Australia is in the midst of a massive construction wave for new liquefied natural gas (LNG) capacity, seeking to profit off of sky-high demand in Asia for the fuel. Already one of the world’s largest exporters of LNG, Australia plans on moving to the top spot over the next 3-4 years, potentially overtaking Qatar. It currently has the capacity to export 23 million tonnes per annum (mtpa), but it plans to almost quadruple that total by 2017. The 62 mtpa under construction in the land down under accounts for almost two-thirds of the total LNG capacity under construction around the world.
We have written in the past about the investment opportunities in Australian LNG, particularly with the coming wave of Chinese demand for the liquid fuel. But this time, let’s take a look at Australia’s natural gas sector from an upstream perspective.
Booming Natural Gas Production
Australian LNG could be a hugely profitable opportunity before the decade is out, but the export terminals are going to need enormous volumes of natural gas in order to supply all of those LNG trains. And once Australia is able to connect to China, Japan, and South Korea via LNG, demand for Australian natural gas is going to surge. That, in turn, will cause natural gas prices to rise.
That means that there will be a great opportunity to invest in upstream Australian natural gas producers. Australia has already steadily lifted its production of natural gas over the last thirty years, and there is no reason to think that is about to slow down.
The Carnarvon Basin holds some of the country’s most prolific natural gas fields, and accounts for more than 40 percent of Australia’s existing oil and gas production. It supplies the North West Shelf LNG facility, which has been shipping LNG to major customers around the world for 20 years.
The Carnarvon Basin is also home to the truly massive Gorgon project, spearheaded by Chevron Corporation (NYSE: CVX) and its partners. While many energy analysts are watching the project because it is one of the largest LNG terminals under construction in the world – with a capacity of 15.6 mtpa when completed – the upstream part of the project is equally impressive. The consortium led by Chevron is developing the Gorgon and Jansz-lo gas fields off the northwest coast of Australia. The area holds an estimated 40 trillion cubic feet (tcf) of natural gas, according to the U.S. Energy Information Administration. The fields are expected to come online next year and will amount to the largest single resource project in Australia’s history.
The Cooper Basin – The Next Shale
But it is the potential of gas from shale that could be the most exciting energy opportunity on the horizon. Australia has an estimated 437 tcf of shale gas, seventh largest in the world according to EIA estimates.
The Cooper Basin is on the border between Queensland and South Australia and represents the most promising spot for an emerging shale gas boom. Magnum Hunter Resources Corporation (NYSE: MHR), a Houston-based oil and gas company has already had some success there. Kip Ferguson, Magnum Hunter’s Executive President, spoke at Houston conference recently where he talked up the potential for American drillers. “You have a lot of Australian companies coming and saying ‘we want that knowledge,’ and we’re saying ‘we want an area that’s not overbought,’” he said. Whereas American shale basins are so saturated with drillers these days, Australia’s remain underexplored.
The state government of Queensland is so confident that there is an enormous bounty within its borders that it recently opened up a trade office in Houston, Texas. “There’s no question we have an abundance of and a diverse range of energy resources,” Queensland’s Trade and Investment Commissioner to North America, David Camerlengo, told the Houston crowd.
The Nappamerri Trough appears to be the richest area within the Cooper Basin for shale gas, holding an estimated 88 to 100 billion cubic feet per square mile. Neighboring Patchawarra Trough only holds about 16 to 19 billion cubic feet of natural gas per square mile, so concentrations are much thinner. However, the Tenappara Trough is rich in oil, holding 22 million barrels per square mile.
Santos (ASX: STO) is probably the best positioned company to ride the Aussie shale wave. It produced 21.1 million barrels of oil equivalent (MMboe) in 2013, and has a market capitalization of $13.6 billion. It has the largest acreage in the Cooper Basin and has demonstrated commercial success. For example, its Moomba-194 vertical shale gas well began flowing 3 million cubic feet per day in December 2013.
This came on the heels of its first well, the Moomba-191, which showed similar flow rates last year and could become Australia’s first commercially viable shale gas well. Santos claims that taken together, its two wells establishes the Cooper Basin as the only successful shale producing region outside of the United States. “It shows it's not just a one-hit-wonder, and that there's much more to come,” Santos Vice-President for Eastern Australia, James Baulderstone, said after the second well came through.
Santos owns natural gas processing facilities nearby and plans on connecting its wells to them.
Beach Energy (ASX: BPT) is another company in the Cooper Basin. Operating with a much smaller capitalization of $2.1 billion, Beach often works in joint ventures with Santos. Beach has 20 oil fields on the western edge of the Cooper basin, and two producing gas wells. It has an annual production of 8 MMboe, and controls a total of 91 MMboe. It drilled two test wells a few years ago and achieved gas flows of 2 million cubic feet per day. And its Encounter-1 field in the Nappamerri Trough is also one of the earliest commercial shale gas wells in Australia.
The region’s existing infrastructure – for conventional natural gas drilling – gives the Cooper Basin the best shot at propelling Australia’s shale gas industry forward.
And companies are taking notice. “Within 12 months, you’re not going to have the ability to find a deal, or find acreage, in the Cooper,” Magnum Hunter’s Ferguson said in an interview with Bloomberg earlier this year.
There are other promising shale basins in Australia but most are much less explored relative to the Cooper. The Maryborough Formation on Australia’s eastern coast could hold an estimated 19 tcf of technically recoverable shale gas, according to an EIA assessment. The Perth Basin in Western Australia holds around 25 tcf of technically recoverable shale gas and 500 million barrels of oil. While it is far behind the Cooper, the Perth Basin does have an active conventional sector. Several smaller conventional companies operating in the region have explored their leases for shale potential, including Norwest Energy (ASX: NWE) and AWE Limited (ASX: AWE), but have not had success thus far.
The Canning Basin in Northwest Australia has a sizable resource base but is largely unexplored. The Goldwyer Shale in the Canning Basin holds an estimated 235 tcf of technically recoverable shale gas and 9.8 billion barrels of oil. ConocoPhillips (NYSE: COP) dipped their toes in the water with a $119 million multi-year exploration program in a joint venture with New Standard Energy (ASX: NSE) in the Goldwyer Shale.
Finally, the Georgina Basin in Northern Australia is another unexplored basin in Northern Australia. It holds up to 13 tcf of technically recoverable shale gas and 1 billion barrels of oil. PetroFrontier (CVE: PFC), a small Canadian company, holds some acreage in the area, and decided to farm out its operation to Statoil (NYSE: STO). The joint venture will drill 10 to 20 wells by 2017. Statoil put in an initial $25 million and plans to scale that up to $100 million if it feels good about the results.
Australia has always been a massive producer of natural resources whether it was coal, natural gas, or hardrock minerals. As a developed country with a mature economy, growth rates are lower than what you would find in emerging economies. But its shale basins are almost entirely untapped and offer huge promise. The Cooper Basin in particular is set to take off. The region can claim to have the first commercially viable shale gas wells outside the United States – an indication that much more is in the offing.