Western Australia’s huge – if largely unproven – potential to host massive so-called unconventional oil and gas resources has already caught the eyes of some major international energy majors.
Now, drilling campaigns in coming months by at least three companies will determine if the hype that has been building over the past year is warranted.
Sydney’s AWE, Norwest Energy and New Standard Energy are all readying to start drilling on their early stage exploration projects.
The trio are hoping to follow the lead of Buru Energy, whose success over the past year has led to a near quadrupling in the company’s share price.
Between them, the companies and their joint venture partners are at the forefront of efforts to prove the presence and commerciality of what could be a major new energy source.
The term unconventional oil and gas broadly applies to resources that need special techniques and technology to be extracted from their underground reservoirs.
Shale rocks and other tightly packed formations hosting oil and gas have historically struggled to produce at economic rates due to the difficulty hydrocarbons face in flowing through the rock.
Advances in extraction techniques have opened up the potential for companies such as AWE, Norwest, New Standard and Buru to unlock those resources previously considered too hard and too costly to extract.
The discovery of vast volumes of unconventional oil and gas reserves in the United States has turned the country’s energy situation on its head, with fears over the country’s energy security all but disappearing and gas prices plummeting because of sudden oversupply.
A worldwide study of shale gas potential by the US Energy Information Agency identified the Canning Basin – which stretches across the Kimberley in WA’s north – as having the biggest unconventional gas potential in Australia.
Buru has already done its bit to prove up the EIA’s findings, with its share price rocketing over the past year on the back of two finds.
Buru’s Ungani oil discovery, while classed as a conventional field, has proven that the Canning Basin can host large oil fields and is described by the company’s managing director, Eric Streitberg, as “a complete game-changer” for the region.
And the Valhalla tight gas discovery has the potential to host at least 2 trillion cubic feet of gas and tens of millions of barrels of oil and/or condensate.
The success of the past year has been particularly satisfying for Mr Streitberg, who had argued for years to a largely uninterested market about the huge potential of the Canning Basin.
Japanese giant Mitsubishi was one of the early believers in Buru and the Canning Basin, agreeing to fund $40 million of the first $50 million worth of Buru’s unconventional exploration.
Mistubishi’s faith has already been rewarded and Mr Streitberg says there are now a lot more other oil and gas majors watching the WA unconventional oil and gas explorers closely.
“We’ve been approached by a number of multi-national companies who are interested in talking to us about potential involvement,” Mr Streitberg said.
“Most of the larger companies are looking at Australia as one of the few places they can get exposure to unconventional resources in a first-world legislative regime, with proper corporate disclosure, proper regulatory oversight, the things they need corporately and commercially. There’s certainly a lot of interest.”
Investors are also finally coming around to the story, with both Buru and Beach Energy, which is investing heavily in unconventional exploration in South Australia’s Cooper Basin, posting strong share price gains over the past year.
“It’s taken investors in Australia quite a long time to understand the dynamics of what might happen here and a lot of … analysts who have been focused on what might happen in the US, and they have now started to focus on Australia,” Mr Streitberg said.
In addition to Mitsubishi’s interest in Buru, US major ConocoPhillips has struck a joint venture with New Standard to drill three exploration wells in the Goldwyer region in the Canning Basin.
Another large US group, Hess, recently acquired interests in two Canning Basin permits from private group Kingsway Oil, a company linked to Queensland entrepreneur Clive Palmer.
Other smaller Australian-based companies such as Tap Oil, Transerv Energy, Latent Petroleum and Norwest Energy have all moved into unconventional exploration in recent times.
Having already negotiated ConocoPhillips’ entry into the Canning Basin, New Standard managing director Sam Willis is certain that other majors are also looking to build a presence there.
“There’s been a lot of companies looking at the Canning, there’s no doubt about that,” Mr Willis told WA Business News.
“There’s a few large organisations doing a number of basin-wide studies across a number of areas in Australia and the Canning is certainly up there in terms of prospectivity and scale.”
AWE chief executive Bruce Clement says WA has a number of key advantages over other potentially shale gas-rich regions, starting with prevailing gas prices and good infrastructure.
“We’re in a $6 to $8 per gigajoule price environment in WA, compared to the east coast where it’s closer to $4 and US where it’s closer to $2,” Mr Clement told WA Business News.
The existing infrastructure in WA means unconventional producers should be able to sell directly into the domestic gas market, compared to the coal seam gas companies of Queensland, which have had to spend huge amounts building liquefied natural gas plants in order to commercialise their projects.
“We have a big advantage where we have under-utilised gas plants and pipelines where we can start production at a smaller scale and bring it on progressively as we add wells and adding infrastructure to increase capacity,” Mr Clement said.
“We’re not in a position where we have to commit billions of dollars of pre-investment to build up production capacity before you start producing, like you have to with the coal seam gas projects in Queensland.”
The potential is immense but challenges remain.
Technical expertise and equipment remains in short supply in the state, with AWE and Norwest securing US unconventional gas drilling expert Halliburton as the contractor for its upcoming drilling program.
New Standard has been leaning heavily on the technical expertise of ConocoPhillips.
“Suitable rigs with suitable contractors capable of executing a project like ours are very, very limited,” Mr Willis said. “We’re seeing a bottleneck in service provision, and for us to secure a rig over a longer period of time is a nice milestone to achieve.”
Unconventional oil and gas has also had a history of attracting environmental controversy. Hydraulic fracturing, or ‘fraccing’ – a process whereby water and chemicals are injected at extreme pressure into the reservoir, cracking the host rock and allowing the previously trapped oil and gas to flow out – has raised fears that water aquifers could be contaminated in the process.
AWE’s drilling campaign was delayed while WA authorities examined the environmental aspects of the company’s proposed campaign but AWE now has all approvals in place for its upcoming first phase of drilling and testing.
That campaign should kick off some time in June. New Standard, meanwhile, should start drilling its acreage in July.