a bakken in our backyard

A good read to help plug the recent dribble...

A Bakken in our backyard?
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Friday, 9 November 2012
David Upton

THE Mereenie oil field is a tiddler in the Santos portfolio that does not even merit comment in quarterly reports. So why has Santos recently committed to spend about $200 million locking up Mereenie and nearby acreage in the Amadeus Basin? By David Upton

The Adelaide-based company is keeping quiet, but the answer might be simple: Mereenie is old and difficult as a conventional oil field, but as a tight oil play it looks like a very nice analogue of the Bakken oil shales of North Dakota.

In fact, recent estimates put Mereenie at the heart of a tight oil play with a mean prospective recoverable resource of 1.1 billion barrels of oil, along with a potential shale gas resource of some 26 trillion cubic feet.

That is in the Bakken ballpark, where the discovery of 4 billion barrels of oil was one of the catalysts of the unconventional energy revolution.

Shale resource estimates always produce startlingly big numbers, and over the past year or two investors have come down with unconventional resource fatigue.

However, the Amadeus figures are worth a closer look, especially following the deal announced last month for a Santos farm-in to 13 permits/applications held by Central Petroleum in the Amadeus Basin and adjacent Pedirka Basin.

Under the farm-in, Santos is committed to spend $30 million under the first stage to earn an unspecified interest. The company must spend a further $120 million over two subsequent stages to earn up to 70%. It will become operator of all permits under the joint venture.

Little information has been provided about the deal, despite the significant sums involved and the fact that Santos expects to begin the first stage “seismic and well appraisal program” within months.

The joint venture follows a deal last year to buy Magellan Petroleum’s 35% stake in the Mereenie oil field and gain outright ownership.

The value of that deal is hard to estimate, but it cost Santos $25 million in cash, plus its interests in the Palm Valley and Dingo gas fields, plus a contract to buy all the gas remaining in those fields over the next 17 years at undisclosed prices.

Magellan could also earn a bonus of up to $17.5 million.

Put all these sums together with the Central farm-in deal, and it’s easy to get a figure north of $200 million.

As a conventional oil field, it is difficult to get excited about Mereenie. It has produced about 4 million barrels of oil, but it has been hard going over the past 40 years. Production flows from about 60 wells through a spaghetti of 80km of pipeline.

Santos has been successful recently at teasing more from the thin, inter-bedded reservoirs. Oil production doubled in the nine months to September to 150,000 barrels, compared to the previous corresponding period.

A company the size of Santos needs a much bigger game plan to justify its investment and that plan appears to be the unconventional resource potential of the Amadeus Basin.

David Warner, who led the unconventional resource group in Santos in 2000-09, assessed the potential of the Amadeus Basin as an independent consultant for Central Petroleum. His study, in conjunction with MBA Petroleum Consultants, was released to the ASX in January 2011.

At the time, the 107-page statement was glossed over by investors as just another highly technical report released by former managing director, John Heugh, containing big figures about the blue sky potential of central Australia.

Since then, Central has discovered oil at Surprise-1 in the western Amadeus Basin, 150km west of Mereenie.

The oil source was the Horn Valley siltstone in the Lower Larapinta group. This is the same source rock at Mereenie, which has huge implications for the petroleum prospectivity of the region.

Warner’s report identified four unconventional resource plays – Horn Valley shale gas, with a prospective resource estimate of 11.3TcF, Horn Valley shale oil (1.1 billion barrels), Pacoota tight gas (9.8TcF) and Stairway tight gas (5.1TcF).

The high case or P10 estimate for Horn Valley shale oil is 2.5 billion barrels. That is based on the conservative assumption that no more than 30% of the total play area constitutes “sweet spots” capable of commercial production.

In a paper to the Central Australian Basins Symposium this year, Warner suggested the Mereenie field might in fact be a sweet spot in a much larger continuous accumulation of oil and gas.

“The Mereenie Gas and Oil field is a very significant oil and gas accumulation,” he said.

“It has a similar size [length approximately 40 kilometres] to the Pinedale field in the Green River Basin in Wyoming, with a similarly thick gas cap in tight reservoirs exceeding 300 metres.

“Currently the gas reserves in Pinedale and the adjacent Jonah field exceed 40TcF recoverable. It is currently thought that both these fields are sweet spots in a continuous gas accumulation – is it possible the same play could be present in the Amadeus Basin?”

There are more plays in the Amadeus Basin than those already mentioned, including conventional oil of the type Central is chasing in the western Amadeus around the Surprise field.

It is understood Santos is interested in cherry-picking some conventional oil targets of its own around Mereenie. Industry sources say it is planning a 3D seismic survey over the field in what would be a first for the Amadeus Basin.

This will help it target some conventional opportunities that can be easily tied into its production infrastructure.

That could produce some handy incremental revenue, but is more likely a foundation for a big push into unconventional oil and gas in central Australia.

Santos is already a leader in unconventional gas in the Cooper Basin, but until now it has watched the rest of its Australian backyard being overrun by a who’s who of foreign heavyweights, with Total the latest to join a long list.

The Amadeus unconventional play looks set to give it a much bigger stake in the future of unconventional energy in Australia, and an oily one at that.


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