article 2/3/04

Arc Energy Consolidates Its Position As Largest Leaseholder In The Perth Basin And Launches A New Exploration Programme
The Perth Basin in Western Australian was long neglected because it was considered gas prone, with too tight reservoirs. In the past three years it has undergone a renaissance with a number of significant oil and gas discoveries.

One small company which has really flourished there is Arc Energy. We wrote last Autumn how Arc had demonstrated that having a 50 per cent stake in successful onshore discoveries looked more immediately profitable than a 7.5 per cent interest in an offshore property; even though the offshore properties hold potentially far more than the onshore ones.

Arc had a little gas production from the mature Dongara field onshore the Perth Basin, when some three years ago it farmed into a consortium led by Roc Oil which discovered oil in December 2001 at Cliff Head, offshore the Perth Basin on permit WA 286 P. It paid some 20 per cent for a 15 per cent stake. Subsequent appraisal wells put the reserves at Cliff Head at over 100 million barrels with possibly one third recoverable. But it takes time to monetise an offshore field.

In the meantime Arc became involved with Origin Energy (50/50 per cent) in the Hovea field onshore the Perth Basin in Licences L1/L2. Hovea 1 found oil. The consortium is now on the Hovea 10 well. Recoverable oil from the Hovea field was initially put at 10 million barrels, although it could be more than that. A subsequent well at Eremia, close to Hovea, also found oil - probably less than Hovea but nevertheless commercial amounts. Arc therefore has a share of between 15 to 20 million barrels of oil plus some gas. Being onshore, the finds could be quickly brought on stream

Cash flow to Arc has risen steadily as the Hovea and Eremia fields have moved towards the initial 5,000 barrels of oil per day target. For the second quarter 2003, which ended September 30, sales were A$11.2 million from 465,202 barrels of oil with 232,601 net to Arc. In the third quarter to December 31, sales were A$14.3 million on a equivalent basis, with 509,970 barrels of oil, and 254,985 barrels net to Arc for a cumulative total of 1,676,188 barrels over the first twelve months period. The increase in revenue was seen as significant given that the Australian dollar strengthened against the US dollar.

Having sold out its interest in Cliff Head, in the third quarter 2003 which ended December 31, Arc also announced a series of moves which will make it the largest leaseholder in the Perth Basin. For a cash consideration of A$15.75 million Arc will buy from Australian Worldwide Exploration (AWE) a 15.245 per cent interest in EP 413, which contains the Jingemia oil field, a 32.5 per cent interest in EP 368 and 100 per cent of the share capital of AWE (Perth Basin) which holds a 33 per cent interest in L11, including the Beharra Springs gas field, and a 33 per cent interest in adjoining EP 320 exploration permit. AWE will concentrate on its larger developments in the Otway Basin and New Zealand. During the quarter, Arc also acquired Bounty Oil & Gas’ 5 per cent interest in TP/15, adjacent to L1/L2, doubling Arc’s interest in that permit to 10 per cent.

To pay for all this and provide funds for further expansion Arc has undertaken a placement of 21.9 million ordinary shares at an issue price of A$0.85 per share to raise approximately A$18.6 million.

There could be an immediate impact from the purchases since Arc will be able to sell the gas produced from Beharra Springs and there will be a contribution from Jingemia. Also, the consortium has received permission to produce 8,000 bopd from the Hovea/Eremia developments, a significant step change from the current 6,000 bopd limit.

Analysts are more excited by what the new exploration programme might throw up. There is an eight well programme in 2004. Specifically there is a minimum three well high impact exploration programme on the 50 per cent owned Ll/L2 licences. The Kingia-1 exploration well is targeting 26 million barrels of oil. Having had a company-making year in 2003, Arc could well repeat the process this year.


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