Strike closes in on new coal play

STRIKE Energy’s faith in the coals of the southern Cooper Basin is being vindicated 15 years after staking a claim in the area. By David Upton
Strike closes in on new coal play Strike closes in on new coal play Strike closes in on new coal play Strike closes in on new coal play Strike closes in on new coal play

Drilling Forge-1

Staff Reporter

The company announced yesterday its second gas supply option agreement based on its 66.7%-owned PEL 96 permit in the southern Cooper.

Under the deal, Strike has granted newly listed packaging giant Orora the right to secure up to 30PJ over 10 years, beginning in 2017. It follows a deal with Orica in July to supply 150PJ of gas over a 20-year period.

Managing director David Wrench said yesterday that a couple of other deals were in advanced discussions.

“Last year I went around to the top 20 industrial gas users in the eastern states and let them know we had potentially a very interesting resource development.

“I wanted to gauge their position and was told by 18 of the top 20 they had no gas contracted beyond 2017. That was a complete shock.

“They are finding it extremely difficult to build a gas supply portfolio beyond 2017 and so I quite quickly came to the view that we could help each other.

“We have a resource that is at an early stage, but we need help in the form of dollars, and they need more supply options.”

The cleverly designed deals give Strike the cash it needs to appraise the southern Cooper coals and bring the project to a point where FID can be considered, although the obligation to supply the gas is conditional on project go-ahead.

While these kinds of offtake agreements have precedents elsewhere in Australia, Strike’s agreements are unusual because they do not include the sale of equity in the project or the company.

“We haven’t put that on the table. That’s important from our perspective because we do not want to dilute our interest in the project, and we want to retain as much control over the development timeline as we can.”

“The quid pro quo for customers is that the gas supply is sufficiently attractive that the investment risk is justified.”

Wrench said the company had a super-innovative board of directors chaired by veteran investment banker and entrepreneur Mark Carnegie.

“We have some very clever guys around the board table. There are always very interesting board discussions and lots of ideas, which is what you need.

“The reality for small companies is that is very tough to develop projects in this market, and you to think outside the square to get things done.”

Strike’s development concept is for a project that can initially produce about 20PJ a year.

“We think that’s a reasonable initial project. The aim is to get going with a meaningful production level, and that could underpin a much larger development if the market demand is there.

“We think the Cooper basin is going to be the backstop supply for eastern Australia forever, and there will be a lot of scope to increase production.”

The company says the southern Cooper coals were at average depths of 2000m, or about half the depth of many other unconventional gas projects in the region.

This means drilling costs of just $3-4 million per well, compared to $10-20 million on other projects, and the potential to take gas to market sooner.

The latest deal with Orora follows some very encouraging drilling results from the Le Chiffre-1 and Klebb-1 exploration wells spudded in November and December, respectively.

The company reported last week that Klebb-1 encountered more than 145m of net coal, which was 35% thicker than Le Chiffre-1, with strong gas shows while drilling.

The two wells tested the centre or the thickest parts of the Weena Trough in PEL 96. Both have been designed for fraccing and initial pilot testing by the middle of this year.

“We have confirmed a very thick coal development, analogous to what we saw at Davenport-1 in PEL 94.

“That’s really exciting because it indicates we have a very significant, continuous system in this area.”

The latest results will also help Strike re-educate the market about the nature of its resource in the southern Cooper.

Investors know it as a coal seam gas play, with all the associated dewatering problems.

In fact, the coals of PEL 96 are very different to the CSG systems of the Surat and Bowen basins and much better described as a deep coal unconventional play, a term that Santos has adopted for similar work in its own areas.

“The southern Cooper coal play is completely different to CSG.

“It’s gas in coals, but it is not water saturated. It’s a completely different reservoir drive mechanism, and the storage mechanism is quite different too.”

“The coals has generated more than gas than it can hold, and it has forced out the water in the coal. We have a system in which the coal itself is dry, but the strata above and below are water-saturated.

“If the system were deeper and hotter, more gas would have been generated and the whole system would have been gas saturated, which is what others are finding in the deeper sections of the Cooper Basin.”

Wrench says Strike believes it is in a sweet spot with a system that is mature enough to have generated gas without carbon dioxide, and not shallow and water-saturated like the coal seams in Queensland.

Wrench said Strike was working hard to understand the coals and find the best technical solution for producing the gas.

“We have done a lot of work on understanding the coals and that is giving us some encouraging and quite unique insights.

“For example, there is porosity developing, which is quite unusual and we are even finding free gas.”

He said Santos was already producing gas from equivalent coals and much greater depths in the Cooper Basin.

“They have developed a fracced a number of wells, including Roswell-1, which is producing gas from the same coals as those in PEL 96.

“We have always maintained that the coals themselves are a very prospective resource play and it’s very encouraging to see others working along the same line.”