Managing Director’s Review

In the past year we have continued to make substantial progress in advancing our core projects whilst also positioning the Company for new opportunities that will enable it generate value and be part of the energy transition.

As outlined in our Net Zero by 2050 statement in July 2021, we believe that Carnarvon has an important role to play in the supply of energy in a responsible and sustainable manner. To this end, we hold the view that oil and gas, as well as other current and emerging energy supply sources and technologies will have an important place for decades to come.

We have also been observing for some time a reduction in oil project investments by energy companies that has the very real potential to cause supply to fall short of demand, resulting in oil prices increasing in the future. We aim to position the Company to benefit from this outcome by maintaining an appropriate balance of the portfolio in oil related assets.

As a result, Carnarvon will continue to focus on the delivery of its core projects in the near term. These include the Buffalo Field Redevelopment, the Dorado Field Development and significant exploration potential in the Bedout basin that hosts the Dorado field.

For the Buffalo Field Redevelopment, our objective has always been to secure a partner to share the cost, risk and rewards, drill the first well to confirm the resource and then bring the field into production in a timely manner.

In December 2020 we announced that Advance would join Carnarvon as a partner and capital provider, providing funding for the Buffalo-10 well, where Carnarvon is free carried to a gross cost of US$20 million. The subsequent cost of development will be funded by the third party lenders through the joint venture, with any additional funding requirements (above that provided by third party lenders) provided by Advance.

The Carnarvon team (as operator of the Buffalo Project) are in the process of preparing to drill the Buffalo-10 well in late October this year. At the time of writing, a drilling rig has been secured and important long lead items have been procured. Whilst there is still a significant amount of work to do to be ready for drilling operations, the activities are on schedule, even with the challenges posed by COVID-19 in Australia and Timor-Leste.

Behind the scenes, the Carnarvon team are also working on field development activities to allow the Buffalo field to be brought back into production as soon as practical after the Buffalo-10 well is drilled. These include consideration of a number of options to accelerate the development timeline, including the utilisation of facilities that are currently based in Asia.

An important facet in delivering the Buffalo Project is securing the necessary approvals of the Timor-Leste regulators. On behalf of the Carnarvon team, I would like to express our gratitude for the efforts of the regulators, particularly given the challenges of severe flooding and COVID-19 outbreaks. Carnarvon once again supported the Timor-Leste people, via UNICEF, with the funds this year being directed to assisting with local flood recovery efforts.

During the year we continued our work with Santos on refining the subsurface resource and production models and top surface facility design for the Dorado Field Development. In June 2021 we announced the commencement of FEED. This phase formalised the project scope of work and allowed for contracts to be prepared with the major engineering contractors. This next phase will deliver the final facility designs and costs which are expected by mid-calendar 2022. This represents an important milestone for the project and will allow the joint venture to take FID leading to the commencement of the construction phase.

Prior to making a FID, the joint venture plans to drill two high impact wells near the Dorado field. The first is the Pavo-1 exploration well with a resource range between 11 and 223 million barrels of oil equivalent. The second is the Apus-1 exploration well with a resource range between 31 and 706 million barrels of oil equivalent. Conceptually, volumes toward the lower to middle end of the range would be tied back to the Dorado field facilities. Outcomes at the higher end of the range could become standalone developments, recognising that they would be larger than the Dorado field.

Irrespective of whether a success case involves a tie back to the Dorado Field Development or a standalone development, the outcome will be transformational value wise for Carnarvon.

A drilling rig for the Pavo-1 and Apus-1 exploration wells has been contracted. The chosen rig, namely the Noble Tom Prosser, was used to drill the successful Dorado-2 and 3 appraisal wells. The rig is expected to drill the Pavo-1 well, as the first of the two wells, after it completes its other operations in late 2021. The Apus-1 well is scheduled to follow immediately after the Pavo-1 well is complete.

In terms of Carnarvon’s other exploration initiatives, they will continue to be weighted towards the highly prospective Bedout basin, in which Dorado resides, with significant time being dedicated by the joint venture to this area.

During the year, two new 3D seismic programs commenced in the Bedout basin. The first 3D survey acquired data around the Dorado field and, from an exploration perspective, aims to enhance the joint venture’s understanding of the prospect opportunities capable of being tied back to Dorado. The second 3D survey covered around 2,600 km² in WA-436-P and WA437-P that was previously only covered by 2D data.

This area has exciting prospectivity and exploration potential based on the joint venture’s current understanding of the basin.

For some time the Company has been considering its position on its future greenhouse gas emissions, how these might be mitigated or offset and the opportunity to participate in the energy transition.

In 2020 the Company released its first Sustainability Report. Internally, Carnarvon enhanced its financial modelling to include carbon pricing in its business decisions, reset its risk management processes for climate change and established a Risk, Governance and Sustainability Committee to ensure a targeted focus on ESG . In July 2021 the Company also announced a new partnership with FIG to build a renewable diesel and biochar production business using internationally proven processing technology.

In the future, the company envisages participating in nature based sequestration programs, notably tree planting, to contribute to delivering on its Net Zero by 2050 commitment. Many of these programs are expected to allow harvesting a portion of the plants for feedstock for the production of the renewable diesel and biochar.

The circular nature of this arrangement is one of the pathways to reduce Carnarvon’s carbon intensity and deliver valuable products to consumers as they in turn seek to lower their carbon emissions, such as in mining, transport and agriculture. This arrangement provides a means of balancing lower carbon emissions while generating appropriate returns on our shareholder’s capital.

Looking forward, our focus is on delivering our key projects, namely the Buffalo Field Redevelopment and Dorado Field Development, and progressing further our broader Bedout basin exploration. In these alone the Carnarvon team expects to be very active in the coming years. However, we also plan to pursue additional growth opportunities, such as maturing the renewable diesel and biochar business, and securing new opportunities where they make strong business sense and offer compelling value and earnings for shareholders.

Adrian Cook
Managing Director and Chief Executive Officer.