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Strike Energy counts on Jaws project to kick east coast gas goals
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Strike Energy is aiming to start supplying east coast gas customers around the end of 2019. James Davies
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by
Angela Macdonald-Smith
After several years in germination, Strike Energy's ambitions to crack the gas-starved east coast market look set to bloom in 2018 and if chief executive Stuart Nicholls proves right, they could provide food for thought for those eyeing LNG imports in the southern states.
Mr Nicholls said the economics of the junior's $500 million Southern Cooper Basin gas project point to the prospect of substantial volumes of gas reaching the market, with commercial gas starting to flow around the end of 2019. Gas is due to be sold to major industrial users including Orica, Brickworks and Orora that have already struck conditional purchase deals.
The depth of the coal seams targeted by the project poses a technical challenge, while Strike's small size – its market value is $66 million –means financing is also a hurdle. But the thickness of the seams holding the gas, the large volumes involved and the existing pipeline crossing the project help to offset that, analysts say.
Mr Nicholls said the project was in the "top quartile" of costs, meaning it and other projects matching that performance may leave only "a short-term opportunity" for players such as
AGL Energy that are eyeing LNG imports into the south-east.
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The Moomba-Adelaide gas pipeline crosses the Southern Cooper Basin project. Strike Energy
"Whether the long-term economics of an LNG import terminal can compete with the undeveloped east coast gas resources like ours, I'd be surprised," Mr Nicholls said. As for
Shell's Arrow gas, which recently took a leap forward towards development, that has already been factored into the market, he said.
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Mr Nicholls describes the Southern Cooper project as "probably the largest accessible undeveloped east coast gas resource at the moment" given the presence of pipeline and processing infrastructure close by and technical confidence in the gas resource. The Moomba-Adelaide gas pipeline, owned by QIC's Epic Energy, crosses the PEL96 permit held jointly by Strike and Energy World Corporation.
The tight east coast gas market, with the step-change that had taken place in prices driven by higher costs and its connection to the Asian LNG market, provided high enough prices to make it work, Mr Nicholls said in an interview, declining to be specific. Historical prices of $3-$4 a gigajoule are rapidly disappearing, with some new contracts being struck at $8-$10/GJ or higher for short-term deals.
"The current prices today are favourable and supportive of a development of the Southern Cooper Basin," he said.
Underpinning the first phase of the project is a gas sales deal with Orica that, after
a lengthy dispute, was renegotiated in September for a smaller volume but at higher prices.
Orica, one of several east coast gas buyers that have complained about soaring prices, has also made a loan to Strike.
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Strike says its project matches up well to alternative new east coast gas projects. Strike Energy
The venture has yet to firm up reserves, and its existing "contingent resource" is relatively small at 155 billion cubic feet of gas. But Mr Nicholls said seismic data over PEL96 and two adjacent licences suggested a prospective resource many times that, at about 11 trillion cubic feet.
Key to converting the initial resource into reserves is the Jaws drilling campaign due to start in mid-February. An appraisal well will reach about two kilometres deep and will involve an 800-metre horizontal section that will meet with a second vertical well to be used for production. Seven fracture stimulation "stages" along the horizontal part will encourage gas to flow.
That well, to be carried out by US shale drilling expert Halliburton, will cost about $15 million. Strike is funding its share from a $9.1 million share sale in September priced at 7¢ a share. The stock closed on Monday at 6¢.
All going to plan, Strike hopes to declare the resource commercial in the June or September quarter of 2018. A reserve booking is targeted for the September or December quarter, followed by a final go-ahead on an initial 50 terajoules a day, 10-year project shortly afterwards.
Ongoing drilling would then progressively prove up more reserves, with an expansion to 200 TJ/day envisaged in a second phase.
"As we start to move from phase one ... to phase two ... I see the competitiveness of Strike improving against the existing suppliers that are coming into the market," Mr Nicholls said, noting the Moomba-Adelaide pipeline allows gas to flow either south or to Sydney and Brisbane.
Still, the estimated $500 million cost for the project over 10 years will require either major partners, equity finance or project finance, Mr Nicholls said.
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