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Eastern Star Gas Limited (ASX code: ESG) recently entered into an agreement with the Marubeni Corporation of Japan on prospective arrangements regarding commercialisation of the Liquefied Natural Gas Newcastle (“LNGN”) export project. Under this agreement, what are the potential offtake obligations of Marubeni from the proposed LNGN Project? How important is the agreement with Marubeni in progressing commercialisation of the LNGN project?

MD David Casey
The relationship with Marubeni serves a number of purposes. Not only does Marubeni bring expertise in marketing and shipping of LNG, it may also be an offtaker of LNG in its own right. In addition, Marubeni has an interest in investing in the LNGN Project, the upstream Narrabri CSG Project and the gas pipeline linking the two. Finally, working with Marubeni strengthens our relationship with Japanese finance markets.

In parallel with the feasibility study presently underway with Hitachi Limited and Toyo Engineering Corporation, Marubeni is investigating LNG marketing opportunities. Our shared objective is to have LNG offtake arrangements in place so that by late 2011 we can commit to development of the LNGN Project.

A key differentiator between the LNGN Project and other, larger projects is that we need to secure only a small number of modestly sized offtake commitments to achieve project viability. It is conceivable that Marubeni could in its own right take a meaningful portion of the foundation offtake. Importantly, ESG already has an equity interest in gas reserves sufficient to underwrite a commitment to development of the project.

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The agreement allows for Marubeni and other prospective LNG buyers to take an equity interest in the LNGN Project and in the Narrabri CSG Project located in PEL 238 (ESG 65% & STO 35%). What level of equity interest do you intend retaining in both projects?

MD David Casey
Indications to date are that prospective purchasers of LNG have a keen interest in taking equity in upstream activities, including gas production. We see a partial sell-down of project equity as a way to fund the equity portion of project development costs, thereby potentially reducing or eliminating the need for further equity raisings and maximising the return to long standing ESG shareholders.

While our aim is to maintain majority control of the Narrabri CSG Project we are prepared to investigate structural refinements that could see a vertically integrated project ownership structure, like that adopted for other Queensland CSG to LNG projects. This can be achieved without loss of project operatorship or control.

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What are your next steps in advancing the LNGN Project? When do you expect to commence FEED on the project? What is the current state of play regarding NSW government environmental approvals for the project?

MD David Casey
By the end of this calendar year we will have finalised the LNGN Project feasibility study and will have significantly progressed LNG marketing. We presently anticipate we will commit to FEED early next year.

Approvals processes for the project are already well underway. We aim to have these processes completed by late 2011, at the same time that FEED is expected to be completed, LNG offtake commitments secured and project equity and financing arrangements put in place.

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The last proven and probable (2P) reserves certification for the Narrabri Project was in December 2009. Current certified 2P reserves stand at 1520 PJ (of which ESG’s net interest is 988 PJ). Why have you delayed the independent gas reserve review until after the Tintsfield pilot comes on line? When in 2011 do you expect the review to be completed?

MD David Casey
There are two reasons we elected to delay the 2010 reserves review. First, above average and persistent rainfall since late last year has stopped us from bringing the Tintsfield pilot on line, a pilot that will make a major contribution to the next upgrade of gas reserves. Second, delays to approvals for certain corehole and pilot upgrade work have compromised other aspects of our 2010 work programme.

The Tintsfield pilot opens up a new reserves horizon as it targets the Hoskissons coal seam, which has not previously been included in our gas reserves assessments. Material reserves from this key component of ESG’s 2010 pilot production programme along with data from the continuing good production performance of Bibblewindi and Bibblewindi West should be reflected in our anticipated reserves upgrade.

We hope to be able to finish works necessary for operation of the Tintsfield pilot over coming weeks, and are in dialogue with the relevant Minister to sort out approval bottle-necks. Provided we are successful on these two fronts, we envisage a reserves upgrade announcement will be possible a few months after the Tintsfield pilot is brought on line and sufficient production has been achieved to satisfy the certifiers.

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How are the Bibblewindi and Bibblewindi West pilots performing?

MD David Casey
With water handling constraints now sorted out and the Bibblewindi pilots brought back on line we have seen good results. The pilots very quickly ramped back up to their previous best production rates, and are now comfortably exceeding those rates and continuing to climb. The Bibblewindi West pilot has achieved a new peak in excess of 2.3 million cubic feet of gas per day, and the Bibblewindi multi-lateral pilot close to 1 million cubic feet per day. This is despite a delay in planned upgrades to the shield wells. We are confident that with sustained pumping at Bibblewindi we will achieve similar if not better production rates than those seen at Bibblewindi West.

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Two LNG projects in Gladstone, Queensland recently received Federal Government environmental approval and BG Group has announced FID for its Queensland Curtis LNG Project. Does this have any implications for the LNGN Project? What domestic market opportunities are available for further commercialisation of the Narrabri CSG Project?

MD David Casey
The FID for BG’s Gladstone project shows that the vision of LNG from CSG is realisable. Overcoming the challenges associated with projects of this scale and scope reinforces the potential benefits in terms of project approvals, finance and delivery for projects such as ours, which are of a similar development size but based on smaller scale trains.

We are continuing to work toward securing near term domestic gas markets, the key opportunity being use of gas for environmentally-friendly generation of electricity. Completion of the NSW privatisation process will help pave the way for the installation of much needed new generating capacity required to avoid potential future shortfalls of electricity supply during periods of peak demand. As the largest and most advanced of NSW’s indigenous gas projects, the Narrabri CSG Project can fill an important role in the supply of gas to new gas fuelled power stations, such as that proposed for Wellington.

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Thank you David.