SPECIAL REPORT: WA’s regulatory system is at the top of the hit list for onshore oil and gas juniors seeking to drill tenements in the state.
WA’s regulatory system is at the top of the hit list for onshore oil and gas juniors seeking to drill tenements in the state.
Onshore oil and gas hopefuls are voicing concern at the high cost of doing business in Western Australia and a regulatory system they consider a barrier to exploration activity, amid a market beset by low prices and sluggish investor interest.
And for potential users of so-called unconventional drilling, a planned moratorium on fracking in the state by the Labor Party is causing further consternation.
In the Canning Basin, Business News understands there’s only about a dozen active exploration permits, while production at Buru Energy’s Ungani field has been suspended due to the low oil price.
It has also been suggested US-based Hess may surrender its interests in the area.
Further south, there’s been limited drilling in the Perth Basin despite some activity on the assets front.
The big moves are around Origin Energy’s assets, which the company is seeking to offload.
An outcome is expected soon.
AWE and Origin are also working on refurbishing the Xyris plant for the Waitsia gas field, with first production expected within the next two months.
It will pump out around 10 terajoules per day on a contract to Alinta, with a second stage to kick up to 100tj/d.
One recent deal was for junior Norwest Energy, which signed a farm-in with TranServ Energy for three permits in the basin.
That included a $200,000 agreement for TranServ to buy a 4.7 per cent stake in Norwest, part of an $800,000 overall raising
On the same day that deal was announced, Norwest asset manager Shelley Robertson was promoted to chief executive.
“We have three wells coming up in the next 12 to 18 months,” Ms Robertson told Business News.
“Our primary objective is to expose our shareholders to the drill bit and get those wells drilled.”
The deal is positive news for Norwest, which had lost a potential partner in February when its cash dried up.
The exploration drilling can be done from onshore, however, and she expects to find a resource of 160 million barrels.
After that there’s the Arrowsmith field, and Lockyer-Deep, which is co-owned with Empire Oil & Gas.
“Success on one of these projects would be a game changer,” Ms Robertson said.
“We have three opportunities to make something out of the company in the next 18 months.”
The alignment with TranServ will be a close one, with the companies sharing office space in West Perth.
That’s part of a plan to share costs and expertise, while Ms Robertson hopes to work with other players to align drill campaigns and to do deals with potential contractors.
“The idea is to do the best deal we can for the shareholders so we retain a relevant interest in the block,” Ms Robertson said.
If Xanadu proves successful, Norwest could use a model similar to Cliff Head, as both fields are in the same geological formation and should have liquids of similar composition.
The company could potentially use an onshore production facility near Dongara and then move oil to the BP refinery in Kwinana.
TranServ Energy managing director Stephen Keenihan has confidence in the potential of the Perth Basin.
“The simple thing is, where are you going to get the best bang for your buck in Australia if you can find gas that is near infrastructure, near big markets?” Mr Keenihan asked.
Those qualifications pointed to places such as the Cooper Basin on Queensland’s border with South Australia, and the Perth Basin, he said.
“There’s a good future in the Perth Basin, a strong economy and good demand for gas,” he said.
The focal point for TranServ has been the Warro gas field, where it estimates it has up to 4 trillion cubic feet of recoverable gas and has drilled six testing wells.
In July, the company reported well four had been re-tested and that it had achieved encouraging gas flows of up to 0.95 million cubic feet per day.
TranServ has flagged that fracture stimulation or horizontal drilling might be used to tap the well further.
Scotland-based Warrego Energy’s managing director, Dennis Donald, said his company would also be seeking to expand its position in the Perth Basin, building on its interest in the West Erregulla tight gas field.
He said Warrego had a lot of seismic data and wanted to consolidate acreage, a strategy that had worked for AWE.
“We’re one of the only (companies) in the Perth Basin that has 3D seismic and has permission to drill, so we can drill very quickly,” Mr Donald said.
“We’re actually looking to up our position in WA.”
The company will first seek to raise cash from European investors.
In Europe, he said, a view was forming that energy prices may have bottomed out, although Australia could do more to encourage foreign investment.
In the Canning Basin, Buru Energy is reviewing operations at Ungani, which is shut due to the low oil price, while undertaking tight gas exploration at the Laurel formation.
Without the production from Ugani, Buru had sales in the three months to March of just $791,000.
Approval times and compliance costs have been increasing as the state government seeks to tighten regulations due to community pushback about the industry, particularly concerning the practice of fracking.
That’s despite fracked wells having a 50-year history in WA.
A quick review of the Department of Mines and Petroleum’s register shows eight exploration permits pending surrender across the state, with 52 active.
Business News understands that about half the permits in the Canning Basin have been surrendered in recent years, while less than a fifth of the basin’s area is now covered.
Foreign capital seems to be fleeing, too, with Dutch investor Dyas walking away from a deal last year.
Australian Petroleum Production and Exploration Association chief operating officer WA Stedman Ellis said the lack of activity in the sector was a concerning development.
“I think it’s clear onshore exploration levels are at their lowest for more than a decade in WA,” Mr Ellis told Business News.
It wasn’t just an issue in WA, he said, with low prices hurting the industry across the country.
There were some particularly unique aspects to the problem in the west, however.
One was the domestic gas reservation policy, and another was the Labor Party’s policy of a moratorium on fracking.
Under the reservation policy, big WA LNG exporters are required to cordon off a portion of their gas production for the domestic market – effectively a tax on them and a subsidy for users.
Mr Ellis said the policy led to an overhang of offshore gas in the market that created a disincentive for onshore exploration, and made it harder for onshore juniors to get funding.
Business News reported earlier this year that analysis from Wood Mackenzie forecast a spike of up to 75 per cent in domgas prices, as new volumes from LNG facilities failed to match the slowdown of the North West Shelf Venture.
Some industry players argued that the current overhang had contributed to a reduction in exploration onshore, exacerbating the problem in the longer term.
Another issue of concern to the sector was the approvals timeframe.
That creates an added compliance cost for the process on top of increasing shire fees and expensive consultations with stakeholders.
Norwest’s Ms Robertson said she could understand those concerns.
“There’s certainly a high degree of red tape … but I also believe it (WA) is still recognised as a good jurisdiction to have projects in and to operate in,” she said.
The interest in the sale of Origin Energy’s assets in the Perth Basin demonstrated that investors were still keen.
“It would be helpful if the time frames were reduced,” Ms Robertson said.
“We’ve sort of gone all the way one way with a lot of heightened interest from activist groups; we just need to find that happy medium.”
The South Australian model was probably the one to look to, she said.
TranServ’s Mr Keenihan said the approvals process was rather exacting, although there was still a learning curve after recent changes.
One example was at the Warro field, he said, where the company wanted to re-enter a well and needed to start the approvals process all over again.
Most players agreed that the Department of Mines and Petroleum was not the biggest problem, but the need to seek approvals from other bodies, such as the Department of Health.
A system-wide lack of coordination was a common complaint among those spoken to by Business News, with claims the process is lengthened because companies are not able to apply at multiple departments simultaneously – a practice permitted in other jurisdictions, such as Texas.
Appea’s Mr Ellis said DMP at least largely met its targets, while suggesting a need for intra-agency coordination on approvals.
More important, however, would be how the government responds on the issue of fracking, he said.
Fracking, or hydraulic fracture stimulation is a technique used to extract oil and gas from more difficult fields, but it has attracted some controversy.
In WA, a parliamentary inquiry made a series of recommendations concerning fracking that Mr Ellis said he’d like enacted.
Mr Ellis said it was important to ensure that the public had confidence in the approvals systems, and he supported the government ensuring it could demonstrate rigour and robustness.
That was not without its challenges, however, Mr Ellis said.
“I think the campaign that is being conducted by groups like Lock the Gate and the Conservation Council of Western Australia is scandalous,” he said.
An example was the fact that a major focus of the campaign against fracking was in the South West, when it was not likely there would be any such operations in the area.
“There’s a body of expert evidence for people who are willing to look past the scare campaign,” Mr Ellis said.
Green groups opposed to fracking are reasonably well funded, with income of around $4 million annually between Lock the Gate Alliance and the Conservation Council of Western Australia. (WA Business News sought comment from the council, but had not received a response at the time of publication.)
Operators reported to Business News that activism around fracking had contributed to a generally more conservative view about the industry generally, particularly when dealing with groups of landowners.