Carbon Energy - Queensland s Fifth Largest 2P Gas Reserve

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1 ASX Announcement 22 September 2014 Level 9, 301 Coronation Drive, Milton QLD 4064 Australia PO Box 2118, Toowong DC QLD 4066 Australia phone + 61 (0) fax + 61 (0) Carbon Energy Limited ABN Carbon Energy (Operations) Pty Ltd ABN Carbon Energy - Queensland s Fifth Largest 2P Gas Reserve Independent consultant confirms 2P gas Reserve of 1,128 PJ (1 Tcf or 188 mmboe), 3P gas Reserve of 5,300 PJ (5 Tcf or 883 mmboe) with total Reserves and Resources (3P + 2C) of 13,810 PJ (13 Tcf or 2,302 mmboe) Definition phase of the Blue Gum Gas Project commenced Gas from the Project would contribute to meeting forecast local demand from 2017 Carbon Energy (ASX:CNX, OTCQX:CNXAY) today announced a significant increase in its Proved and Probable (2P) Surat Basin gas Reserves to 1,128 petajoule (PJ 1 ) (1 trillion cubic feet (Tcf)) of natural gas equivalent or 188 million barrels of oil equivalent (mmboe), transforming the Company into the fifth largest 2P gas Reserve in Queensland and more than doubling the Company s total gas Reserves. The upgrade provides a solid foundation for building a Queensland gas business and will support the Company s plans to develop its first commercial scale gas project in Queensland, the Blue Gum Gas Project. The Conceptual Plan for development on MDL374 and land owned by the Company in the Surat Basin is the Blue Gum Gas Project. This Project is intended to deliver 25PJ per annum of pipeline quality natural gas from a plant that converts the underground coal gasification (UCG) process Syngas to pipeline quality gas. It is anticipated that first gas could be supplied to local industry from 2017, once finding suitable investment partners and receiving State Government approvals. Based on projected gas prices, the Blue Gum Gas Project could deliver in excess of $4 billion in gross revenue to the Company over a 25 year period and could create more than $200 million in royalties for the State. It will create in excess of 1000 jobs during the construction phase and approximately 150 sustained direct jobs in the region over the 25 years. The Project is located within easy access to markets and close to existing infrastructure. 1 Estimated gross raw gas. 1,055 Petajoule (PJ) = 1 Trillion cubic feet (Tcf). 1 barrel of oil equivalent (boe) = 6,000 cubic feet.

2 Carbon Energy s CEO Morné Engelbrecht said, This Reserve upgrade reinforces Carbon Energy s ability to provide the Queensland market with access to a major new gas resource and comes at a time when the east coast industrial and domestic market is facing looming gas shortages. We are planning to bring our Reserves onto the market in time to meet the forecast gas shortages towards the end of the decade. The constraints on the local gas market are going to hit industry particularly hard. We are in discussions with potential industrial off-take partners to supply them with this new source of gas. Mr Engelbrecht added. The Company recently submitted a Decommissioning Report to Government which detailed results of more than 2,000 water samples taken over the past 6 years. The results from this rigorous monitoring program demonstrate Carbon Energy s ability to operate its keyseam technology without harm to the environment or impact on beneficial use of the region s groundwater. The Company is currently preparing a Rehabilitation Plan for its Bloodwood Creek UCG trial site. This is on schedule for lodgement with the Queensland Government by the end of September Carbon Energy is hopeful that it will receive a decision from the Queensland Government allowing it to proceed with the standard approvals process for the Blue Gum Gas Project shortly after submission of the Rehabilitation Plan. Summary of the upgraded Reserves Statement Area Reserve and Resource Classification Gross (100%) Syngas Energy (PJ) Gross (100%) SNG Energy (PJ) 1P Reserves MDL374 2P Reserves 1, , P Reserves 2, ,631.5 EPC867 3P Reserves 5, , C Contingent Res 7, ,022.3 EPC869 2C Contingent Res 4, ,695.0 EPC1132 2C Contingent Res 1, Notes to the above table: 1P Reserves = Proved 2P Reserves = Proved + Probable 3P Reserves = Proved + Probable + Possible UCG Energy conversion factor used was GJ of Syngas per tonne of coal 25 PJ of SNG (Synthetic Natural Gas) is created from 38.5 PJ of Syngas 2

3 The Reserve and Resource estimates stated herein are based on, and fairly represent, information and supporting documentation prepared by Timothy Hower of MHA Petroleum Consultants, Denver USA. Mr Hower is a member of the Society of Petroleum Engineers and has consented to the use of the Reserve and Resource estimates and supporting information contained herein in the form and context in which it appears. A copy of the report prepared by Mr Hower is attached to this announcement. ENDS For and on behalf of the Board Morné Engelbrecht Managing Director & Chief Executive Officer Company Marina Cid Corporate Affairs Manager Tel: mcid@carbonenergy.com.au Investor relations Paul Dekkers Buchan Consulting Tel: +61 (2) pdekkers@buchanwe.com.au 3

4 About Carbon Energy Carbon Energy (ASX: CNX) (OTCQX: CNXAY) is building a Queensland gas business. The Company is committed to providing Australian industrial gas users with an affordable and secure source of high quality gas, as gas prices continue to rise with increased overseas demand. Carbon Energy is developing a new Queensland-based energy portfolio. Subject to government approvals, the Company is currently developing its first commercial project, the Blue Gum Gas Project, near Dalby in Queensland. This plant will supply 25PJ of natural gas per annum and is located within easy access to markets, and close to existing infrastructure. Additionally, Carbon Energy has the potential to supply the growing overseas markets. A key competitive advantage for Carbon Energy has been the development of its unique keyseam technology. This proven and highly controlled technology enables access to productive gas resources that were previously considered too deep or uneconomic. keyseam maximises resource efficiency, while minimising surface disturbance and preserving groundwater quality. Originally developed by the Commonwealth Scientific and Industrial Research Organisation (CSIRO) it has been proven through six years of field trials. Alongside its local operations, Carbon Energy works with international partners to unlock new energy resources offshore. The Company delivers end-to-end services from initial project assessment through to commercial project development, operations, site decommissioning and rehabilitation. It also has an established project in Inner Mongolia, China. Carbon Energy is headquartered in Brisbane, Australia, is listed on the Australian Securities Exchange (ASX) as CNX and is quoted on the OTCQX International Exchange as CNXAY in the United States. keyseam is a registered Trademark of Carbon Energy Ltd 4

5 General Manager Technical Services Carbon Energy Limited Level 9, 301 Coronation Drive Milton, QLD 4064 Australia Re: MHA Updated Reserves and Resources Certification Carbon Energy s Surat Basin Underground Coal Gasification Project Dear Mr. Haines: At the request of Carbon Energy ( Carbon Energy ), ( MHA ) has prepared an updated estimate of the Underground Coal Gasification ( UCG ) reserves and contingent resources attributable to the gross (100 percent) ownership interest in certain coal properties located in MDL374, EPC867, EPC869 and EPC1132 located in the Surat Basin of Queensland, Australia. The estimates of reserves and contingent resources in this report have been prepared in accordance with the definitions and guidelines set forth in the 2007 Petroleum Resources Management System, as well as the 2011 Guildelines for Application of the Petroleum Resources Management System, approved by the Society of Petroleum Engineers. Based on our evaluation, MHA estimates the UCG volumes attributable to the gross (100 percent) interest in these properties to be: th Street, Suite 410, Denver, Colorado USA Telephone:

6 Notes to the above table: 1P Reserves = Proved 2P Reserves = Proved + Probable 3P Reserves = Proved + Probable + Possible UCG Energy conversion factor used was GJ of Syngas per tonne of coal 25 PJ of SNG (Synthetic Natural Gas) is created from 38.5 PJ of Syngas The project area is located approximately 30km west of the township of Dalby. (Figure 1) The Western Railway is located across the south of the Carbon Energy project and provides access to the Port of Brisbane. A summary of the status of Carbon Energy s tenement holdings specific to this evaluation is provided in the table below: G Granted RN Renewal pending Renewal for EPC867 to be submitted before 17 th October 2014 A large range of technical data has been obtained over the project area, particularly within MDL374, in order to evaluate the commercial nature of this resource. The proximity to existing infrastructure has also been considered. The drillhole data for the project included 882 holes and includes rock type and lithological descriptions, sample intervals and seam correlations. (Figure 2) A total of 348 holes constrain the stratigraphic model. Wireline geophysics for over 100 holes was compiled into a data base for the generation of geologic cross-sections. This comprehensive data set was used by GeoConsult Pty Ltd ( GeoConsult ) in January 2013 to develop a geological model and to conduct estimations of the coal volumes and tonnage for the referenced coal properties within the project area. This geological model was used by MHA in our assessment of the UCG reserves and resources presented in this report. Carbon Energy has conducted two UCG pilot tests in the Bloodwood Creek area, which is located within MDL374. The company successfully exported electricity generated from the produced syngas to Ergon Energy Corporation Ltd s local electricity grid, up to the limit of 1.5MW as permitted under the Environmental Authority. MHA was able to evaluate results from both pilots, as well as numerous technical reports and all available data from the coals in the study area. The syngas yield of GJ/tonne of coal contacted, which was used by MHA in the above table, was calculated directly from the data collected from the most recent Panel 2 UCG pilot. Page 2

7 The reserves and resources assessment prepared by MHA utilizes a deterministic estimation method. As shown in the above table, MHA assigned only a small volume of 1P reserves in this estimate. The proved reserves are associated with the UCG pilot. Additional proved reserves cannot be assigned at this time due to the fact that the project is not yet at development stage with an approved field development plan. However, due to the large amount of technical data, the success of pilot programs, and a firm intent of Carbon Energy to proceed with further evaluation and ultimately development of the assets, MHA is of the opinion that 2P and 3P reserves volumes are justified and warranted. The reserves and resource volumes presented in this report reflect an update to the prior estimates prepared by MHA on behalf of Carbon Energy (December 2009 and November 2013). The November 2013 MHA report listed the following reserves for MDL374: 1P syngas reserves at 11.0 PJ, 2P syngas reserves at PJ, and 3P syngas reserves at PJ. The current reserves recognized by MHA in this report for MDL374 demonstrate an increase in the 2P reserves, due to an expansion of the 2P reserves area as a result of increased confidence in this central core area given the results of the Panel 2 pilot, and a decrease in the 3P reserves, due to a downward revision in the estimated resource recovery efficiency from 85% to 65%. The resource recovery efficiency represents the percentage of coal that will be gasified within a UCG project. Outside experts retained by Carbon Energy recommended that MHA reduce our resource recovery efficiency and MHA adopted that recommendation in this current evaluation. The December 2009 MHA report estimated PJ of syngas contingent resources associated with EPC869. The current contingent resources recognized by MHA in this report for EPC869 reflect a significant increase to the December 2009 volumes. This increase is due to the extensive geological analyses conducted by GeoConsult, and the resulting mapping of the inferred coal resource and the geological model prepared by GeoConsult for the project area. The estimates presented in this current report for EPC867 (outside of MDL374), and EPC1132 reflect new estimates prepared by MHA which were not reported in previous assessments. UCG is a process by which coal is converted in-situ to a combustible gas that can be used as a fuel or chemical feedstock. In its simplest form, UCG involves the drilling of two boreholes into a coal seam at depth, and the injection into the coal seam down one hole of a pressurized oxidant such as air or oxygen and steam. The coal is ignited and gasification is maintained by continuous oxidant flow, with the recovery of the produced gas from the second borehole. For a successful UCG operation, there are a number of technical factors which are important to the process. A major issue lies in correctly defining the geological characteristics and layout of the site before commencing the process design and operation. Key characteristics in the selection of a favorable gasification site include: Seam of sufficient thickness Between 200 to 800 meters below ground level Site with high hydraulic head Minimal faulting within the target coal seam(s) Ash content below 50% Structurally sound overburden consisting of low permeability rock Page 3

8 Once a coal deposit has been identified, the next step in the evaluation is to determine the insitu energy. This process is analogous to what a company operating a coal seam gas ( CSG ) development project would undertake. In the case of CSG, the operator would map their coal seam to determine the volume and tonnage of coal in place, and then apply an in-situ gas content value (typically in m 3 per tonne) to estimate the coal seam gas in place. In a UCG project, the operator would go through the same process of mapping the coal seam to determine the volume and tonnage of coal in place. The in-situ energy resource would then be calculated by determining the extractable energy per tonne of coal in place (typically in GJ per tonne). This energy conversion is obtained by conducting a small-scale UCG pilot test on a single panel. From the standpoint of certifying reserves or contingent resources, it is necessary to determine a recovery factor associated with the UCG process. This is simply the fraction of the total in-situ energy resource that will likely be recovered or extracted. This recovery factor is dependent upon how much coal can be gasified by the operating methods which are employed. Critical factors which influence the recovery factor are: How much coal is left behind?: In a UCG operation, it is important to limit the extent of fracturing in the overburden strata, and to minimize the likelihood of subsidence. This is achieved by selecting a UCG site with an overlying formation of sufficient depth and strength. Fracturing and subsidence is also contained by designing a UCG panel width (the panel width is the distance between the injection and production borehole; the coal between these two boreholes will be completely gasified) to prevent subsidence, and by ensuring that pillars of coal between UCG panels provide sufficient strength to support the overlying formation. Any coal that is left behind, and not gasified, will reduce the overall recovery efficiency. Geological influences on panel placement: Similar to a CSG project, a well-designed field development plan is necessary to ensure maximum access to the energy resource. Coal deposits, which are influenced by many geological factors, occur in many irregular sizes and shapes, and may contain macro features such as faults or pinch-outs, as well as variations in thickness, coal quality and depth. Maximizing the recovery factor in a UCG project is dependent upon the layout of panels across the coal resource, the ability to place boreholes to achieve gasifier configurations, and the capacity to maintain conditions around the UCG panels that contain the process. A well designed development plan will maximize the access to the in-situ coal resource which will optimize the energy recovery factor. MHA routinely certifies coal seam gas assets throughout Australia and other locations worldwide. In those studies, we evaluate the coal characteristics and the field development plans to determine an appropriate recovery factor to use in the certification of reserves and contingent resources. MHA has followed the same approach in this evaluation of MDL374, EPC867, EPC869 and EPC1132. We have defined two separate recovery factors: Resource Recovery Efficiency: This factor accounts for the percentage of coal gasified in a given area. This has been assumed to be 100% within a given panel, such as the pilot panel. It has been assumed to be 65% across larger areas to account for the coal left behind in pillars. The basic design plans for 30m wide panels and 15m wide pillars. Thus, approximately 2/3 of the coal in any given project area will be gasified, which is the basis for the 65% assumption. Page 4

9 Geological Risk Factor: This factor accounts for geological variations in the coal which could adversely impact the UCG process. Such factors might include faulting in the coal seam, variations in seam thickness or ash content, and the architecture of the coal deposit which might influence placement of the UCG panels. It has been assumed that the geologic risk will increase as the distance from the existing pilot panel increases. Thus, the geologic risk factor was assumed to be 95% in MDL374, which is in the immediate vicinity of the pilot panels, decreasing to 85% in the remaining areas. GeoConsult constructed a geological model of net coal thickness across the entire project area. The target coal identified for UCG, the Macalister seam, was divided into two separate plys; the Upper Macalister (MAU) and the Macalister Main (MAM). The total coal resource was mapped by GeoConsult based on points of observation less than 4km apart and not exceeding 1km past the last data point, constrained by a minimum seam thickness of 2m (in aggregate of plys), a maximum stone parting thickness of 0.5m, and a maximum raw ash content of 50%. Figure 3 illustrates the reserves and contingent resource areas as mapped by MHA for the MAU seam within MDL374 and EPC867 using the above constraints imposed by GeoConsult in their geological model. The 2P reserves area is in the area of greatest well control and the vicinity of the UCG pilots. The 3P reserves area extends outward a distance of 5km from the core area, and the contingent resources are mapped beyond that. Figure 4 illustrates the reserves and contingent resource areas as mapped by MHA for the MAM seam within MDL374 and EPC867 using the same criteria as described in the previous paragraph. No maps are included for EPC869 or EPC1132 as only contingent resources were recognized in these two areas. The reason for this classification is simply due to a greater distance from the core pilot area. As additional data are collected, and future pilot programs are conducted in these areas, it would be anticipated that these contingent resources would mature into reserves. The approach used by MHA to estimate the reserves and contingent resources was as follows: 1. Coal in place (Mt) was taken from the March 2013 Surat Geological Modeling Report, and the associated interpretations, prepared by GeoConsult. 2. A gross volume of syngas in place was calculated using a syngas yield of GJ per tonne of in-situ coal. This value was calculated from the data collected from the Panel 2 UCG pilot. The energy production from the pilot averaged 413 GJ/day. The amount of in-situ coal gasified during the pilot test was 24.7 tonnes/day, which yields a value of GJ/tonne of in-situ coal. 3. Recoverable syngas volumes were determined by applying a resource recovery efficiency value and a geologic risk factor to the gross syngas volumes. The resource recovery efficiency was assumed to be 100% for the Proved Reserves, due to the fact that the volumes are calculated on a panel by panel basis. For all other categories, the resource recovery efficiency was assumed to be 65%, taking into account coal remaining in retaining pillars. The geologic risk factor varied from 85% to 95%. This factor took into account the potential negative impact associated with variations in key coal characteristics such as faulting, groundwater, ash content, overburden and Page 5

10 discontinuities in the coal seams. The geologic risk was considered more significant in larger areas more remote from the pilot area. 4. The maps shown in Figures 3 and 4 were used to assign areas for 2P reserves, 3P reserves and contingent resources within MDL374 and EPC867. Only contingent resources were recognized within EPC869 and EPC1132. The material economic assumptions used in this evaluation were based upon numerous commercialization studies and proof of concept evaluations reviewed by MHA which were commissioned by Carbon Energy using third party consultants and experts. Most notable of these evaluations was a 2012 report prepared by Incitec Pivot Pty Ltd ( Incitec Pivot ) which indicated the following: Capital cost and operating cost estimates were prepared for 8.2 and 25 PJ/year SNG plants which allowed Incitec Pivot to assess the economic feasibility of the project. Capital cost estimates were based on the following process that was selected as part of the Incitec Pivot study: - Oxygen blown gasification in UCG panels with raw syngas pre-treatment - SNG production from the treated syngas - Steam and power generation from a conventional high pressure steam boiler with condensing steam turbine generator - Acid gas and black liquor disposal by incineration in the boiler The capital cost of the project is dominated by the oxygen plant, the UCG panels and the SNG plant. Average operating costs were evaluated for both 8.2 and 25 PJ/year options. Greenhouse gas emissions for the project were also considered and were included in the commercial evaluation. For the larger scale plant, a total of 38.5 PJ of syngas was required to produce 25 PJ of pipeline quality SNG. This turndown ratio was used in the MHA reserves and resources estimate to convert syngas volumes to SNG volumes. The primary conclusion from the Incitec Pivot study was that the overall process is a costeffective method of production of syngas and conversion of that syngas to pipeline quality SNG. Incitec Pivot also noted that further options exist to consider the production of other value-added products in the future, which were not considered in their evaluation, that may improve the project economics beyond that evaluated in their study. This reserves and resource evaluation was prepared under my direct control and supervision in accordance with the SPE Petroleum Resource Management System guidelines. I am the Chief Executive Officer, and a full-time employee of MHA, and I am a qualified person as defined under the ASX Listing Rule is a leading independent petroleum engineering and independent certification firm based in Denver, Colorado which has experience working in most of the significant petroleum provinces throughout the world. MHA Page 6

11 has completed reserve and resource assessments for a number of clients in Australia and internationally including Adelaide Energy, Arrow Energy, Conoco Phillips, CS Energy, Metgasco, Molopo Energy Australia, Pure Energy, Santos, Sunbird Energy and Sunshine Gas. MHA did not perform any field inspection of the properties, nor did we examine the mechanical operation or condition of the UCG pilot and related facilities. MHA did not investigate any possible environmental liabilities related to the properties. Neither MHA, nor any of our employees have any interest in the subject properties and neither the employment to do this work, nor the compensation, is contingent on our estimates of reserves and resources for the properties in this report. It has been a pleasure to perform this evaluation for Carbon Energy. If you have any questions regarding this evaluation, or if additional information is needed, please feel free to contact me. Sincerely, Timothy L. Hower, PE Chief Executive Officer Page 7

12 Figure 1 Regional location map of Carbon Energy s Surat Basin UCG project. Tenement area (orange fill), Queensland s coal exploration tenure (light grey fill), Queensland s mineral development licenses (medium grey fill), Queensland s mining leases (dark grey fill), townships (black dots), and railway lines (black lines). Map taken from GeoConsult March 2013 Surat Geological Modeling Report. Page 8

13 Figure 2 Tenement areas shown in orange outlines. Also shown are locations for drillholes, stratigraphic bores, petroleum wells and CSG wells. Map taken from GeoConsult March 2013 Surat Geological Modeling Report. Page 9

14 Figure 3 Reserve and contingent resource areas used by MHA for MDL374 (polygon in center of figure) and EPC867 for the MAU seam. Page 10

15 Figure 4 Reserve and contingent resource areas used by MHA for MDL374 (polygon in center of figure) and EPC867 for the MAM seam. Page 11