Strike Energy in an emerging petroleum play with a rapidly growing presence in the unconventional energy sector in South Australia’s Cooper Basin, where an important flow-testing and fraccing program is currently underway.
|Key Parameters||Rating (✓out of 5)||Quarterly Statistics|
|Management Quality||✓✓✓✓✓||Q1 2014 Expl’n & Dev’t Spend: $6.885m|
|Financial Security||✓✓✓✓✓||Q1 2014 Admin Spend: $0.704m|
|Project Quality||✓✓✓✓✓||Exploration Spend 91%, Admin Spend 9%|
|Exploration / Resource Potential||✓✓✓✓✓||Q2 2014 Forecast Exploration Spend: $4.84m|
|Project Risk||✓✓✓✓✓||Q2 2014 Forecast Admin Spend: $1.5m|
We introduced Strike Energy to our Portfolio during March 2012, based on a series of extremely positive meetings with Managing Director, David Wrench. We regard the company as one of the most prospective ‘unconventional’ energy plays available to ASX investors and this is reflected in the methodical manner in which the company has identified its acreage, undertaken meaningful exploration and appraisal activity, and also signed up significant cornerstone gas customers.
Strike Energy has undergone a major rejuvenation over recent years, comprising a revitalization of both its board and its management teams, along with a diversification away from the company’s historic focus on USA petroleum activity. The company’s primary focus is now its Cooper Basin gas acreage and this revised strategy is paying dividends in terms of heightened market interest, with Strike enjoying a strong share price recovery from a 12-month low of $0.07 during July 2013 to a 12-month high of $0.16 during June 2014.
The unconventional energy space within Australia does have enormous potential, but we believe there are clear geographic and commercial considerations. Strike has consciously identified projects within specific locations of South Australia’s Cooper Basin, based on important fundamentals: firstly, their proximity to essential energy infrastructure and growing energy markets; and secondly the comparatively low-cost of exploration, appraisal and production activity, based on what are relatively shallow reservoir targets.
Successful Initial Frac and Flow-test Program
Strike has provided a very positive update with respect to fracture stimulation and flow back operations at its Le Chiffre 1 and Klebb 1 wells. Strike advised on Wednesday morning that frac operations at both wells have been successfully completed. Interestingly, the second stage of the frac program at Klebb within the thick Patchawarra Vu Upper seam has been redesigned to be less than 10% of the size of the stage pumped in Le Chiffre well, due to the unexpectedly high permeability and productivity observed at Le Chiffre.
Following completion of the large second (upper) frac stage at Le Chiffre, the well began flowing back unassisted and 2,700 bbls of fluid was recovered at high flow rates (up to 5,000 bbls per day) before commencing coil tubing operations, including circulating fluid and pumping nitrogen to clean the wellbore and artificially lifting fluid out of the well during which a net 2,500 bbls of fluid was recovered. Overall, approximately 5,200bbls of fluids have been produced from Le Chiffre over approximately three days of combined flowing time. The well is currently shut-in and pressure build up is being observed.
Analysis of the fracture stimulation jobs pumped and the flow back rates and pressures observed so far indicate that the coals at Le Chiffre have an average permeability of up to 25 mD. These are exceptional permeabilities for coals at these depths and are significantly greater than pre-test expectations.
The high formation permeability and the size of the fracs pumped within Le Chiffre have resulted in very high fluid productivity from the well. In turn, the substantial fluid inflows mean that, at this early stage, Strike is yet to reduce the formation pressure sufficiently to initiate sustained gas production to surface. Monitoring will continue, along with a review of the samples and data collected to date to allow planning for the next stage of testing.
Flow back operations at Klebb commenced on Tuesday from the Vu Upper stage only, with high initial flow rates (up to 3,000 bbls per day) being observed. The well is currently shut-in for a pressure build-up test and flow-testing will continue using coil tubing nitrogen lift over the next few days. Very preliminary analysis of data from Klebb suggests that the Upper Vu seam has high permeability, although not as high as observed at Le Chiffre.
The coals at Le Chiffre have high permeability (up to 25 mD) which, combined with 50 – 60 metres of net coal thickness in each well, result in very high productivity as demonstrated by the flow rates observed. Expectations had been for a low permeability reservoir system (around 0.1mD) with correspondingly low productivity.
Encouragingly however, it appears that the coals within both wells only require minimal stimulation to flow at high rates. These permeabilities have fundamentally altered our understanding of the reservoir system that has demonstrated exceptional deliverability capacity. There is not yet evidence of free gas flow to surface, although further flow-testing should generate such gas flows.
Results from these tests demonstrated that formation permeabilities within the target zones are encouragingly in excess of the company’s expectations. Formation permeability across all coal intervals is a key factor with respect to the potential commercialisation of the company’s gas resource.
Expanded Gas Sales Agreement
Strike has entered into a Gas Sales Agreement (GSA) for 45PJ of gas with Orora Limited (ASX: ORA), which adds a further 15PJ of gas to the 30PJ agreed with Orora earlier this year. The additional gas has been contracted on the same terms at a fixed rate of supply over a 10-year term from 2017, the expected commencement of production from the Southern Cooper Basin Gas Project within PEL 96.
The GSA complements the foundation contract for up to 250PJ of gas with Orica, announced during March 2014 and the Gas Supply Option Agreement with Austral Bricks for 12.5PJ of gas, announced during February 2014. With aggregate contracted off‐take of 307.5PJ (net to Strike) and a balanced portfolio of fixed price, market linked and production cost based tariffs, the Southern Cooper Basin Gas Project is positioned for rapid commercialisation.
Cooper Basin Project Background
Strike Energy is one of the largest permit holders within the southern Cooper and Eromanga Basins, with around 15,000 sq km of net area across six permits. The company is focused on proving-up the commercial potential of its key permits – PEL 96 (Strike 66.67%), PEL 95 (Strike 50%) and PEL 94 (Strike 35%). The strategic value of these permits, close to infrastructure and with world-class resource potential, is increasingly being recognised by participants within the Australian east coast gas business.
The Cooper Basin is known as Australia’s most prolific onshore hydrocarbon region. Since the 1970s, the Cooper Basin has supplied more than 5 Tcf of gas to Australia’s eastern and southern gas markets. The Eastern Australia gas markets are experiencing rapidly increasing gas demand due to the development of LNG for export and higher domestic demand. With limited supplies, some domestic customers have commented on an inability to contract the necessary gas volumes to meet their needs beyond 2015.
Why Cooper Basin?
The Cooper Basin has become Australia’s premier location for evaluation of unconventional resources due to the historical hydrocarbon production, extensive geologic database and existing gas processing, pipeline and service infrastructure. Strike’s Southern Cooper Basin Project is initially targeting the coal seam gas potential within permits PEL 94, PEL 95 and PEL 96.
Strike estimates that approximately 75% of the 8.2 to 21.5 Tcf prospective resource within this area is associated with the coal. The project is ideally positioned to supply the Eastern and Southern Australian gas markets with open-access pipelines passing through the permits.
Strike’s prime Cooper Basin permits (PEL 94, 95 and 96) are located on the southern flanks of the Cooper Basin. The southern flank is less thermally mature than the centre of the basin, suggesting that gas may be liquid-prone and may contain significantly less CO2. The unconventional resource within Strike’s permit areas is comparatively shallow, meaning that drilling costs are significantly lower than rival unconventional plays within the central portion of the Cooper Basin.
Successful Exploration Activity
During H1 2012, Strike drilled two successful evaluation wells that were aimed at analyzing the coal and shale sequences within the Permian section. The Marsden 1 well within PEL 95 encountered thick coals and shales, along with the presence of heavy hydrocarbons up to pentane (C5). The Davenport 1 well within PEL 94 encountered thick shales and over 110 metres of net coal – the thickest coals yet encountered within the Cooper Basin.
At the same time, Strike’s focus shifted from the upgrading of its Prospective Resource (highlighted in the table below) to the future appraisal program for its Southern Cooper Basin Project. Subsequent activity involved included geological studies, the identification of potential well locations within PEL 96 and the commencement of well-planning activities. This work culminated during 2013 with the drilling of the Le Chiffre 1 and Klebb 1 wells within PEL 96.
Le Chiffre 1 is located approximately 4km east of the Moomba to Adelaide gas pipeline and was drilled to a total depth of 2,089 metres and cased using premium casing, which will allow the well to be fracture stimulated in the near future. A total of 105 metres of coal was encountered in the well, of which 86 metres was recovered in cores. Of note, was 46 metres of net coal within a 70-metre gross pay interval of the Patchawarra Formation.
The Klebb 1 well is located approximately 4km west of the Moomba to Adelaide gas pipeline and approximately 8km to the north-west of Le Chiffre 1. The well was drilled to a total depth of 2,193 metres and was cased and cemented just after the period ended. A total of 147 metres of coal was encountered by the well and observed via wire-line logging. In particular, 89 metres of coal was observed within the Patchawarra Formation, including one 34-metre thick seam and two seams over 15 metres thick.
Sizeable Resource Upgrades
Following the completion of the PEL 96 appraisal drilling program, Strike Energy announced during February 2014 an increase in the Pmean (best) estimate prospective resource within PEL 96 to 6.8 Tcf (recoverable sales gas), of which 4.5 Tcf is net to Strike.
PEL 96 forms a significant component of the Strike’s Southern Cooper Basin Gas Project and Strike is focused on the rapid commercialisation of a portion of the resource within the Phase One Area of the permit. This 141 sq km area is centered directly under the Moomba to Adelaide Gas Pipeline. Within the PEL 96 Phase One Area, the Company’s Pmean (best) estimate of the prospective resource has increased to 1.2 Tcf (recoverable sales gas, net to Strike). Notable increases in gas readings were recorded in both wells whilst drilling through the coals and these gas readings increased with depth.
The company has recently announced a couple of significant milestones with respect to the commercialisation of its Southern Cooper Basin Gas Project, located within PEL 96, which forms part of the immediate work program. The PEL 96 Joint Operating Committee is currently proceeding with the first phase of the Pilot Production Test Project, which will involve a multi‐stage fracture stimulation of the target Patchawarra coals in each of the Le Chiffre 1 and Klebb 1 wells. Following fracture stimulation, the wells will be completed to enable flow and extended production testing to be undertaken.
In addition, the PEL 94 Joint Venture (STX 35%, Beach Energy Ltd (ASX: BPT) 50% and Operator, Senex Energy Ltd (ASX: SXY) 15%) has committed to fracture stimulation and extended production testing of the Patchawarra coals within the Davenport 1 well, which lies within the adjacent permit to PEL 96.
The three wells to be drilled across PEL 96 and PEL 94 will be fracture-stimulated back-to-back in a coordinated program. The initial goal of the first phase of the PPTP program is to demonstrate that the Patchawarra coals within PEL 96 are capable of sustained gas flows to surface.
Improving Gas Market Fundamentals
The gas market in Eastern Australia is transitioning from supply-driven to demand-driven conditions, with commercial and industrial gas consumers increasingly concerned about their ability to secure gas supply contracts beyond the 2015/16 start-up of the three Gladstone LNG export projects. Strike’s Southern Cooper basin gas and liquids resource is ideally located to supply gas directly into this market, taking advantage of existing open-access and under-utilised gas pipeline infrastructure.
Given our very strong existing exposure, we currently maintain a Hold recommendation on Strike Energy for existing holders, with a Spec Buy recommendation around $0.135 for those without exposure. Few companies offer investors such high quality exposure to the huge untapped potential of non-conventional energy within the Cooper Basin. Most importantly, the company’s drilling costs for the foreseeable future are now fully funded and it has keen buyers lined up for its gas. We look forward with great anticipation to the results of the company’s current flow-testing program, which will hopefully demonstrate project commerciality.