Drillsearch

Right on the money

Focusing on Australia’s Cooper Basin has given oil & gas explorer and producer Drillsearch Energy security in the present and great promise for the future.

Owning many good permits isn’t enough to make an explorer a success; to succeed, one needs to know which permits to focus on, as well as what to do with them. Failure to recognise this held back Australian oil & gas explorer Drillsearch Energy Limited (ASX: DLS) for years, until a new Managing Director came on board to turn it around.

That MD was Brad Lingo, a man with 25 years in the oil & gas industry, in almost every continent, under his belt. Lingo’s last job before joining Drillsearch was as Head of Oil & Gas for the Commonwealth Bank of Australia. Drillsearch, a company listed on the ASX since 1987, was one of his clients.

“I knew the company well, and saw both the technical and commercial opportunity in its Cooper Basin assets,” says Lingo. “I also realised that, back then, the company’s management didn’t quite understand the significance of what they owned. As their banker, I tried to help them understand this.”

Prior to Lingo’s appointment in October 2009, Drillsearch had a geographically diverse portfolio. It had a Canadian production subsidiary, exploration assets just offshore Papua New Guinea and assets both offshore and onshore in Australia, including the Browse Basin off the northwest coast. Lingo’s primary goal as Drillsearch’s new Managing Director was to focus the company’s human resources and financial capital to where they could be used to best effect.

“We did a thorough portfolio review to look at where we’d been good at creating shareholder value… and that was within the Cooper Basin,” he says. From that point, Drillsearch began to sell off its other assets and committed itself to the Cooper Basin.

Untapped opportunity

The Cooper Basin and the Eromanga Basin that overlies it stretch from South Australia into Queensland, forming Australia’s largest onshore oil & gas province.
Explorers began making significant oil & gas discoveries there in the 1960s and yet, according to Lingo, the basin remains relatively underexplored and underexploited, barely touched by modern exploration methods. “That is what really presents the opportunity,” he remarks.

“The Cooper Basin is well understood in terms of its overall geology, but historically that has not been applied to unlocking the basin’s resources. People looked at it as predominantly a gas production basin, and although it had large areas believed to be oil-prone, these had only been very lightly explored.”

One such area was the Western Flank Oil Fairway, from which Drillsearch now produces almost 13,000 barrels per day (bpd). This and other triumphs can be attributed largely to Drillsearch’s decision to focus on the Cooper Basin at a time when other companies still considered it mature and couldn’t see any upside.

“We saw there were still an awful lot of hydrocarbons to be discovered, so moved early to acquire large interests in the basin,” adds Lingo. “To this day we are one of the largest anchorage holders in there.”

At the time of interview, Drillsearch’s net acreage in the basin exceeds 18,000 square kilometres, totalling approximately 4.7 million acres (this will change once Drillsearch’s latest deal with JV partner Santos is finalised). It holds 22 permits, 14 of which are subject to operation, each pertaining to one of Drillsearch’s three growth platforms: Oil, Wet Gas and Unconventional Gas.

Oil

Drillsearch’s oil business is its strongest growth platform and accounts for approximately 80% of its current production – most of which comes from the Western Flank Oil Fairway. According to Lingo, this area has yielded many prospects, much drilling and a great deal of oil. Drillsearch has 60% equity in PEL 91, one of the Fairway’s biggest permits; 55% equity in PEL 100, which it is selling to Santos; and 50% equity in PEL 182. PEL 91 is a Joint Venture with operator Beach Energy, covering part of the south-western flank of the Patchawarra Trough, South Australia. It contains estimated reserves of 7.58 million barrels of oil equivalents (mmboe).

Oil production in the Western Flank Oil Fairway recently reached 12,620 bpd gross, 60% of which are net to Drillsearch. This became possible with the completion of the Bauer-to-Lycium Crude Oil Pipeline in April, to transport oil from PEL 91.

Other oil milestones achieved in the Western Flank Oil Fairway this year include first production from the Hanson Oil Field and new oil discoveries at the Kalladeina-2, Congony-1 and Sceale-1-1 wells – since named the KCS oil discoveries, believed to form part of a larger accumulation.

Drillsearch also acquired a 100% equity holding in a more ‘frontier’ oil area called the Inland-Cook Oil Fairway. “We see this as a north-eastern extension of the Western Flank Oil Fairway,” says Lingo. The company is currently undertaking regional geological, geophysical and seismic studies here.

“We also have a strong legacy position in the Eastern Margin of the Cooper Basin, which has been a historical oil fairway,” he adds. “We’ve recently expanded that position through acquiring additional oil production assets in our Western Cooper Wet Gas Joint Venture with Santos.”

Wet Gas

Lingo speaks of Drillsearch’s wet gas exploration work in the Cooper Basin with pride, claiming it has been “very successful” in discovering deposits of the liquid-rich gas. “We’re the only independent in the basin that’s been able to make these conventional gas discoveries, get them developed, get them connected and get them commercialised, through the Santos-operated gas gathering and processing network,” he says.

Drillsearch signed a Joint Venture agreement with Santos Limited in July 2013, its main object being to accelerate the commercialisation of its Western Cooper Wet Gas permits. Lingo says Drillsearch worked “very hard” to grow its relationship with Santos.

“Through spending AU$100-120 million, Santos now earns a 60% operated interest in the Western Cooper permits (PEL 106A and PEL 513) and, in return, the discoveries we made are being accelerated in terms of development, which will drive further production and cash flow for Drillsearch,” he explains. “We now have a 12-year gas sales agreement with Santos.”

Drillsearch also owns 100% of the Northern Cooper Wet Gas project area, gained through acquiring Acer Energy earlier this year. “These are significant wet gas and high-volatility oil discoveries made by Acer and its predecessors, but they had never been appropriately developed,” says Lingo. “Getting those existing discoveries developed and producing is going to be a key focus for us over the next 18-24 months.”

Unconventional gas

Cooper Basin’s reserves of unconventional gas have been known of for a long time, says Lingo, but not until Drillsearch’s arrival had they been appropriately explored or appraised. Through a strategic Joint Venture with QGC (BG Group), Drillsearch aims to explore, appraise and ultimately develop the shale gas in the Central Cooper project areas. The gas would serve both the domestic and export markets.

As in most of its Joint Ventures, in this project Drillsearch will be doing what it does best – exploration – leaving QGC to do the heavy lifting.

“We’ll operate through the exploration phase but if we prove up this world-class resource, then QGC has the right to take over the development operatorship,” explains Lingo. “That stage could involve 600 wells, which is a large undertaking better suited to QGC than us.”

Drillsearch is a relatively small company compared with its competitors and partners in the Cooper Basin – Beach, Santos, QGC and Senex to name a few – but Drillsearch plays this fact to its advantage. “Being smaller makes having a focus that much more imperative,” says Lingo.

“It means we’re not trying to do the things we do well in multiple areas. We do not have to understand multiple geologies. We consciously moved away from being a jack of all trades and a master of none – our model is to be the master of one.”

Much more to come

Lingo sums up Drillsearch’s plans for the few years as, “continued specific focus on increasing reserves, increasing production and increasing cash flow”.

In its Oil Business, this will include further exploration drilling in the Western Flank Oil Fairway, creating more oil Reserves and expanding the facilities to increase production and cash flow. Having recently acquired a bigger stake in the producing assets of the Eastern Margin, Drillsearch wants to expand that asset and grow its footprint in the area. It will simultaneously be proving up oil Reserves in the Inland-Cook Oil Fairway.

In its Wet Gas Business, Drillsearch aims to ramp up exploration and the development of its existing discoveries in the Western Cooper Joint Venture with Santos, while accelerating appraisal and development activities in its 100% owned Northern Cooper Wet Gas project area.

Work in the Unconventional Business will comprise 3D seismic work, drilling and testing of the first Central Cooper shale gas wells.

With so much going on in the Cooper Basin – each of its growth platforms constituting “a business in its own right,” says Lingo. With this in mind the explorer and producer does see itself becoming a significantly larger player in the Australian oil & gas sector.

“One of the key messages that we get from investors is that Drillsearch is a small-to-medium-sized company with a very big business,” Lingo remarks.

“We’re an ASX 200 company today – we aspire to become an ASX 100 company in the not too distant future.”

www.drillsearch.com.au

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