CRUNCH time is looming for the partners in the problematic Evans Shoal gas field in NT/P48 in the Arafura Sea.
Evans Shoal was discovered by BHP in 1988 and measures up to 8 trillion cubic feet of dry gas. This ranks it as the second largest gas field in Australian waters without a development plan ? behind only the remote and deepwater Scarborough field.
Development plans have been frustrated for more than a decade by the field?s high carbon dioxide content (up to 26%) and the inability of the partners in NT/P48 to reach agreement on the way forward.
Santos is operator with 40%, but is keen to quit the project. The sale of its stake to Magellan Petroleum finally fell through last month when the US-based junior failed to raise the initial $100 million of a deal costing up to $200 million.
Santos and its partners ? Shell (25%), Petronas (25%) and Osaka Gas (10%) ? now face some difficult decisions regarding the NT/P48 permit. They will also have to stump up the costs of a commitment well which is due next year.
NT/P48 was first granted back in 1996 to Timor Petroleum. It has already been renewed twice and is now due to expire on October next year.
At each renewal large chunks of the permit area were relinquished. NT/P48 is now barely larger than the Evans Shoal gas field itself.
Regulations for offshore acreage do not allow a third renewal in most circumstances, and a retention lease application would normally be the way to retain tenure.
In the past, retention leases were waved through, but federal Resources Minister Martin Ferguson has adopted a ?use it or lose it? policy, as shown by his tough approach to the gas fields underpinning the Browse LNG project.
The new policy on retention leases will be formalised in his department?s Energy White Paper, which is due for release in draft form before Christmas ahead of its adoption next year.
Analysts are divided on whether the government will get tough with the Evans Shoal partners, given the field is compromised by its high carbon dioxide content, and all the additional costs this could mean under a carbon tax.
The carbon tax could actually help the partners with an application for a retention lease by making it even harder for Evans Shoal to pass any commerciality test. It needs to fail such a test to go on to a retention lease.
However, this could backfire if the carbon tax blows any prospect of finding a commercial solution for the development of Evans Shoal in the next 15 years. Under current policy, the partners have to show there is such likelihood or the government will take them straight to the ?lose it? scenario.
One way to take carbon out of the equation is to convert the C02 of Evans Shoal into methanol, a process that requires gas feedstock with a high C02 content.
Melbourne-based MEO has been pursuing this dream for more than a decade with its Tassie Shoals project.
It has all environmental approvals and major project status for the construction of LNG and methanol plants on concrete platforms in 15 metres of water at Tassie Shoal, immediately south of the Evans Shoal field.
However, it has never been able to reach a deal to buy gas from the Evans Shoal partners or take equity in the field.
MEO is now trying to secure its own gas supplies by expanding on the Heron and Blackwood discoveries in nearby permit NT/P68. In May it reached a deal with ENI, which can earn up to 50% of Heron discovery by funding the cost of two wells.
With crunch time looming for NT/P48, the government has an opportunity to exert more pressure on the Evans Shoal partners to bring them back to the negotiating table with MEO.
Evans Shoal is not the political football that Browse LNG became last year and therefore unlikely to attract the same kind of government intervention.
However, a lot rides on Evans Shoal in terms of development in the region. Finding a way to develop Evans Shoal could be a catalyst for many other projects in the Arafura Sea that have languished, including the Caldita and Barossa fields held by Santos and ConocoPhillips adjacent to Evans Shoal in NT/P61 and NT/P68 respectively.
These permits are also coming up for renewal and will be another factor weighing on Santos as it grapples with the question about the future of Evans Shoal.
NT/P69, which is adjacent to the Abadi gas field in Indonesian waters immediately to the north, expires in just four months time.
This will force ConocoPhilips and Santos to relinquish a large part of the permit area, and open the door to new explorers who are queuing up to get into the Arafura Sea.
The partners have until 2013 to renew NT/P61, but there?s a commitment well due in 2012.
A Santos spokesman said yesterday the company was in regular and ongoing discussions with its joint venture partners in Evans Shoal in regard to the forward work program, and was considering all its options for the future of the field.
The high level of interest in the area from a new generation of explorers is clear, including a number of overseas heavyweights.
In response to nominations from upstream, the government recently released two new offshore areas, NT11-1 and NT11-2 in the Money Shoal Basin, wedged between Evans Shoal, Caldita and Barossa and the Darwin coastline.
These are set to join a large number of new permits in the region that have been granted to the likes of Eassar of India, while ENI and others have been busy farming in.
With new competition, the expiry of some key permits and a more difficult retention lease regime, the Arafura Sea may finally see some long overdue development action.
MEO Price at posting:
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