have a large number of plants in Queensland. If an LNG facility schedules perfectly, one berth will load 365 cargoes a year. It makes little sense to have a lot of infrastructure sitting there and not be heavily utilised. To be honest, I think all the companies involved know that, and that up until now it has just been an issue of timing. One company needed to get approval and make a final investment decision, and now everyone involved will start to investigate whether there are opportunities to share.
Comet Ridge is aiming to have its gas resources moved to reserves and ready to go when these projects are completed. However, there will also be opportunities in east coast Australia for gas to go to local power generation as well. My sense is that although a lot of people are focused and keen to talk about LNG, and that in a lot of ways is where the biggest dollar per gigajoule numbers are, there will also be opportunities in power and domestic gas.
What do you think you bring to Comet Ridge as managing director?
I think my four years of LNG experience are useful. When people in the industry here in Australia talk about dealing with Asian companies and ongoing LNG deals, I have an advantage in that I have spent many hours in meetings with companies in Japan, South Korea and Taiwan over the four years I was in Indonesia, and I believe I have a good sense of what LNG buyers are looking for when they decide to buy LNG. Many analysts study supply-demand curves and pricing issues and in my experience that’s different to how LNG buyers think. They’re looking for security of supply, and flexibility of supply. Our friends in Western Australia have given Australia an enviable reputation by being very reliable suppliers for so long – that will help LNG buyers come to Queensland and buy gas from here.
I hope I bring just a little bit of versatility to the company. I was fortunate to work as a reservoir engineer for the first ten or twelve years of my career, followed by some time in finance and then LNG commercial. I can look at things not purely as a petroleum engineer but from a broader perspective.
Comet Ridge has abundant resources, assets close to existing infrastructure, and a prudent and experienced management team. Where do you expect the company to be in ten years’ time?
Comet Ridge needs to build, initially over the next year or two, a resource and reserve base. Then, as the opportunities to commercialise that arise, we plan to move that into production and revenue. Comet Ridge’s New Zealand assets will probably provide our earliest opportunity for revenue, given that New Zealand is not a huge place in terms of distance to infrastructure, and that the South Island is totally powered by hydro at the moment. There is a need for some thermal generation, and Greymouth, where our assets are located, is a perfect place to start a small-scale CSG power project and to build it up over time as gas rates rise.
Mahalo block’s proximity to infrastructure means it could be brought into production relatively quickly. Depending on where gas production in Gunnedah Basin goes, our PEL-427 and PEL-428 assets could be in a similar situation. And Comet Ridge’s asset with the mostraw potential is Galilee, these blocks equate to 0.7% of Queensland, and the potential gas volumes are high. Our challenge is to find the right location to start in, and we think we’re well on the way to that with our last couple of wells this year.
Do you have a final message that you’d like to send to our readers about Comet Ridge?
Since the merger, Comet Ridge has had a year and a half of hard work: we’ve established our first two resource bookings which are products of that work. We have an experienced team and some promising assets that are very well located so we have good reasons to be confident. Our efforts over the next 12-18 months will be focused on building the company’s resources and moving resources to reserves, and if we’re able to do that the value of the company will look after itself.