Gas for all seasons: Comet Ridge

Tor McCaul is the CEO of Comet Ridge. Comet Ridge has got some gas fields, one of them in particular in the Barwon Basin in Queensland. Coal seam gas, there’s a fair bit of it, and they’ve got 40% of the field and there’s a fair chance it will be pumping gas into the east coast system, Melbourne, Sydney and Brisbane of course, before too long, like a couple of years. In which case, they’ll be making some decent money at that point. 

Then they’ve got some more gas in Galilee Basin, north of that in Queensland, and also they’ve got some ground in New South Wales. New South Wales are upset about coal seam gas and they don’t like it and it will be more difficult to develop. But Queensland are okay with it, that’s where Comet Ridge is and I think they look pretty prospective. If you’re interested in the gas business and there’s a good reason to be interested in that because there’s a shortage of it in Australia, down the east coast in particular, and so it’s always good to have a product that’s in short supply.  

Here’s Tor McCaul, the CEO of Comet Ridge.

Tor, you’ve got two big gas prospects in Queensland, just take them one at a time.  The one to the south called Mahalo, is that what it’s called?

Yeah, it is.  It’s about a 900 square kilometre block north of Ralston, so south east of Emerald.  We’re a 40% equity partner in there with Santos and APLNG so that block has been explored for the last six or eight years but it really got going in the past six or nine months where we drilled a horizontal well in November and we have had some pretty staggeringly good flow rates out of it ever since.  So, that’s been causing a bit of a stir.

Now, in May last year you sort of took the lead with that prospect, didn’t you, from your partner.

Santos, yeah.

Santos gave it to you.  So, I think that there was a condition in that deal that there needed to be a certain amount of 2P reserves as opposed to 3P reserves in order for it to go to the next level.  Tell us about that and whether you’ve achieved that yet.

Yeah, it was a little bit innovative in that Santos, obviously with the fall in ore price a few years ago, has been downsizing.  They’ve become very efficient and much lower cost.  We went and had a chat to them early last year in Adelaide and agreed we’d take on the role of operating that block for the year and we’d be happy to carry their costs for them with a reserves target and if we achieved the reserves target then we could ask for a refund of about $1.5 million.  This year in early March we let our reserve statement out, we were able to get almost 30% above the target and so subsequently they have refunded us the carry we had.  So, it was a slightly unusual deal but it was one that worked very well for us and very well for them.

So, how much money did they refund you?

So, it was $1.4 million.  So, the work program last year was in total a little bit under $5 million so $1.4 million was their share.  It doesn’t sound like a lot of money but for an explorer with a market cap of a couple hundred million dollars it is.  So, we were pleased to exceed the target by a fair bit and get the funds back.

So, as you say basically that $5 million went on one horizontal well, didn’t it?

It went on a few things, Alan.  The horizontal well was probably the most significant part of it but we stimulated three other wells with a process called under-reaming.  So we ran in a tool to open the coal out to 48 inches, so we took an 8 inch hole in diameter and widened it out to 48 inches.  We also drilled a shallow core hole that was a little bit over 300 metres.  But, the big work was the horizontal, it’s at a total length of about 1,300 metres and even though the coal is only a couple hundred metres deep we turned the corner as we went and we drilled a bit over 900 metres through the coal seam.  So, that has been phenomenally productive for us.  We brought it online in December and steadily increased the pump speed to lift the water out of it and what’s happened is the gas has come in behind and we’ve now got a situation where the gas is flowing almost a million cubic feet a day so it’s been a great success.

So, is that coal seam particularly gassy, is that what it is?

Yeah, it is a little bit for its depth.  There are places around eastern Australia where you wouldn’t see this sort of gas content at only 220 or 230 metres.  In the southern Bowen Basin and parts of the Bowen you do get very high gas contents and so it’s not surprising for that area but it’s very productive because our horizontal well is intersecting lots of natural fractures.  Pleasingly it’s not producing very much water so that’s a good sign for development and that’ll lower capital and operating cost and development.  It’s very close to existing pipelines so it’ll be relatively cheap to tie in and the gas is almost pure methane so we don’t have a lot of processing to do at surface to knock any impurities out of it, we simply dehydrate it and compress it and put it in the pipeline.  So, we think it’s got probably about the best economics around.

So, tell us what the total amount of proved and probable reserves that you’ve got there are?

Yeah, so on the 2P side, on the proved and probable, we have booked 172 petajoules which is our net share.  If you look at sort of what the whole might be on the east coast market that’s a reasonable proportion of what’s missing on the east coast market.  AEMO, the Australian Energy Market Operator, is saying that the shortfall for the domestic market by 2021 could be almost around 400 PJs a year so to book that sort of volume it’s quite significant but also we’re pleased on the 3P which is proven, probable and possible, and we booked 374 PJs net to us.  That upscales to indicate the project could be up towards a trillion cubic feet of gas, a little bit short of that.  So, that’s starting to look very material, combine it with the productivity we’ve got and the fact that we think this is very low cost and we think this is really a key feel to get tied into the market. 

So, how soon do you think you could develop a field and get it plugged into the east coast market?

Yeah, that’s a good question.  We think we’ll take the best part of this year to get all the pieces together.  We’re doing some environmental work in the field right now and the environmental stuff is very important, it can be on a project sometimes a significant part of the work that’s got to be done upfront.  So, that’s all happening right now.  We’re doing some studies work to look at what the right flow rates should be, should it be 50 PJs a day or 80 or 100, or how should that look.  So, we think with all of that coming together we could be in a position to sanction or go to final investment decision, FID, on this project late this year.  Because it’s onshore and it’s relatively close to infrastructure and it’s relatively simple there’s not a lot of processing to do, then you might be something like 18 or 20 or 22 months to get it up and running from that point.  So, it could be delivering gas into the network by the middle part of 2020 which for projects is relatively soon.

Okay, so talk to us about the costs and margins.  So, obviously it depends a bit on, as you say, the water content of it, how tightly gas is held and so on.  So, what does your modelling suggest that the cost is going to be to extract it and get it into the grid?

Yeah, that’s a good question and that’s work that’s ongoing right now.  This could be tied in on gross terms and we’re still going through that.  There’s lots of work happening, it’ll be refined as we go but this could be tied in for in the order of a couple hundred million dollars gross.  Given the volume of gas it produces it could be relatively low cost, we may be able to produce gas for something in the order of $5 a gigajoule.  Given that gas prices are looking around $8 or $9 at the moment, in certain places they’re higher for short term contracts, then we think this is about as low cost as we could get a molecule into the network.  So, still got a bit to go, we’re still looking at longer horizontal wells.  What we’d like to do is to take the current horizontal well we’ve drilled at 900 metres through coal and do the next one out to 2,000 metres, we think there’s better economics in that.  Also there’s a second coal seam under the coal seam we’re producing from and so we’re looking at a well design where we could potentially put two horizontal wells out of the same well boar 2,000 metres in coal each.  So, we’d be contacting 4,000 metres of coal.  So, there’s some optimisation yet that we can be doing and that work will go through the next couple of quarters of this year until we get that refined.

So, this is in the Bowen Basin, isn’t it?

It is, it’s the southern Bowen.  When the conventional fields were developed up there in the nineties remember Queensland has had gas production for – well, next year it’ll be 50 years, but there’s some sandstone gas fields up there that were discovered in the sixties and the eighties and connected in 1991.  So, then it was called the Denison Trough which is on trend from Santos’s Fairview and Arcadia, and basically up north of that trend.  But, now it’s generally called the southern Bowen Basin. 

So, why don’t you dig up the coal and sell that too?

Well, one day that might happen.  We don’t have rights to that, it’s handled under a different act in Queensland.

Right, you’ve only got rights on the gas.

We’ve got petroleum rights, yeah.  Generally the stuff we produce from wouldn’t be economic to go digging up but in the future that may well happen.  This stuff would need to be de-gassed in an underground mine because it’s so gassy.  So, to a degree it’s probably better that you get the gas guys in there first to get the gas out and then down the track it can be mined.

So, your other Queensland prospect is in the Galilee Basin to the north of the Bowen Basin but that’s a bit less advanced isn’t it?

Yeah, it’s much bigger in scale.  The Galilee Basin is an interesting one, over about 100 years it’s only had about 100 petroleum exploration wells and the vast majority of those would have been for oil.  So, if you compare it to other basins in Australia it’s very lightly explored.  We’re about to go and drill a deep well into the sandstones at 2,800 metres, so nearly three kilometres.  The reason for that is in the part of the basin we are there’s been three old legacy oil exploration wells that were drilled between 1964 and 1995 that all flowed gas at low rates.  They were drilled looking for oil, they were specifically focussed on that, there wasn’t even a gas pipeline in Australia in 1964.  We believe by applying latest technology and drilling with nitrogen rather than drilling mud we think that there’s a very high chance that these will flow.  So, we’re going to drill beside about 150 metres away from an old well that was drilled in ’95 and we’ll start that well, we’ll get that started in the early part of May. 

So, we would have been started a little bit earlier but thankfully for the farmers up there they’ve just had I think their wettest season for about nine or ten years so that slowed us down a few weeks but we’ll be up there in May to drill that well.  We think it’s got a very good chance of flowing gas and that gas then could come down into the east coast market.  There’s a few pipeline companies up there looking at which way to bring gas to market and gas molecules from there subject to a decent flow rate and reserves could be down into the market in the next three or four years.  So, that could have a really material impact on what we’re seeing happening with shortages of gas on the east coast.

So, what you’re exploring there is sandstone reservoirs rather than coal seam, is that right?

It is, yeah.  What’s interesting about the Galilee for us is we’ve got both.  We’ve got coal between about 600 and 1,100 metres that have gas in them but we’ve also got sandstone underneath.  The volume in the coal is probably bigger ultimately but the sandstone stuff will be cheaper, quicker and easier to get at.  So, we’ve drilled nine wells in the coal over the years, since 2010 we have done a lot of exploration for coal seam gas over a wide area, but we think right now in terms of just sheer bang for the buck and to get an initial gas flow we’ll focus on the sandstones.  I think after we get this well drilled in May I think you’ll see us then coming back to looking at the coals in more detail later in the year.  But, the beauty of a sandstone well is it takes 20 days to drill, if it’s going to flow it will flow really while you’re drilling through it with the nitrogen so you’d get an instant result and know what the reservoir looks like.  CSG, coal seam gas, takes a little bit longer.  You have to drill a group of wells, a pilot of maybe four or five wells, you have to have water handling facilities and you have to pump and de-water.  Gas production is really a secondary process sometimes in behind the water production so we think better to focus on the sandstones first but ultimately there’s a lot of volume also in the coals.

It’s because the sandstone reservoirs are larger, aren’t they?  The gas is not held tightly in the sandstone, there’s big reservoirs of just flow gas rather than having to break up the coal.

Yeah, the process is different.  We’re familiar with sandstone, so your Bass Strait, North West Shelf, onshore Cooper Basin around the Roma area.  So, there’s lots of farmers in Roma that have had their sandstone reservoirs produce since the late 60s.  The difference, I guess, in the sandstone is the gas molecule just sits in the void spaces between the sandstone grains, in coal seam gas the methane molecule is actually stuck to the wall of the coal and with water in the fractures.  You need to reduce a little bit of the water pressure before the molecule actually lets go.  So, the process is a little different.  Ultimately a methane molecule is a methane molecule and so the gas streams from what we see up in Galilee, the samples we have look pretty close to what we would expect, slightly different but almost the same proportion of methane as what we see from coal.  So, the consumer doesn’t care.  Whether they’re a fertilizer manufacturer or they’re a customer in Japan burning LNG or they’re a brickmaker or they’re a glass maker or plastic maker, whatever, they really don’t mind.  It’s just about getting the molecules in the pipeline for them.

So, what makes you think there’s a fair bit of gas there?

Well historically from these wells that were drilled from ’64 through to ’95 they flowed gas.  So, we’ve got samples of it and the seismic process our industry and a lot of other industries go through to set off soundwaves at surface and bounce the soundwaves back, and from that can get a picture, if you like, of what the structure looks like.  This Albany Well we’re about to drill the sandstone reservoir is about twelve kilometres long and it’s about four, five or six kilometres wide at its widest point.  So, we can see the reservoir, there’s been an old well drilled through it so we know it’s about 140 metres thick and we have three gas samples taken from it from different levels when they flowed it.  So, there’s a whole pile of stuff here that really shows us that there is a gas reservoir there.  Our key challenge is to get it to flow better than it did before.  When it flowed before it was a pretty low rate, we need to make it commercial, we need to flow it at a higher rate and we think the application of technology from today plus the nitrogen drilling should be enough to do that.

So, is it fair to say that the Mahalo one in the Bowen Basin is definitely going to turn into a gas field and you will definitely sell gas out of that but you’re not absolutely positive about Bowen Basin, you don’t know for sure yet?

Yeah, about the Galilee.

Sorry, the Galilee, yeah.

Yeah, that’s correct.  The Mahalo thing now with the 2P and 3P reserves booked and what we know about the reservoir we’ve had two successful horizontal wells now.  We know a lot about it, it’s shallow, it’s close to infrastructure, it ticks all the boxes.  You’d be a brave man, I think, to now say it won’t be connected and go ahead.  Galilee is a little bit sort of behind that in terms of certainty.  We need to go and flow this well in May and we also need to then get back into focussing on the coals later in the year.  But, the scale of Galilee, Galilee is about an order of magnitude and a half bigger than Mahalo but it also has the challenge of needing a pipeline of a longer distance of a few hundred kilometres to get it to market.  So, we like both of these assets and for a company our size we love having both of these assets together.  The first one, Mahalo, probably underpins our market cap, it’s really where shareholders see value.  You can see a real path emerging to market on a relatively short timeframe.  Galilee though has this real upside to it, this real scale to it, it won’ be to market at best for three to four years but it could be very large.  So, I think for us both of these assets fit together nicely.

Yeah, so when you say underpin the market cap do you mean that – and this is, I guess, the key question for investors, is whether the revenue that you are likely to get from Mahalo is sufficient to justify the market cap so that buying a share is a free option on what happens in the Galilee and also your New South Wales prospect, which we haven’t talked about.

Yeah, I think there’s four analysts out there that cover us in quite some detail and I look at the way they value us and how they put our pieces together, and it seems that any of them would see most or all of our value right now coming from Mahalo and that the New South Wales blocks we hold and the Galilee we hold I think don’t really figure in our market cap at the moment.  So, perhaps there’s a couple of cents for Galilee in there but I wouldn’t think there’s very much.  So, we see that as very positive for shareholders, that the value is kind of underpinned by Mahalo and yet there is a real chance for upside out of Galilee.  For New South Wales we’ve got a big position there with Santos, we’ve got three big blocks.  It’s hard to say when New South Wales will start moving.  New South Wales only procures about 5% of its own gas to it really does need to do something and we think it will move but it’s just difficult to try and work out when that might be.  So, we see New South Wales as a holding option, as some value upside.  It’s not costing us very much at all to hold it and if it goes ahead in a year or two, fine, if it doesn’t then it doesn’t.

They get a bit more upset in New South Wales about fracking and coal seam gas than they do in Queensland, don’t they?

Yeah, and I think there’s a few reasons for that but the two states the interesting thing, Alan, is the only two states in Australia that are going ahead on onshore gas are really Queensland and South Australia.  They’re the only two states with the 50 year history, no other place in eastern Australia has had gas production since the late 60s.  Victoria has had it offshore but Victoria hasn’t had production really onshore.  So, I think the sort of green anti-fossil fuel stuff we get out of the cities tends to bite in the states where the farmers and people don’t have experience with gas production.  In Queensland we’ve got 5,500 farmers have signed up to have gas wells and gas production and gas exploration because for generations they’ve seen it on the land and they realise it does actually co-exist, and they’ve got an uncle that works in the industry somewhere or a cousin or a brother.  I’ve seen families where one brother works the farm and one brother works in the gas field.  Queensland and South Australia haven’t been prone to all the green noise that’s around because people can actually see it for themselves.  New South Wales and Victoria don’t have that, they haven’t had that luxury of being able to see gas production for the last couple of generations.

That’s very interesting.  I haven’t really thought about it that way but that’s correct, isn’t it?

Yeah, it’s amazing how I’ve worked with guys when I was in my younger days as a graduate, blokes who had a property who spent seven days on the property, seven days in the gas plant and then went back to the property for seven.  It was just the perfect mix, the job in the gas field protected them against drought and so they had two income streams and as we know farmers’ income streams can be all over the place, they can be up and down.  So, it was the perfect match to have guys being able to mend fences and fix water bores and get windmills working on their seven days on the farm and then get into the gas field for seven.  So, the closer you get to a physical gas field the less the resistance is.  People who’ve seen them know what they’re actually like in real life.  If you walk down Pitt Street in Sydney or George Street in Brisbane or Collins Street in Melbourne you get all this anti-gas stuff coming from people who have never seen a gas well.  So, it’s actually quite telling.

Fascinating talking to you, thanks very much.

That’s alright, Alan, nice to talk to you again.

That was Tor McCaul, CEO of Comet Ridge.