2P or not 2P?
The game in the coal seam methane gold rush right now is to move gas from 3P to 2P – that is to move resources from “possible” into the “probable” and/or “proven” box by drilling wells and actually seeing what’s down there.
This morning’s announcement from Queensland Gas that it has more than doubled its 3P resources (proven, probable and possible) and increased 2P (proven and probable) by 80 per cent is purely a function of drilling.
QGC has been putting down wells in the Walloon Fairway section of the Surat basin since chairman Bob Bryan founded the company eight years ago and has now drilled 171 kilometres in 264 wells. Another 200 holes are planned for 2008-09.
Managing director Richard Cottee is under pressure to meet the demands of the company’s joint venture with BG Group, in which BG parted with $664 million for 20 per cent of the gas tenements and 10 per cent QGC itself.
That money is for drilling to prove up 7000 petajoules (PJ) of 2P reserves to supply a 3-4 million tonne-a-year LNG plant.
Cottee’s now got the 3P resource up to the 7000 PJ, and 2P is about a third of the way there at 2370 PJ.
At the same time Arrow Energy, Santos, Sunshine Gas, Origin Energy and a rapidly growing host of new opportunists are drilling like mad trying to get Netherland Sewell & Associates (NSAI) – the international reserves certifiers – to give them a tick for a bankable amount of 2P gas.
Banks have traditionally only been prepared to fund 1P gas (that is, proven), while the sharemarket has traditionally paid for 2P.
The wave of big deals that happened recently – BG with QGC, Petronas with Santos and Shell with Arrow – has produced a valuation paradigm shift for 2P gas reserves.
But even so, the pressure is mounting on investors to start valuing, and investing in, 3P gas – simply because of frenetic competition for position in Australia’s new gold rush. Investors are resisting – they generally prefer the probable over the possible in all things.
And in any case, $7 billion LNG projects need the certainty of proven and probable reserves, not just “possible”, so the race is on to get the 2P numbers up and get NSAI’s signature on the certificates.
And then the game will shift to one of raising the capital and finding enough people and material to build four LNG export plants: Santos/Petronas; QGC/BG; Arrow/Shell; Sunshine Gas/Sojitz of Japan.
Actually, there’s no way four will get built – there simply aren’t the people to do it, even if they find the gas and the customers.
The most likely outcome, you would think, is rationalisation, and that’s certainly what the industry is talking about these days, whispering about who’s going to make the first bid.
It should be a very interesting 12 months ahead in the Queensland gas fields, as Santos, Arrow, QGC, Sunshine, Origin and the others jockey for position, and BG, Petronas, Shell and Sojitz pull the strings behind the scenes.
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