Juniors’ conventional conundrumFriday, 24 October 2014 Anthony Barich
WITH majors thinking twice about high-risk jurisdictions globally and re-focusing on the US, Aussie juniors are conflicted about whether conventional or unconventional is the way to go in a plummeting oil price. The US shale boom that had triggered a global investment frenzy is starting to bite, with analysts’ early warnings about the heterogeneity and variability of shales now combining with the falling oil price and political fiascos like France’s fraccing moratorium to ironically send companies back the good old US of A.
Such was the case with ASX junior Elixir Petroleum, which has been in hiatus since France’s ban, forcing a review and return, in the case of new MD Dougal Ferguson, to conventional plays US, as he believes unconventional is too expensive for juniors. More on that later.
Analysts have also warned that even chasing unconventional – an industry built by aggressive, adventurous and cashed-up private mid-tier companies – was fraught with peril, with the rapid production drop-off rates raised questions about the economic viability.
That hasn’t stopped the likes of recent ASX IPO American Patriot farming into acreage in Valley County, Montana. During Q4 2014 it will participate with a 21.5% free-carried interest in the first of two unconventional oil exploration and development wells.
Analyst Peter Strachan, who has expressed concerns about majors “going back to the US to lose money”, called American Patriot’s strategy a “familiar” business model of entering into the “competitive and highly liquid” US onshore oil and gas industry, where its success will “depend on financial discipline and luck with the drill bit”.
This week the company announced it had been producing oil for nearly two weeks already.
Managing director of New Standard Energy Phil Thick believes unconventional is perfectly economic, and then some. His company is divesting, but keeping, its too-expensive unconventional Canning Basin assets in favour of its Eagle Ford shale plays in the US.
While acknowledging the rapid drop-off in production with shale oil, “you can recover the cost of drilling the well in the first 12 months of production; then you have 30 years of production after that”.
“There are offset wells around us on which we have data, which are recovering $10 million worth of revenue in the first 12 months and they’re $6-7 million wells. If you can do that, then how quickly it drops off doesn’t matter.
“Then, regardless of how many wells you have, there are these beautiful long tails that go out for many years and might only be producing 50-60bbl of oil a day; but if you’ve already covered the cost of drilling them, then you add that up over 10, 15 or 20 wells, suddenly you’ve got a long-term annuity that just keeps rolling into the company and keeps funding the rest of your program.”
What’s important, he warned, is that companies don’t over-extend in terms of borrowing or over commit in the number of wells; while in picking up new acreage it’s crucial to have a clear view on how many wells you need to drill on that acreage to hold it.
“If that’s a minimal number of wells then you can hold the acreage by production then put in place a drilling program that suits your requirements, rather than being driven by some of the permits which have quite onerous drilling commitments on them in terms of continuous drilling,” Thick told Energy News. “It’s very important that you know what you’re doing in terms of acquisition of acreage. The companies that have come unstuck have been those that have had too many commitments and not been able to hold on to the acreage.”
Part of the problem of the Canning was that, with companies largely chasing unconventional gas, it needs exorbitantly expensive pipelines to get it to market. Buru Energy’s planned 550km Broome to Port Headland Great Northern Pipeline has been estimated to cost about $1 million per kilometre.
Thick believes the sensible place for Canning Basin to be connected to, now that James Price Point has been shelved, is the Burrup Peninsula at Karratha, as in three to five years from now those LNG trains at Karratha will be looking for gas. Thick’s rationalisation in refocusing on the US was simple: “Do you drill a $20 million exploration well in the Canning in Western Australia or drill three wells for the same amount in the Eagle Ford and have it in production in three months, producing 200-300bbl of oil a day, each well, consistently?
“It’s not hard to work out where I put my money.”
While he said Western Australia’s regulations were acceptable, negotiations with traditional owners ate time and dollars; while the increased voice of the Greens and the Conservation Council also made life tough.
In comparison to such hassles, chasing conventional in the US is cheap. Ferguson, whose company acquired the Petra project in Colorado last month, said wells are sub-$1 million, with immediate payback, which would enable the company to use its own cash flow to develop the basin.
Elixir unashamedly wants to replicate the recent success of AIM-listed junior Nighthawk Energy, which has had a couple of good discoveries on Elixir’s same trend. Ferguson was commercial manager at Arc Energy when he built the company with Buru founder Eric Streitberg on conventional oil, the same thing Buru is using as cash flow while it chases unconventional gas in the Canning.
He then did the transaction that brought Neon’s assets into the company, which had a decent California portfolio, but unfortunately it was when the oil price crashed and its production crashed from $US140/bbl to about $30/bbl in about two weeks in 2010. With decent Vietnam assets, he took Salinas from being a 7-8c company to 40c before it all came apart.
Ferguson has known about the Montana region since a failed attempt to grab nearby ground with Nighthawk. He didn’t want to give up on it as, if from a purely operational perspective, is pretty much ideal.
“There are oil basins everywhere you can chase, as the big players don’t chase the smaller stuff, and they are really going after resource plays in the US, and some of these conventional plays have been left behind and provides a good opportunity for small companies to pick them up,” Ferguson told Energy News.
“In the early stages of a company chasing big resource plays is tough. Aurora did it well, but it took them a long, long time to get to where they are.” With unconventional, he said, “you’re farming in millions and millions of dollars, payback is slow and, particularly in this oil price environment, conventional is looking a far better option particularly for juniors”.
Kind Regards, Ian Howarth Managing Director - Collins Street Media Level 4, 401 Collins Street, Melbourne VIC 3000 Direct: +61 3 9223 2465 Mobile 0407 822 319 Email: [email protected] Twitter: @CollinsStMedia
