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Australia rejoins road to shale riches

Shale gas developers are beginning to ramp up their exploration efforts following the end of a freeze on fracking approvals in the Northern Territory

Australia’s shale gas sector is showing its first true signs of activity since the Northern Territory (NT) decided to lift its two-year moratorium on hydraulic fracturing in 2018.

The Darwin government’s ban on fracking, introduced in 2016, derailed Santos and Origin Energy’s exploration plans, with both companies having only drilled a handful of wells up to that point. The decision, prompted by growing environmental opposition to fracking, froze development on the federal territory’s estimated 500tn ft³ shale gas resource.

The NT lifted its ban after a 15-month independent scientific inquiry reported in March 2018 that the risks surrounding fracking could be mitigated if its 135 recommendations were implemented. The government adopted the inquiry’s proposals, lifted the moratorium and was then able to approve the new work programmes of leading Australian independent Santos and E&P company (and energy retailer) Origin Energy in June 2019.

Santos revealed in its annual report, published on February 20, that its production test, at an almost six-year old well in the MacArthur Basin, has delivered better than expected flow tests. Meanwhile, Origin successfully completed the first of a two-well drilling programme in the Beetaloo sub-basin. Australian independent Empire Energy, meanwhile, reported in January that its recently completed 2D seismic study had led to the identification of two drilling targets on its Beetaloo acreage.

Project progress

Santos also noted in its annual report that it has completed a diagnostic fracture injection test (DFIT) and four-stage stimulation of the vertical Tanumbirini-1 well in exploration permit 161 (EP161). Santos operates EP161, EP162 and EP189—which form the Beetaloo/McArthur Project—with a 50pc stake, while NT-focused private E&P company Tamboran Resources owns the remaining interest.

The vertical well test of Tanumbirini-1, which was originally spudded in June 2014, flowed at more than 1.2mn ft³/d, the company says. Santos intends to drill two appraisal wells in EP161 once the NT’s wet season ends in April.

500tn ft³ - Northern Territory shale reserves

Origin, meanwhile, has successfully drilled, cased and cemented the Kyalla 117 N2-1H ST2 well in EP117, junior partner Falcon Oil & Gas announced on February 20. The well, which targets the Lower Kyalla Formation, has been drilled to a total measured depth of 3,809m, including a 1,579m lateral section drilled at 90 degrees.

Falcon says the joint venture would evaluate all the technical data gathered from the conventional cores, sidewall cores, DFITs and wireline logging in order to determine the Kyalla Formation’s prospectivity. Origin Energy operates EP76, EP98 and EP117 with a 70pc stake, while Falcon owns the remaining 30pc. A second well at EP76 is to be drilled later this year.

In Empire Energy’s annual report, published on January 31, the company says drilling approvals for its planned 2020 exploration well in EP187 were near completion. Recently finalised mapping results of its seismic data have determined two well site locations, with drilling scheduled to begin once the wet season has passed and regulatory approvals have been secured.

Market options

The sheer size of the NT’s shale gas potential has made it a tempting target for developers eager to replicate the US shale gas revolution in a market with extensive LNG export infrastructure and tight domestic supplies.

The successful development of Beetaloo could lead to a major new source of gas supply for the domestic market at a time when the Australian government is negotiating with state and territory governments over boosting the volume of gas production earmarked for local consumption.

The Australian Competition and Consumer Commission (ACCC) warns, in a February 18 report, that east coast states could experience gas supply shortages in the long term. The commission says averting a shortfall in the country’s southern states from 2024 would require more upstream investment in the south, expanding transportation capacity to facilitate increased NT and Queensland gas shipments and at least one LNG import terminal to be developed.

Jemena’s Northern Gas Pipeline (NGP), which has a capacity of 32.85 PJ/yr, delivers NT gas to the east coast gas market. The pipeline operator says it could expand the NGP to 255.5 PJ/yr should shale gas exploration justify the multi-billion-dollar commitment.

“If Beetaloo shale was in Texas and had to sell at Henry Hub prices—$2/mn Btu—it would almost certainly be uneconomic” Levy, Rystad Energy

The federal government’s efforts are aimed squarely at reducing east coast gas prices, which are higher than those seen on the spot LNG market. But it is those same high domestic prices that have made shale gas development possible.

“High domestic gas prices give operators a much higher breakeven price to work with. For example, if Beetaloo shale was in Texas and had to sell at Henry Hub prices—$2/mn Btu—it would almost certainly be uneconomic,” Daniel Levy, the Sydney-based head of Rystad Energy’s Australasian upstream research, tells Petroleum Economist. “However, selling at east coast prices of $5.50/mn Btu, assuming the current price is a short-term trough, offers a much more achievable target.”

The breakeven price of the 5tn ft³ Beetaloo play is $7-9/mn ft³, Wood Mackenzie senior analyst Daniel Toleman tells Petroleum Economist. He adds that the breakeven would be lower if appraisal activity confirms a larger resource, dropping to around $4-6/mn ft³ for a 30tn ft³ resource.

Both Santos and Japan’s Inpex have suggested the NT’s shale gas production could be exported. Santos stated in mid-February that the McArthur Basin’s gas resources could support a future backfill or expansion of its Darwin LNG terminal. Inpex’s president director for Australia, Hitoshi Okawa, stated last September that Inpex’s acreage in Beetaloo might eventually underpin an expansion of the Ichthys LNG project.

If shale gas developers looking to the export market, NT production may fail to reduce domestic gas prices as officials. Toleman says: “If Beetaloo is developed I expect LNG exports to play a significant role. This will reduce the impact on the Australian domestic market.”

Cost challenge

While the future is looking brighter for NT’s shale gas sector, challenges remain. The need to reduce costs is first among these.

While early results in Beetaloo were encouraging, “a lot more work is needed to prove it is a viable play”, Graeme Bethune, CEO of Australian consultancy EnergyQuest, tells Petroleum Economist. He lists the NT’s higher regulatory burden, remoteness of the plays and the fact that drilling had to be suspended during the wet season as additional challenges. In addition to these challenges, Toleman highlights a lack of existing infrastructure .

Onshore developers in the NT must adhere to a code of practice that the territory’s government introduced in June 2019. The code mandates enforceable standards and requirements on key areas including well operations, surface activities, wastewater management and methane emissions. Falcon, for example, stated on 20 February that Origin would drill water impact monitoring bores at Kyalla 117 over the next month in order to comply with the code of practice.

Levy agreed that bringing costs down would be a major challenge for drillers and says equipment scarcity, high labour costs and stricter regulatory requirements had made stimulated wells in NT uneconomic up to this point. While noting that costs would eventually fall as operators grew to understand the region, he warns “there is a real possibility that operators will be unable to economise under Australian conditions to a level that would make the play commercial”.

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