A Flipper for Kipper

Hello Posters

Can I offer you a few facts that might help you form a vision of the value of your company.

Facts:

1. On 3 March 2016, Santos sold its 35% non-operated interest in the Kipper gas field to Mitsui E&P Australia Pty Ltd for AUD$520 million in cash on a contract executed in November 2015 (approximately 5 months after CTP and Santos entered into their agreement for the sale of a 50% interest in the Mereenie Field to CTP).

2. The Kipper gas field is located in the Gippsland Basin, offshore Victoria [Source STO Ann. 3 March 2016].

3. Kipper, lies in 100m of water and has 2P reserves of 610 PJ of recoverable sales gas together with 2P reserves of recoverable condensate and LPG amounting to some 30 million barrels of oil equivalent. [STO Ann. 19 Dec 2007; RMLS Report Eastern Australia Gas Reserves and Resources at 31 December 2012].

4. The other 65% interest in the Kipper field was and remains held by ExxonMobil, as operator, and BHP Billiton in equal shares as the Gippsland Basin Joint Venture with ExxonMobil as operator. [STO Ann. 19 Dec 2007]

5. Santos' 35% share of the field [610 PJ 2P gas and 30 mmboe 2P liquids] amounted to 228 PJ of 2P sales gas reserves and 10.5 mmboe of 2P condensate and LPG reserves. [STO Ann. 19 Dec 2007; RMLS Report Eastern Australia Gas Reserves and Resources at 31 December 2012].

6. STO purchased Kipper prior to 2007 in an undeveloped state. That is, no development wells, no subsea uplift terminal/appliance, no pipeline. [STO Ann. 19 Dec 2007]

7. STO expected the field to be into production by 2012 [STO web site].

8. That objective was later revised to 2016 [OffshoreTechnology.com 10 Nov 2015].

9. When STO agreed to sell Kipper, in November 2015, it was reasonable for Mitsui E&P Australia Pty Ltd to assume that ExxonMobil would complete development and connection to its delivery system for the Kipper Tuna Turrum project "in the near future" [Western Port News – 25 August 2015].

10. At present, the Kipper field remains unconnected to any delivery network but it is reasonable to suppose that a connection to ExxonMobil's subsea delivery system for the Kipper Tuna Turrum project will occur sometime this year.

My Observations:

Kipper's location, outstanding development requirements and path to market appears to me to be no more favourable (or, if more favourable, then only marginally more favourable) and was the situation in respect of the Mereenie Field when CTP agreed to purchase it.  

Kipper has an apparent advantage in so far as the proximity of the Gippsland Coast to the New South Wales markets gives rise to the inference that gas transportation costs would be significantly less than the costs of transportation of gas from Mereenie to the New South Wales market.

That apparent advantage might well be regarded as offset however by the reality of Mitsui's capital contribution requirements in respect of the production and delivery systems (both  subsea and onshore).

The Gippsland Basin Joint Venture has announced that the capital expenditure offshore and onshore to bring gas from the Kipper Tuna Turrum project will be $5.5 billion. It is highly unlikely that Mitsui will not be required to contribute to that expenditure.

Mitsui will receive no cash flow from its investment in Kipper for many years. The development of the production and delivery systems must be completed; following which the $5 .5 billion must first be repaid.  

I contrast that situation with CTP's immediate cash flow benefits from a purchase which has allowed it to step into a connected producing field with existing customers. That cash flow may be modest for the next 2 years but it is vastly superior to nothing.

Whilst it must be conceded that CTP will face an almost two-year delay before it can enjoy any substantial cash flow from sales to the east coast market I venture to think that the actual time of benefit to CTP will be earlier than the date of free cash flow from Kipper. It takes a long time to pay off $5 .5 billion whereas CTP will not face that financial impediment.

The Northern Gas Pipeline is the factor which delays CTP's East Coast cash flow. I predict that particular delay will be resolved long before the Gippsland Basin Joint Venture's capital retirement delay is resolved.

My Point Is:

These facts provide a foundation for formulating thoughts about the in situ value the 2P reserves that we purchased when we bought Mereenie.  We bought 75 PJ 2P in ground sales gas in a field soon already developed with access to a delivery system.

How does that compare with Mitsui's purchase of 228 PJ in situ value the 2P reserves?

I suggest that CTP got the better deal! Why do I say that?

Taking Mitsui's price paid of $520 million, it is fair to say that it paid a per PJ value of $2,280,701 ($520,000,000 divided by 228 PJ).

In these circumstances, I suggest that it is reasonable to say therefore that the value of CTP's half share in the Mereenie Field could be $171,052,570  ($2,280,701 x 75 PJ 2P reserves). Say - M$171.

Nothing turns on the presence at Kipper of 2P reserves of recoverable condensate and LPG amounting to some 30 million barrels of oil equivalent.  Santos' Mereenie Field had similar representation of such reserves at the time of purchase by CTP which are not included in the foregoing calculations. The 2 will
balance out.

And even more encouraging way of looking at the comparison between Kipper and CTP, is to reflect on the total productive assets of CTP – Dingo, Palm Valley and 50% of Mereenie. When we do that we can say that CTP's 2P reserves are Mereenie 75 PJ, Palm Valley 24.6 PJ and Dingo 34.6 PJ. Total 2P reserves are therefore 134 PJ.

If we perform the same calculation in respect of all 3 tenements the figures will be: 134 PJ x M$2,280,701 = $305,613,932. Say - M$305

Extracts from sources:

Source: STO Ann. 19 Dec 2007 - Santos today welcomed the announcement by ExxonMobil Australia and BHP Billiton that the Kipper Gas Project in Bass Strait has been approved for development. The Kipper gas field was discovered in 1986 and is located in 100 metres of water, approximately 45 kilometres from Ninety Mile Beach on the Gippsland coast of Victoria. First gas production is targeted for the first half of 2011, with gross gas production rates commencing at approximately 75 terajoules per day. Detailed design and procurement of equipment will commence in 2008 with offshore construction and installation commencing in 2010. The Kipper field proven and probable (2P) reserves are estimated at approximately 610 Petajoules of sales gas (net of fuel and flare) and 30 million barrels of oil equivalent of recoverable condensate and LPG.

Source: "Eastern Australia Gas Reserves and Resources at 31 December 2012", available from:

http://www.industry.gov.au/Energy/EnergyMarkets/Documents/RLMS astAustralianGasReserves.doc

This report was prepared by RMLS (Resource and Land Management Services) at the request of the Commonwealth Department of Industry. RLMS is an independent consultancy established in 1990, focusing on the energy, transport, communications and exploration sectors Australia wide. RLMS specialises in tenure management, land negotiation and acquisition, route corridor selection, environmental approvals, mapping, and gas market analysis.  See page 10 - "Santos has a 35% interest in the gas reserves in the Kipper Field with the balance being held by the GBJV with ExxonMobil as the project operator. Santos has a 35% interest in the gas reserves and resources of the Kipper gas and condensate field. ExxonMobil reported [13 November 2012] that Kipper has 2P gas reserves of 620 Bcf [650 PJ]. Santos share of these gas reserves is 228 PJ."

Source STO web site -

https://www.santos.com/what-we-do/activities/victoria/gippsland-basin/kipper/

"Kipper will be developed as a subsea tie-back to existing processing facilities owned by the Gippsland Basin Joint Venture, and from there the gas will be transported via the existing West Tuna platform for processing at the onshore Longford gas plant. The operator advised that the Kipper gas field's offshore
production facilities, including wells, subsea equipment and pipelines, were completed during the third quarter 2012."

Source: OffshoreTechnology.com 10 Nov 2015 -

http://www.offshore-technology.com/...pper-field-offshore-victoria-for-366m-4715296

"Mitsui E&P Australia has signed an agreement to acquire Santos Offshore's 35% working interest in the Kipper gas and condensate field, located in the Gippsland basin, around 45km off the coast of Victoria for US$366m. Production of gas, condensate and LPG from the field is expected to commence in 2016.  Kipper, which lies in 100m of water, has a confirmed resource of 620 billion square feet of recoverable gas, together with reserves of recoverable condensate and LPG, amounting to some 30 million barrels of oil equivalent."

Source: Western Port News – 25 August 2015 - "New gas to boost Hastings plant" Mike Hast Latest News - "....the chairman of Esso’s parent company ExxonMobil Australia, Richard Owen, told about 80 people the ExxonMobil–BHP Billiton joint venture in Bass Strait had recently finished drilling the Turrum gas field. “We’re spending $5.5 billion offshore and onshore to bring gas from the Kipper Tuna Turrum project,” he said. The so-called KTT field contains the largest volume of uncontracted gas in Australia and is the biggest potential provider of gas for Australia’s east coast market, with enough product to head off predicted supply shortages as global demand continues to exceed supply. Mr Owen said the investment included $1 billion being spent at its plant at Longford near Sale in Gippsland. “This doesn’t increase Longford’s capacity but allows us to treat the KTT gas before putting it into the plant,” he said. Gas from the new field would have to be extracted from deeper than ever before, from smaller pockets and it contained more contaminants than gas previously extracted from Bass Strait,
making it more costly."