Full article text: Life on the gas frontier pays off for Incitec The single most productive response by a government, federal or state, to the eastern gas dilemma has been Queensland’s decision to attach domestic market obligation to the release of new but compelling coal seam licences in the Surat Basin and Galilee basins.
This is gas reservation that everyone can deal with. Unlike the regulatory bazooka built by the federal government, the Queensland approach was prospective rather than retrospective so it does not threaten the return metrics of very large investments already made in the northern state's onshore gas sector. As well, it opened the gates of opportunity for reputation recovery by the majors, while spurring innovation by drillers and customers alike.
Since 2017 the Palaszczuk government has released about 25,000 km2 of prospective coal seam country to explorers big and small, with nearly a third of that acreage being covered by caveats that require future production to be delivered to domestic markets generally or industrial users very particularly.Wednesday bought further demonstration of the quality of Queensland’s policy inspiration with confirmation that a recently completed four-well drilling program in a sweet spot in the Surat Basin coal seams had delivered one of the more unusual exploration joint ventures with a surprisingly large initial contingent resource base.
The joint venturers in question are the plucky Northern Territory adventurer, Central Petroleum, and arguably the feistiest of the Australian manufacturers made vulnerable to historically high east coast gas prices, Incitec Pivot.This pairing was the product of managements past at both the gas explorer and the explosives and fertilizer company but their foresight looks like bringing enduring value for those who have inherited the coal seam winds.
To refresh there, when the government announced its qualified reservation program, Incitec was still run by James Fazzino and Central was under the direction of the man who helped ignite Queensland’s coal seam rush in the first place, Richard Cottee.Incitec and Cottee had form in gas. The gas-hungry manufacturer was a foundation customer of Cottee’s pioneering coal seam player, Queensland Gas, and its support had proven critical in the recovery plan that Cottee took to Central back in 2012.But this time around Incitec wanted to do more than secure a project through its custom. Fazzino’s team wanted to creep right upstream to the well-head. So Central was invited to a deal that would see Incitec stump up with the first $20 million of exploration and pre-development funding and Central would operate any project they secured.
That work commitment was enough for Incitec and Central to win a square of prospective country whose neighbours include LNG operators like Australia Pacific LNG (APLNG) and Santos along with Shell both in its own right and under the flag of its joint venture with China Arrow.Central, which is populated by a cohort of ex-Queensland gas folk but is no longer Cottee’s domain, opened its drilling campaign expecting the prove-up a contingent resource of something under 180 petajoules (PJ).But things went much better than anyone had imagined possible. Central has proved that two target upper level coal seams are as productive as they are for its neighbours. But it has also proved that a deeper layer of coal is unexpectedly productive. Even better, those seams are made productive by conventional vertical drilling and will not need to be fractured. So, the up-front drilling costs will be low and so, too, will the technical risks given that Central reckons there will be no need for horizontal drilling.
The net result of all of that is that independent experts have certified a 2C resource of 270/PJ and declared that the resource is contingent on everything but the natural productivity of the rocks and the capacity of existing technologies to release and capture their bounty.In other words, Central and Incitec have been given the highest assurance possible that, with firm development, market and funding plans, the 2C resource will become a bankable 2P reserve.To put that into some sort of context, 270/PJ is about equivalent to nearly half of Australia’s annual domestic gas consumption and Incitec’s half share of the resource would be enough to feed its Gibson Island urea plant for a decade.
One of the welcome byproducts of success in ATP 2031 could be Incitec’s introduction to complexities, costs and risks of running coal seam gas projects.As we keep saying, there is an awful lot of onshore gas about, but it is not cheap because drilling costs are naturally higher because of the need to keep rolling out new wells and then the gas has to travel a long way to market.For all of that, the benefits of owning production should prove tangible and material for Incitec.The pay-off for Incitec in this experiment in vertical integration is that it will pay field-gate cost for its share of gas production rather than the export netback price it is currently being charged.
The quality of Central’s drilling results suggests that this most proximate gas might well arrive at a comparatively low cost.The other things to appreciate on the cost front are the things that lured the joint venture to ATP 2031 in the first place. It sits in an undeveloped pocket in the middle of one of the most heavily drilled corners of Australia, it is within spitting distance of the Queensland’s Wallumbilla pricing hub and it is surrounded by a web of pipelines feeding the north-south mainline.
This is potentially, then, very good news for the 450 people whose jobs at Gibson Island have so regularly been used as bargaining chips in Incitec’s quest for competitively priced gas supply.In June, Incitec boss Jeanne Johns, whose command of the darker arts of negotiation upset a few potential suppliers over the past year and more, forged agreement with APLNG on an 18-month supply arrangement that extended Gibson Island’s life until December 31, 2022.Johns said the short-term deal would start in April next year and would add $5 million to Incitec’s EBIT in 2020.
The obvious implication to draw from that forecast was that the new gas will land cheaper than it does from Gibson Island’s current supplier, which is Central, which presently draws all of its gas from central Australia. So that EBIT difference announces, more than anything, the value of proximity.The independent expert’s affirmation of the quality of Central’s ATP 2031 drilling results has inspired the partners to contemplate more rapid progress than may have previously been imagined.
Central’s new boss, Leon Devaney, told me on Wednesday that plans for a pilot plant and production enough to support it had been bought forward, with the target moved to early 2020. Devaney indicated that he wanted to move into some level of production well ahead of the December 2023 end date of Incitec’s supply agreement with APLNG.The next steps will include further discussion with his new neighbours on the potential of infrastructure sharing. “You will see from the map that we are in the middle of the pipe network but in the empty middle of a donut when it comes to processing and other infrastructure,” he observed.
Filling that hole could be just as helpful for others as it would certainly be for Central and Incitec, he suggested.“But look, we have got critical mass enough to support our own plant easily. This is going to be an efficient project with costs better than we could have anticipated and with more gas per well because of the additional deeper layer of production,” Devaney said.“We want to bring this to market very quickly now,” he said, agreeing that Central could mimic the comparatively short development timelines achieved by Senex Energy at its pioneering Project Atlas, which is just to the north-west of ATP 2023 and was the original exploration licence issued with firm domestic obligations.“Of course they had 2P (bankable reserves) and a PL (production licence) from the start, so we are naturally a bit behind their starting point. But we can follow their fast track,” he said.
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