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Leading the shale gas charge in Australia

Development of the country’s shales will follow the path blazed by the coal-bed methane sector – with lots of M&A, plenty of risk, and big rewards

Australia offers the savvy investor some of the best shale gas investment opportunities across the globe. Its entry costs, averaging as little as A$400 ($375) per acre (frontier plays, which exclude the more mature Cooper basin, average even lower, at A$19/acre), are significantly cheaper than US unconventional acreage, which averages $15,000/acre. It makes the Australian shale gas scene an attractive proposition for intrepid investors and international oil companies. But in the US most acreage is often sold after production from certified reserves has been proven. There is also a large domestic gas market that is easy to access. Australia does not have this.  

Despite the potential – Australia is estimated to hold 437 trillion cubic feet of unproven technically recoverable shale-gas resources - it’s still early days. Shale gas development remains very much experimental. It’s not clear which basins will work or where the sweet spots lie, let alone if the economics will stack up. Still, what Australia does offer, which is not in the price, is the opportunity to channel any shale gas volumes into small- or large-scale liquefied natural gas (LNG) opportunities with no shortage of demand in neighbouring Asia. And there are huge upsides.

Indeed, Australia’s emerging shale-gas sector bears a striking resemblance to the development of the country’s lucrative coal-bed methane (CBM) industry more than a decade ago. Then, a handful of small Australian companies led the charge to prove up the potential. Their successes triggered a wave of mergers and acquisitions, followed by the arrival of big international players carrying billions of dollars of cash to invest. The CBM boom sparked the development of an LNG export hub in Queensland that alone will rival LNG production capacity in Malaysia – the world’s third-largest exporter after Qatar and Australia. Already majors and independents are opting to buy into shale-gas acreage previously held by domestic small and mid-caps. During the past three years over A$1.5 billion has been committed through unconventional farm-in deals.

When BG Group paid A$344/acre in 2011 to buy into Drillsearch’s ATP 940 permit, the market was stunned because values in other basins at the time were averaging closer to A$15/acre. Yet more recent Cooper basin deals have seen prices escalate. Chevron paid A$719/acre to farm into Beach’s PEL 218 and ATP 855 permits, while Beach paid A$887/acre for an extra 4.9% interest in PEL 218 from minority partner Icon Energy. 

It is not surprising that the Cooper basin, home to Australia’s first commercial shale gas flows and the bulk of shale development so far, has been widely tipped as the favourite to emulate the US’ success. It is Australia’s oldest producing hydrocarbons basin, with plenty of infrastructure connecting it to local and international markets.

Still the risks in the Cooper unconventional remain high. The shale depth, the harsh climate and high costs are the main obstacles, says Johan Hedstrom, a senior Sydney-based oil and gas analyst at Canaccord Genuity. 

The investment firm rates the chance of a large-scale development in the Cooper at only 10%. If the basin’s rocks produce results in line with the average Haynesville shale play, it won’t generate a return higher than 14-17%, making it a marginal play. “So the rocks need to be more friendly, or it looks challenging,” Hedstrom added. 

As shown in the US experience, tight sands appear more economic to develop than shales. Senex certainly believes this will be the case in the Cooper too. 

Still, local players Beach Energy, Drillsearch and Cooper Energy have all been actively picking off smaller explorers in the basin. But “most of the best ground is taken so the only way in is via the front door, with Drillsearch and Senex looking like tasty morsels to a big player,” Peter Strachan, an independent Perth-based analyst at StockAnalysis, told Petroleum Economist.

What’s clear is the energy companies are paying large sums to get involved in the Cooper basin’s unconventional gas space while the market is significantly discounting unconventional opportunities in frontier basins, which could be more lucrative. The frontier basins in the Northern Territory and northwest Queensland look promising. They’re close to markets, have associated liquids and low levels of carbon dioxide – which could be crucial for the shale plays to work – unlike the rocks in the Cooper basin. Big international players such as Total and Statoil, as well as leading Australian-based independent Santos, have all been actively building positions in the northern areas.

Technically, the Northern Territory’s McArthur basin looks exciting. Last December Santos said that it arrived at the McArthur “after a systematic evaluation of all onshore basins in the country looking for unconventional plays and the McArthur rocks looked best”. It added that the McArthur “rocks appear to have the attributes required to deliver a real outcome of scale”.

In Western Australia, the Perth and Otway basins, though far less mature than the Cooper, are close to pipelines and markets. The Perth basin could quietly emerge as a leading play. Local players AWE and Norwest Energy are slowly starting to test the rocks. 

The Canning basin, also in Western Australia, is technically one of the best unconventional plays in the world, but its remoteness takes the shine off it. Buru Energy, which has joint ventures with Mitsubishi and Apache Energy, dominates the acreage in the basin. But where should investors seeking exposure to the unfolding shale gas story in Australia look? 

Santos, along with Beach Energy, have blazed a trail for shale in Australia. Both look set to be a part of the unconventional story in the Cooper basin, however it unfolds. Icon Energy, which has a stake in one of Beach’s permits, is a dark horse as a corporate play. Junior players Drillsearch and Senex Energy both have good leverage to the Cooper’s unconventional gas potential and stand out as strong takeover targets for big players. 

Australian minnow Real Energy offers a high-risk entry strategy with significant upside potential in the Cooper, while frontier explorer Armour Energy has built an impressive land bank of prospective shale gas acreage in northern Australia. Brisbane-based explorer Blue Energy, driven by a team of entrepreneurial geologists, has a clear strategy of picking emerging hot spots in the northern basins too. In Western Australia, AWE holds a prime position in the Perth basin. 

Australia’s shale gas sector is risky. But the payoff for early movers – and those that can stomach the risk – could be huge. Bear in mind that many critics dismissed development of the country’s CBM resources as folly not long ago. Tellingly, many of those early CBM pioneers, who sold out when the big money arrived, can be found heading up the latest shale-gas charge. Watch this space.

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