The smaller, less ambitions upstream plan will see AGL aiming producing just 20% of its gas requirements in the next decade, assuming Gloucester goes ahead, well below its former target of around 50%
The company’s management says that it isn’t planning on any new upstream gas investments beyond that it will have remaining after a sales and divestment process.
A number of poorly performing assets have been deemed non-core and will be sold or relinquished.
It aims to focus on a smaller number of gas projects, including strategically important gas storage, while avoiding significant capital expenditure associated with exploration.
Core projects to be retained include the Camden CSG development, the proposed Gloucester gas project, and the recently opened Newcastle gas storage facility in New South Wales and its Silver Springs underground storage facility and Wallumbilla LPG plant in Queensland.
AGL says it can cover expected domestic gas demand until 2027 and contracted commercial and industrial demand until 2021, and can be augmented by “ongoing portfolio management” tailored to customers’ requirements, with its future now significantly wedded to its downstream interests.
The diversified concern says it has a strong gas supply position through a combination of contracted gas at competitive prices and owned production at Camden, while its storage assets enhance AGL’s flexibility in managing its gas portfolio.
AGL has confirmed that the proposed Camden Northern expansion project, which has been on hold since February 2013, will not go ahead, while Camden, NSW’s only operating CSG field, will continue, with a drive to focus on lower costs.
The company will sell PELs 2, 4 and 267, which hold the Camden North and the Hunter gas projects back to the NSW government, probably for around $600,000.
“While there is significant coal seam gas in the Hunter Valley, the overlay of so-called critical industry clusters, agriculture activities, and the two kilometre setback result in this resource not being economic to develop,” AGL said.
The company will also sell its share in two of Queensland’s oldest CSG fields: Spring Gully and Moranbah.
AGL’s 50% interest in the Moranbah gas project, back-in rights in the wider Bowen Basin permit [ATP 1103P] and the North Queensland Energy business that includes gas supply agreements with Yabulu power station has been on the market for 18 months without a buyer, in part because the NQE business isn’t sufficient revenue to cover the fixed costs.
The various parts of the business may need to be broken up and sold individually.
AGL will take a $237 million impairment on the Moranbah business based on onerous contract provisions of $262 million, the remaining book value of NQE of $34 million and depreciation previously not recognised on the entire Moranbah project for the 18 months to 30 June 2015 of $25 million, all offset by a tax benefit of $84 million.
ATP 1103 potentially has significant value but is recorded in AGL’s books with no value.
AGL says it could easily surprise to the positive or negative, given ATP 1103 is a valuable asset, but one with a future that is in the hands of Shell, and the outcome of its merger with BG Group.
The company says it is in no rush to sell the permit without clarity around its development options.
Also on the chopping block is the Cooper oil project [ATP 1056P], which will probably be sold at a loss of $7 million.
The block was secured as part of the $123 million takeover of Mosaic Oil that AGL undertook in 2010 effectively for the depleted Silver Springs asset.
While it is far from the best market to sell the large Taipan block, ATP 1056P covers more than 3800 square kilometres and straddles a significant part of the prospective southeast Cooper margin oil fairway close to existing oil fields.
The block is located south of the 49 million barrel Jackson field and west of the 1.3MMbbl Maxwell field.
AGL has also affirmed its plans to develop the controversial Gloucester CSG project near Newcastle.
It has recently signed an agreement for the removal of flowback water to an approved treatment facility, enabling testing of the four Waukivory pilot wells over six months.
Plans for a final investment decision in 2016 are ongoing, however a detailed in-house review of the valuation of the project has been completed incorporating the effect of significant delays in production of first gas and the latest estimates of gas volumes, development costs and lower forward gas prices.
The value of the project will be written down by $193 million after tax.
AGL says Gloucester will only cost it $10-20 million this year, with final development costs in flux.
It is still top crunch the numbers, but even though costs have come down in recently months they are still higher than they were 3-4 years ago.
While the company wasn’t keen to go into specifics, well costs are expected to be about $2 million each.
The minimum flow rate hasn’t been disclosed, but AGL said the project would need to work in a $7-10 per gigajoule world.
Gas prices have already fallen $1-1.50/GJ, with pricing issues complicated by the lower oil price, the falling Australian dollar and the LNG glut.
The company said it wasn’t thinking of any new CSG investments, but was evaluating new gas storage opportunities.
Despite the writedowns AGL says it expects its 2014-15 underlying profit is expected to be in the top half of the guidance range of $575-$635 million.
