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Bankers Beware! QLD Coal Seam Gas Industry Is Changing. A Briefing for Lenders, Legal

Thursday 30 October 2014

This presentation sets out Deloitte’s continuing perspectives on the

Australia’s export gas sector

• Global gas outlook is still

positive

• America awakens

• 7 of planet’s biggest projects

here

• Investment assumptions

pressured

• Fix cost, productivity, social

license

About your presenter: Geoffrey Cann

• National Director, Oil and Gas, Brisbane

• Blog: www.geoffreycann.com

• Twitter: @geoffreycann

• Email: gecann@deloitte.com.au

• Phone: +61 (7) 3308-7125

• Youtube: www.youtube.com/user/gsccann

• LinkedIn: au.linkedin.com/in/geoffcann

Global LNG demand forecasted to be strong, enduring, distributed

0

2

4

6

8

10

12

14

2013 2014 2015 2016 2017 2018 2019 2020

Global LNG demand (bcf/d)

Japan Korea China Other Asia & Pacific Europe India Latin America

Korea, Japan, Taiwan may be slowing, but other AsiaPac beckons

-2%

2%

19%

13%

7%

15%

19%

-5% 0% 5% 10% 15% 20% 25%

Japan

Korea

China

Other Asia & Pacific

Europe

India

Latin America

LNG demand growth forecast 2013-20 CAGR (%)

Latter half of the decade belongs to North America

Global Liquefaction Capacity Growth Outlook 2008-20

Americans Are Coming!

Source: RBC Capital Markets, March 26th 2014

Project

Final

Investment

Decision (FID)

Offtake

Agreement(s)

DOE Export

Approval

(FTA)

DOE Export

Approval

(Non‐FTA)

FERC

Application

Submitted

FERC

Construction

Approval

Sabine Pass

(18mtpa,

2015‐17)

Freeport LNG

(13.2mtpa, 2018)

Lake Charles

(15mtpa, 2019)

Cove Point LNG

(5.3mtpa, 2017)

Cameron LNG

(12mtpa, 2018)

Jordan Cove:

(6mtpa, 2018‐19)

Oregon LNG

(9.6mtpa, 2019)

Corpus Christi

(13.5mtpa, 2018)

Lavaca Bay

FLNG:

(4.4ttpa, 2018)

Incomplete Complete

The US form guide to LNG

• Tolling model

• Multiple market

exposures

• HH indexed pricing

• Brownfield capital cost

• Low operating cost

• Asian partners

• Deep supply base

• EPA rules, demand

growth

• Mexican demand

• Weather

• Panama Canal pricing

• HH pricing volatility

• Regulatory environment

• Social license

• Contract time limits

Handicaps Strategies to Win

Wither Australia’s Gas Sector?

The projects are progressing – PNG into production, Arrow into FEED

Our handicap is $1-$4/mcf in integrated supply costs

5.44 4.93 4.82 6.95

2.88

2.43 2.17 2.31

1.58

3.26

5.3

4.1 3.6 2.5

4.3

0

2

4

6

8

10

12

14

16

Eastern Australia (CSG) East Africa(Mozambique)

West Coast Canada(Montney)

Western Australia(Conventional

Offshore)

US Gulf Coast(Haynesville)

Integrated supply cost comparisons Estimated Capital Cost ranges

Liquefaction Processing & Transportation Upstream Cost

$10-12/mcf

$13-14/mcf $11-13/mcf

$11-13/mcf $10-12/mcf

The GFC favoured Australia, but conditions are now Much More

Competitive

• Global Gas Demand

• Global Gas Supply

• Pricing

• Contract Structuring

• Emerging Resources

• Substitutes, Efficiencies

• Sovereign Risks

• Geologic Uncertainty

• Domestic Costs and Productivity

As 61mt enter production, new services will be in demand in WA, QLD, NT

• Transport

• Shorebase

• Logistics

• Utilities

• Spares (land, floating)

• Maintenance

• Inspections, Repairs

• Employee Services

• Emergency

• Turn Arounds

• Equipment Usage

• Expert Services

• Sustaining Projects

Australia earns the right to grow beyond 2016 when it gets a few things right

• Close out existing projects

• Become excellent in all

operations

• Deliver high reliability

• Lower costs, fix productivity

• Work on social license

• Explore brownfield options

In March 2013, we called attention to the capital profile of the LNG projects.

Suppliers need to play to the curve. $'s

/ w

ell

co

un

t

Time

Capital expenditure Pipeline Capital expenditure Operating costs per GJ Cumulative wells drilled

In March 2013, there were 10 key questions you should have asked to

understand your borrower’s position

1. What does your company do within the LNG industry? How are the borrowed funds going

to be used?

2. The LNG industry is encountering major cost blow-outs, what strategies and plans do you

have to reduce costs now and in the future?

3. What is your ratio of fixed to variable costs? What are the drivers in variable cost

fluctuation?

4. Do your compensation models allow for increased labour cost?

5. Are your operations based on improved labour?

6. Will you earn revenue inline with outgoing costs? What is the revenue timeline?

7. What is your geographical growth strategy? Is your business “mobile”?

8. How are you transforming your business from a construction focus to an operation focus?

9. How exposed are you to FX fluctuations? Do your contracts provide for foreign currency

fluctuation adjustments?

10. How exposed are you to non-compliance risk when purchasing assets overseas?

There are 10 key questions now you should ask to understand your

borrower’s position

1. Cost reduction is needed now and here to stay! How are your customers approaching this

issue?

2. Cost audits are happening now. How are your customers positioned? Do they have the

funds to pay back?

3. How are they positioned for industry consolidation or joint venture arrangements?

4. What success are they having on tendering? Any signs of margin pressure?

5. Are they thinking about overseas assistance?

6. How are they embedding technology and data in their business?

7. Have they maintained their safety record? Do they recognise their safety achievements?

8. Do they rely on a tier 1 contractor for work?

9. How are they positioned for asset sales?

10. Overall, how has the strategy responded to the change in circumstances?

Thank you

Primary colors

R 0

G 39

B 118

R 0

G 161

B 222

R 60

G 138

B 46

R 114

G 199

B 231

R 201

G 221

B 3

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B 0

General information only

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nor to be a substitute for, specific professional advice. Deloitte accepts no responsibility

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