Ann: Southern Cooper Basin Operations Update, page-38

Yes I suspect you are right rexsh. Somebody said previously they used pressure coring but that would be unusual (and very expensive) and the references to lost gas suggest they use conventional wireline core.

If they used the normal wireline coring then yes there would be a lost gas component. However it's not correct to say that they don't know what that lost gas component is, there are standard procedures in the industry to estimate that lost gas component which is called Q1. So they will know what the Q1 estimate is.

It is normal in CSG to get 20-30% of your total gas as lost gas but this is deeper than most so it has a longer travel time to surface, so I would expect the upper limit of 30% lost gas would be reasonable here. So if desorbed gas represents 30% saturation I would estimate the true saturation to be 40-45%. The fact they are assuming 40% saturation backs up this too.

In most CSG plays, especially those with 20mD, this sort of saturation would be a deal-breaker. But the saving graces here are that the coals are so thick, and the gas content is still high despite the low saturation.

It's not just water handling costs that are the issue here. It's costs in general. It's a well-known fact that the O&G industry consistently underestimates costs. In a high-cost environment like Australia it's even easier to do. The costs are estimated under ideal situations, but then supply issues, labour, drilling costs, testing costs, infrastructure and above all red and green tape regulatory costs consistently come in higher than forecast. Cost risk is almost always to the upside.

In unconventional plays that are generally marginal to begin with (except in very rare circumstances) and live or die by small margins, those costs are extremely important but extremely hard to predict accurately.

I hope 2 bcf will be economic because my modelling as well as STX's show that this should be fairly achievable IF they have estimated the reservoir parameters correctly. But my suspicion is that if you bell-curved the cost estimates here and ran a Monte Carlo simulation on them, a significant proportion of that bell curve would lie above 2 bcf. As you move the EUR up, more and more of the bell curve falls below the EUR figure and then you have a greater chance of an economic project.

That's all you can say at this point. There is no magic number you can calculate at which this project is economic at this point, even if they could guarantee that that is the true average EUR per well figure, which you can't. In reality, EUR is a bell curve too. So you've got two bell curves. Using those you calculate an NPV bell curve which will likely include both positive and negative numbers. That will tell you that, for instance, there is a 30% chance that the project will be economic at 2 bcf, but a 50% chance at 2.5 bcf. At 6 bcf it might be 95% chance. Then you need to find out whether you can actually get those EURs.

De-risking a project is about trying to narrow those bell curves to achieve the necessary level of certainty to take FID. The production tests will help narrow the EUR bell curve, which is why they are so important.