CSG, Markets, Projects, Technology

Lucas Energy – tapping NSW CSG

Paul Bilston, the man in charge of Lucas Energy – a company set to spin off from its parent, AJ Lucas Group, within the next twelve months – seems quietly confident about the company’s future and is quite happy with progress to date at its CSG Gloucester Basin development which it owns 70 per cent with joint venture partner Molopo Australia owning the balance.

With an estimated 2.5 to 3.0 trillion cubic feet (Tcf) of gas in-place, Gloucester has an initial 2P reserves certification of 170 billion cubic feet (Bcf) and 3P reserves of 359.2 Bcf. And while he won’t answer the multimillion dollar question of just how much gas Gloucester has, Mr Bilston does think the current reserve estimations are conservative and that the company will ultimately recover a significant portion of the gas in-place.

As one of the largest initial reserves certifications of any Australian CSG project, Mr Bilston says that Gloucester is clearly commercially viable. However, the ultimate scale of the project will only become clearer after a significant amount of additional exploration work.

The Gloucester team has been busy completing its technical understanding of the basin. Wet weather hampered some field operations in the last year but the company is now 80 per cent through its current appraisal work and once complete, Mr Bilston says the company will have an improved confidence of Gloucester’s overall resources.

A prospective east coast market

With the amount of the gas reserves awaiting the outcome of further drilling results, Mr Bilston says the focus is now on what to do with the gas. He notes that for CSG exploration and production companies, NSW is full of opportunity.

“In NSW we’ve got a market that is largely uncontracted for gas from about 2012 onwards”? he explains. “It is a market that is growing and has the potential to grow substantially from power generation across the course of the next few years. So we’re looking to try and identify the commercial path that provides us with the best opportunities and the best returns. That is our focus for this year.

“We’re in the process of permitting a pipeline down to Hexham, we’re looking at power generation, we’re looking at sales direct to customers, we’re looking at all sorts of things. This is potentially significant capital project and it’s important to consider all of the alternatives to maximise the returns”? Mr Bilston adds with cautious excitement.

And will the future see Lucas scaling up to LNG? The short answer is no, at least not at the moment. LNG requires a significantly greater level of reserves than currently exists in the region.

“We get quite a lot of our benefits from a price perspective from Queensland’s proposed CSG LNG projects by virtue of our location and by virtue of the fact that they are keeping gas in Queensland at the moment. If all of the gas in Queensland was all of a sudden turned down to come into NSW, we would suffer but at the moment, the likely implementation of future LNG exports from Queensland is holding gas prices.”?

The issue of domestic gas supply versus export markets has been the source of much consternation, particularly on Australia’s west coast. However when you are an exploration and production company like Lucas, this particular dilemma becomes a good business opportunity.

Mr Bilston believes NSW has got some considerable issues in terms of its future gas supply.

“New gas supply from Victoria is capacity constrained at the moment”? he explains, adding that potential flows from the state is limited by its pipeline capacity and declining gas resources from the Cooper Basin.

So without a particularly vibrant indigenous gas resource itself, where is the New South Wales’ gas going to come from?

As Mr Bilston explains, the nice thing about CSG is that coal basins have typically been reasonably well defined. In addition to the Gloucester Basin, he says the prospects with most potential in the state are, the Sydney Basin (Sydney Gas), the Gunnedah Basin (Eastern Star Gas and Santos) and the Clarence Moreton Basin (Metgasco). Despite these many prospects, Mr Bilston says that NSW has not proved itself a massive resource base like Queensland.

“At this stage, the NSW industry has not demonstrated that any of those projects as they stand are comparable to Fairview or Berwyndale South, both located in Queensland”? he says. “That’s not to say that they won’t be. A number of the projects have a very large resource base, and if the operators can make them work, then they could potentially become quite big projects.

“To date, what I haven’t seen evidence of is anything in the NSW CSG prospects that has quite the scale and the productive capacity that we’re seeing out in Queensland. However, New South Wales is much earlier in its CSG development evolution. But we’re making rapid strides to catch up. At Gloucester, we’ve got a well doing upwards of a million [cubic feet] a day which is just a fantastic rate – it is highly economic – but do we have the potential to create 7 Tcf of reserves? Not at Gloucester, we just don’t have the area. However, I’m sure that NSW as a whole will prove up significant extra reserves in time. Who knows, one day, the NSW reserves may match those in Queensland.”?

Not discounting the tension between gas demand and supply on the east coast, the good news for gas exploration and production companies in NSW is for a prospective market post-2012 of much higher gas prices.

“From a producer’s perspective, we’re all trying to maximise how much money we get paid for the gas. From a supply/security perspective, people don’t want to pay any more than they have to.

“But the reality is that energy prices in the eastern seaboard are going to go up materially”? he adds, “and as that happens, the price gap between the potential for LNG and domestic markets is such that the drive to go to export LNG will decrease for some places. I suspect what will happen is that some companies will choose to go offshore and enough will stay onshore because prices will come up.”?

So what is Lucas planning to do with Gloucester’s gas? The possibilities are many and the company is focusing on identifying the most prospective commercial path. Route selection and refinement is underway on a pipeline to Hexham, which would feed gas into Newcastle’s grid, with first gas targeted for 2010. Then there is power generation which Mr Bilston says includes the potential for everything from small to large-scale generation within the region. He says that Lucas has had informal discussions with the key players in the power generation industry but nothing has been finalised yet.

“We’re not in a rush, because right now it is difficult to frame where the energy equation in NSW is going to be in twelve months”? he says, adding that one of the major variables is the impact of the New South Wales privatisation process which may create an environment where attaining firm commitments from private sector businesses is difficult.

Of course, the other unknown factor is the uncertainty around climate change and a price on carbon. Like many company executives in the emerging CSG space, Mr Bilston has a number of questions: What is happening with emissions trading? Will existing coal-fired power stations be allocated free permits and what are the implications of this? The result of the situation for Lucas, says Mr Bilston, is that until there is clarification on the answers to these questions, and the NSW energy privatisation process becomes clearer, it is better to delay any significant commercial decisions.

Working with the community

With these potential large-scale changes in mind, Mr Bilston considers the effective management of regulatory and approvals processes as the company’s biggest challenge. Key to this is the relationship Lucas has with Gloucester’s local communities. Managing the company’s relationship with the community involves a multilayered strategy but Mr Bilston says the most important thing is being honest and transparent.

“At the moment, we’ve got a reasonably supportive community but engaging in it in a positive way and creating a win-win situation is really important to us. Securing our pipeline route will obviously also be a challenge in its own right,”? he adds.

“Engaging, communicating with the community, being sensible with our commercial arrangements and maximising local content are the things we’re doing in that space at the moment”? he explains. “In terms of approvals – the bit that we can control – it’s important to put the best quality information in front of the regulatory system and that’s what we’re focused on at the moment.”?

Ultimately the challenge comes back to the community. The more detailed information out there in the public domain, the easier it is to gain approvals from the government. As Mr Bilston says, “If we don’t win the trust of that community, then we potentially don’t have a project.”?

Expanding horizons

While Gloucester is the company’s main focus, Lucas has other projects and prospects in the pipeline. In January, AJ Lucas Group acquired a 15 per cent shareholding in Sydney Gas whose acreage extends throughout the Sydney Basin.

Overseas, Lucas Energy owns 60 per cent of Canadian company Arawn Energy. Mr Bilston says the “complex”? and mature North American gas market has some interesting opportunities. The higher gas prices mean that projects do not require the same flow rates needed in Australia to make a project viable and there are some really good skills and expertise working in that sector which Lucas can tap into. However Mr Bilston believes there is also the opportunity to take some of Australia’s expertise north.

“Australia of necessity has been really good at developing innovation. As an example, we just haven’t had the population density to support pipeline infrastructure”? he says. “We therefore had to develop new pipeline installation methods to reduce the cost to a level the market could bear. I think we probably still have the best pipeline code in the world and we are amongst the lowest cost builders of pipelines in the world. The same applies to drilling and I know from what we’re drilling in Canada that some of our drilling costs are very competitive.”?

Mr Bilston also flags the potential of developing unconventional hydrocarbons in Southeast Asia, particularly in Indonesia and India.

“We could be quite well-positioned, given the leverage we could potentially bring from our drilling business, to participate in some overseas development,”? he explains. “So we’re trying to work that through. Our focus has been in Gloucester, still is Gloucester but we’re trying to work past that and apply our CSG and drilling expertise elsewhere.”?

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