ferrets stock to watch: arc energy limited

Ferrets Stock to Watch: ARC ENERGY LIMITED
08:41, Friday, July 13, 2007

ALCOA SUPPORTS LOCAL GAS PRODUCER WITH MAJOR SALE

Sydney - Friday - July 13: RWE Aust Business News
*************************************************

OVERVIEW
********

ARC Energy Ltd (ASX:ARQ) is one of Australia's emerging energy
companies, owning and operating oil and gas interests in the Perth,
Canning and Bass basins and internationally in Yemen.

The company attracted market attention on Wednesday after it
announced a gas sale agreement with Alcoa.

ARC has an aggressive exploration and development drilling
program which continues to drive increased shareholder value by the
early adoption of innovative technical and commercial practices.

ARC Energy told the Australian Stock Exchange that it has
entered into a major gas sales agreement with Alcoa Australia for the
delivery of up to 500 petajoules of gas from future discoveries on its
interests in the onshore Canning Basin.

The GSA includes a gas prepayment by Alcoa to ARC of $40 million
in September that will be used to accelerate ARC's regional Canning
Basin exploration program.

The transaction has a range of benefits, including:

* Provides ARC with the customer support to rapidly
commercialise gas discoveries;

* Provides Alcoa with a diversified long-term gas supply option;

* Accelerates ARC's Canning Basin exploration program; and

* Allows ARC to retain all liquids and oil discovered in the
exploration program and retain operatorship and full equity in its
permits.

ARC's Canning Basin exploration program is due to commence in
August when the Century Rig 18 is transported to the Canning Basin from
the Perth Basin.

The Canning Basin exploration program is currently scheduled to
run for three years and to drill up to 20 exploration wells.

As part of the GSA arrangements, at least four of the
exploration wells will target gas prospects with potential reserves
sufficient to supply the GSA.

The first wells in the program will test the Valentine and
Stokes Bay prospects targeting reserves of up to one TCF of gas and 19
million barrels of liquids.

GAS EXPORTS NEED A PIPELINE
***************************

The export of gas from the Canning Basin will require the
construction of the Great Northern Pipeline (GNP) from the area east
of Broome to the Pilbara, a distance in excess of 630 kilometres.

ARC has applied for a licence to construct the GNP and is
currently undertaking preliminary engineering design and route and
environmental surveys and discussions with the traditional owners of the
area.

Once constructed, the GNP will serve as a vital infrastructure
link for the development of the gas resources of the Kimberley region.

Separately, ARC is investigating the feasibility of supplying
gas through the shipment of "coastal LNG" from the Kimberley to Perth or
other customer sites.

The GSA has established a powerful commercial alliance between
Alcoa, Western Australia's, largest domestic gas consumer and one of
Australia's leading industrial and resource companies, and ARC, WA's
largest onshore oil and gas producer and most active onshore explorer.

In addition to the commercial benefits to both ARC and Alcoa,
the GSA promotes the exploration and development of Western Australia's
onshore hydrocarbon resources and represents an innovative and timely
response to the Western Australian Government's concerns regarding the
security of domestic gas supplies.

ARC's extensive Canning Basin exploration program and the
subsequent development of any gas discoveries and building of the
GNP will also bring very substantial benefits to the Kimberley region of
Western Australia, including the traditional owners, with minimal
environmental and social impact.

Furthermore, the development of significant new onshore gas
resources in Western Australia would allow gas to be economically
substituted for other fuels in industrial processes.

Any substitution of gas for liquid hydrocarbon fuels reduces
greenhouse gas emissions and associated climate change impacts.

SHARE PRICE MOVEMENTS
*********************

Shares of ARC Energy Ltd yesterday traded 21c higher at $1.555.
Rolling high for the year is $1.845 and low $1.21. The company has 317.6
million shares on issue with a market cap of $490.7 million.

In a recent Corporatefile interview, ARC Energy's managing
director Eric Streitberg said the gas sales agreement was very flexible.

"We have established a 'base case' which is a nominal 400 PJ of
gas delivered over 15 years with a take or pay quantity of 75 TJ per day
and a minimum daily take of 20 TJ per day.

"Alcoa has the option to take another 100 PJ of gas in addition
to the 400 PJ if we find it.

"Both parties have flexibility around these numbers to ensure we
get the best commercial outcome.

Mr Streitberg said the pricing terms are confidential, as they
are in all other WA gas contracts, but there are a series of
commerciality tests to ensure neither side is disadvantaged when it
comes to a development.

"If we don't reach our reserves targets we can't be forced to
deliver, and Alcoa can simply cancel the contract.

"However, if we do get the minimum reserves we need, we both
have the incentive to go into a development," the managing director
said.

"Our aim is to supply the gas from the Canning Basin. We have
the flexibility to supply it from the Perth Basin as well, but the
reality is that we are unlikely to find 400 or 500 PJ of gas in the
Perth Basin in the short term, as attractive as that would be.

"We think the earliest we could get gas to Alcoa is 2010 and the
most likely is in 2011."

The agreement included a gas prepayment by Alcoa to ARC of $40
million.

"The prepayment provides a demonstration of Alcoa's seriousness
in diversifying their gas supply options and opening up new areas of
production, and provides us with a great incentive to accelerate and
focus our exploration program on gas," Mr Streitberg disclosed.

The first two wells, Valentine and Stokes Bay should spud in
August.

ARC is close to finishing the Apium well in the Perth Basin and
construction of the Valentine pad is underway.

The company expects to drill five or six wells in this drilling
season and has a large range of candidates.

"We have had a string of wells that have found oil and gas pools
but none that have given us an immediately obvious commercial success,
which is encouraging but frustrating at the same time," Mr Streitberg
explained.

"I suspect one or both of Frankland and Dunsborough in the
offshore Perth Basin will be developed in a reasonable timeframe and the
Drakea results have opened up a whole new play type for us and we
definitely have an oil pool there; it just looks a bit restricted on the
data we have.

"In Yemen we are testing the first well with some encouragement,
but the wells have to be pumped so it is a bit of a slow process to get
a definitive result."

ARC recently completed the Wandoo Petroleum asset purchase for
in excess of $US175 million.

Mr Streitberg has described the Wandoo purchase as a "cracker,"
a bit like the Alcoa deal.

"Our reserves have essentially trebled, the BassGas project
looks to have the potential to have twice the resources we thought and
we think the offshore Perth Basin will be a good long-term exploration
playground for us.

"Our strategy has been to focus on share price growth through
acquisitions that have good upside and through oil and gas exploration,"
Mr Streitberg told Corporatefile.

BACKGROUND
**********

ARC Energy is a long-time listed WA oil and gas explorer and
producer, having listed on May 21, 1987.

The company based its foundation asset in the Perth Basin, 360
kilometres north of Perth, as well as a significant exploration holding
in the onshore Canning Basin in Australia's northwest, production and
exploration interests in the Bass Basin south of Victoria, and interests
in highly prospective acreage in Yemen.

ARC produces and sells gas to industrial customers in Perth via
the Parmelia Pipeline and has substantial oil production which is
trucked to the Kwinana refinery in Perth.

The company has:

* The dominant acreage position in the most prospective parts of
the Perth, Canning and Bass basins;

* Developed and operates key infrastructure in the Perth Basin;

* A solid earnings base from diversified oil and gas production;

* An experienced and innovative management team with proven
project execution skills;

* A strong balance sheet and cash position;

* Outstanding near-term exploration potential in the Perth and
Canning basins, as well as Yemen; and

* A focus on investing for growth in exploration and
development.

ARC's corporate vision is clear and focused - to become a major
Australian oil and gas company through organic growth and value-adding
to complement its existing businesses, whilst maximising shareholder
returns over the medium to long term.

ARC ranks as the second highest energy stock by shareholder
returns over the past decade, returning over 25 per cent compound
growth.

The company's strategic goal is reflected in its asset portfolio
approach, and simple corporate and commercial structure.

The strategy for the Perth, Canning and Bass Basin assets is to:

* Produce cash flow from new discoveries as quickly as possible;

* Drill as many exploration prospects as possible to replace and
increase its reserves; and

* Add value to its existing assets by commercial and technical
innovation.

ENDS

Copyright © 2007 RWE Australian Business News. All rights reserved.