Tapping the winners and avoiding losers who turn up late to the...

Tapping the winners and avoiding losers who turn up late to the shale gas party

by: Tim Treadgold September


A STRING of shale gas discoveries and developments are under way across Australia, potentially providing a good cashflow to investors in the right companies.

The rush to develop a shale-gas industry in Australia and revolutionise the country's energy sector has accelerated with more successful tests in South Australia and Western Australia, along with plans to start first commercial production of the unconventional gas in a matter of weeks.

Santos, the leading oil and gas producer in the Cooper Basin, quietly confirmed its intention to lead the shale-gas race by announcing a significant discovery of the previously ignored gas in its original conventional gasfield, Moomba Big Lake.

Gas flows from tapping beds of tightly packed shale rock that were first drilled in the 1960s but never tested have been so strong from the Moomba No 191 well that it is being connected to the nearby pipeline system.

By next month, Santos customers in Adelaide and east coast markets will be the first to cook with gas from the new source, signalling Australia's entry into a business that has revolutionised the US energy sector.

In WA, an equally significant test occurred last week when another oil company, AWE, recorded near-commercial gas flows from testing its Senecio No 2 well near Dongara in the Perth Basin.

Success for Santos and AWE means they join Beach Energy and Senex Energy in finding shale gas, and other explorers are close behind, including Icon Energy, Drillsearch, Buru Energy, Norwest Energy and New Standard Energy.

Shale gas will produce as many winners as losers while also generating environmental controversy because of the rock fracturing (fracking) required to liberate gas trapped in shales and other types of tight rock.

For investors, that means keeping an eye on the shale leaders in areas such as the Cooper, Perth and Canning basins, where conditions are believed to be best for discoveries and developments, with the Cooper explorers in the best position to generate early revenue.

Interest will be heightened by plans to drill at least 30 shale-specific wells during the next 18 months, and for some to join Santos in connecting their discoveries to existing pipelines.

While early movers will be winners, gas users will also win because they will have access to a new source of energy that will drive down prices, as shale gas has in the US, where prices have crashed by 80 per cent.

Losers from shale gas include late arrivals at the party, in much the same way BHP Billiton overpaid for US shale gas assets only to be forced to book big balance-sheet write-offs. Rival energy sources, including coal and renewables such as wind and solar, could face stiff competition.

Directly transferring the US experience to Australia might be unwise because other countries have struggled to find the same volumes of gas (and oil) as US explorers have in thick and rich beds of shale.

But what happened last week was a reminder that Australia's geology, as predicted by the US Energy Department, shows striking similarities to that of the US, with gas-rich shales located in the same broad structures as conventional gas.

Santos, which has kept its shale gas search under wraps for the past few years, made its dramatic entry with the release of its annual profit announcement. As well as reporting a 27 per cent increase in sales revenue, and a 20 per cent increase in net profit, the company announced the Moomba No 191 success and plans to accelerate its shale gas hunt.

"It's only now that we've really got our eye in and we'll really chase hard," the company's manager of eastern Australian business, James Baulderstone, says. "There's no doubt we will spend more than we originally were planning over the last few years."

The reason shale gas exploration takes longer than conventional exploration is that vertical wells, those drilled directly into a target, will only ever produce limited flows of gas because any fracking is limited to the immediate area around the drill pipe.

Horizontal drilling, in which a drill pipe is turned underground to follow the shale bed, increases exposure to trapped gas and generates much stronger gas flows.

Few Australian tests have yet included horizontal drilling.

During the next 18 months, the new flows from the shale gas industry will expand sharply as the number of wells drilled increases and horizontal drilling increases access to gas deposits.

The Santos drilling program, which started quietly as long ago as 2006 with early fracking and coring in old conventional gas wells, now includes shale-specific wells, to be followed next year by horizontal drilling. Multiple horizontal wells will be drilled from next year, with full-scale shale gas production from 2015.

Beach, which has exposure to a number of shale gas projects, including as minority shareholder in the Santos well, Moomba No 191, is planning to drill two vertical shale-specific wells in the current quarter and two more in the December quarter. It will also drill its first horizontal shale test well, with another three vertical and three horizontal wells planned in the first half of next year.

Senex is planning a 12-well program in its unconventional gas search. AWE has a three-well program pencilled in for the Perth Basin, and Norwest Energy is running trials on its Arrowsmith shale-gas well.

Big oil producers, and customers, are slowly signing up for the Australian phase of an industry that is spreading worldwide, and promises to change the global energy business.

In Australia, US oil major ConocoPhillips is a partner in the Canning Basin gas hunt with New Standard Energy in northwest WA, while aluminium producer (and major gas consumer) Alcoa is partnering Buru Energy's Canning Basin search, along with the Japanese trading house Mitsubishi. BG Group, one of the liquefied natural gas project developers in Queensland, has formed an exploration alliance with Drillsearch on its Cooper Basin tenements.

With exploration news building and first commercial production weeks away, it is difficult to identify shale gas winners. For Santos, shale gas is an interesting but small addition to its portfolio. For Beach and AWE, it could be a significant additional source of revenue. For smaller explorers, success could be a company-making experience.

Best exposure to the emerging shale-gas industry is probably through investing in a mix of participants: Santos for size and stability; Beach, AWE and Senex for possible strong growth; and Drillsearch, Icon and Norwest for the potential of rapid growth.

Whatever the preferred entry, shale gas is an industry that has arrived in Australia and it will change the country's energy sector.