milestones - part 2

This post is a follow on to my Milestones post of a couple of days ago, which concentrated on the "Upstream" (the E&P part) and the process of discovery, getting to a Contingent Resource and then to Reserves. There are some short term milestones there and mid term.

Now to turn to the "Downstream" part for ICN. Usually this is not a factor for small ASX stocks - they take a wellhead price and sell into a pipeline and thats the last they care about their product.

Reality for ICN is that it has a downstream business because of its GSA (there will also be a midstream business to care about also but thats Part-3), if the plan is to sell the gas discovered in ATP855P as part of the 2P Reserves of 2Tcf that is a condition precedent of the GSA.

One criteria Contingent Reserves need to be converted to 2P Reserves is "REASONABLE EXPECTATION that there is a market and sales quantities/production to justify development" and Assessment of Economic Feasibility.

Could just say have GSA, tick box and move on. Doubt that though. GSA IS NOT SELLING GAS - BUT IS SELLING LNG

One immediate issue - our costs are in AUS$ and our pricing is in US$ - not favourable for past couple of years - but hopefully corrects.

The GSA itself is not well understood (and I've spoken to the company to clarify some of my understanding relative to what I expected - Richard was gracious to discuss in general terms as of course actual terms would be commercial in confidence).

This URL may help in your understanding of gas contracts - the specific section Read – Group 3 – Oil linked price markets

http://www.natgas.info/html/gascontracts.html

I would expect that ICN GSA to be some form of "S" curve contract.


ICN GSA highlights the term, the quantity, offtake only, not restricted to port/feedstock and of course TAPIS linked pricing with review every 3 years.

This could mean any number of things but my interpretation is as a normal commercial contract that it is "collared" with a floor/ceiling. It would be highly unlikely to be a continuous "spot price" otherwise both parties would be hedging continuously so as not the be exposed to risk of wild price swings.

Remembering that 1 Barrel Oil = 6Mcf on BTU equivalency, then it round terms 1/6th (or 0.167) so that "linkage" is the default multiplier (slope). Graphically they look like:

Price(LNG) = Price(Oil)*Slope + Variable

Research says that the Slope ranges between 0.10 - 0.14. The above image has Slope of 0.12 and Variable of $1.25


This is just highlighting that we are operating in much more of a price sensitive space than say the CSG guys close to Gladstone (assuming the Gov't allows them to operate at all - which they will) because their all-in costs to produce saleable gas is lower than ours.

My research shows costs to liquify are broad but its somewhere between $2-$3 per Mcf - so being Australia I'll go with $3/Mcf. Processing, Taxes and Transport will snare another $3/Mcf (I think) so the focus is can CB shale gas be produced for total all in F&D cost of $5/Mcf? That would be a very profitable business supplying and selling our GSA for LNG.

Below is the what Core Energy research thinks..

They have CB Unconventional at $8/Mcf - so add liquifaction costs and a little extra for more transportation to LNG facility from Gas Plant.

Based on what is inplace currently for "Downstream" what gets discovered "Upstream" looks to be qualified for conversion to Reserves on the economic & evidence of market/sales criteria.

But it does show we are very sensitive to costs on the E&P side, price of oil and currency fluctuation.

Who said O&G wasn't any fun!!