We believe PEL218 has the potential to contain recoverable sales gas of up to 60Tcf - to put this into context, this would be: • Equivalent to over 100 times Beach’s current 2P reserve base; • Larger than the Gorgon project in WA which has around 40Tcf; • Greater than all of Queensland’s gas reserves; • Ten times the gas produced out of the Cooper Basin over its 40 year history; and • Sufficient to meet Australia’s current domestic east coast gas demand for 90 years
This just to put into to perspective the potential size of PEL218, which from what I can see doesn't mention ATP855, which could also significantly increase this estmiate of 60 tcf - as they will be looking at the whole Nappamerri trough eventually! - I have also included the article from the SMH - about BHP's shale gas purchases which they paid $20 billion for 45 TCF!!! This gives you an idea of the upside in beach if they are sitting on 60 Tcf with a market cap of $1.5 billion, even if the shale gas in australia is valued at a fraction of it's US counterparts!!
BHP's $20b shale bet will be debated until return is clearer November 28, 2011
"When you think about the big resources that have changed hands in the past 30 years, you can name them on one hand" ... Michael Yeager.
"When you think about the big resources that have changed hands in the past 30 years, you can name them on one hand" ... Michael Yeager. Photo: Louie Douvis
It appears to be a reference to the time frame on achieving returns on the $20 billion BHP Billiton has invested in these assets in the past year.
There has been no shortage of eyebrows raised over this investment – it is not a particular market favourite, as many investors are yet to be convinced that BHP has not overpaid for the shale assets.
It has, arguably, received a more critical eye than the failed – but also enormous – play to buy the Canadian potash assets. This strategy is now being pursued organically and with significantly less risk. Advertisement: Story continues below
The rationale behind both was fundamentally the same. Ultimately, the price of the gas (and liquids) from shale will increase, thanks to a structural increase in demand. Similarly, potash, as a commodity used for agriculture, was also on the cusp of a demand-led take-off.
The BHP Billiton plan was to get in early, get in cheap, hold on and ride the price curve. The head of BHP's petroleum division, Mike Yeager, has been out and about in the past couple of weeks, extolling the virtues of the US onshore shale model.
Apparently, Yeager has never seen anything like it in his long career. "When you think about the big resources that have changed hands in the past 30 years, you can name them on one hand," he told BusinessDay's Barry FitzGerald.
"And, here, we've been able to go out and buy 45 trillion cubic feet of gas — that has never been available in my entire career. And we bought it at a low point in the market," Yeager said.
The reason gas resources of this size have become available is that the smaller companies which unlocked the potential of the extensive shale beds, through the application of hydraulic fracturing and horizontal drilling technologies, did not have the financial capacity to maximise the potential.
(It sounds a little like the iron ore industry in Western Australia.)
The $60 billion BHP forecasts it will spend in the next 10 years to mine this shale gas to its potential is ample demonstration why industry bit players didn't have a chance.
As large, exciting and long-term as this sounds, the investment community is focusing on the fact the price of this gas is falling of late – sufficiently so that, at the current price, it won't be making anything like a decent return.
While BHP has just unlocked huge reserves by taking out capital-constrained smaller players, it has also fed into a big boost in supply – which, itself, will pressure the price.
UBS says the US shale acquisitions reflect BHP Billiton's view the arbitrage between US gas prices, and those in Europe and the liquefied natural gas price in Asia, will narrow over time. US prices are about one third of those in Europe and Asia.
A note from Macquarie Bank last week, while more positive, said, at present spot prices, the US onshore business is slightly negative for earnings before interest and tax.
Macquarie does not see these returns on assets getting to 10 per cent until 2015 and, then, sees it doing so only on the assumption that price will double.
If the present price of gas persists longer term, the value of this business is closer to $US 8 billion, compared with its price tag of $US 20 billion, based on Macquarie's modelling.
UBS fiddled with its BHP Billiton shale model last week by reducing its realised price and midstream assumptions but mitigating the downside by including some better tax treatment and a cut in the capital expenditure. In doing so, the investment bank reduces the estimated net present value of the onshore business from $US 19.2 billion to $US 18.3 billion.
It's not much below the magic purchase price but it also assumes a rise of more than 50 per cent in the long-term price of the gas.
If the price improves as BHP Billiton expects, then no one is suggesting the shale play is a bad one. At the right price, it has the potential to make strong returns and cash flow.
But in the current market, where pricing remains depressed and could come under even more pressure given the fragility of much of the Western economy, the market will remain less than convinced.
As it stands, this deal will be the one that defines Marius Kloppers' time as chief executive. He missed out on the Canadian potash, the takeover of Rio Tinto and the merger of the iron ore businesses.
While it is a huge deal, the falling gas price is a sideshow at the moment, and the market is far more interested in the debate around the Chinese economy and what this will mean for the short to medium-term price of BHP's exports of iron ore and coal.
Last week's escalation of the European debt crisis put further question marks over world economic growth and the degree to which China can continue to be immune from any contagion.
BHP's share price sustained plenty of damage but there is an expectation the local market will open a little better this morning.
Whether any relief rally is sustainable depends on what news comes out of Europe during the week. At the weekend there were reports the French and the Germans were considering a new stability treaty which would include only some of the countries in the euro zone.
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