EFB210: Queensland Liquefied Natural Gas - Finance Assignment

Internal Code: MAS3445

Finance Assignment:

Primitive Energy owns several coal seam gas reserves in south-west Queensland. As a relatively minor player in the Queensland Liquefied Natural Gas (LNG) market, Primitive does not have the capacity to transfer and process the gas for sale to domestic or international buyers. Instead, Primitive simply extracts the gas and then sells it immediately (at the well-head, which is at the surface) to one of the major gas companies operating in the area. Recently, Primitive entered into a contract to sell gas from one of its reserves for the fixed price of $4.50 per gigajoule (GJ) for the life of the reserve. With this contract in place, Primitive’s management is currently trying to determine whether they should extract the gas through conventional ‘Vertical’ drilling or the recently developed ‘Horizontal’ drilling. As indicated in Figure 1, the Vertical drilling approach drills to the coal seam while the Horizontal approach drills down to and then across the coal seam. Questions: 1) A brief outline of task, methodology and recommendation. 2) Explains and justifies the selected evaluation metric. 3) Recommends a preferred drilling approach and provides insight into why one drilling approach creates more value than another. 4) Highlights the key limitations of the analysis and recommends additional analysis to alleviate these limitations where appropriate.