With its core focus shifting to the renewable energy sector, AGL chief executive officer Andy Vesey has confirmed that despite being seven years in the making AGL has cancelled its Gloucester Gas Project and will relinquish rather than sell-off its exploration licence when it has fully remediated its coal seam gas sites in the region.
“We will be surrendering that licence to the government,” he said, clarifying that relinquishing the licence did not involve selling it.
“This is not a negotiation for a buyback,” he said.
Before the day’s end, the minister for Industry, Resources and Energy Anthony Roberts confirmed that “AGL has relinquished its PEL and will be required to decommission and rehabilitate its wells.”
The announcement that AGL would not be proceeding with its Gloucester Gas Project and would eventually divest of its coal seam gas activities elsewhere was released to the Australian Stock Exchange at 8.30am this morning. It came a little earlier than many expected, with Part 3A of its Gloucester Gas Project Stage One approval due to expire on February 22.
Citing the decision as purely financial with no community influences, Mr Vesey said that the impetus to inform its shareholders through the Australian Stock Exchange and the media came about it when it became “obvious there was an impairment.”
“And once you have uncovered an impairment you must disclose it to the market.”
AGL expects to recognise an impairment charge of $640 million after tax against the value of its gas exploration and production assets, including an increase in rehabilitation provisions. It found the economic returns to support the investment of approximately $1 billion for the Gloucester project were not adequate.
Mr Vasey attributed the lack of financial viability of Gloucester’s Project to sustained and forecast low oil prices translating into lower gas prices. This was compounded by the research figures coming from its Waukivory pilot gas wells, which showed gas levels were “20 per cent lower than what we needed, to have an economic project.”
The ASX statement released by AGL states it “has taken a strategic decision that exploration and production of natural gas assets will no longer be a core business for the company due to the volatility of commodity prices and long development lead times.”
“It’s always disappointing to declare write downs and this is no exception,” Mr Vesey said.
“We aren’t willing to deploy any further capital on CSG production,” Mr Vesey said.
Adding that AGL would continue with its commercial and gas retail activities but where once it believed Gloucester would have provided an appropriately priced gas , “now we believe we can get more appropriately priced gas in the market,” now seen by AGL to be a transition fuel more than anything else.
Instead, Mr Vesey said AGL will “capitalise on the evolution occurring in the energy sector... This is a definitive change in our strategy.”
Mr Vesey went on to describe a decarbonised future, with the value of energy changing as ‘it moves towards the customer’. He said AGL would focus on becoming more intimate with their customers energy needs and how AGL can use technology to help – whether it be battery, solar, or other.
“Technology is making a significant change in our industry and we need to be on top of it,” he said.
Mr Vesey thanked the landowners in Gloucester for their support as well as AGL employees in Gloucester for their hard work.
In an announcement applauded by the state government, AGL will leave behind a $2 million independent trust fund as an “identity opportunity” for Gloucester.
The Gloucester Dialogue meeting scheduled the same morning as the announcement was due to discuss AGL’s extractive water management strategy, submitted to agencies on the first of this month. It ended up discussing AGL’s exit strategy instead.
AGL will sell off its natural gas assets at Mornabah, Silver Springs and Spring Gully in Queensland, although Mr Vesey acknowledged that due to market conditions “this may take some time.”
AGL’s Newcastle Storage Facility will remain operational on its list of assets as it was not dependent on the Gloucester operation to be viable.
“The storage facility itself provides value in locality and load. We did talk about it, because it’s regionally in the same region as Gloucester, but the connection isn’t that important in terms of the viability of the Newcastle storage,” Mr Vesey said.
On the sharemarket, AGL shares experienced a hike in value based on what an AGL spokesperson calls a buyer’s ‘preference for certainty’.
AGL has already begun the process of rehabilitating the sites, a process expected to take a year. The company will hold a public meeting in Gloucester on February 16 (venue TBA) to discuss its decisions with the community and the rehabilitation process.