santos appears to have supply problems

Posted on MEL and on ESG

This is Mr Lincoln Augustus, first second cousin of Holymagiman

7.00 am in Kingston on a fine Monday morning, and just some thoughts to while away the time.

1.From the Santos 22/10/10 announcement :
The approval covers the development of coal seam gas resources in the Bowen and Surat Basins around Roma, construction of a pipeline from the gas fields to the coast, and construction of UP TO THREE processing trains at a liquefied natural gas plant and export facility on Curtis Island, off Gladstone.

COMMENTS: so perhaps they hope to finally, by and by, end up with a 3 train LNG plant. Makes a lot of sense.

2.From the Santos 22/10/10 announcement :
GLNG involves the production of LNG using coal seam gas SOURCED FROM THE GLNG GAS FIELDS in the Bowen and Surat Basins in Queensland. The project includes a two train LNG plant with a capacity of 7.2 mtpa

COMMENTS: so if they have enough gas in the Bowen and Surat Basins in the announcement made on 22 October 2010, why do they have to suddenly change their minds and decide on 25 October 2010 that they now need gas from the Cooper Basin for the second train?

Could it be possible that they knew all along that they had a shortfall, and that they would need gas from outside Queensland?

GLNG offtake:
3.5 mtpa of LNG to PETRONAS, comprising:
2.3 mtpa from train 1
1.2 mtpa from train 2

1.5 mtpa of LNG to Total, comprising:
1.0 mtpa from train 1
0.5 mtpa from train 2

First LNG train = 3.5 mtpa
Second LNG train = 1.7 mtpa

Need 60 PJ to produce 1 mtpa of LNG

Therefore need 210 PJ per annum to produce 3.5 mtpa of LNG for first LNG train

Will need another 90 PJ per annum to produce 1.5 mtpa LNG for the second train

Therefore for two trains producing 5 mtpa LNG, Santos will need a total of 300 PJ per annum.

If they reach full capacity for 2 trains, they will need 432 PJ/annum to produce 7.2 mtpa LNG

Of course if they decide to expand to a third train, Santos will need much much more gas again.

So, if they are having to bring in 750 PJ in 15 years from the Cooper Basin, that means that they have a definite shortfall of gas from Queensland for the second train.

750 PJ in 15 years equates to 50 PJ a year.

So a number of questions arise:

Does this 50 PJ per year fully satisfy their requirements for the 1.5 mpta that they have committed to the second train, ie 90 PJ? If not, from where are they going to make up any further shortfall?

If they are struggling to get the 90 PJ/annum to satisfy the 1.5 mpta for the second train, then where are they going to get the gas to reach full capacity of 7.2 mpta?

Santos will need (7.2 5.0) mpta more = 2.2 mpta more = 60 x 2.2 PJ = 132 PJ/annum more to reach full capacity of 7.2 mpta.

So Santos will have to find another 132 PJ of gas to expand from 5 mpta LNG to full capacity of 7.2 mpta in their 2 train LNG.

And this is if we assume that with the 50 PG/annum from the Cooper Basin, they have enough gas to fulfil the present annual requirements of 300 PJ a year for their present commitments in the first two trains.

So, in the light of these thoughts, Eastern Star and Metgasco both start to look interesting, with huge reserves waiting to be utilised.

I must stress here that as far as we are concerned, the Metgasco Board leaves the Eastern Star Board for dead in their ability to inform shareholders as to what is happening. Perhaps things will change soon, but the Eastern Star Board do not have too much time more to continue sitting there saying little.

But another thought runs through the brain.

Could it be that Santos has to talk about bringing in gas from the Cooper Basin because of WATER MANAGEMENT PROBLEMS that they are encountering in Queensland due to new and unexpected conditions that have been imposed upon them. So could it be that the water impositions are in some way limiting the anount of gas they are able to produce?

If this is the case, then Metgasco is in the box seat, because it has very few water issues....think Horse Shoe Canyon..

Metgasco has both coal seam gas and conventional gas (which can be ramped up or down at will, according to requirements.) And, as Metgasco stated in a presentation on 8 September 2010,

There is an opportunity to prove up to 4.5 Tcf(2P) in coal seam gas reserves and 1.5 Tcf(P50) in conventional gas resources through a focused reserve development work program. This volume of gas is sufficient to supply a 3 mtpa LNG plant over 20 years.

And Metgasco has very few water issues and has approval for a gas pipeline from Casino to Ipswich, where it can tap into the Brisbane Roma pipeline and thence to Gladstone.

And we believe that Metgasco has had unsolicited interest from parties seeking to buy into 49 % of PEL 16, and we have our own thoughts on who these parties may be.

So there are a few issues that the eastern Star Board must clarify, such as what water management issues ESG has, and how Eastern Star is going to take its gas to wherever it is going, and what discussions Eastern star has had with santos.

For we refuse to believe that there has been no communication, be it be for the better or for the worse.

Blessing of the Lord
MLA