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T ues day, 1 3 M arc h 2 0 1 2 James M c G rath

Friday, 4 May 2012

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Waiting for the cowboys to ride into town

THE theory goes something like this: while the US government dithers on the question of increasing LNG exports, domestic gas players contending with a depressed gas price may just start looking for growth opportunities outside the US. This, of course, includes Australia.
The challenges facing the US shale gas industry have been repeated ad nauseam, but they can be summed up in one neat figure. $US2.30 per million British thermal units. Its that figure which has prompted domestic producers to switch their focus to domestic liquids. C hesapeake Energy, the second largest US producer, announced in January that it would immediately cut its dry gas production by 8%, or 500,000 cubic feet of gas per day as it looked to counteract the effects of a gas glut. In addition, the US independent said it would switch its focus to developing liquids plays, rebalancing its capital allocated to liquids to about 85% of total capex. Multi-billion dollar deals have pushed the entry cost into liquid-rich shale areas ever upward, with deals implying acreage costs of up to $15,000 per acre in some areas. The desire to pay up to $15,000 per acre hasnt been helped by rumblings from C apitol Hill that there could be a freeze on LNG export projects, at least in the near-term, to help the domestic price keep low with an election in mind. The stance from US legislators led to Royal Dutch Shell chief executive Peter Voser telling a conference just last week that he thought the US would seek to curb gas exports to keep the domestic price low. Voser sees US natural gas prices trading at the lower end of the $4-6MBtu range over the next few years, and is pricing its projects accordingly. The company's long term strategy for gas in the US includes potential integrated projects, such as gas-toliquids and gas-to-chemicals in which gas is a cost component and not an absolute price component. The factors at play would seem to squeeze some of the mid-range and smaller players out of the more lucrative plays and while the majors do have the scale to move late into the plays via M&A and farmins, they probably dont appreciate being bled dry. US shale producers will be hoping to tap the lucrative Asian market, and while the question of increased LNG exports from North America goes on unresolved, at the very least it can sell gas into a domestic market linked to Asian prices. Enter Australia Speculation has been rife that US companies are keeping half an eye on the Australian shale scene, which has been helped by bullish estimates from the US Energy Information Administration which has total shale reserves at 396 trillion cubic feet. US companies, at least on the face of it, would jump at the chance to make some money in the Australian market either through LNG export into Asia, or through the domestic market, which has largely been shaped by said LNG projects. This speculation has also been backed up by the actions of Hess and C onocoPhillips. In April last year, Falcon Oil and Hess entered into an STORY IMAGE SLIDESHOW
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US weighs up more LNG exports

(1 7 February 2 0 1 2 )

Wells Reports 2-May-2012 26-Apr-2012 18-Apr-2012 11-Apr-2012 4-Apr-2012 more

WHILE US shale gas explorers may be pushing for LNG exports, the US Energy Department has not made up its mind, according to Energy Secretary Steven C hu. - more

Double whammy for US shale game

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NATURAL gas drillers in the US would be required to disclose which chemicals are used for their frac treatments on public land under rules drafted by the Department of Interior. - more

Slugcatcher on the great gas price crash

(3 January 2 0 1 2 )

NO ONE has yet been so rude as to suggest that BHP Billiton has made the mother of all investment mistakes with its $20 billion plunge into US shale gas, so Slugcatcher had best not use those words today. - more

In April last year, Falcon Oil and Hess entered into an agreement under which Hess could potentially take up to 62.5% in three of Falcons shale projects in the Beetaloo Basin. Elsewhere, C onocoPhillips signed a deal with New Standard Energy for a 75% share of NSEs Goldwyer shale project in the C anning Basin. C onoco will bring roughly $US110 million in cash to fund exploration. While other shale farm-in deals in Australia, such as BG Groups $130 million farm-in for Drillsearch Energys shale assets, can largely be read as an attempt to shore up supply for the mass of LNG projects dotted around Australia, its hard to read US interest in shale as anything other than an attempt to leverage experience into cold, hard gas. Elsewhere, C anning Basin player Buru Energy has hinted that a number of large players are looking to gain a foothold in the basin, citing relatively attractive acreage costs of $250 per acre as one of the reasons they were seeing interest. The most advanced player in the space is Beach Energy, which has generated headlines with its exploration campaign in the C ooper Basin. It has booked a resource estimate for its two test wells in the basin of 2 trillion cubic feet of shale gas. The shale resource booking from Beachs test results from its Holdfast-1 and Encounter-1 wells equates to in excess of 330 million barrels of oil equivalent and five times what it had the previous year. While it is interesting to note that Beach is investing in more acreage in the Northern Territory and Western Australia, the far more interesting story came out of its latest half-yearly accounts. If it is to continue with its push into shale, it will have to raise a lot of money. It estimated that it would need $A366 million in the next financial year to fund its activities, up from the usual $250 million it can draw upon. Beach managing director Reg Nelson told an earnings call last week that Beach was looking at a variety of options for raising more cash. "What I can say right here and now is we have nothing specific identified, he said. "We do, of course, have $50 million in cash and a ($150 million) debt facility. It is all a question of timing. When we make a decision we will move accordingly but there is no decision point right now." While the hike in budget can be partly put down to catch-up development post-C ooper floods, it can be read as a general indication of where Beachs long term cash needs are going and the need for a partner to share the load. The planets are aligning for a new wave of shale investment in Australia. The early work done by explorers and the strength of the domestic gas market are acting as pull factors while a weak gas price is pushing US explorers to find alternative growth options. Of course, at this point its hard to say whether the interest is genuine or the product of several excited commentators trying to read a magnum opus in between the lines. Gilding the lily In August last year, Lloyds Bank labelled Australia the next shale gas opportunity and confirmed that it planned to help US companies get into the sector in August last year. Managing director and global head of oil and gas Andrew Moorfield told Bloomberg the bank was in active discussions with a number of US players about getting into the Australian shale game. Financing discussions are well progressed across a range of our offices with companies looking to enter shale gas, Moorfield said. What well see is steady foreign investment into shale gas in Australia, and that investment will primarily come from the US. All fairly bullish stuff for the Australian shale scene, but the situation may have changed. But Lloyds Australian subsidiary BOS International told EnergyNewsPremium that interest had dropped off from its US clients since August on the back of rising condensate prices in the US offsetting the lower price of gas. So despite the gas price depression, shale players may just be happy to sit and wait to see how it all plays out instead of making investments in relatively Industry News

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plays out instead of making investments in relatively wildcat acreage on the other side of the world. One only needs to look to the slew of comparative weaknesses in the Australian shale scene, which would be playing on the minds of those who would seek a market entry. A lack of infrastructure and drilling rigs is one such bugbear, with a lack of drilling and frac equipment holding up companies to the point where securing drilling rigs is worthy of a price-sensitive announcement on the Australian Securities Exchange. While an embryonic drilling and service industry has opened up for the C SG industry, the deeper depths shale drilling presents makes many of the rigs servicing the C SG industry unsuitable for the work. The burgeoning anti-C SG movement in Australia could also be the sign of things to come for shale explorers, but since many of the basins are quite remote, the chance of a groundswell of opposition to drilling seems to be lessened. Such is the perceived benefits of exploring in remote area, C SG explorers have told ENP that they are currently considering looking inland to avoid the C SG debate altogether. We used to rank opportunities on the basis of the geology, then we looked at the available tenure or the costs of getting access through a joint venture or acquisition, one such source said. Now we look at all those things as well as the politics. If you have choices about where to explore, the [opposition to C SG] has meant some changes in thinking. Of course in one of those lovely C atch-22 moments, the further one goes out, the further one is from established infrastructure. While this is true of the C anning Basin, the North Perth Basin and the C ooper Basin represent two key areas of investment where infrastructure and routes to market are readily (relatively) available. Still, its nothing like the sheer amount of infrastructure available in even the most remote shale plays in the US and C anada. When one looks at the distance to market any US explorer will be confronted with if they chose to invest in any of the Australian shale scene, they will undoubtedly be given pause for concern, no matter how bad the gas price gets in the US. The message being that an investment in Australian shale will have to be a long-term investment. With the bottom line of US explorers having been buffeted in recent times by the gas depression, its hard to see the desire for long-term investments in plays on the other side of the world eventuating. Its why 2012 is already shaping as a transformative year for the domestic shale industry. Drilling programs by the likes of Buru, Beach and AWE may not just prove up the concept of shale gas and liquids in Australia, but dangle a big enough of a carrot in front of potential investors noses.

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