aut new news::joint deal in texas

Aurora to Drill Major Deep Gas Prospect in Onshore Texas Aurora Oil and Gas Limited (ASX: AUT) is pleased to announce that it has entered into a farm-in agreement to acquire a 12.5% interest in the Sugarloaf Prospect, which has the potential to host several trillion cubic feet of gas. The Sugarloaf Prospect is a world class exploration prospect. It is a robust four-way dip closure covering about 80 square kilometres (approximately the same areal size as the large Moomba gas field in onshore South Australia) at 5,200 metres (m) depth, which makes it one of the largest undrilled structures in the onshore US. The primary target reservoirs are thick sands of the Cretaceous age Hosston Formation which are major producers elsewhere in the Gulf Coast region. There have been many successful deep gas wells in the Gulf Coast region, where initial flow rates of up to 80 million cubic feet per day (average daily rate over one month) have been obtained from wells to comparable depths. Aurora Executive Chairman, Jon Stewart said: “By any standard in the prolific Gulf Coast gas hydrocarbon production region, Sugarloaf is a major un-drilled structure and represents an outstanding opportunity for Aurora to participate in a potentially company-making prospect in onshore USA, where gas prices are at historic highs. “The Sugarloaf Prospect is unusual among the large number of onshore USA hydrocarbon prospects in that it is a giant prospect with multi-trillion cubic feet gas potential. Most similar prospects in onshore USA were drilled long ago, even at this depth. “The application of modern processing of 1970s and 1980s seismic revealed the presence of the major Sugarloaf anticline which was not evident from the original processing. “We consider the Sugarloaf Prospect an ideal addition to Aurora’s gas development project at Flour Bluff near Corpus Christi Texas. Sugarloaf has the potential to add very significantly to the reserve base of the Company. A discovery at Sugarloaf would generate early cash flow in what is currently a strong domestic gas market with historically high gas prices.
Aurora will earn its 12.5% working interest (8.9% Net Revenue Interest) by funding 12.5% of leasing costs and 15.625% of the cost of the first well to production. Aurora’s share of leasing costs will be US$ 281,250. Aurora will acquire its interest from Texas Crude Energy Inc (TCEI) who will operate the well. TCEI operate Aurora’s Flour Bluff Gas Field where development of the deeper reservoirs is under way and gas production is steadily increasing. Fellow ASX-listed Adelphi Energy Limited (ASX: ADI) is also acquiring a 12.5% interest on identical farm-in terms to Aurora. “We are very pleased to have extended our association with Texas Crude and to work with Adelphi with whom we feel we share a similar exploration and development philosophy,” Mr Stewart said. The first well has a proposed Total Depth of 6,400m (21,000 feet) and is estimated to cost US$5.8 million dry hole, with an additional US$2 million to complete the well for production. Aurora’s share of the well costs would be US$920,500 dry hole, with an additional US$321,313 to complete the well for production. The well is anticipated to be spudded as soon as long lead time items such as high pressure casing are available and a suitable rig becomes available. This is likely to be around November-December 2005. The well is programmed to reach total depth in 110 days from spud. Technical details of the Sugarloaf Hosston Prospect and key farm-in terms are provided in the attached summary which also includes a review of the US gas market and terms.
1. Introduction The Sugarloaf prospect was identified by local Houston-based operator/explorer Texas Crude Energy Inc. during seismic reprocessing directed at shallower horizons. The reprocessed data showed that below the currently productive Wilcox, Edwards and Sligo Formations, there is a large “text-book” example of a growth fault in lower Cretaceous-aged clastic rocks setting up the Sugarloaf Hosston prospect. The Sugarloaf prospect is surrounded by several shallower oil and gas fields within a 25 km radius. Most of these fields were discovered in the 1950s and 60s and contain total reserves of some 5 trillion cubic feet (“TCF”) gas and 100 million barrels (“mmbbls”) oil. The fields are a combination of structural and stratigraphic play types predominantly in carbonate rocks at shallower levels than the Sugarloaf prospect.

The Sugarloaf Prospect The Sugarloaf prospect is a large (80 sq km / 20,000 acre), deep (5,200m+) well developed, four way dip closure associated with an early Cretaceous growth fault in the prolific Gulf Coast Basin of Texas. The total depth of the farm-in well is expected to be up to 6,400m (21,000 ft). The well is targeting a reservoir comprising an expanded section of Hosston Formation prograding delta wedge sandstones. The geological structure at Sugarloaf is clearly defined on seismic data, and the presence of source rock and seal is considered to be low risk.

The main technical risk to the Sugarloaf prospect is the preservation of porosity at a depth of greater than 5,200m (17,000 ft). At these depths in most basins of the world, reservoir quality porosity and permeability is usually too low to be productive. However, in the Gulf Coast Basin of the USA (especially Texas and Louisiana) there is abundant production from fields at these depths. Published data indicates that in excess of 21 TCF of gas has been produced to date from approximately 350 “deep” onshore fields in the Gulf Coast Basin area at an average well depth of 5,200m. The explanation for this is that reservoir porosity and permeability tend to be preserved when hydrocarbons are entrapped in early formed structures. At sugarloaf seismic sections show clear evidence of early structural growth, thus enhancing the possibility of reservoir quality preservation within the structure.

A secondary target at the Sugarloaf prospect is the overlying carbonate Sligo Formation where there are indications of a reef build-up on the reprocessed seismic data. Note that Aurora does not hold lease rights to targets shallower than the Sligo Formation over the majority of the prospect area. The initial well is expected to be drilled in late 2005 or early 2006. It is programmed to take 110 days to drill at a cost of approximately US$6 million on a dry hole basis. If successful, well completion costs are expected to be in the order of US$2 million and given the existing nearby pipeline infrastructure, any commercial quantities of gas should be able to be sold within a very short time frame into the strong US gas market (also refer below). Mean potential reserves at Sugarloaf are estimated to be approximately 800 billion cubic feet (“BCF”) of gas. However, given the large size of the prospect area, there is upside potential of several TCF if geological factors such as porosity, net sandstone and permeability combine favourably.

Farm-in terms for Aurora are modest at 1.25 for 1 for any costs in relation to the first well and associated prospect leasing costs. Accordingly, Aurora’s net dry hole cost exposure on a trouble-free basis is expected to be some A$1.75 million to earn a 12.5% working interest in the prospect and associated leads within the prospect area. There is also a success case cost recovery mechanism for the promote paid on drilling and completion costs in relation to the farm-in well. With total royalties payable to landowners and other third parties of up to 29% across the various prospect leases, Aurora will have a Net Revenue Interest (“NRI”) of some 9% (~71% of its 12.5% Working Interest (“WI”)). One lease holder has the right to participate at a working interest level of 43.75% in the drilling and production of wells on a small proportion of the prospect which may also include the farm-in well. If that lease holder was to exercise its participation rights, Aurora’s funding commitments and interests in relation to those parts of the project would be diluted accordingly. In a success case, the 1.25 for 1 promote would also be payable on well completion and pipeline tie-in costs for the farm-in well in addition to any subsequent 3D seismic acquisition. However, these promoted costs would also be recoverable from any production from the farm-in well.

The USA is the world’s largest energy producer, consumer and net importer. According to Energy Information Administration (“EIA”) (www.eia.doe.gov), as of January 2004 the USA had estimated proven natural gas reserves of 187 TCF, or 3.1% of world reserves (6th in the world). Natural gas consumption for 2004 was approximately 22.0 TCF, with gross imports of 4.1 TCF. Overall, the USA depends on natural gas for about 24% of its total primary energy requirements. Oil accounts for around 40% and coal for 23%.

From 1990 through to 2003, natural gas consumption in the USA increased by about 15%, although consumption fell about 5% during 2003 in large part as a result of high gas prices. In response to continued economic growth, natural gas demand was projected to increase by 3.7% in 2005. Natural gas is consumed in the United States mainly in the industrial (37%), electric power (23%), residential (22%), and commercial (14%) sectors. As of 2002, the top natural-gas-producing states (in descending order) included Texas, New Mexico, Oklahoma, Wyoming, Louisiana, Colorado, Alaska, Kansas, California, and Alabama. Natural Gas Prices Over the past few years, natural gas wellhead prices have steadily increased from a base of around US$2.50 per thousand cubic feet (“MCF”) in the mid to late 1990’s to over US$11 / MCF at present. The reason for the increase in natural gas prices, and why there continues to be upward price pressure can be attributed to: • Natural gas is no longer in surplus. Previously there was a bubble of oversupply which depressed prices for 10 years. • Economic outlook is improving and this will increase energy consumption. • Natural gas demand in North America is increasing at about 3 % per year whereas supply is increasing at only about 1%. • Production from many older gas wells is declining quite rapidly. • More natural gas is being used for electricity generation. Any new electricity capacity brought on line right now is generated by natural gas, rather than oil, coal, water or nuclear. • As the price of crude oil increases, some industries switched to natural gas. Many developed this dual fuel capability when petroleum prices increased in 2001. According to the EIA, at the beginning of the year, natural gas prices were expected to average US$6.18 per MCF in 2005. This has since been exceeded by recent price rises, with current gas futures suggesting a higher gas price regime for the remainder of this year and beyond. These US gas prices compare very favourably with A$2-3 / MCF (~US$2 / MCF) currently achievable in Australia. USA Fiscal Terms for the Oil and Gas Business In the USA, mineral rights (including oil and gas rights) for any onshore resources belong to the landowner (unless sold or assigned to a third party). Therefore the first step in the oil and gas exploration process involves the acquisition of leases from the holders of mineral rights which cover the prospect. Once the leases are secured, exploration operations may commence. If a discovery is made, a negotiated royalty is payable to the mineral rights holder based on revenue earned from the lease. Additional overriding royalties to other third parties are also very common as these rights change ownership over time. Several State and local taxes are payable based on overall production volumes and net income in addition to a federal corporate tax which is levied at 35%.

In summary, the USA provides an attractive environment for international oil and gas explorers given its proven hydrocarbon potential, well established petroleum industry infrastructure, strong domestic gas market and an overall fiscal regime that compares favourably to most other oil and gas rich countries.