Challenges facing the Australian Gas Industry: Real, Imagined or Inevitable? RISC Conversation Series, 30 June 2015 Geoff Barker, RISC Partner

Challenges facing the Australian Gas Industry: Real, Imagined or Inevitable? RISC Conversation Series, 30 June 2015 Geoff Barker, RISC Partner

Disclaimer The statements and opinions attributable to the presenter and RISC Operations Ltd (RISC) in this presentation are given in good faith and in the belief that such statements are neither false nor misleading. In preparing this presentation RISC has considered and relied solely upon information in the public domain. This information has been considered in the light of RISC s knowledge and experience of the upstream oil and gas industry and, in some instances, our perspectives differ from many of our highly valued clients. RISC has no pecuniary interest or professional fees receivable for the preparation of this presentation, or any other interest that could reasonably be regarded as affecting our ability to give an unbiased view. This presentation is the copyright of RISC and may not be reproduced, electronically or in hard copy, without the written permission of RISC. 2

Agenda About RISC The significance of the Australian gas industry Conventional vs unconventional gas Size of the prize Industry competiveness Strategic decisions and their impact Opportunities and challenges 3

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Significance of the Australian Gas Industry 7

There are lots of different types of petroleum Conventional Petroleum Trapping affected by buoyancy of petroleum in water Exists in gas or liquid phase No special processing/refinement to convert to saleable hydrocarbons Confined to structural or stratigraphic traps Todays Focus Unconventional Petroleum Not affected by buoyancy, may be adsorbed in organic matrix Exist in solid, gas or liquid phase May require stimulation to flow, e.g. fraccing, heating May require special processing/refinement Pervasive over large areas Shale Oil

Conventional vs Unconventional Petroleum Source: Beach Energy 9

What is shale gas? Commercial shale gas is found in organic-rich fine grained sedimentary rocks that are: Thick, typically over 20m Generally widespread in distribution High in TOC (total organic content), 1-20% i.e. source rocks Low porosity, typically 2-8% Ultra low permeability, typically >500 nano-darcies Clay content <30% (needs some brittleness for fracturing) Gas Sources: Gas is generated from organic material in the rock Free Gas contained within gas filled porosity Adsorbed Gas within organic material Produced from thermogenic or biogenic sources Pollastro et al, 2003 Gas Production: Requires hydraulic fracture stimulation to flow commercial quantities 10

What is Tight and Basin Centred Gas? Tight Gas Conventional trap Low permeability < 0.1 milli-darcy (md) in USA Typically discontinuous reservoirs Requires hydraulic fracture stimulation to flow commercial quantities Basin Centred Gas Trapping may be stratigraphic and/or capillary dominated Low permeability << 0.1 md Overpressured No down-dip water leg Continuous gas saturation over long intervals Requires hydraulic fracture stimulation to flow commercial quantities Pollastro et al, 2003 11

What is Coal Seam Gas? Gas contained in coal seams Gas is adsorbed onto coal surfaces Usually shallow 200-1000 m Water usually fills pore/fracture space Permeability is provided through naturally occurring cleats (fractures) Coal has to be de-watered to enable gas to be de-sorbed and produced by wells 12

Conventional and Unconventional Discovered Resources, (Tcf) (1 Tcf = 1 trillion (10 12 ) standard cubic feet, 28.3 x 10 9 sm3) 172 Tcf conventional gas 76 Tcf unconventional gas 248 Tcf total 2P+2C Unconventional is predominantly coal seam gas Separate E. Coast, W. Coast and NT markets 2P = Proved + Probable reserves i.e. best estimate of commercial recovery 2C = best estimate of currently noncommercial discovered resources 100 40 10 Conventional Unconventional Source: Geoscience Australia, BREE & RLMS, RISC 13

Unconventional Prospective Resources (Tcf) 415 Tcf unconventional prospective resource i.e. undiscovered potentially recoverable Predominantly tight/shale/bcg gas Huge potential, high costs, can it make be commercialised? Infrastructure Perth, S. Bowen/Surat, Cooper/Eromanga, Gippsland and Otway Basins close to good production infrastructure Liquids Approximately 40% gas considered to be liquids prone which is important for commercialisation Areas of Canning, Perth and McArthur Basins stand out Politics Vic and Tas closed for business? NSW problematic in the absence of bipartisan support WA, NT, QLD and SA Governments supportive Traditional Owner and regulatory approval issues in WA causing significant delays and overheads 100 40 10 Unconventional Source: RISC analysis 14

We have unconventional gas (and liquids) Yulleroo-2 Egilabria-2 Wombat-2 Source: Company websites and RISC analysis 15

Australia s Liquefied Natural Gas Industry (LNG) Current production installed capacity circa 30 million tonnes pa (Mtpa) from four projects A further six projects under construction US$220 billion investment in eight new projects since 2007 Forecast 85 Mtpa by 2019 CARNARVON BASIN NWSJV Pluto Gorgon Wheatstone Scarborough BROWSE BASIN Browse Ichthys Prelude Karratha Broome Bayu Undan Sunrise Bonaparte BONAPARTE BASIN Darwin SURAT/BOWEN BASIN Gladstone QCLNG GLNG APLNG Arrow LNG FLLNG Brisbane Key Major Australian city LNG source gas basin Producing project Under construction Uncommitted Perth Sydney Melbourne Source: Department of Mines and Petroleum, RISC research and analysis

Bcf / pa A$mm Australian Gas Market Value 2014 revenue A$ 18.9 billion, over 60% from LNG Gas production will more than double by 2019 Committed LNG projects will bring total exports to 85 Mtpa Australia will be largest LNG exporter in the world LNG pricing from Australia is oil-linked, as is some domestic gas pricing Gross Revenue will increase to approximately A$50 b pa (assuming US$70/bbl) LNG will be the second highest value Australian export commodity behind iron ore 60,000 50,000 40,000 30,000 20,000 10,000 0 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Committed LNG Projects (A$12/mmbtu) Source: ABS, RISC analysis 17

Industry Competiveness 18

US$ / MMBTU Gas Pricing LNG pricing in the region traditionally oil-linked Australian domestic gas is predominantly sold on a contract basis Trend towards oil price linking for this also Significant decline seen in US$ terms prices Oil price moving from $100/bbl in 2014 to $60/bbl in 2015 In A$ terms, partially offset by declining US$ FX 1.0 to 0.75 Domestic gas pricing is competitive with the regions Regional gas prices significantly higher than US Henry Hub This creates a threat to Australian LNG markets 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 Asia-Pacific Regional Average Gas Prices 2014 2015 Source: RISC analysis, Platts, NYMEX Aus Domestic Gas Contracts Indon PLN Purchase Average Indon LNG Regas China Wellhead LNG JKM Spot FOB LNG Contract N Asia FOB Henry Hub MMBTU = million British thermal units 1 MMBTU is approximately 1,000 standard cubic feet (28.3 sm3) 19

Australian LNG Competitive Advantage (1) Australian LNG has to compete internationally Although it has an advantage in being closer to markets and hence shipping costs are lower, the costs of development can be higher US gas delivered to Asia has an advantage when Henry Hub prices are low 16 Direct (PV) Cost of Delivered LNG, US$MM/mmBtu 14 12 10 8 6 4 2 0 Ship to Japan OPEX LNG & Export OPEX Pipeline OPEX Upstream CAPEX LNG & Export CAPEX Pipeline CAPEX Upstream nm = nautical mile, 1.85 km Source: RISC analysis 20

Capex US$ per tonne pa Australian LNG Competitive Advantage (2) Australian has a reputation as a high cost country for oil and gas projects RISC s analysis shows that globally, large oil and gas projects have a history of poor project management Hence the perception of Australia as a high cost destination is only partially true 4500 4000 3500 3000 2500 2000 1500 1000 500 0-500 -1000 Recent LNG Project Cost Overruns Average forecast overrun 39% RISC view today Cost at FID e.g. 20% rise in Australian labour costs results in 5% project cost increase There are also underlying strategic decisions have a much more material impact Source: RISC analysis 21

Strategic decisions and their impact 22

Strategic Decision # 1: proliferation vs cooperation 10 projects in operation or under construction All with separate, stand alone LNG production infrastructure Capital cost US$220b + since 2007 Why? CARNARVON BASIN NWSJV Pluto Gorgon Wheatstone Scarborough BROWSE BASIN Browse Ichthys Prelude Karratha Broome Bayu Undan Sunrise Bonaparte BONAPARTE BASIN Darwin SURAT/BOWEN BASIN Gladstone QCLNG GLNG APLNG Arrow LNG FLLNG What is the cost/benefit? Brisbane Perth Key Major Australian city LNG source gas basin Sydney Melbourne Producing project Under construction Uncommitted Source: Department of Mines and Petroleum, RISC research and analysis

Carnarvon Basin LNG Scarborough FLNG Wheatstone Pluto Gorgon NWSV Pluto LNG Gorgon LNG Barrow Island Wheatstone LNG Ashburton North Source Gas LNG Facility operational LNG Facility under construction LNG Facility planning Source: RISC 24

Surat/Bowen Basin CSG-LNG Arrow LNG QCLNG Gladstone/Curtis Island LNG facilities QCLNG APLNG GLNG Arrow FLLNG GLNG QCLNG APLNG Arrow LNG Brisbane Source Gas LNG Facility under construction LNG Facility planning Source: RISC 25

Current and proposed CSG-LNG facilities at Gladstone APLNG QCLNG Fisherman s Landing LNG GLNG Arrow LNG Sources: EIS submissions, RISC estimate for Arrow Gladstone 26

Browse Basin LNG To Darwin Prelude FLNG Browse FLNG Ichthys Source Gas LNG Facility under construction LNG Facility planning Source: RISC 27

Bonaparte Basin LNG Abadi FLNG Sunrise FLNG Evans Shoal Barossa/Caldita Bayu Undan Source Gas LNG Facility operational LNG Facility under construction LNG Facility planning Bonaparte FLNG Darwin LNG Ichthys LNG From Ichthys Source: RISC 28

LNG Project Cost US$ billion Strategic Decision # 1: proliferation vs cooperation What if projects in Carnarvon Basin and Gladstone used common LNG facilities? RISC estimates total costs US$184 billion in these two areas using proliferation strategy 200 190 180 170 160 184 LNG Project Costs: Cooperation vs Proliferation 174.6 173.2 172.2 168.7 165.7 165.7 Estimate potential savings of over US$18 billion if cooperation strategy pursued 150 140 130 Excludes any potential synergies in field development and upstream infrastructure 120 110 100 Total Cost Proliferation LNG Trains Utility & Support Systems LNG Storage Tanks Marine Site clearance & camps Total Cost Cooperation Source: RISC research and analysis

Strategic impact # 2 Project performance RISC estimates aggregate cost overruns of $ 70 billion in global LNG projects since 2007 2013: Woodside abandons James Price Point onshore option in favour of FLNG 2014: oil prices fall from US$100 to US$60/bbl 2015: BG writes down US$6.8 billion in their QCLNG project Arrow (Shell/Petrochina) announced cancellation of project Reserve base On a 2P reserve basis, all CSG-LNG projects will require additional resources to secure 20 years supply GLNG in particular will be reliant on 3 rd party supply How were decisions made in respect of the project size vs reserve base? 1 PJ = 1 Petajoule = approx. 1 Bcf Source: RISC analysis 30

Opportunities and challenges 31

How to commercialise Australia s vast potential? Yulleroo-2 Egilabria-2 Wombat-2 Source: Company websites and RISC analysis 32

Challenge: Well Costs In unconventional projects, well costs may be up to 90% of total costs For comparable scope, Australian well costs are typically higher than in other regions. Factors which influence this are: Ageing drilling rigs Limited competition Inefficient practices Regulation Lower activity levels Higher labor costs Remote operations Lack of infrastructure The higher costs directly affects profitability Savings of $0.75/GJ nominal after tax assuming normal improvement expected from 15-20% reduction in a typical vertical tight gas well campaign Potential to increase this saving to over $3/GJ if a more aggressive and structured approach is taken to cost reduction A well cost reduction target of 50% is not only feasible but necessary to monetise the substantial potential that exists Source: RISC analysis 33

Challenge Australia has vast natural resources How can we make the Australian gas industry more competitive? How can we improve cooperation amongst projects to get the best result for all? Why is Australian iron ore amongst the lowest cost in the world, but our petroleum is amongst the most expensive? What role should governments, management and shareholders play in these strategic issues? 34

Final thoughts Despite rumours to the contrary, the oil and gas industry is not dead Great opportunities for innovative thinkers in the oil and gas industry Data and knowledge management - embryonic Automation barely begun Decision making clearly remedial Environment/Sustainability it s your world Heavier-than-air flying machines are impossible Lord Kelvin, British mathematician, physicist, and president of the British Royal Society, 1895 I think there is a world market for about five computers Thomas J. Watson Chairman of IBM, 1943 The oil and gas industry has no future the speaker s best friend in year 12, 1972 when discussing career options 35

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