Dont throw the Baby out with the Bath Water

Stokes’ big strategy for east coastThursday, 19 March 2015

David Upton

THE sudden appearance of Seven Group Holdings as the largest shareholder of Beach Energy has analysts around the country trying to guess the end game.


Of course, only Kerry Stokes (SGH executive chairman) and Don Voelte (SGH CEO) know where they are going, but there are some clues that many seem to have missed.


Let’s start by pointing out there is ample and obvious rationale for a move by SGH on Beach – Australia’s largest onshore oil producer and a crack exploration outfit that always has an eye on tomorrow’s opportunities.


Analysts have naturally focused their attention on Beach’s Cooper Basin assets, and in particular the Nappamerri Trough unconventional has joint venture with Chevron.


The conventional wisdom in the market is that Chevron’s decision on whether to proceed to stage 2 of the joint venture – due within the fortnight – will be some kind of make or break moment for Beach and its growth pipeline.


But as former managing director, Reg Nelson, tried to tell anyone who listened, Beach can happily go it alone to bring unconventional gas wells into production as a phased development, just like oil on the western flank.


Beach doesn’t need a huge capex program to deliver gas in LNG-sized quantities. It already has infrastructure to sell every gigajoule into a gas-hungry market on the east coast, and can effectively self-fund well after well.


Regardless of whether Chevron is on or out, Beach will be selling much more conventional gas into the east coast market (via the Cooper Basin Joint Venture) and almost certainly meaningful volumes of unconventional gas.


A question mark remains over the cost of unconventional production, particularly with the prospect that oil-linked LNG pricing could create less upward pressure on east coast prices than anticipated.


But the odds still favour development. The Nappamerri Trough is a banquet of unconventional opportunities and Beach and Chevron are homing in on lower-cost sweet spots such as the Daralingie Formation.


If Chevron decides against stage 2 of the joint venture, SGH might just see any resulting weakness in Beach’s share price as an opportunity to increase its stake from 13.8%.


The more intriguing aspect of link between SGH and Beach is the intersection of their east coast gas interests.


SGH last year famously won a long battle for control of Nexus. It is fair to say some analysts were puzzled by the selection of the troubled junior as SGH’s first foray into oil and gas.


Nexus’ only producing asset is the Longtom field in Bass Strait, which has been bedeviled by operational problems and reservoir downgrades.


The financial viability of Longtom is also handicapped by the fact that it is not a market-facing project. Gas production is processed and marketed by Santos at its Orbost plant under a contract that winds up in late 2018.


SGH’s interest in Nexus makes much more sense if you think about partnering up with Bass Strait neighbour Cooper Energy.


And lo and behold, Cooper’s largest shareholder with an 18.4% stake and frequent project partner is Beach Energy. Cooper is quietly putting together an important new conventional gas hub in the east coast market.


Under a deal announced just before Christmas, Cooper is earning from Santos a 50% interest in the 200PJ Sole field and the Orbost gas plant by funding the first $50 million of modifications to switch from Longtom to Sole feedstock.


Combined with a $2.5 million payment upfront, Cooper is earning a very strategic position and significant gas reserves at an effective cost of $27.5 million.

First gas from Sole is planned for late 2018, with Cooper’s share at about 12PJ per annum.


That could double very quickly if Cooper succeeds in bringing on stream its Basker-Manter-Gummy gas project. Cooper holds 65% of the project, with Beach holding the remaining 35%.


The Orbost plant would once again be the logical choice for processing BMG gas, although this would need an expansion of current capacity of 30PJ per annum.

With Sole and BMG in production, Cooper would achieve a 10-fold increase in energy production from its current annual level of about 500,000 barrels of oil.


That would clearly be a huge win for Cooper’s shareholders, but it would also represent a meaningful new gas source for east coast, equivalent to about 15% of today’s output from Exxon-BHP Gippsland Basin joint venture.


But what if someone with deep pockets like SGH stepped into the picture and had much grander plans?


Longtom still has 2P reserves of 110PJ. And far from being a sunset asset, there are those with the view that Longtom could be just the first of several producing gas fields in the sands of the Emperor subgroup.


Then there is Bass Strait Oil Company, in which Cooper has a 20% stake. The junior explorer has two permits in the vicinity that have large, undrilled gas structures.

With a bit of vision and some exploration success, it is possible to imagine Orbost as the basis of a major new hub for conventional gas production on the east coast.


That will take capital, which Cooper does not have by virtue of its size, but SGH has in spades. And it will also take some form of partnership or takeover, which brings us right back to the start of the story.


Whichever way the SGH strategy unfolds, we may not have to wait long to see how Voelte plays his cards.

From Energy News