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Chevron adds weight to Australian shale with Cooper deal

The company sealed a deal potentially worth $349 million to study the potential of Beach Energy's Cooper basin acreage

Chevron is buying an option on Australian shale gas after sealing a deal potentially worth $349 million to study the potential of Beach Energy's promising Cooper basin acreage. 

The deal, which could propel the US supermajor into the eastern Australian gas market, is the nation's biggest so far. It comes just a week after PetroChina signed an agreement to join ConocoPhillips at its shale gas exploration project in Western Australia's Canning basin.

Japan's Mitsubishi, BG Group of the UK and Norway's Statoil have all taken early positions in Australia's shale gas sector. The country is estimated to have the fifth-largest shale-gas reserves in the world, according to the US Energy Information Administration (EIA). Risked recoverable shale-gas reserves are estimated at 400 trillion cubic feet (cf) - equivalent to the total estimated resource of coal-bed methane (CBM) and more than the total proved plus yet to find conventional resources in Australia.

Over the next couple of years, international and local explorers will, in total, spend more than $1 billion drilling and testing Australia's shale reserves. But whether Australia can replicate the unconventional success in the US remains to be seen. In its recent Energy White Paper, the Australian government said the country's shale resources were lower in liquids, including more profitable crude oil, than the US, due to the differing geology. The country's shale plays are, for the most part, far from infrastructure.

The Cooper basin, which straddles the borders of Queensland and South Australia, is the exception. The infrastructure needed to transport its dry gas and the markets for production already exist. But the basin's commerciality remains to be proven. Early well tests have shown gas flow from shale, but at rates of 2m cf a day or lower. 

Beach's exploration work, although promising, is at an early stage. It will be at least 12-18 months before Beach and Chevron can determine initial flow rates and the decline curve.

Beach has only drilled six vertical wells in PEL218 and one in ATP 855, which cover 810,000 acres. Holdfast-2, the first horizontal well of Beach's unconventional campaign, was spudded in early December and will be fracture stimulated in April. But Chevron's interest vindicates the unconventional potential of the basin, say analysts.

The deal, like most in the Australian shale sector, will be carried out in stages to hedge risk. In stage one Chevron will put up $95 million to gain an equity stake of 18% to 30% in the permits. The US firm also agreed to fund $95m in costs over the next year to study and drill exploration wells.

If Chevron is in agreement, the partners will then move into stage two, which will see the supermajor put up another $124m to fund another chunk of equity and drilling, then possibly a $35m bonus.

By September 2014, if Chevron decides not to go forward with stage two, then all the acreage will revert back to Beach at no cost. Analysts value the deal at $500-1000 per acre, up from earlier deals fixed at $50-60/acre, but still a fraction of some deals seen in the US, where acreage can sell at over $10,000/acre.

Chevron is already one of Australia's biggest foreign investors through its $52bn Gorgon liquefied natural gas (LNG) export venture and its $29bn Wheatstone LNG venture, both being built in Western Australia. It has until now shown no interest in the east coast gas market, where several coal-bed methane-to-LNG export plants are being built.

Elsewhere liquids-rich shale plays in North Australia and the Canning basin remain highly speculative although analysts say the upside could be enormous if exploration is successful.

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