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2012 AGM - Chairman’s Address

The economic and political setting for Metgasco looks brighter now than it did when we met twelve months ago and certainly a lot better than it did six months ago. The demand for natural gas is being strongly supported by the major domestic utilities and by overseas buyers, the outlook for domestic gas prices is very positive, the political cloud over coal seam gas in NSW has been removed and our resource base remains as strong as ever. After a period of some uncertainty, we can once again look forward to unlocking the potential of the Clarence Moreton Basin.

The past year has been a period of consolidation. It must be acknowledged that last year’s exploration and appraisal program was completely overtaken by an effective moratorium imposed by the NSW government which held back exploration licence renewals, production leases and work approvals. During this period, the government conducted a lengthy process of scientific and community consultation into the coal seam gas industry to deal with the opposition they were feeling in the community. What initially seemed to be a short term delay progressively extended into an 18 month hiatus.

As you know, the coal seam gas industry has been subjected to very strident opposition from certain political parties, individuals and community groups. As a result, the NSW government imposed their moratorium and set about developing or updating a number of industry policies including a Strategic Regional Land Use Policy, an Aquifer Interference Policy, a Code of Practice and some new drilling and fraccing standards guided by the NSW Chief Scientist. We recognised early that a prolonged moratorium or ill-conceived regulation could damage our industry. Metgasco became fully engaged in the public debate by providing expert submissions to government and actively participating in community forums. We have held countless community meetings and we have met with government leaders and bureaucrats. Our aim has been to put forward a factual and scientifically balanced view of our industry. This has been a very time consuming effort and every member of the Metgasco organisation has played a part in positively supporting your company in the wider community and doing all they could to support us and our industry. In September this year, the government finally released their new policies, issued the necessary licences and leases and encouraged the industry to resume its work programs.

Despite the moratorium, we were able to re-direct our efforts last year towards fully abandoning some old test wells and restoring some operating sites to their former condition so they could be handed back to the relevant landholders. Our geological team continued to build a comprehensive understanding of the Clarence Moreton Basin and to identify the areas of greatest prospectivity. During the year we recruited some experienced new members to the Metgasco team; members who are helping to help drive progress towards successful development and commercialisation.

There is no doubt that we need to be good corporate citizens and do what we can to support the community in which we operate. This is not only good for business but an integral part of how Metgasco does business. To that end the Metgasco team has been extraordinarily active over many years, right back to our commencement in the region. We will continue to look for practical ways in which we can support the Northern Rivers community. In the Casino area we have a strong support base amongst the landowners we work with and in the wider community. We also have some vocal opposition, particularly from the coastal areas near Byron Bay and areas where lifestyle is seen as of paramount importance with economic development and employment much less so. In the context of the environmental debate, we continue to believe that natural gas is a valuable fuel which helps address concerns about greenhouse warming and that coal seam gas wells can be safely produced with no significant risk to the environment.

In recent years, the Metgasco team has been active in the local community promoting our company and explaining what we do. We have held community meetings, addressed community groups and held smaller discussion sessions. Audiences have included farmers, politicians, business people, community leaders, academics, students and the media. A few people will never agree that Metgasco has a responsible business model, but we have found that most rational people are willing to give us a fair go. It is up to us to continue to go about our work in a responsible manner and I am sure the wider community will let us get on with it.

In this context, let me describe Metgasco’s performance. In the middle of 2011 we raised sufficient new funds to enable a work program that we believed would add reserves and, most importantly, would be capable of demonstrating sustainable economic production via horizontal well productivity. We also planned to drill a conventional well as a follow-up to the Kingfisher-1 discovery. We were prepared to commence this work in mid-2011, assuming the government was almost finished with its new regulations. But the government took another 15 months. Because we lost well over a year of productive time waiting on government approvals, a good portion of our funds were consumed.

The investment market for small exploration companies like Metgasco has been and continues to be very weak. That is a reality being felt by all our peers. The Metgasco share price has been depressed over the past year just like our competitors in the coal seam gas industry. Unfortunately it is in this generally depressed market that we have had to raise capital.

At the point eight weeks ago when government finally gave the green light, our funds were not sufficient to carry out the required work program. Without taking on significant risk, we could not initiate an underfunded development program. We needed funds to underpin commitments to drilling rigs and related services. We also have expenditure commitments embedded in our renewed exploration licences.

We had little choice but to go to the market and raise fresh capital. It was appropriate to raise these funds at a time of more positive sentiment towards the company.

Some shareholders have suggested that had we not gone to the market to raise capital when we did, the Metgasco share price would have risen to perhaps 30 or 40 cents on the back of the NSW government’s green light to the industry. At a level of 30 or 40 cents we could have made a less dilutionary raising. That scenario seemed very unlikely to your board and certainly one that we could not rely on to deliver the funds needed to get the company moving again quickly. Given the state of the global economy, it is a brave person who confidently waits for things to improve in the short term when all recent experience tells us that global circumstances can deteriorate very quickly as a consequence of crises in Europe, the Middle East or even in the USA and Asia. The Board decided that the most certain course of action was to make the placement at 20 cents and to offer the same opportunity to shareholders via an SPP. This was a painful decision, but a necessary one. That course of action secured $20 million. These funds are already at work.

We have received questions from shareholders wanting to know why we have failed to attract a major player to farm in to our project and help fund the work program. The simple answer to that question is that the absence of secure exploration licences and production leases make these types of discussions somewhat problematic. Metgasco needs to have security of title – which we now have again. It is also a fact that the more we can de-risk the projects by demonstrating adequate reserves and well productivity, the better terms we will be able to secure from any new partner. The moratorium in place over the last 18 months has of course prevented any advancement on these de-risking issues. The Board remains open to discussions with new partners with, of course, a keen eye on delivering shareholder value.

It is also likely that potential investors in the NSW coal seam gas sector would have had serious concerns about the community’s willingness to work with the industry, particularly with no positive lead from the NSW government. However, the Government has now made its support for the industry very clear and their new policy provisions have addressed the reasonable concerns of the community.

Since our last AGM, there has been one board change when executive director and Chief Financial Officer, Glenda McLoughlin, left the company early this year. I know shareholders would like to join me in acknowledging Glenda’s contribution to the growth of Metgasco over many years.

Today, Metgasco stands as a lean but capable organisation with very good and dedicated people. Over the past year or so a number of new executives have brought to Metgasco very valuable skills and experience which they acquired from major industry players and from government. I have great confidence in Peter Henderson and his team to carry out the work program ahead of us.

Let me conclude with a look to the future. From an energy market perspective, the evidence is that NSW will be short of contracted gas supply from 2014 onwards. Gas prices will have to increase in order to attract new supplies from interstate. This is a healthy, competitive domestic market for Metgasco to be working in. For the longer term, overseas gas markets, particularly in Asia, continue to draw on Australia’s exports of LNG. Metgasco has the potential to supply planned Queensland LNG projects or may even support its own LNG export project. There is certainly demand out there, notwithstanding some sense that export prices might be dampened somewhat by shale gas availability, particularly in the USA. The NSW government has at last given the green light to the CSG industry by renewing licences and providing necessary approvals to operate. The greatly strengthened regulations will provide the community with confidence that the industry will operate sustainably. We are also pleased that the government is quite actively communicating its support for the industry.

In conclusion, I can say to shareholders that with your continuing support and the support of the local community and government, Metgasco will be pressing ahead with our ambition to commercialise the wonderful gas resources of the Clarence Moreton Basin.

CONTACT US

North Sydney Office
Level 3, 2 Elizabeth Plaza
North Sydney NSW 2060

Tel: +61 2 9923 9100
Fax: +61 2 9959 5387

Metgasco Ltd  ACN 088 196 383