the catch-22 of reserves and takeovers

ESG is in an interesting position.

ESG know that, if you can certify very large 2P reserves, the majors are willing to pay the big dollars, on a price per GJ basis. The majors also know that, once commercial flow rates can be demonstrated from all three seams, time, money and drilling will convert large % of the remaining contingent resource into reserves.

However, 2P reserves require two things - technical data to show that the gas can be produced profitably, and, importantly, a market for that gas to be sold into.

Now, here is the Catch-22. ESG have to demonstrate concrete evidence of a market to the certifiers in order to book the 2P reserve. But if your ultimate goal is to be taken over by a major, (and preferably in a contested situation), you cannot afford to lock in a GSA with just one party (make your valuable uncontracted gas 'contracted') ... all that does is limit your optionality and reduce your corporate appeal to the party with whom you have signed the GSA with.

So, the only way to both book large 2P reserves and keep your options open is to sign a large MOU for sales into an LNG market - either to potential LNGN partners via LNGN, or into QLD.

The other interesting thing is that the new 2P reserves will be booked in August. Now in order to do the certification, NSAI will need all the data, technical AND market, before then. Without evidence of concrete evidence of additional LNG markets, NSAI cannot increase ESG's 2P reserves beyond the limits of their current market constraint.

All this leads me to believe ESG will sign a non-binding MOU for sales into LNG in July - probably for 4mtpa.

In this way, ESG are able to:

- book large 2P reserves based on increased market certainty
- not commit to one party and thus not limit their corporate appeal
- give other interested parties time to act (bid)
- put a firm end date, at which time the threat of signing a binding contract will become reality.
- and, in the absence of another intervening bidder, ESG will have a very valuable GSA that they can pursue (this is ESG's risk reversal).

So, IMO, July rather than August will be the interesting month.

Yaq