WA oil strikes refuel interest

Oil has returned to centre stage in the resources sector, with three big developments including a major new discovery off Western Australia.

Summary: Oil is flowing off the Western Australian coastline, with two new significant discoveries while, off South Australia, BP has revealed plans to make a fresh assault on the oil potential in the wild waters of the Southern Ocean.
Key take-out: What the three oil and gas developments represent is a reminder that Australia is grossly under-explored, even after decades of trying.
Key beneficiaries: General investors. Category: Commodities.

Jean Paul Getty, once the richest man in the world, had a simple formula for creating wealth: “rise early, work hard, strike oil”.

Australian investors got a small taste of Getty’s recipe last week when oil returned to centre stage in the resources sector, with two significant discoveries in northern waters and the release of details of a bold exploration project in southern waters.

The most important of the trifecta was an oil discovery off a remote stretch of north-west Western Australia known as 80 Mile Beach, where there are no towns and just a handful of cattle stations made famous every few years when their homesteads are flattened by seasonal cyclones.

It was there, roughly 200 kilometres out to sea from Mandora station, that a syndicate led by the US oil explorer, Apache Corporation, rewrote the Australian geological handbook with a discovery that could “join the dots” linking two top oil and gas producing regions.

Work so far at the Phoenix South No.1 well (in permit WA-435-P) has found an oil pool of at least 300 million barrels, helping push Apache’s share price up by 3% on the New York Stock Exchange, while a local partner with a 20% stake in the well, Carnarvon Petroleum, rose by 200%.

It was Carnarvon’s run from 8c to yesterday’s close at 24c (with a few trades above 28c) which helped put the Phoenix South discovery in the news, making a few people richer, as J. Paul Getty predicted, but not outrageously because Carnarvon is small, valued on the ASX at just $236 million.

What’s far more important than a boost to Carnarvon’s share price, and the reason investors with an appetite for oil need to understand the Phoenix South discovery, is a combination of its location and geology.

Technically, the region is known as the offshore Canning Basin, a vast expanse of water which splits the prolific Carnarvon Basin to the south and the Browse Basin to the north.

The Carnarvon is home to the North-West Shelf gasfields, the new Gorgon and Wheatstone LNG projects, multiple small oilfields and Barrow Island, a field classified as a giant and in which will be production for 50 years.

The Browse is home to the next generation of oil and gas projects, including the Japanese-led Ichthys LNG development, Shell Oil’s floating LNG project at Prelude, and the planned Woodside Petroleum-led Browse floating LNG development.

The offshore portion of the Canning Basin was, until last week, classified as barren, despite early sniffs of gas in a 1980 well drilled by BP, and modest production in the onshore portions of the region at small oil pools that included the Blina field.

What Apache, Carnarvon, JX Nippon of Japan and the private Finder Exploration might have done is discover the missing link between the Carnarvon and Browse basins, potentially opening up an entirely new oil province.

Another legendary oilman and founder of Occidental Petroleum, the late Armand Hammer, would be delighted with the news from Phoenix South because shortly after the Blina discovery in 1981 he predicted that the Canning Basin would prove to be bigger than the oilfields of Libya.

Hammer was probably talking about a different geological setting than that being explored offshore, but what the consortium at Phoenix South has done is find a way to make the biggest discovery yet in the Canning.

The keys to their success have been a combination of picking the right location to drill, having the latest equipment to properly test the discovery (something BP did not have) and to drill deeper, testing potential oil and gas reservoirs in older rocks deeper than 4600 metres.

Having discovered one pool of oil in Phoenix South, the Apache-led consortium has decided to deepen the well to test even deeper structures identified by seismic surveys.

The ongoing drilling means that more discovery news might come from the current well.

More importantly, it’s the next phase of drilling which could make bigger news, with the Apache-led group getting ready to drill the next target in their tenements, the Roc prospect which is closer to the coast.

After that a number of other exploration teams will move into the Canning Basin, including a joint venture between Woodside and Shell, which are planning eight wells in their tenements with the first, Hanover South No.1, due to start soon.

There is always a long time (and a huge cost) between discovery and development, which is why last week’s Phoenix South news should be treated as a signal of what might happen rather than a guarantee that commercial development will follow.

The same can be said of the other two developments in the reawakening of the Australian offshore oil and gas industry.

In the Browse Basin, Santos has chalked up a significant gas discovery at a location called Lasseter, roughly 35km from the earlier Crown discovery which is 480km north-north-east of the WA coastal town of Broome.

Rated by Santos as an important discovery it is likely to be developed in association with Crown and could become a future supplier of gas to an expanded Darwin LNG project in which Santos has an 11.5% stake.

Off South Australia, BP has revealed plans to make a fresh assault on the oil potential in the wild waters of the Southern Ocean.

In an interview with The Australian newspaper BP’s country head in Australia, Andy Holmes, revealed that a new oil rig costing more than $800 million is being built in South Korea to tackle targets 300km south of Ceduna, in waters 2.5km deep.

In talking up the high-risk venture Holmes suggested that the region could one day prove to contain as much oil as the Gulf of Mexico or Nigeria, while adding an important rider that: “we don’t know yet”.

BP’s adventure in the Southern Ocean is possibly the most high-risk oil and gas project since Woodside and partners drilled the North West Shelf in the 1970s.

The discoveries made found there were once dubbed “the loneliest gasfields in the world”, a title BP could inherit if it is successful in the Southern Ocean.

What the three oil and gas developments represent is a reminder that Australia is grossly under-explored, even after decades of trying and, as J. Paul Getty said, the secret to great wealth is “rise early, work hard, strike oil”.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles