Empire Energy discusses looming gas shortfalls across Australia

Empire Energy Limited (ASX:EEG) CEO Alex Underwood discusses the implications of gas shortfalls across Australia and possible sources for new supply.

Paul Sanger: I'm Paul Sanger for the Finance News Network, and today I’m talking to Empire Energy (ASX:EEG). Empire Energy, trading under the ASX code “EEG” with a market capitalisation of $135m is a Sydney-based Australian oil and gas company holding 100 per cent owned and operated assets with unconventional targets in the Northern Territory Beetaloo sub-basin, and central trough of the McArthur Basin. Joining me is today is Empire Energy Chief Executive Officer Alex Underwood. Alex, welcome back to the network.

Alex Underwood: Thank you, Paul, and great to be here in these salubrious surrounds today.

Paul Sanger: I'm glad you like the environment. Alex, let's start with your view on the unfolding discussion around looming shortfalls for east coast gas and what looks to be the government's grudging acceptance that gas is here to stay and is a key pillar of any transition to renewables.

Alex Underwood: The warnings about looming gas shortfalls on Australia's east coast have been around for a long time, but it's really… we're starting to reach sort of max alarm stage now. Just this week, we've got the Australian Domestic Gas Outlook Conference, and we're hearing from the industry body, Australian energy producers and Ian Davies, the CEO of Senex (ASX:SXY), that this situation is now becoming really quite critical. So, there have been warnings about the potential for serious shortfalls in the next couple of winters. The Australian energy market operators’ forecasts are showing that demand is expected to stay flat for a long time, but supply is dropping all the time, and really the time now has come for us really to get on with it and bring new supply into the market. It's not just about affordability of gas, and gas does have a very inelastic demand-supply response where you can just have a slight shortfall and you can see prices take off. Obviously, those high prices hurt households and businesses, but this is also about the viability of manufacturing in this country and ensuring that we can remain competitive on a global platform. And so, you know, it's been very pleasing to see that the Federal Government is finally starting to recognise the importance of gas. As you mentioned, the more renewables we have in the system, the reality is the more we need gas because the sun doesn't always shine and the wind doesn't always blow. And if as a country we're going to move coal-fired power out of the system, gas is going to be a critical feedstock. I would also note that, you know, I've spent a lot of time in the US in my career in this industry, and in the US about 40 per cent of power now comes from gas, and they're really leading the world in emissions reduction because it's half the emissions intensity of coal, and in the US they've embraced shale gas and now it's 70 per cent of US production and they've got the cheapest gas prices in the world and the cheapest energy prices in the world. It's literally saving the average US household thousands of dollars a year through affordable gas, and so we've just got to get on with it now. We need faster approvals, and we're very blessed with a lot of natural resources in this country, and it's good to see the Federal Government finally recognising that.

Paul Sanger: And as you alluded to, the press are picking up on this now, that gas is the pathway to renewables. Big article in the AFR, which you mentioned earlier, so you're just seeing that there is a real spotlight, and hopefully as there's a spotlight, it forces change and acceptance.

Alex Underwood: Absolutely. We've already seen in the last couple of years what happens with shortfalls. You know, when the Ukraine war took off, Australian gas prices went through the roof and the government was forced to intervene. I think with the benefit of hindsight, we all realised that any intervention in the market has to encourage new supply, and it's taken a while for that to flow through, but, yeah, the writing's on the wall. We've got to get on with it. We need more gas supply. It's going to be good for households. It's going to drive down inflation. It's going to support our manufacturing sector and ultimately economic growth.

Paul Sanger: Now, Alex, where does the Beetaloo and Empire fit into the east coast gas narrative?

Alex Underwood: If you look in the years ahead, particularly out to about 2040, there's a huge shortfall forecast on Australia's east coast. So, I think right now the east coast uses about 1,500 terajoules a day. The shortfall is going to be over half that in just 10 or 20 short years. So, we need new sources of supply. You know, it's fantastic to see companies like Senex (ASX:SXY) and Comet Ridge (ASX:COI) and others looking to bring additional coal seam methane supplies into the market, but, you know, eventually those coal seam methane fields are going to start maturing and rolling over. And then, you know, the Bass Strait, its production's falling off a cliff. I think it was down 25 per cent last year. The Bass Strait was really an incredible blessing for this country. Seven trillion cubic feet produced, two billion barrels of oil produced, but it's really in its twilight years now, and when you look around, there's really only two other options. There's the Beetaloo, one of the world's largest shale gas deposits, and frankly, with some of the results that are coming out of the basin from us and our neighbours in the basin, I think it's looking like it's going to be one of the world's most prolific shale basins. The only other alternative we've got is LNG import. Now LNG import, it's a horrible way to create energy security for your country. You're literally looking at liquefying gas potentially from as far afield as the United States, putting it on a boat, and then re-gasifying it. It's not as good environmentally and also will directly expose us to global LNG prices. So, I don't think in this country we should be competing against fundamentally our own LNG customers to be supplying our major population centres. And so, if we want to keep the jobs associated with this industry in the country, keep royalties flowing, going to, in our case, the NT government, with all the services it can provide, you know, really the Beetaloo is really looking like in the medium term the only major domestic source of supply to keep our markets suitably supplied.

Paul Sanger: You make a very good argument there, Alex. Alex, the Northern Territory Government has made it clear that the territory is in a precarious position from a gas supply perspective. How can the Beetaloo and Empire provide a solution?

Alex Underwood: The NT market, it's a relatively small market, but I think over 80 per cent of Darwin's power comes from two gas-fired power stations. Gas is the source of power for mining operations up and down the length and breadth of the Northern Territory, and I must say the NT Government's support for us has been absolutely fantastic. They have made a significant investment in putting a regulatory system in place. They actively promote this industry both in Australia and globally. And they're facing a major problem right now. So, there are only a couple of existing sources of gas, and one of them down in the Amadeus Basin is just chugging along quite nicely at a flat rate, but the other main field that supplies the NT market, the production has dropped precipitously. It's only producing about 15 per cent of what it should. And that's causing a major energy security issue for the NT Government.

We as a company and as a basin are here to support the NT and its people. So, you know, we want to get into production as quickly as possible. Empire anticipates being in production quite soon. It's just over the horizon. And, in our first pilot phase of development, our intention is to sell gas into that local market. That'll bring downward pressure on prices, it'll help support existing mines and new mines and help power Darwin and other population centres. And so we see a very good opportunity to work very closely with the Northern Territory to help provide them with the energy they need.

Paul Sanger: So, what I'm hearing there, Alex, is you're telling me that the Northern Territory Government is being proactive rather than reactive, which is great to see, try and deal with the problem before the problem arises.

Alex Underwood: The Northern Territory Government, they've got a plan to grow their gross territory product, so the equivalent of GDP at the territory level, to, I believe, it's $40 billion by 2030, and really this large deposit of gas fundamentally, I think, sits at the centre of that. So, as I mentioned, there's a lot of mineral deposits up in the territory, but mines consume a lot of power, and gas is the obvious way to provide that in these off-grid areas. And so they've been very supportive, and we're really looking forward to sort of repaying that investment they've made by getting the gas flowing soon.

Paul Sanger: And Alex, just to finish off, I'd like to discuss Empire specifically. Is it realistic to anticipate first gas for Empire in 2025, and, additionally, what level of output can Empire deliver it in the short term and beyond?

Alex Underwood: Well, I can tell you definitively, it absolutely is realistic. I mean, we're working night and day as a team at the moment on our pretty well publicised plans to move into pilot production. We're quite fortuitous where we are that there's a pipeline that runs right through the middle of our tenement. It goes from the Amadeus Gas Pipeline out near Tennant Creek out towards the McArthur River zinc mine. The constraining factor on our initial plans is the capacity of that pipeline, so about 25 terajoules a day. You know, it's not a great deal of gas in the scheme of things, but when you think about, for example, Darwin uses 40 to 50 terajoules a day, it's pretty material in an undersupplied market. We're very confident we can be in production in about the next 12 months, so hopefully by early 2025, if not later 2025.

And really there's a couple of factors driving that. So, first of all, we've had highly encouraging flow rates from our first couple of horizontal wells. We acquired a gas processing facility at a tiny fraction of what it had cost us to buy a new build. We're right on the pipeline. We're negotiating gas sales agreements at the moment. We're working on various financing options that I think, drawing on my experience previously as an investor in this space, is really designed to maximise value to shareholders and minimise dilution to shareholders, submitted all our regulatory documents, and, assuming all goes well, we intend to be in the field later this year installing the gas plant, hooking up the two existing horizontal wells, drilling another horizontal well, and that should have the gas flowing by early next year.

Paul Sanger: So, Alex, I just want to get your views, press are picking up that gas is the pathway to the renewable transition, but from an investor perspective, there's been some real apathy from investors investing in this space. Why do you think that is and do you think that's going to change in the short term?

Alex Underwood: I think there's a couple of factors at play here, and again, if I think back to earlier in my career when I was an institutional investor in this space, one of the key factors driving this I think is that shale gas is so new to Australians. And if I rewind 15 or 20 years back to when I was at Macquarie and we were investing in small oil and gas companies, particularly those in Australia, it took us even as a quite sophisticated organisation quite a long time to understand the potential of coal seam methane in Queensland. And those who got in on coal seam methane in Queensland early made unbelievable returns. And I must say a number of them are our major shareholders, because they can see the same potential, but, you know, it was very new, and the industry, coal seam methane industry at that time, they were developing their type curves, which is the expected rate of production. Also, at the time, when you were drilling one coal seam methane well at a time, it was pretty expensive as opposed to now, where they're drilling lots of them. As one metric, I think the typical coal seam well originally cost about $5 million. Now, they're getting them down for less than $1 million, and that's due to the efficiencies of scale. And so, now you've got shale gas. Again, shale gas, it's actually a more productive form of unconventional gas production than coal seam methane, and that played out in the US where you saw unconventional started with what they call coalbed methane, we call coal seam methane. Shale quickly overtook it. But, again, the numbers are still pretty big now. These are big wells and they're costing quite a lot of money. And so, I think Aussie investors are still getting their heads around it. I must say, though, when you go to the US and you tell them about the Beetaloo and you show them the flow rates you're achieving so early, they get it. And I would say to Aussie investors, follow the money. If you look at the key players who are coming in on this basin, these are highly sophisticated, very successful US shale investors, and they can see the inherent value here. And so, it is sometimes a little frustrating that there is that investor apathy, but I must say, from my own perspective, I have no concerns at all. I think we're on the cusp of something pretty huge. And next time we speak, we can discuss whether or not I was correct in that prediction.

Paul Sanger: Alex, I look forward to that. Thank you for your time today.

Alex Underwood: Thank you, Paul, cheers.