January 20, 2011Central Petroleum Scopes LNG Options In Central...

January 20, 2011

Central Petroleum Scopes LNG Options In Central Australia.

www.oilbarrel.com

There is nothing like being prepared. Central Petroleum may only just be getting started on the exploration of the vast tracts of land that make up its frontier portfolio in the Northern Territory of central Australia but the ASX-quoted company has already undertaken an initial scoping exercise for an LNG plant. This was no doubt driven by investor concerns - and those of potential industry partners - that it's one thing to find huge volumes of gas in the vast emptiness of central Australia, it's quite another to monetise it. Now, at least, management can point to the conceptual appraisal study to show how much gas, and money, they would need to find to build an LNG plant in this under-drilled frontier.

Central started buying up acreage out here in 1998 when oil was US$12 a barrel and few were prepared to invest in remote outbacks, even though these neglected lands are home to two large producing fields, the Mereenie and Palm Valley oil and gas fields, which at one time were Australia's largest onshore oil and gas fields with over 140 million barrels of oil equivalent. These highly prospective lands have been overlooked because of what Central MD John Heugh calls the "tyranny of distance": the well density out here is just one well per 1.2 million acres. But higher gas prices and Australia's dash-for-gas to supply its high value LNG export boom could transform that dynamic - and Central is keen to prove to investors that these remote lands are a commercial proposition.

The preliminary concept appraisal study was conducted by Perth-based engineering consultancy Holt Campbell and Payton. As Central has yet to make a commercial gas find, the engineers used the Magellan-operated Palm Valley gas field as the basis for the study. The report concludes that an LNG export project in Central Australia would have to produce 3 million tonnes of LNG a year and would require discoveries in the order of 4 tcf of recoverable gas. Indicative costs developed in the screening study, which would include a 1,500 km trunkline from the Amadeus Basin discoveries to the port of Darwin, suggest the capital investment would be around A$1,700 per tonne, which is marginally lower than the A$2,000 per tonne capex numbers for the live LNG projects in Queensland. The company hopes this basic evaluation of the conceptual feasibility of a Darwin-based LNG plant will help in its efforts to find farm-in partners to help with the exploration of its portfolio.

Central is chasing a wide range of targets across a portfolio that stretches for 270,000 sq km and spans a number of basins in the Northern Territory, Western Australia and Queensland. These targets include conventional oil and gas, coal, helium, and shale oil and gas. The latter is thought to lie in its application areas for the Southern Georgina Basin, where the potential resource could run to 80 tcf and 650 million barrels of oil in place. An independent assessment of the prospective recoverable resources on the three permit applications, which cover 17,000 sq km, is expected soon. A nearby operator, Baraka Petroleum, has had its 30,000 sq km holding independently assessed by Ryder Scott, which put the recoverable oil shale potential at between five and 11 billion barrels.

In terms of conventional oil and gas, Central has reported mixed results from its permits in the Western Amadeus Basin of the Northern Territory. Last year's Ooramina -2 well found a 15 metre gas column but yielded a very low flow rate while the Johnstone West-1 well found a 14 metre net oil column but failed to flow oil to the surface. It appears to have encountered a tight and low permeability reservoir in the Stairway Sandstone, which horizontal drilling may be able to unlock. The reservoir apparently shared similarities with the nearby Mereenie oilfield, where some wells also had challenges flowing to surface.

Then in December, the company had to demobilise the rig from the Surprise-1 well, eight km southwest of Johnstone West, following damage to the rig and the threat of flooding from the approaching wet season. This is disappointing: prior to the rig damage, the well had found four zones of oil shows in the Stairway Sandstone, above the main Pacoota Sandstone target, three of which showed live oil and were due to be flow tested. The company hopes to continue drilling later this year.

Central's search for coal seam gas also yielded mixed results. Last year's five well CSG drilling programme in the Pedirka Basin unearthed an abundance of coal but very little methane. It was, it seems, the wrong kind of coal for gas. This was a disappointment for those shareholders hoping to get in on the ground floor of Australia's latest CSG play but good news for those who still see plenty of value in good old fashioned coal: Central could be sitting on more than 600 billion tonnes of the black stuff in an area that has recently attracted investment from mining giant Rio Tinto.

Now the company needs to work out what to do with the coal. It plans to drill 25 stratigraphic wells this year - drilling is already underway - to find out more about the lateral distribution of the coal. Last month Central added another three mineral tenements covering 3,700 sq km to its portfolio. The permits are thought to overlie relatively shallow coal in the northern part of the Basin and are contiguous with the company's other permits in the area.

For now, however, less-than-stellar drilling results and funding concerns weigh on the share price. Investors are keen to see farm-in partners signed up to help fund the exploration effort across this large portfolio.