Perth-based energy company Magnum Gas & Power has a strong portfolio of CBM and petroleum exploration in Botswana and Australia.
Formed last year by the merger of two companies – Ormil Energy Limited and Energy Botswana Limited – Magnum Gas & Power Limited (ASX: MPE) has had an extremely busy and productive 18 months. Subsequent to the merger, Magnum completed an entitlement offer, appointed a new Chairman and commenced drilling and testing for Coal Bed Methane (CBM) at its Central project area in Botswana.
These 100% owned CBM projects in Botswana are Magnum’s current focus, and although at an early stage are potentially very significant – not only for Magnum, but also for the country and the southern African region. “Botswana is a lovely country with friendly people, and has a great track record of growth with stability, but it imports the bulk of its electricity and has on-going security of supply issues,” explains Managing Director Trent Wheeler.
Magnum is working to prove and develop the potential gas resource here, while supporting the development of associated and downstream industries and services. The company has already completed successful coring operations on one of its boreholes, finding that the gas composition exceeded 95% methane, and is looking forward to 2014.
Wheeler, previously the Managing Director of Energy Botswana Limited, attributes Magnum’s rapid and successful progress to the experienced team behind it – particularly Chairman Tom Fontaine, formerly Ormil’s MD. “Tom’s a petroleum engineer and he’s the one who put together the portfolio of acreage for Pure Energy Resources Limited [ASX: PES], which was a very good success story in Australia,” he explains. “Pure Energy made its IPO in 2006 for approximately A$13 million and within three years was bought by British Gas for more than $1 billion.”
Fontaine was one of many good reasons for Energy Botswana to accept Ormil’s takeover offer in August 2012. “Ormil had been drifting downwards with the market sentiment… we thought they were undervalued,” begins Wheeler. “We liked the team and we liked the New South Wales acreage: it has existing Coal Seam Gas [CSG] reserves that just need to be drilled out, is near existing infrastructure and within a demanding market.” The takeover enabled funds to be raised and priority given to exploration in Botswana, while waiting to recommence NSW operations.
Energy Botswana was one of the first CBM explorers to enter Botswana, says Wheeler, so was able to secure 100% of some of the more prospective acreages. These were defined in a large regional study done by consulting firm Advanced Resources International, which identified a very large coal basin across the country, but of which only a small portion had correct depths and the thickest coal seams.
“Our central project area is in the Mmashoro Basin within the vast Kalahari Karoo basin, along with our peers Kubu Energy (a joint venture between Sasol and Origin Energy), Exxaro and Tlou Energy,” Wheeler explains. “We also have CBM exploration acreage in the north and a very large conventional petroleum exploration licence, but that’s very early stage as it really hasn’t been explored at depth.”
Magnum has completed Pre-Feasibility Studies for the CBM projects and recently completed the second phase of exploration drilling, confirming the presence of CBM with a high percentage of methane. Wheeler deems the results “very encouraging” and Magnum is now testing other parameters. Once that’s complete, Magnum will repeat the process on other blocks to confirm the overall basin model, allowing it to select and lock on to the most prospective area on which to focus first. “The coal stratas and geology are quite well-known; it’s just a matter of firming up the variability and finding the sweet spots,” says Wheeler.
Magnum’s acreage is located close to existing infrastructure and power generation currently running on diesel, and surrounded by significant peers. Wheeler believes this to be a major advantage, particularly as the basin is at an early stage of development. “It takes time to understand a CBM basin,” he says.
“Characteristics of the major basins differ and it takes time to work through those characteristics to find a way that’s appropriate to drill each one. The majors in the area help qualify the basin for the market and to the government, and show that it is deserving of attention. The juniors have the flexibility to try different things and proceed in a different way to the larger companies. These synergies help make a basin successful, and there will be opportunities for joint ventures further down the track.”
The path to production is “robust” and the process to go through “vanilla,” adds Wheeler. “We’re going through a phased, toll-gated approach; we’re going through the acreage and ticking off the characteristics we’re looking for, so that we can focus on the areas we like most.”
Operating in Botswana has both pros and cons, says Wheeler, but overall it’s an attractive early-stage, market driven environment for resources projects – particularly energy projects.
“There used to be hesitancy and a lack of understanding towards Africa, but Botswana is a very different African country to be operating in,” he says. “It has been ranked as the fourth-best operating environment in the world, above Australia. It has a growing educated population who are looking for employment. The country grew up off the back of diamonds, but the government now realises that diamonds alone won’t keep it going, so it needs to build up its other industries and capabilities.”
Botswana also has high and growing energy demand that current supply cannot meet, leading to rolling blackouts. Magnum aims to develop the country’s CBM resources so that energy demand can be met and exceeded, enabling Botswana to become an exporter to the region.
So the market is definitely there, along with a cooperative government and low sovereign risk. The country’s only drawback, says Wheeler, is that the administration for resources projects tends to go slowly. “[The administration office] tends to be a little bit under resourced in some areas and they want to do it the right way, so it can take time for them to let you move on the ground,” he comments.
This much is clear in the four years it took for Magnum to be awarded its first blocks of conventional petroleum exploration in Botswana. The company’s 100% owned petroleum exploration licence covers 24,300 square kilometres. The team has past experience in developing conventional oil and gas projects, but for the time being this project is third in line after the central and northern CBM project areas.
Magnum is working on developing relationships, possibly with Independent Power Providers (IPPs), to help it establish vertical integration in Botswana so that it can get its gas to market. The company plans to look initially at gas to wire (electricity production) and possibly compressed natural gas (CNG), then later at the production of gas to liquids such as small-scale diesel, followed by supporting industries such as ammonium nitrate production. In addition, as water is such a precious resource for a dry country such as Botswana, there are many opportunities to make use of the water produced from the wells.
NSW ready to unfold
Magnum’s CSG projects in New South Wales have “great potential,” says Wheeler, but are currently “politically stranded”. The state currently imports 95% of its gas and the remaining 5% is produced locally from CSG.
“With growing pressure on gas prices and supply issues as Queensland develops its LNG projects – and as a number of the state’s long-term coal-fired power contracts approach expiry, so that cheaper coal-fired power won’t be available either – we saw NSW as a very demanding and supply-constrained market,” Wheeler comments.
The NSW projects have existing reserves, but exploration is at standstill awaiting clarity from the NSW government regarding CSG exploration and developments. Magnum is the Operator of the NSW projects, which are a joint venture with APEX Energy NL, in which Magnum has a 13% shareholding. The farm-in agreement entitles Magnum to increase its holding in the acreage to 50% upon completion of phased exploration expenditure commitments. The acreage has a gross estimated probable (2P) gas reserve of 58 petajoules (PJ) and possible (3P) gas reserve of 210 PJ. The gross estimated gas resource is GIP 2.6 trillion cubic feet (tcf).
Preparing for the future
Magnum’s latest announcement was a Share Purchase Plan that will allow shareholders to increase their holdings in the company. Wheeler explains that the company sees this as the best way to raise capital for next year’s exploration programme in Botswana in a capital market “constrained” for small to mid-tier juniors like itself, ensuring shareholders have the first opportunity to participate.
At the same time, Magnum is keeping its eyes open for new investment opportunities across the world – though being careful to look before it leaps. “As a strategy, we like to have a portfolio of regionally diversified acreage, which is why we have packages in both NSW and Botswana,” Wheeler remarks.
“We’re also considering other projects internationally; and I’d like to have projects at various stages of their lives. We’re mindful of the current life stage of the company and wary of biting off more than we can chew, but there are certainly benefits for our shareholders in diversification and in bringing other projects into the company.”
Converting its Botswana acreage into resource and reserves, then moving the project into production, is Magnum’s top priority for the foreseeable future. While adding value for shareholders, the company also aspires to help create a sustainable CBM industry in Botswana.
“I see CBM as a great fuel; the fuel for now,” Wheeler remarks. “The tide is turning against coal due to its large carbon footprint. Renewables are great and I’d like to see them come online, but that’s not going to happen quickly. I see CBM as being a transition fuel, as it’s one of the cleanest energy sources being used at the moment and a flexible fuel source too. Energy will always be highly demanded and required, and suppliers are not keeping up with demand. I think we’re in a good space to help fill that gap in both Botswana and NSW.”