I'm getting back to basics during the pre-upgrade lull.The...

I'm getting back to basics during the pre-upgrade lull.

The fickle market has been jumping at shadows since the GFC and I imagine hedge funds are making a killing. Good luck to those blackguards.

On the demand side, CSG and ESG is looking better than ever.

The big bold LNG projects in Queensland need scale for the big payday. If your stumping up $16 billion there is no way that two train projects with projected IRR's between 11% to 14% is the Holy Grail. Faced with the risk of capex blowouts, you have to assume 11% is looking more likely.

With that in mind you don't have to be a genius to conclude that Trains 3, 4 and 5 are the main game. BG, GLNG, Shell-Petrochina and APLNG think big, not small.

When was the last time a CEO of an oil and gas major went to his shareholders and said, "We're expecting mediocre returns from the biggest project we're ever undertaken"?

LNG Ltd has CNPC subsidiary in its corner now and LNG ain't talkin? about a 1.5 mtpa project no more. It's 3 mtpa with a lazy eye on the adjacent Sojitz block.

I'm repeating some points made before again (some fine tautology there), but not only do the Asian buyers want equity in the projects, Asian LNG buyers want to secure LNG off-take to cover future expected demand. By taking equity in the projects they also secure first dibs on additional off-take when the LNG plant is expanded to Train 3, 4 & 5.

Where does that put ESG, well the NSW CSG players will have to prove up reserves and work with the governments, the Greens and the farmers to get everything done. Is there any wonder DC and team push for more pay and options!

?Ok, Ok, whatever you want guys, just get the job done. And DC whatever you do, don't strangle Christine Milne even if you think the 20 years hard time would be worth it!

Back to the main point about the zone.

If you want an Asian buyer to take equity in your LNG project, you?ve got to have scale. Based on the information we have about LNGN, the first 1mtpa looks economically feasible. That means LNGN needs 2mtpa to start humming.

To secure 2 mtpa, ESG needs at least 2,400 2P and some head space. If I was an Asian buyer or Marubeni, I?d be waiting for ESG to prove up the 2P before I got close to a deal. In addition to that, ESG need to back up the price with gas reserves.

Likewise, on the take-over/acquisition front. Looking at back at history (whoops there I go again), the billion dollar plus takeovers happened after 2,000 2P was proven up. That?s BG QGC, Conoco Origin and Shell Arrow. The early mover exceptions were STO Petronas and Pure.

Others will know more about the Pure take-over but I?m guessing Arrow got the party started early forcing BG to come over the top based on Pure?s prospectivity and location. Smaller take-overs such as Sunshine, Roma also occurred possibly for location reasons.

Big O&G companies like BG, Total, Kogas, Shell and Conoco won't be stumping up the cash for a takeover until they have certainty as to what there buying.

I?m sure this is not news to many readers, but I?m thinking ESG enters the zone when it has proves up at least 3,076 2P which is 2,000 2P net to ESG.

Good luck and let?s hope the upgrade gets us in the zone.