Beach Energy Ltd

ASX:BPT

Earnings Call Transcript 2023-Q2

[Operator]

Thank you for standing by, and welcome to the Beach Energy Limited Q2 FY '23 Quarterly Report. [Operator Instructions]

I would now like to hand the conference over to Mr. Morne Engelbrecht, Chief Executive Officer. Please go ahead.

[Morné Engelbrecht, executive]

Thank you, Rachel. Good morning, and thank you for joining us today on the short notice conference call. My name is Morne Engelbrecht, and I am the Chief Executive Officer of Beach Energy. Joining me today is Sam Algar, our Group Executive Exploration and Subsurface; and our CFO, Anne-Marie Barbaro. Other members of the executive team are also with us.

You would have seen the -- that we've put out our quarterly this morning, the FY '23 second quarter activities report, which include a few important updates on the Perth Basin, Otway Stage 2 project. So we thought a conference call would be a benefit to convey these updates and key messages.

I'll firstly talk to the Waitsia Stage 2 drilling results in the Perth Basin, provide an update on the Waitsia project and then provide a quick summary of the quarterly report. Following that, we will open the lines for Q&A.

Before I begin, the key messages I would like you to take from today despite some challenges, we are progressing our major growth projects in the Appland Perth Basins. These projects will deliver a material step change in production and cash flow in FY '24 and beyond. Well, we have announced today a reduction to our 2P Perth Basin reserves following the Waitsia development drilling campaign. We remain confident in our ability to supply the 3.75 million tonnes of LNG volumes to BP and meeting our domestic demand commitment.

We're also very close to securing the contractor that will take forward completion of the Waitsia Stage 2 project. The signing of agreements are imminent, and we will be making it a separate announcement on that soon. And then our balance sheet remains in great shape and still provide us with much flexibility to pursue growth and higher returns to shareholders.

Firstly, covering off on the Waitsia drilling results in more detail. The 6-well Waitsia development drilling campaign was completed at the end of October 2022. With the completion of this phase of development drilling, we now have 10 wells in the Waitsia field. Attach base development drilling involving up to 8 wells is strictly scheduled to begin in the second half of 2024. In the second phase of development drilling just completed, the primary Kinger reservoir came in largely as expected. Four of the 6 wells tested in line with pre-drill expectations at rates up to equipment constrained 68 million cups a day.

The final well of the campaign, Waitsia, tested the Western extent of the field. It reported no gas shows and was plugged and suspended for potential feature. Volumetric assessment indicates a Perth Basin net 2P reduction of 11% or 10.6 million barrels of oil equivalent for the basin and represents 3.7% of our total company 2P reserves. This reduction in 2P reserve is mostly driven by the following factors: The first is additional structural complexity. As mentioned before, Waitsia tested the western part of the field, which is adjacent to a large fault where the seismic data was our resolution, whilst the well found good quality King year, no gas was present.

We interpret this to mean that this part of the structure is disconnected or not part of the Waitsia field. This effectively reduces the area of the field and hence the reserves. In addition, the reservoir came in high in some wells and low in others. So we have adjusted for this as well.

The second major impact on reserve relates to less-than-expected net gas reservoir in the high cliff formation. The high cliff is the secondary reservoir in the Waitsia field and it's productive from Waitsia-1 and Sunesi3 wells. Our reserve is expected it to be present elsewhere in the northern part of the field. Although, we did encounter some reservoir at Waitsia-5, 6 and 8, it was not developed by Waitsia-6 or 10.

Together, the total amount of the net pay was less than predicted. So we have incorporated this into our reserve assessment as well. In addition, up to and including last weekend, the operator Mitsui has been in the field acquiring Press data at Waitsia-4 well site, which we have also incorporated into the reserves position. An independent audit of view results will also be undertaken.

It's important to stress the following conclusions from today's announcement on the development drilling results. First, our ability to produce and supply 3.75 million tonnes of LNG volumes for BP remains unchanged. This means the high-value nature of our LNG sale and purchase agreement with BP remains intact.

Secondly, our ability to produce volumes required to meet our domestic gas commitment remains unchanged and intact. Thirdly, there is no impairment of our basin carrying values as a result. And lastly, the review outcomes do not impact our expectations for the third phase exploration campaign where we are focused on the Kenya reservoir in areas of less structural compete.

Turning to the update on Otway Gas plant construction. I'm very pleased to say that the execution of agreements are imminent with our preferred contractor for delivery of the Waitsia Stage 2 project. Unfortunately, we're not able to announce that we've closed the deal today. I would have loved to have done that, but we do believe we can make an announcement soon.

Our team has worked over many weeks with our joint venture and other contract is to reach an agreement and keep the project moving forward to completion. At the time, we make a separate announcement. We will also confirm our total cost guidance and target first gas timing. As I said, we expect this to be imminent. The construction of the 250 terajoule day Otway Gas Plant also continued throughout the quarter with several key milestones achieved on site and at the North West Shelf Carafa gas plants, including completion and commissioning of the Carafa gas plant signed to enable backhaul of gas molecules, delivery and installation of all 4 export compressions on site, construction and installation of the electrical switch room, cable connection of all major equipment and commencements are cable pull into the switch room, installation of the hot water heating system, installation of the Mercury guided and construction of all administration buildings.

Turning now to the quarterly reports. Production for the quarter of 4.8 million barrels of oil equivalent was 8% down by quarter. A large driver of this was planned downtime at the Otway Gas Plants as well as some unplanned outages at landbank. We also saw reduced customer gas nominations toward the low end of expectations. Seasonally, in the Perth Basin, we will high reliability and uptime lead to a 10% increase in production and increased activity in operational improvements in the Cooper Basin JV saw production up 8%.

In the Cooper Basin, we've cleared the backlog of optimization, maintenance and in wellbore activities, meaning the workover rig, which is running 24 -- on a 24-hour cycle has returned to 12-hour shifts. Unfortunately, we did experience supply chain and procurement challenges, including the rain delays and the changes to the drilling schedule that they impose on us. This meant a number of wells, which we plan to connect during the quarter with delayed. At the end of the quarter, we had about 10 oil wells drilled but unconnected. We expect to have these wells online during the second half of FY '23.

Given the continued challenges in the [indiscernible], we have revisited our prior target of flat oil production in FY '23. We're now expecting a decline of around 10% year-on-year, but note, this will translate to barrels being deferred into FY '24. We provided DD&A guidance today to assess the market with estimating Beach's FY '23 full year earnings as well. We will provide a full FY '23 guidance update with the half year results in February as is our usual factors.

Beach's major growth projects continue to progress well, and we remain on track for a step change in production and free cash flow in FY '24. In the Otway Basin, we again take our key milestones towards connecting wells to the Otway Gas Plant. This included delivery of all major procurement items and finalization of timing, construction and engineering activities.

Bringing these files online will make available 100 terajoules per day of additional gas supply for the East Coast gas market, which will no doubt once again experienced tight supply next winter. It is worth noting that Beach is the only gas producer adding material new volumes for the East Coast market in 2023, as result of our planned activities over the last few years.

Connection of enterprise discovery is also progressing, although we have experienced some poor weather conditions, which have restricted land access, some procurement challenges and further negotiations on land access rights, meaning we are now aiming for enterprise to be online in mid FY '24.

On Waitsia Stage 2, I've already covered the status of the project, but we also had a good start to the gas exploration campaign with 1 discovery from the first 2 wells drills Atrix, successfully intersected 6 meters of net gas pay across 37-meter projection and the target in formation. Production and testing will be undertaken later in 2023, early 2024, which will give us a much better understanding of the resource size.

The next one in the campaign is Trigg 1, and this will be Beach's first operator exploration well. We are aiming despite Trigg 1 in early Q4 FY '23, and this will likely be followed by drilling the Beharra Springs 2 and Tranche 1 wells. Turning to our financial performance and our balance sheet remains in great shape and gives us much flexibility to pursue both further growth and higher returns to shareholders. We ended the quarter with cash reserves of $189 million and available liquidity of $609 million.

This provides us the flexibility to complete our major projects for strategic growth and implement capital initiatives. To that end, we will be releasing capital management framework with our FY '23 half year results on the 13th of February. Finally, our sustainability initiatives are progressing and the important Moomba CCS project is on schedule and on budget with the Arriestimating at 40% of the works on our complete.

During the quarter, the first 2 Moomba CCS injector wells were successfully broad. First works were completed and key equipment continued to try on site. The announced changes to the safeguard mechanism are also worth a quick mention. The mechanism focuses on emissions intensity reduction, which is aligned with features ambitions and our focus on venturous intensity as well.

In closing, thank you for joining us for today's overview and key points for this morning's release. Before we turn to Q&A, I would like to leave you again with the following messages. So despite some challenges, we are progressing our major growth projects in the Otway and Perth Basins, which will deliver a material step change in production and cash flow in FY '24 and beyond.

While we have announced today of reduction in 2P reserves in the Perth Basin, following the Waitsia development drilling campaign, we remain confident in our ability to supply 3.75 million tonnes of LNG volumes to BP and meeting our domestic demand commitment. We also are very close to securing the contractor that will take forward the completion of the Waitsia Stage 2 project. The signing of agreement is imminent, and we will be making a separate announcement on that soon. And then our balance sheet remains in great shape and still provide us with much flexibility to pursue growth and high returns to shareholders.

On that note, I will ask for the lines to be open for Q&A. Thank you, operator.

[Operator]

[Operator Instructions] Your first question comes from Dale koenders with Barrenjoey.

[Dale Koenders, analyst]

I'm just wondering with the Waitsia project given you're so advanced in tendering, if you have a read on sort of the impacts to schedule and to budget for the project?

[Morné Engelbrecht, executive]

Dale, thanks for the question. Yes, we do. But the -- we leave that for the announcement in terms of when we announced the contract, as I said, that's imminent. So hopefully, in the not-too-distant future, we can announce who the contract is and then what -- if we're targeting and then also an update on the total cost at that point in time. So unfortunately, not today, but hopefully, very soon.

[Dale Koenders, analyst]

Is there any reason why we shouldn't be anticipating risk to sort of what have been communicated previously, just given the effectively a resetting of the contract to mid project or potential to reset?

[Morné Engelbrecht, executive]

Look, I think from what we've gone through in terms of the administration prices, you would expect some sort of delay being caused by that in terms of efficiency, in terms of dealing with the administrator through the process. As I said, we'll make an update on the timing on that and also the costs when we announced the contractor.

[Dale Koenders, analyst]

Okay. I might try a second question just on Victoria's start-up in mid-'23. You said sort of subject to OEP. Is this -- what timing is needed for this approval? We're seeing sort of---not seem as a delaying approvals for others? Is there a risk around the start-up time frame?

[Morné Engelbrecht, executive]

Look, from where we're sitting right now, we're actually progressing that relatively well with op the EPV, we are requesting a global forward an operational EP. So it's nothing to do with gunning after wells connecting if the well is actually just the flowing of the gas molecules through the plant. So it's from a relative point of view, it's a less complex EP to get approved.

So we are working with Optima and we are confident we'll get there with them with the approvals. And if our assessment on the timing of when gas will flow in terms of 2023.

[Operator]

Your next question comes from Gordon Ramsay with RBC Capital Markets.

[Gordon Ramsay, analyst]

I'm just interested about the BP contract and whether that's still covered by 1P reserves because you've announced there's a change in 2P reserves. Can you share that? Are you able to comment on the 1P business or position of Waitsia with respect to the BP contract?

[Morné Engelbrecht, executive]

Yes. Look, in terms of the -- thanks, Gordon, in terms of the contract itself, there is no commitment in terms of volumes under the contract. As we previously announced, that's a pretty flexible contract in terms of how we approach the volumes of production under that contract. So there's no commitment to supply the 3.75 million tonnes under the contract. So there's no penalties for like start-up as well under the contract, and there's no firm commitment in terms of the actual volumes to be reduced under the conference.

[Gordon Ramsay, analyst]

And just one other one, and this is probably more a question for Sam on your comment earlier about drilling wells with structural complexity or adjacent defaults after the result from Waitsia-10. Clearly, there's some issues here with Trigg. If you look at the Trigg prospect, there's a major fault running along the side of that prospect. Would that result Waitsia-10 or the information you've got from the additional wells at Waitsia change your view on the risk profile with Trigg? And is that not adjacent to a major fault and therefore, potential for additional complexity that you've just seen at Waitsia?

[Stephen Algar, executive]

Yes. Thanks for the question. No, it doesn't change our position at all. The key point in this part of Waitsia was that the imaging adjacent to that fault with the seismic was very poor. So it was unclear exactly where the fault is, the imaging we have with our 3D seismic. The Trigg is extremely clear. So we're very confident where the fault is there, and we see no issues without whatsoever. So this is purely related to the quality of seismic data we have in that portion of Waitsia.

[Operator]

Your next question comes from James Byrne with Citi.

[James Byrne, analyst]

I guess I want to pick up on what Jay was asking earlier about schedule. The reality is like 4 out of the 4 contractors, I've spoken to that operate in WA have all said that they've been purchasing staff from Claus from the Waitsia projects. And if there's an announcement that's imminent because you've managed to find somebody take over that contract from Clough, how can we, as a market have any sort of confidence on schedule for these projects starting up in a timely manner when you've got such a tight labor market in WA and the staff being lost from the projects?

[Morné Engelbrecht, executive]

James, thanks for the question. So in terms of the process we've gone through so far, we've been very clear in terms of negotiating and talking to various contracts in the market as well. It's probably the same contract as you're talking to. It is a very tight labor market more generally. We have seen some people obviously go to other projects. We have been filling open positions in the Waitsia project from taking people from other projects as well.

So we have managed in terms of the projects load in terms of number of people we need. So up until Christmas, there was close to 250 people working on site on the Waitsia project. What we've been able to do as well in the interim period with us administrate is make sure that those key people that manage our project and keep people from a site-based role point of view as well, are incentivized to keep working on the project through the administration process, but also in talking to the contractors taking that project forward, incentivizing those same people to remain with the project as well.

So we operate, I suppose a long winded answer to say that we do operate in the same market, and we've got the same ability to attract other people to the project as other project players as well. So we don't see that, that's going to be a major issue for us going forward, but it's generally an issue in the WA market.

So it's not just for this project but other projects as well, but we are working our way through that, and we have sought to make sure that we do have the right people on the project. And if we do need more people on the project, we have the ability to pull in from other contractors as well. So we have confirmed that we have those people available if we need to contract into the project as well.

[James Byrne, analyst]

Got it. Okay. That's pretty clear on schedule. I guess if you're having to "uncentivized" people to sound the project that will ultimately flow through into costs for the projects than you might have otherwise expected?

[Morné Engelbrecht, executive]

Yes, you would say that. I mean, that's again, with the inefficiency of the administration process, you would expect that over the last couple of months. With the tight of labor market as well and inflation that will have an impact on labor cost. But if you think about the overall cost of the project that we've got it to previously times. That's, I would say, immaterial in terms of the capital that we guided to before. So I'd say it's material adjustment to from a labor point of view.

[James Byrne, analyst]

Yes. Okay. Great. And then secondly, it's easy to run like a thought experiment to say would the WA government have given you an exemption to sell the gas into offshore markets if the reserves position had it accounted for the things that were in today's downgrade. But I guess what I'm looking for is can you equivocally say that you've already sort of presented this update on reserves position to the WA government and they've already sort of come back and explicitly said that you can still export?

[Morné Engelbrecht, executive]

Look, James, in terms of discussing with the government, we'll obviously go through that communication process with the government. We're making the announcement on the reserves today. What we said as we can confirm that we can meet our domestic demand obligations under the export agreement, so that has not changed. So nothing on what we've agreed with the government has changed at all.

[Operator]

Next question comes from Mark Wiseman with Macquarie.

[Mark Wiseman, analyst]

Sam, I just wanted to ask about the Beharra Springs with the reserves there downgraded as a result of this review as well? Or is it just Waitsia?

[Stephen Algar, executive]

Mark, yes, there's no change to Beharra Springs and the data from these wells has no bearing on Beharra Springs deep One well has been producing extremely well. So we've got no concerns with that. So this is exclusively related to Waitsia, the combination of the drilling results and the pressure information we received over the weekend.

[Mark Wiseman, analyst]

Okay. Great. And you have to provide a breakdown of the 88 Mb between those fields?

[Stephen Algar, executive]

I don't think we've declared that now.

[Mark Wiseman, analyst]

Okay. And just finally, I mean it looks like the timeline here of when you sort of came to the realization that there was some issues with the reserves just before you bid for -- you entered into the scheme with. I was just wondering could you comment whether these downgrades have any bearing on your sort of M&A strategy in the third basin?

[Morné Engelbrecht, executive]

It does not, and it's totally coincidental. The Warrego reserves in any event would not be able to be explored at all to any of the LNG volumes. We're exporting all the domestic demand commitment with the government. So that all comes from L1 and L2 from a reserve point of view. So the Warrego, but has got no bearing whatsoever in terms of export volumes or domestic demand commitments. I mean, as we've previously said, I mean, obviously, the bit to Warrego was in relation to expanding our position within the Perth basin. We obviously got to a point where we couldn't see any more value in that process and pulled out of the process. So we are very happy in terms of our positioning there in terms of the process we went through there. So no viewing what even on the reserve side of things.

[Operator]

Your next question comes from Mark Samter with MST Marquee.

[Mark Samter, analyst]

I've got 3 quick questions, if that's not too first really quick one. Morne, just there was no reference to FY '23 production guidance, either reiterating or changing. And obviously, annualized you're right on the very valued guidance. Should we take it as it's under review or you're finely sticking to it as of today?

[Morné Engelbrecht, executive]

Mark, just in terms of FY '23 guidance, like we said, we'll come out at half year and update that. So I don't want to make any predictions as yet.

[Mark Samter, analyst]

Okay. The next question is just on the -- you mentioned in the quarter, you're going to get the Waitsia reserves externally orders. Can you confirm that just now from last time you form previously, as you tended to only get about half of 2P reserves externally audited would wait you paid to get 100% of those Waitsia reserves audited or stick to the traditional plan?

[Morné Engelbrecht, executive]

There is no traditional plan there. We get 100% of Waitsia reserves audited.

[Mark Samter, analyst]

Perfect. And then last question for you, Morne, it's kind of big picture question. I hope it's not an answer question. And to be clear, this question is I'm certainly not directed anywhere close to you. The decision is made by previous management. And I guess I think some of these things can come from the boardrooms as well. But if we look at only 2.5 years ago, Beach was forecasting 34 million to 38 million barrels of production in FY '23. You might struggle to hit in '23. Does the business need or are you trying to drive? Or are you seeing a cultural change moving away from just chasing production growth arguably in the past at any cost and driving a business that might be driven more by value than more industrial view of the world on the company?

[Morné Engelbrecht, executive]

Thanks, Mark. I don't know whether that -- there was a question in some way, but there was definitely, in terms of the previous guidance we had out there as a company, we've obviously taken that off the table. And we've -- I think we've gone through the explanation in terms of what's caused that in terms of the previous Western Flank reserve downgrades.

In terms of where we sit here today, I can definitely tell you that in terms of the executive, the team, the Board, we're all focused on delivering our growth that we promised to the market. So that's what we're squarely focused on. And that's the -- I suppose the purpose of call as well is to give you some sort of certainty around how we're progressing with the offshore connections, which is still on time, on budget. And then obviously, the Waitsia project is very important for us, just reconfirming that we're able to meet our commitments in terms of the LNG production and domestic demand commitments as well.

So I think in terms of those key projects that will give us the step change in production and cash flow going forward, and especially in FY '24, we're very much focused on delivering on that promise. So that's what I can guarantee here today is that we're very much focused on delivering that to the market and creating that step change, which will provide us with quite a bit of free cash flow and ability and flexibility and a lot to continue to grow, not only in our own assets, but look at other opportunities as well and increase returns to shareholders. So I am very excited about that opportunity and what we're delivering the -- and so it's the rest of the team and the Board.

[Mark Samter, analyst]

Perfect. Sorry, the fourth question taken this. As part of that, you talked about inorganic growth there given regulatory government intervention the new capital do you even consider the East Coast of Australia investment grade now? Or do you think the business needs to pivot elsewhere given the challenges of anyone to buy capital on the East Coast at the moment?

[Morné Engelbrecht, executive]

Yes. Look, I think, I mean, there's obviously a bit of detail over in terms of how reasonably priced gas will be priced going forward. So I think once we get that detail, it will definitely clarify things for us. We obviously have, from an outlay offshore point of view, we've got a lot of prospectivity lift within our assets, not only there but also in VAS as well.

We definitely want to try and develop that. But as everybody else operating in the East Coast want more certainty around how that will actually work and to make sure that we can make the economic returns that will justify the capital expenditure on that. And as far as that works the same from an M&A point of view as well.

[Operator]

Next question comes from Adam Martin with E&P Financial.

[Adam Martin, analyst]

Just on the FY '24, you historically put production guidance out there about 28 million barrels, again annualizing a bit under 20 at the moment. Will you be in a position in to update on that? Or is that sort of should we wait until all this to sort of get a view there?

[Morné Engelbrecht, executive]

No, we should be able to update in February as well. Again, we want to confirm the contractor and then we can confirm the timing on Waitsia gas going through the Waitsia gas plant. Once we've done that and confirmed and signed up with the contractor, then we can reconfirm the '28 or '24.

[Adam Martin, analyst]

Perfect. And just as a comment in the call just on the enterprise opportunity in the enterprise development in the Otway flipping and touch you just talk through that? You've talked about land access and just the magnitude there of any timing slippage if there is any?

[Morné Engelbrecht, executive]

Yes. Look, we're working through a structured process there. So we're well into that process. We're actually coming to the end of that process. We have worked in a bit of contingency there in terms of working our way through that in terms of the timing, but it's progressing well at the moment. So not seeing any major issues there in terms of further slippage but we are working our way through. So it's just one of those things. And as I said, weather had a major impact on the start of work in terms of building the pipeline as well. So that's impacted on the timing from that perspective. Okay.

[Adam Martin, analyst]

Just a final question. Just the Golar West opportunity. Obviously, the Basco producing less than nameplate and it's also important to backfill that medium term. How is that progressing? And just obviously your thoughts with this sort of the uncertainty around gas prices medium-term government intervention?

[Morné Engelbrecht, executive]

Yes. Look, I think -- I mean the -- I suppose to start with the second part first, the uncertainty around the gas prices to feature in it. So we do need to get some more certainty around that before we can commit to -- committing to a drill rig and getting focalized on that. But in terms of looking at the opportunities we do have in terms of Yolla waste, the gas, the base gas opportunities and allay offshore and nearshore as well.

I think it goes without saying that there's a lot of opportunity there, and we're working our way through it and working through the capital cost, working through potential timing and working with other operators in the basin as well to see whether there is a way, we can reduce capital cost by collaborating with other operators. So we are working our way through it. But there's a few things to fall in place before we can commit to that and the future program.

[Operator]

Next question comes from Nick Burns with Jarden Australia.

[Nik Burns, analyst]

Two questions on the Otway. Just on enterprise first. Can you talk about where you're at in terms of contracting the volumes from enterprise and whether delay in connecting wells feeding into that process or whether it's being impacted by the reasonable price provision in the mandatory code of conduct?

[Morné Engelbrecht, executive]

Nick, good question. So in terms of the enterprise schedule, obviously, that's pushed out our marketing for enterprise. So we'll wait a bit in terms of progressing that project a little bit more before we then go out of market the volumes. In terms of our timing, which we set out today, that will be beyond 2023. We would probably start looking at marketing those volumes. So that will fit into the reasonably priced gas discussion, which will hopefully have more clarity on before we start marketing the gas for enterprise as well.

[Nik Burns, analyst]

Got it. And just I wanted to raise a question around -- it was an HPC report out late last week, which called out a reduction in forecast outweigh production due to an unexpectedly poor performance of gas wells. Just wondering if you could clarify what you think that comment relates to seems like it relates to existing wells, but just wanted to get your info?

[Morné Engelbrecht, executive]

Well, it's definitely not wells are performing as expected. I think as we said in the quarterly, the reduction there was planned downtime due to works for Phase 5 in terms of connecting up the various wells and doing the subsea work. And then there was obviously the reduction in nominations as well from customers. So I didn't see that comment, to be honest, Nick. So we'll go back and check that, but that's definitely not from a Beach perspective in terms of well performance.

[Operator]

The next question comes from Saul Kavonic with Credit Suisse.

[Saul Kavonic, analyst]

Two questions from me. I just want to come back first to Perth Basin. And just confirm my understanding here that the 11% downgrade essentially means you're going to get 11% less domestic gas and 11% less LNG than you would have otherwise because it's 50% of the reserves that are required to be kept onshore in order to export the other 50% through the WAS policy. Is that the right way of understanding?

[Morné Engelbrecht, executive]

And so as we said, we are under the 2P scenario, we meet our 3.75 million tonnes of export LNG volumes during the 5-year period. And we also meet our domestic demand commitments. We'll be talking about here as gas at the back end from a domestic supply point of view.

[Saul Kavonic, analyst]

Okay. Understood. So just clarity the WA policy and the exemption you've been given allowed the reserve downgrade to knock off just the domestic component that pay all and doesn't impact the export for the first 5-year period?

[Morné Engelbrecht, executive]

The domestic demand commitment relates to the 5-year period in terms of the export of LNG. So it's a percentage of the total export consideration. I understand it's a volume that's been agreed with the government in terms of that 5-year period.

[Saul Kavonic, analyst]

Okay. So all right, understood. So the 3.75 is just a fixed number. And if you ended up, for example, having a much higher reserve number, you've got 3.75 wouldn't have increased the likewise of the decrease on the reserves come down?

[Morné Engelbrecht, executive]

Yes.

[Saul Kavonic, analyst]

Okay, great. And quickly, just -- another question on the gas cap policy. Can you provide any color on what implications that could have for the lattice price due from the middle of this year. You previously, I think, given indications of how that price review works and the relevant contracts of the previous 3-year period, et cetera. I just wanted to check, is that still intact? Or is there some kind of change of law or other clause in there which can to that previous assessment out the?

[Morné Engelbrecht, executive]

No. The -- I mean, as you previously described it is still intact. So don't particularly have a view on how that would impact those negotiations. Obviously, those negotiations are live at the moment with Origin. So, the period in which that looks like -- looks at us from 1st of July to 30th of June, over a 3-year period proceeding the 1st of July 2023. So -- and it looks at contracts of supply in a similar market over a similar time frame.

So in terms of contracts that come and are struck in the 6 months since the price cap was set, obviously, that if that it's stable in terms of the description under the contract, then that will obviously form part of it, if it doesn't, in terms of term or location, then it wouldn't.

[Saul Kavonic, analyst]

Understood. So just a quick follow-up on that will be my last question. So does that mean hypothetically speaking, it is quite possible that price or you can end up being above the $12 cap if all those relevant contracts which were assigned prior to the price cut coming in forth were higher than that number, and it ends up actually ending up being higher than that.

[Morné Engelbrecht, executive]

Yes. Just remembering that the contract and the pricing under the contract will then form part over the next 3 years. I mean the price cap will essentially be the first 6 months of that 3-year period, if they don't change in June or lifted in June? So in terms of the price we agree there for the 3-year period, it could possibly be higher than the $12 cap for the first 6 months of the 3-year period.

[Saul Kavonic, analyst]

Sorry, you're saying theoretically can be higher than 12%, including from the second half of this year, the December half?

[Morné Engelbrecht, executive]

Yes, under the contract terms and the GSI, yes.

[Saul Kavonic, analyst]

Understood. And does the gas policy and the directions given because there's things in there about variations, does this not constitute a variation under the policy. So it's still allowed us to grow above 12?

[Morné Engelbrecht, executive]

As far as we understand yes.

[Operator]

Your next question comes from Henry Meyer with Goldman Sachs.

[Henry Meyer, analyst]

Just first question around the Waitsia reserves downgrade. Are you able to give an indicative split on the reserves downgrade attributed to Waitsia-10 being on the wrong side of the fault versus the high cliff reservoirs?

[Morné Engelbrecht, executive]

Yes. Thanks for the question. Difficult to be too specific on that. The -- I think, approximately the high cliff accounted for around about 40% of the change and probably a similar amount, if not slightly more for the structural changes. That's not just wait to attend. It's a number of structural changes, which we've taken into account in updating our models.

[Henry Meyer, analyst]

Great. And then maybe just a follow-on from that. Is the current 2P volume, a P50 probabilistic forecast based on the current development plan. And do you see the opportunity to actually accelerate or recover some of those volumes from maybe a sidetrack or an infill well?

[Stephen Algar, executive]

Yes, certainly, we -- there is still additional drilling to be done in the field. The field development plan called for 18 or 19 wells. And we now got a lot better handle of the field. So we drilled 11 wells now, have clear line of sight to be able to produce up to the capacity of their new Waitsia plant. So we're very happy with the outcome of the wells in that respect.

There is, in the case of Waitsia-10 potential to sidetrack that well. So we are working with the operator to review that opportunity and we'll decide that in the future.

In regards to the 2P numbers, yes, those are a probabilistic assessment, but we've also looked at it from a deterministic perspective as is normal with reserves.

[Henry Meyer, analyst]

Great. And maybe just one more quickly at the end then. Moving over to the Western Flank, quite challenging to recover volumes back from decline and offsetting weather delays. I would just share any details just around the current rig fleets, how many drilling rigs you have at the moment, workover rigs and what your appetite or ability might be to contract additional rigs in FY '24?

[Morné Engelbrecht, executive]

Henry, thanks for the question. So as we noted, in terms of where we are right now, we've got a workover rig working in the basin. That's gone from 24 our shift back down to a 12-hour shift. So we have done most of the work in terms of getting the wells connected. So in terms of what we're doing over the next couple of quarters, that is making those final flow and connecting that up to our facilities the inflow of the barrels that we sort of referred to through the latter part of FY '23.

So in terms of the big part of the work that we needed to do to recover some of that correction. We have done that. Now it's basically connecting up those wells to the facilities to make sure we can get the well down to In terms of the rigs we've got running, so we've got to work over and we've got a rig that's continually drilling in the basin in the Western Flank. And then just to confirm that we've got the fire store running with Santos and the Cooper Basin JV as well.

[Operator]

Next question comes from Sarah Cue with Morgan Stanley.

[Unknown Analyst]

I have 2 questions, if I may. Following Paul's question. I just wanted to know how Beach is approaching the East Coast code of conduct consultation process in relation to wholesale gas price cap?

[Morné Engelbrecht, executive]

Yes. Thanks, Sara. So in terms of how we're approaching that, we're obviously contributing to our comments directly through to the government and treasury in terms of how that -- how we see that playing out and how we fit in as really as one of the few local producers with no export feeding into the East Coast gas market. So how we are placed in that and how we want to see that mechanism work going forward as well.

We're also providing our comments through a peer on the APA Board as well. So we are feeding through our comments through the broader industry comments from that perspective as well.

[Unknown Analyst]

And my second question might be a question for Samuel. Just post Waitsia Stage 2 drilling, what are the gas water pressure ingredients telling you about the connectivity of the field?

[Stephen Algar, executive]

It's a complex question to answer in a simple way. But thanks for that. I would say the short answer is quite variable. The key thing is that the King reservoir has been as expected. So the quality of the reservoir is excellent. And we are seeing some areas of good connectivity.

And as we've noted, there are other areas where all are clearly not connected. So it's quite variable. We've now got 11 wells in the field. We've got 3 producing wells. We've got 7 wells with tests. So we have a lot of data. And I think, therefore, quite a lot of certainty on our update to our 2P reserves, which is in a very good position to understand the field well.

And so you're seeing those baffles coming more from structural complexity than variability in the reservoir.

It's a good question. It's probably a potential to be a combination of the two and that's something we're working through right now. So I think the other thing is, over the weekend, Morne noted, we received some new pressure data from the Waitsia-4, and that was very important to our understanding of the reserves because that was a well which was connected to a very large volume and we confirmed that.

[Operator]

Your next question is a follow-up question from James Byrne with Citi.

[James Byrne, analyst]

Indulging in the last final question, perhaps one for Sam. Look, obviously, like this is a really complex fields heavily compartmentalized despite a reasonable level of appraisal, you're still sort of getting the surprises during development drilling. And if you're getting surprises during development, it can be a bit of a yellow flag. And I guess what I'm worried about is here in 2 years' time, you've had a couple of -- you've had 12 months of production, let's call it, and the field just isn't quite performing relative to what you expected. And I've been trying to rack my head around how to best ask this question, but I think maybe if you could give us an indication of how the spread between 1P and 3P has changed because it obviously got lot of new well-controlled data from drilling the wells and even you say over the week and you're even getting more data coming in from Waitsia-4 pressure data that's yet to be incorporated into these reserves presumably. But if we could understand the extent to which 1P/3P is narrowed could help give us in public markets, an idea of how confident you are in your 2P number itself?

[Morné Engelbrecht, executive]

Yes, sure. So just a clarification, we have incorporated the Waitsia-4 data into our reserves assessment noted today. We have not released 1P and 3P. So I can't fully make a statement there. But generally, the 1P and 2P have narrowed. Obviously, with the 2P going down. And so I think we have increased our certainty quite considerably. And as I noted before, we've now got 11 wells rather than 5 and we've got 7 wells that have been tested and 3 on production. So we do have a lot more understanding. I don't think the field is necessarily heavily compartmentalized. I just think we're understanding which parts of compartmentalized and which parts are not.

So we have a much greater understanding and probably 3/4 of the field is pretty much fully understood now. There are some more wells to be drilled, but I expect that the changes -- any changes were they to happen in the future should be relatively minor.

[Operator]

Thank you. There are no further questions at this time. I'll now hand back to Morne for closing remarks.

[Morné Engelbrecht, executive]

Thank you very much, everybody, for dialing in this morning. Really appreciate you joining us at short notice. If you've got any further questions, obviously, Derek and the team are available to take calls afterwards. Thank you very much. Have a great day. Cheers.