Shale Oil and the Australian Outback - A Hot, Secure Frontier

Forget the "frontier" basins of North Africa for now, and the energy sector uncertainty in the Levant, which has been taken over by the Muslim Brotherhood, here's a massive opportunity without the security risk: The Australian Outback which is euphoric this week over a massive shale oil find said to be worth trillions of dollars.

Australian mining company Linc Energy announced this week that it had discovered shale oil deposits in the South Australian outback that would put the area's reserves above those of Saudi Arabia if proven commercially viable. The estimates for now are a bit rough-to say the least-with Linc Energy noting anywhere between 4 billion and 230 billion barrels of oil in the fields it owns. The clincher, says Linc, is that the area has no environmental baggage-it's in the middle of nowhere, in the Arckaringa Basin. On news of the find, Linc shares closed up 23% on 24 January.

Linc Energy CEO Peter Bond told international media: "It is massive, it is just huge If the Arckaringa plays out the way we hope it will, and the way our independent reports have shown, it's one of the key prospective territories in the world at the moment. If you stress test it right down and you only took the very sweetest spots in the absolute known areas and you do nothing else, it is about 3.5 billion [barrels] and that's sort of worse-case scenario."

This is a massive deal for a country that only produces about 180 million barrels a year. South Australia's minister of mining, Tom Koutsantonis, prefers to remain sober and cautious over the announcement, however. The deposits found are deep and remote and it's still early days: Can they be profitably tapped? This is where the risk comes in, but the reward will be enormous.

Investors may want to look a bit more closely at Linc Energy and the Arckaringa Basin. The first thing to understand is that Linc's shale discovery comes as it is seeking to sell some of its exploration acreage in the Arckaringa Basin, which it acquired four years ago for $100 million. The company has a $1.16 billion market value and holds 100% interest in licenses covering 65,000 square kilometers in the basin. It needs partners to help with exploration and development.

The market says yes. There have been a series of deals in the area recently. Total SA and Santos Ltd invested in a small local explorer (Central Petroleum Ltd) in 2012.

The trend is to immediately compare new finds to Bakken or Eagle Ford in the US, and Arckaringa Basin has been no different. Linc says the basin is similar in geology to both of the US sweet spots. Linc says it has already been approached by "several" majors.

Australia's unconventional and tight gas potential has always been there, but the exorbitant expense of extracting it has kept explorers away until recently, with new technology making things easier and cheaper.

Beyond Arckaringa, Let's look at the other Basins:

•    Cooper Basin: Holds potential recoverable unconventional gas resources of 85 trillion cubic feet (Tcf) of gas. Santos (ASX:STO) holds the largest acreage in this basin as well as a majority stake in the Moomba gas plant and other Cooper Basin infrastructure. This gives it an advantage in terms of luring investors because it is all that much more likely to be first off the starting blocks in terms of production. Santos is preparing to connect what will be Australia's first commercial shale gas well. Total SA has already taken the bait.
•    Southern Georgina Basin: This Northern Territory basin is attracting increasing interest from bigger players, notably Norway's state-owned Statoil, for unconventional gas exploration. Statoil has bought into Canada-listed PetroFrontier (CVE:PFC) in the basin and plans to spend up to $210 million on exploration. This is the biggest deal in terms of money in Australia's shale sector. Statoil plans to drill between 10 and 20 wells by 2017 in Georgina. The key target here is the Arthur Creek Formation shale play.
•    Perth Basin: Here, fracture stimulation and testing have been encouraging, but exploration is still in the very early stages. Early gas flow rates have been fairly high at the primary well (High Cliff Sandstone), operated by Norwest Energy (ASX:NWE)
•    Canning Basin: Here, ConocoPhillips is preparing to drill the first of three wells with local New Standard Energy (ASX:NSE) in the Goldwyer Shale play, which is being compared to both Bakken and Eagle Ford.
•    Galilee Basin: This Queensland venue is all about the Chinese. China's state-owned CNOOC (in partnership with local Exoma Energy) has hit the ground running here, with plans to drill 22 exploratory wells over 27,000 square kilometers. So far, exploration suggests the basin's Toolebuc shale play could hold more than 3 million barrels of equivalent (in place oil and gas) per square kilometer.

Linc Energy's sensational discovery is only a small part of the Australian unconventional and tight gas puzzle. It still needs to prove the quality of its resource and determine economic viability. But in the meantime, there is no end to the prospective shale plays in Australia, and offshore is a gem as well: Ask Chevron Corp.

The US company has made 19 discoveries off Australia's western coast since 2009. The two most recent discoveries-made this month-at the Arnhem-1 and Pinhoe-1 sites in the Carnarvon Basin underscore the quality and quality of the hydrocarbons in the basins and the market has responded positively.

We'll be monitoring developments here closely for subscribers.