Eastern Star Gas MD Discusses on LNGN and Narrabri Coal Seam Gas Projects (Australia)

Eastern Star Gas Managing Director David Casey Discusses LNGN and Narrabri Coal Seam Gas Projects with openbriefing.com:

Eastern Star Gas Limited recently announced a commitment to carry out front end engineering and design work (FEED) for the LNG Newcastle (LNGN) Project (100% ESG owned) and a feasibility study on development of the Narrabri Coal Seam Gas Project located in PEL 238 (ESG 65% & STO 35%) followed by FEED. ESG’s cash of $100.4 million at the end December 2010 will be reduced later this month by the final payment of $22.5 million for land for the LNGN project. Do you have sufficient funds to complete these studies?

MD David Casey

We remain well-placed to progress LNGN FEED and the PEL 238 feasibility study within our existing cash reserves, and have no plans to seek fresh funds from our shareholders in the near term.

In August last year we raised $100 million in an oversubscribed placement. As we said at that time, those funds will be used to complete feasibility studies and progress FEED on the LNGN project, as well as acquire the LNGN land and cover ongoing drilling, development and corporate costs. Of these, the FEED and feasibility work is expected to cost around $35 million.

The amount of FEED, feasibility and other costs that ESG ultimately bears will depend on the nature and timing of changes to the ownership structure of the projects. ESG’s primary longterm aim is to participate in our area of expertise – the upstream Narrabri Coal Seam Project. Within this, ESG has the flexibility to sell-down some of its existing upstream interest and potentially all of its LNGN interest.

A feasibility study on the LNGN Project examining the use of electric motor driven, midscale technology was completed at the end of 2010. Can you provide an indication of the forecast project costs? What level of offtake commitments would you need for an investment of this size to be economic and what are the most promising markets for the project.

MD David Casey

The feasibility study outcomes are in line with our expectation that the first 1 million tonnes per annum of capacity of the LNGN Project will cost around 1 billion dollars, including the LNG storage tank and the export jetty. On the basis of information we have seen published, the first stage of the LNGN project comprising one LNG train is competitive in capital cost terms with that achieved by larger projects after completion of their second LNG train. In addition, the cost of expanding the capacity of the LNGN Project will see economies of scale realised, since the tank and jetty can handle greater than 1 million tonnes of throughput.

The low cost of the LNGN Project is one of the key advantages of the modular design of the mid-scale technology we have selected for use at Newcastle. Other major advantages include quick construction to reduce lead time between construction and revenue, and operational flexibility, which suits supply from a coal seam gas project where gas production ramps up progressively.

In terms of the level of offtake commitments, this is yet to be determined in detail. However, LNG projects are typically developed with most, if not all, of their production capacity backed up with long term sales contracts. We don’t expect the LNGN Project to be different in that regard. However, a significant advantage of mid-scale LNG projects producing smaller total volumes is the flexibility to exploit niche sales opportunities not necessarily attractive or available to the big LNG projects.

What options for development of upstream gas production, processing and compression facilities for the Narrabri CSG Project are likely to be considered as part of the feasibility study and review?

MD David Casey

While most technical aspects of coal seam gas project development are well understood, there are a number of optimisation and refinement options, some of which are interactive, that need to be specifically determined for the Narrabri CSG Project. For example, during detailed feasibility work we will make a final determination on matters such as electric versus gas engine drives for compressors, and the best technology for water handling. We will also optimise the timing and design of well drilling and corresponding drilling rig requirements, along with the location of compression and processing facilities.

Ultimately, at the end of the feasibility study process we will have determined the single goforward option for upstream development, which we will then take into FEED.

What funding arrangements and project ownership structures are being advanced to meet development costs for the LNGN Project and Narrabri CSG Project?

MD David Casey

One characteristic common to many recent LNG sales contracts is the simultaneous investment by the LNG buyer into both the upstream gas field and the gas production infrastructure. This benefits customers as it gives them a partial hedge on the cost of LNG production, and provides an alignment of interests for all parties involved in the development. We have indicated our willingness to make some upstream gas field and LNGN Project interests available to offtakers of our LNG. Not only do we anticipate this will be attractive to the LNG offtakers, it also has the consequent benefit of reducing our funding requirements.

You have indicated that a final investment decision (FID) on the LNGN Project could be made in the first quarter of CY2012, following completion of FEED in the fourth quarter CY2011. What will be the key deciding factors in any FID on the project?

MD David Casey

Starting at the macro level, commercialisation of the Narrabri CSG Project is our number one priority. We aim to be in a position to commit to development of the project by early 2012. To do this we need to complete the upstream gas field feasibility and FEED, have gas pipeline arrangements in place, have markets committed and have all government approvals in place, including environmental approvals.

The LNGN Project represents one prospective high-value market for gas from Narrabri and so is being advanced in conjunction with the upstream gas field project. Like the upstream project, to commit to development of the LNGN Project will require numerous matters to be addressed, including securing LNG markets, receiving project approvals, and finalising port access arrangements and project financing. We aim to bring all these factors together to enable a commitment to development of the LNGN Project within the timeframe for commitment to the upstream project.

[mappress]

Source: Eastern Star Gas, February 16, 2011;