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6 March 2019

Positioning Esso to meet the needs of the East Australia gas market

Johanna Boothey

Johanna Boothey Commercial Director, Esso Australia

~ Check against delivery ~

It is a pleasure to participate in the conference this year and share with you how Esso is positioning itself to meet the needs of the East Australia gas market. 

It has been a challenging time for the industry. One where we have seen supply tighten and gas prices rise. 

We anticipate this to now be a time of opportunity. We are already seeing new development and innovation, as the market responds to the demand for more competitively priced gas. This has included gas exploration, new developments and five potential LNG import projects.

Gas prices have risen from a level where they were underpinned by oil production, to a level where they need to support investment on their own. We are seeing leading energy companies from Australia and the rest of the world competing to bring new supply into the East Coast gas market. 

I would like to take the opportunity to share with you Esso’s strategy in continuing to contribute to the supply needs of this market.  

This year marks the 50th anniversary of first production from our Gippsland Basin Joint Venture with BHP. In fact, first gas flowed from offshore Barracouta today, 6 March 1969. Esso is proud to have operated the fields and infrastructure which have produced approximately 8 trillion cubic feet of natural gas and we’ve been the major supplier to the market.  Currently production from the Gippsland Basin continues to meet around 40% of the East Australia domestic demand.

We’ve seen over the past decades the market transition and grow from a single supplier and single customer in many states, to a competitive gas market. There is increasing liquidity with gas supply hubs and short term trading markets emerging as shown on the slide, as well as a vast and expanding pipeline network which connects supply sources, gas plants and storage to end users. 

This year has also seen another transition, the start of separate marketing of Gippsland Basin Joint Venture gas. Esso is pleased to have established ‘Esso Australia Gas Marketing’ as our new marketing organisation.

Although the Gippsland Basin has been a tremendous performer, after 50 years, the fields are in decline. 

We understand the concern from families and industry as supply has tightened and prices have risen. Our view is that the best way to have increased affordable gas is through increased supply and competition from the industry. 

Esso is actively investigating a three pronged approach to help bring more gas to market:
- Firstly through continuing development and optimization of the Gippsland Basin joint venture acreage
- Secondly through exploration; and
- Thirdly through a potential LNG import terminal in Victoria.

So let’s start with the continuing development and optimisation of the Gippsland Basin acreage with our partners BHP and Mitsui. 

Media reports have ranged from where the Gippsland fields were seen to be a magic pudding that was never running out of supply, to the Gippsland Basin being almost dried up. It is neither of these. 

We have seen the fields, which drove the development of the gas market 50 years ago, mature and decline. These fields were world class. They had high pressures and limited impurities. The pressures were so high that gas could flow from over 1000 metres underground in Bass Strait and be delivered to homes in Melbourne with no or limited compression. Low impurities meant that there was limited gas processing beyond liquid removal. 

In the last decade Esso and our co-venturers have worked together on the next generation of gas supply. 

In 2017, we completed the largest single investment into Australia’s domestic gas market with the A$5.5B Kipper Tuna Turrum Project. This generation of gas is vastly more expensive to develop. 

For example, more than one billion dollars of this investment was to build the Longford gas conditioning plant and other facilities to remove impurities.

Earlier this year, Esso and BHP also announced a final investment decision to develop the West Barracouta gas field in Bass Strait. This project, with costs in the hundreds of millions of dollars, is expected to start producing in 2021.

We are not finishing there. We have our highly experienced technical organisation, including local and international experts, focused on evaluating other gas opportunities. These were not economic at historic prices and technologies, but today’s innovations make the infeasible, feasible.  

Let’s move to our second approach for new supply. Exploration. 

Exploration within the Gippsland Basin is mature in comparison to many other Australian basins. However it is relatively under-explored in comparison to many prolific basins around the world.

We are using advanced technology to ensure full potential of the resource can be realised.  New seismic reprocessing technology, including proprietary algorithms, has enabled our geoscientists to identify interesting new concepts and leads in the acreage.

In 2017, Esso acquired 100% of an exploration block in the Gippsland Basin called VIC/P70. As you can see, it is a large block covering over 200,000 hectares. To give some context, this new block is approximately half the size of the existing Gippsland Basin Joint Venture acreage.  

Adjacent to the map is the drilling rig, the Ocean Monarch.  In 2018, we invested $120 million to drill 2 deep-water exploration wells in VIC/P70 and were hopeful of making a significant gas discovery. Unfortunately the wells did not find commercial gas. I know that it was a huge disappointment, not only for Esso but also for the industry.

The wells have provided valuable information though that will assist our ongoing exploration efforts. Our Geoscientists continue to see significant potential in the area and have identified a number of prospective leads that merit further investigation. 

Let’s now move to LNG Import. 

Esso is continuing to study and progress the import of LNG into Victoria. We are leveraging our global ExxonMobil project execution and LNG supply and trading expertise. 

We believe that LNG import could be complimentary to both the further development of our Gippsland assets and any potential new supply from our exploration activities.

Through bilateral discussions with our retail, commercial and industrial customers, Esso has been seeking to further understand their medium and long term business goals. We need to work together to promote continued investment and growth in the industry in order to deliver positive outcomes for energy consumers throughout the East coast.

LNG and conventional gas development projects remain highly capital intensive. As Esso seeks to invest in supply, we will take on upstream risk, like that of unsuccessful VIC/P70 exploration wells. We will require strong signals of commitment from customers that they need this gas including through longer-term offtake agreements. 

Securing creditworthy offtake agreements and therefore Final Investment Decisions for new projects will not be easy given the price environment.  And yet, without new investments, we risk setting the stage for a supply-constrained market in the future.

At the same time we look forward to the establishment of a comprehensive and stable long term energy policy in Australia. One which promotes investment and free market principles to drive supply and demand. 

We believe that a constructive regulatory framework is critical to enable all market participants to work together to develop efficient gas value chains that meet the needs of the East Australian gas market into the future. 

A significant contribution has been made over the past 50 years by Esso to this market and the subsequent economic development in Australia. We are working to ensure we remain a market leader and meet the needs of our customers by looking beyond our areas of traditional participation and striving to be innovative. 

We are focused on development of a diverse gas portfolio, including existing and new Gippsland Basin Joint Venture developments, further exploration, and potential LNG imports.

We continue to utilise our world class technical expertise, commitment to safe operations and focus on minimising the impact on the environment. 

We value highly our well established and strong business relationships with communities, our customers, industry partners and governments.

We look forward to meeting the future needs of the East Australia gas market by supplying affordable and reliable gas to the market and safely fuelling a cleaner, more prosperous future for Australia.

Thank you.