Junior explorer makes a big splash into the ASX 200

FOCUSSING on conventional and unconventional resources in the Cooper Basin of Queensland and South Australia, explorer and producer Drillsearch Energy has enjoyed a year of record growth.
The company, which listed on the ASX in 1987, expanded its exploration and production portfolio during the last financial year.
“Drillsearch is unique in a lot of respects [in] that we have chosen to be focussed on the Cooper Basin,” Drillsearch managing director Brad Lingo said.
“Our entire approach is to bring together the right plan, the right projects and the right people to create shareholder value, and we been able to do that in the Cooper Basin.
“We have been very successful across our three main businesses in conventional oil, conventional wet gas and unconventional resources.” ASX 200
In June, Drillsearch was accepted into the S&P/ASX 200. The company attributed this industry recognition to its strong growth in reserves, production and cash flow.
Mr Lingo said it was a big milestone for the company. “It was only at the previous rebalance that we could join the ASX 300, so we are growing quite significantly and delivering a very focussed financial year in terms of growing our reserves, our production and our cash flow,” he said.
Cooper Basin
The first gas discovery in the Cooper Basin was made by Santos in 1963, in the Gidgealpa field. For nearly 50 years, the Cooper Basin reservoirs have produced gas for NSW, Victoria, South Australia and Queensland.
The Cooper Basin, which is overlapped in part by the Eromanga Basin, is now being explored more than ever before, with Drillsearch conducting extensive 3D onshore seismic surveys of the area.
Western Flank Oil Fairway
In May, Drillsearch announced that oil was being produced from the its joint venture with Beach Energy in PEL 91 in the Bauer oil field, in the South Australian portion of the Cooper Basin.
Drillsearch owns a 60 per cent share in PEL 91 while the operator, Beach, owns the remaining 40 per cent.
The field is part of the Western Flank Oil Fairway and covers about 1972 square kilometres.
The JV has drilled six exploration wells in the licence and made five discoveries, three of which have been progressed to oil development wells.
“This has generated a significant increase in 2P reserves for us and the discoveries just commenced production in the middle of May…and will be followed up with production from the Hanson field,” Mr Lingo said.
The Drillsearch March 2012 quarterly report stated that there had been a 33 per cent increase in 2P reserves, to 11.3 million barrels of oil equivalent, from oil discoveries in the Western Flank Oil Fairway.
The JV partners are in the process of constructing a crude oil export pipeline that will connect PEL 91 to the trunkline between the western flank and Moomba, reducing transport costs and increasing total crude oil production rates.
Construction is scheduled to start in the second half of 2012, with completion expected by the end of the year.
“With the crude oil pipeline, total production is estimated to be 5000 barrels of oil equivalent per day, of which 3000 will be Drillsearch’s interest. We anticipate achieving that by the end of the 2012 calendar year,” Mr Lingo said.
The quarterly report also stated that the Bauer production facility was currently under construction and scheduled to be brought online during the second half of 2012. Construction would include surface production facilities, gathering pipelines, dewatering and evaporating facilities, oil storage and crude oil load out facilities.
Following this, similar facilities would be constructed for the Hanson field.
According to the report, the Bauer-1, Bauer-3 and Hanson-1 wells, which will feed into the Bauer and Hanson facilities, had all been completed and perforated.
The Bauer-2 and Bauer-4 wells had not yet been perforated. Initial gross flow rates from the testing of wells to date were approximately 8100boepd, combined.
3D surveying
In late 2011 and early 2012, Drillsearch undertook two further 3D seismic surveys of the PEL 91 area to increase its scope for future exploration. These comprised 434sqkm in the Aquillus area and 151sqkm in the Limbatus area.
The results are still being processed, however Mr Lingo said he believed that they would lead to further exploration and development wells being drilled in the 2013 financial year.
“The JV is committed to a significant expansion of activity in the Western Flank Oil Fairway in PEL 91, where we have acquired a substantial amount of new 3D [survey results] which has identified high-graded significant numbers of new prospects,” Mr Lingo said.
“What we are seeing already on the preliminary analysis of the Aquillus 3D [survey] is a significant number of what appear to be quite strong Birkhead channel systems, which is the very successful play that has been working for Senex at Growler [also in the Cooper Basin].
“In the coming 2013 financial year, we expect to drill at least seven appraisal wells within the existing discoveries and drill a firm five exploration wells within the existing 3D [surveyed] area.
“We are also considering a further four exploration wells once we complete the interpretation of the new 3Ds.”
Inland-Cook Oil Fairway
In May, Drillsearch announced that it had contracted WesternGeco to undertake a 281sqkm Kaden 3D seismic survey, along with an additional 18km of line 2D seismic survey, on its 100 per cent owned and operated ATP 539P in the Inland-Cook Oil Fairway of the Cooper-Eromanga Basin in north-western Queensland.
The 3D survey was the first of its kind in the area. Completed in June, it targeted significant oil potential and oil shows.
Drillsearch is now undertaking processing and interpretation of the surveys. According to Mr Lingo, the company anticipated drilling two exploration wells in ATP 539P between December 2012 and January 2013.
“It is very early days but we do see that the Inland-Cook Oil Fairway is in a very similar setting as the Western Flank Oil Fairway,” he said.
According to a company media release, earlier work undertaken by Drillsearch indicated that there was significant potential for a mature oil source and migration into the area covered by the 3D seismic survey.
Although exploration is in its early stages, the processing of the seismic surveys will provide the company with a clearer picture of expected output within the area.
Conventional wet gas In addition to developing its oil discoveries, Drillsearch is undertaking 3D seismic surveying and testing of its current wet gas interests within PEL 106A and PEL 106B, in the South Australian region of the Cooper Basin.
Drillsearch and Beach each own a 50 per cent share of PEL 106 and PEL 106B, while Drillsearch owns 100 per cent (and is the operator) of the PEL 106A and PELA 513 permit areas.
The latter comprises 1500sqkm in the basin’s western flank and incorporates a production licence that extends across the south-western flank of the Moomba gas field, adjacent to the company’s PEL 91, PEL 106 and 106B licences areas.
Exploration will begin in PELA 513 once all Native Title agreements are completed. WesternGeco is currently undertaking 3D seismic surveying of this area and PEL 106A, and Drillsearch expects to start drilling in mid to late 2013, after processing the seismic results.
“We just completed an exploration program with Beach in [PEL] 106B and [PEL] 107, where we drilled five exploration wells [and] made three discoveries, which have been cased and suspended.
“We have cased and suspended a further fourth well, Baird-1, where we recovered tight oil for further evaluation,” Mr Lingo said.
According to the Drillsearch website, the company has made 12 gas discoveries in 15 wells drilled in the PEL 106B permit. Most of the wells are currently shut in and are awaiting suitable commercial arrangements to connect them to the market.
Selected discovery wells within PEL 106B include: Haslam-1, Coolawang-1 and Baird-1, which have all been cased and suspended; Canunda-1, a producer that is currently shut in; and Brownlow-1 and Middleton-1, which are both producing wells.
“What we are looking to do first and foremost is to expand the existing wet gas pilot project by installing some additional infield compression to maintain supply reliability deliverability to develop and tie into the wet gas project.
“The Canunda wet gas discovery, which was discovered at the same time we made the wet gas discovery at Brownlow, is very liquids-rich [and] produces 180 to 200 barrels of condensate per million cubic feet of raw gas produced,” Mr Lingo said.
Gas sales agreement
In December 2011, the PEL 106B JV partners signed a contract with the South Australian Cooper Basin JV (comprising Santos with 66.60 per cent interest, Delhi Petroleum with 20.21 per cent and Origin Energy with 13.19 per cent) for a gas sales agreement for the production from the permit.
The current PEL 106B producing wells, Brownlow-1 and Middleton-1, are producing at a daily rate of 22 million standard cubic feet of raw gas and 900 barrels of oil.
In its March 2012 quarterly report, Drillsearch stated that raw gas production from these wells was 814mmscf, which consisted of an undefined amount of sales gas plus 268,000t of LPG and 15,771 bbl of condensate.
Drillsearch stated that sales revenue for the March quarter was $8.2 million, which represented a 376 per cent increase on the previous quarter ($1.7 million), due largely to the escalation in production at PEL 91 and the start of production at PEL 106B. Drillsearch sold 36,132 bbl of oil and condensate in this period and realised an average sale price of $118.60 per barrel, compared to $112.70/barrel in the prior quarter.
Unconventional shale gas
Drillsearch formed a JV with QGC (part of the BG Group) in July 2011 to explore, appraise and delineate shale gas, tight gas and deep-formed CSG in ATP 940P in the Central Cooper Basin, which covers approximately 2545sqkm.
QGC has a 60 per cent share in the JV, while Drillsearch holds the remaining 40 per cent and is the operator.
The JV partners agreed to complete a 1100sqkm 3D seismic survey of the Nappamerri Trough Shale Gas Fairway in the Central Cooper Basin, beginning in early July.
As part of the agreement, QGC committed to a five-year, $130 million, three-tier exploration, production and appraisal program.
QGC has expertise in the commercialisation of gas resources, and is a major wholesale gas supplier to domestic and export markets.
“This joint venture is significant for both the Cooper Basin and Drillsearch. This landmark transaction puts Cooper Basin shale gas resources on the world stage.
“This transaction is a major achievement for Drillsearch: validating not only the quality of the position the company holds in the Nappamerri Trough Shale Gas Fairway but also the company’s capability as an exploration operator in the Cooper Basin,” Mr Lingo said.
The processing of the seismic data is expected to take place in late 2012 and early 2013, with a drilling program to start afterwards.
“We recognise that as unconventional resources are proven up in the Cooper Basin there are going to be large resources and large markets to exploit the unconventional resources,” Mr Lingo said.
Regulatory changes and taxes The new Carbon Tax was implemented at the start of July and is aimed at reducing the carbon footprint that mining and production companies have on the environment, while also imposing a tax on the mining of non-renewable resources.
Mr Lingo said that the overall impacts on Drillsearch were “indeterminate” as it was not one of the companies identified as being subject to the tax directly.
However, he did anticipate that the Carbon Tax would have cost implications for the company at some point.
Meanwhile, the Federal Government has imposed an extension of the Petroleum Resource Rent Tax (PRRT).
Previously only applied to the recovery of petroleum products from Australian Government waters, it has been levied on all onshore oil and gas operations, including oil shale and CSG projects, since July 1.
In addition, the Queensland Government has introduced a stamp duty charge on the transfer of exploration permits for minerals and petroleum prospecting where it had not applied previously, potentially impacting exploration as well as investor sentiment and confidence.
“The challenge is that over the last several years there have been quite a number of regulatory challenges which introduce additional uncertainty within our business and the capital markets,” Mr Lingo said.
“It’s about how many changes you can manage at one time and how many challenges investors can digest at one time.”
Skills shortages and the future As exploration and production in Queensland increases, it has become more difficult for resource companies to find skilled people.
Queensland Resources Council chief executive Michael Roche stated that despite the global recession, the skills shortage was far from resolved.
He added that this would become increasingly evident as global demand for minerals and energy commodities rebounded.
According to Mr Lingo, “One challenge is access to the right people: having enough skilled people – senior, mid-tier and junior – to be able to undertake the overall aspirational plan that the company has both on a strategic and day-to-day business level”.

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