23/06/2014 - 09:43

Pick-up in onshore gas drilling

23/06/2014 - 09:43

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The entry of two European energy companies into WA will help to bolster activity in the onshore oil and gas sector, which is set for a pick-up after a series of disappointments.

Pick-up in onshore gas drilling
Warrego Energy directors Duncan MacNiven and Dennis Donald. Photo: Warrego

The entry of two European energy companies into WA will help to bolster activity in the onshore oil and gas sector, which is set for a pick-up after a series of disappointments.

The timing could not have been more unfortunate.

The April edition of the state government’s Petroleum magazine featured a spectacular front-page photo of Advanced Energy Group’s Crusader 405, the newest onshore drill rig to enter the Western Australian market.

In the same month, however, Advanced Energy customer Buru Energy decided to release the rig after disappointing drilling results at its Ungani oil project, inland from Broome.

The Crusader 405 rig has since been demobilised and its owners are evaluating opportunities on the east coast after their experience in WA.

It’s a big change from last September, when Advanced Energy told Business News it was looking to bring more rigs into WA after securing its initial four-well contract with Buru.

This episode wasn’t the only setback for the onshore oil and gas sector in WA, which is yet to realise its enormous potential.

Early this month, New Standard Energy announced it was deferring all of its onshore drilling activity in the Canning and Carnarvon basins until next year.

Citing delays in getting native title, heritage and other approvals, New Standard said it would have been impossible to drill its wells prior to this year’s wet season.

The delay followed a strategic decision last December by New Standard to invest in the Eagle Ford shale in Texas and the Cooper Basin in South Australia, where it is seeking better short-term opportunities.

After the setbacks, however, there are positive signs for the WA industry.

In the Perth Basin, local company Key Petroleum and Sydney-based AWE are about to start drilling programs.

They are due to be followed next year by several others, including Aberdeen-based Warrego Energy, which has recently gained backing from two Dutch energy groups.

Norwest Energy, Transerv Energy, and Empire Oil & Gas are also likely to undertake drilling programs next year, after spending long periods of time evaluating earlier exploration and production results.

In the Canning Basin, Buru will continue its work programs, potentially with a new partner, with corporate advisers JP Morgan and Highbury Partnership helping the company evaluate the ability to attract a new strategic partner at the asset level, to support its exploration, appraisal and development program.

Any new partner would be in addition to funding and joint venture agreements already in place with Mitsubishi, Alcoa and Apache Energy.

New Standard also remains a long-term player, helped by farm-in agreements it has previously negotiated with PetroChina and ConocoPhillips.

Drilling prospects

Reflecting on the sector’s prospects, Enerdrill director Eddie Rigg remains positive.

He is particularly ebullient about the Perth Basin after a couple of years of little drilling activity.

“The Perth Basin looks pretty promising, albeit we’ve been through this long hiatus,” Mr Rigg said.

“We think the ‘thematics’ behind it are enormous.”

Mr Rigg, who also heads corporate finance group Argonaut, said these ‘thematics’ included the high demand for domestic gas in WA, the good price for gas, and the proximity to gas pipelines and other infrastructure.

Enerdrill currently has two rigs in WA, with a third booked up on the east coast, and is evaluating bringing in an extra rig to manage the expected work.

Not surprisingly, Advanced Energy Group director Paul Tudor is not so positive.

“As a company, we’re looking at other states for work opportunities,” Mr Tudor told Business News.

Like many people in the sector, Mr Tudor said the exploration companies needed to work together so that equipment could be deployed more effectively.

“We need to be able to string together a meaningful program to make it commercially viable,” he said.

Perth Basin

Key Petroleum is set to drill the first new well in the Perth Basin this year.

It plans to drill the Dunnart-2 exploration well to a depth of 670 metres, after clearing all regulatory constraints and striking a deal with DCA Drilling.

Key gained backing last month from Rey Resources, which has agreed to spend $1.7 million farming-into the project.

“The timing of the farm-out agreement is particularly noteworthy as it comes at a time when no onshore exploration wells are being drilled in WA,” Key Petroleum managing director Kane Marshall said.

Sydney company AWE is also about to start drilling in the Perth Basin.

AWE has oil and gas projects around the globe, but is putting a lot of focus this year on the Perth Basin, which has had producing wells for more than 40 years.

AWE plans to drill three unconventional gas wells this calendar year.

The Drover-1 exploration well in the southern part of the Perth Basis is planned to start this month.

In the northern part, near the producing Dongara field, the Senecio-3 appraisal/development well is planned for the September quarter, to be followed by the nearby Irwin prospect.

Another big focus for AWE is the Arrowsmith field, which is operated by minority owner Norwest Energy.

The Arrowsmith-2 well, drilled in 2011, was the first shale gas project in WA and delivered what Norwest considers ‘very encouraging’ results.

Arrowsmith-2 was drilled to a depth of 3,300 metres and was designed to identify the dominant zones for gas production.

The next step is a 3D seismic acquisition program, which will be used to help determine the target zone and location of the Arrowsmith-3 horizontal well.

Transerv Energy also plans a drilling and testing program in 2015, in the Warro field 200 kilometres north of Perth.

Alcoa has a 43 per cent stake and can earn up to 65 per cent under a farm-in agreement, in which the alumina producer will spend up to $100 million.

Transerv plans a two well drilling and testing program at the Warro field, which starts from about 3,750 metres below the surface.

European investment

Aberdeen-based Warrego Energy has been working on its Perth Basin plans since 2008, when it secured exploration block EP469 in a competitive tender.

EP469 includes the West Erregulla tight gas field, which has been assessed to contain an estimated 185 bcf (billion cubic feet) of gas with potential for much more.

Since 2008, Warrego has been conducting engineering studies and gaining environmental, safety and traditional owner approvals.

Its plans took a big step forward in February when it finalised a $40 million farm-out deal with European energy companies Dyas (30 per cent) and Mazarine Energy (50 per cent).

Ahead of a visit to Perth next week, managing director Dennis Donald told Business News the company was on track to conduct a 3D seismic program in November.

It will take four to six months to process and interpret the seismic data, after which Warrego plans to drill an appraisal well in 2015.

“Absolutely it’s our intent to drill in the middle of next year,” Mr Donald said.

If all goes to plan, that would be followed by development, which would involve drilling a further six wells.

Mr Donald said he became aware of the opportunities in Australia while running consultancy Leading Edge.

His new partners have strong credentials.

Dyas is part of SHV Holdings, a family owned multinational with 56,000 employees and annual turnover of 20 billion euro.

It has been an investor in the oil and gas sector since 1964 but until now has not invested outside Europe.

“I think this is a tremendous endorsement of Western Australia as a place to invest,” Mr Donald said.

Mazarine is a private oil and gas company focused on early-stage exploration and field development.

“These guys not only being money, they bring a lot of smarts,” Mr Donald said.

He said the Warrego consortium was likely to expand its portfolio.

”We will be looking to see if we can farm into other blocks in the Perth Basin.”

Regulatory issues

In the Canning Basin, high operating costs are seen as a major hurdle.

New Standard’s Phil Thick said it cost approximately $20 million for one vertical exploration well.

Before an exploration company can do any drilling, it needs to make a big investment just to reach the project site.

In New Standard’s case, the company spent $11 million building 600km of dirt road and three airstrips for a planned three-well drilling program.

In addition, there is the time and expense of obtaining native title, heritage, environmental and other approvals.

Mr Thick said the number of approvals, often negotiated on a site-by-site basis, and the number of traditional owner groups, created challenges.

“Everybody in the Canning is seeing a lack of certainty as the biggest issue,” he said.

“We would like to be able to negotiate a broader agreement with the traditional owners.”

To try and expedite the negotiation process, New Standard works with Aboriginal leader Wayne Bergman’s KRED Enterprises, which represents some of the traditional owner groups.

But as often occurs, there is a gap between the two sides.

“They are very keen to negotiate, very keen to have an agreement, it’s the commercial terms that are difficult,” Mr Thick said.

For its part, Buru has stated that its native title negotiations are designed to ensure that “agreements reached provide the basis for long-term alignment”.

Mr Thick said he was also keen to see flexibility in the permitting system, for instance to help explorers that change the timing of their programs.

“If they tighten up the ‘use it or lose it’ rules in a remote place like the Canning, you will end up with nobody there,” he said.

Canning Basin

Despite all of the issues and setbacks, Buru Energy still has a substantial work program this year.

It plans to drill two coastal wells, Olympus and Commodore, during the September quarter.

These will be funded under the $25 million farm-in agreement signed in November with Apache Energy.

Buru is also obtaining approvals for its work program in the Laurel ‘tight gas’ formation.

It had good news on that front last week, when Environment Minister Albert Jacob said the program would not require formal environmental assessment.

Buru plans to test for gas flows using hydraulic fracture stimulation (‘fracking’) of four existing wells, located at Yulleroo 80km east of Broome and Valhalla 320km east of Broome.

The EPA had previously concluded that Buru’s “small scale, limited duration ‘proof of concept’ exploration proposal is unlikely to have a significant effect on the environment”.

The proposal is subject to further evaluation by the Department Mines and Petroleum.

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