Slugcatcher on Santos' seasonal bonus

IT’S a good day when one well adds almost $1 billion to the value of an oil explorer, which is how Slugcatcher likes to measure the pre-Christmas success of the Moomba-194 “shale gas” well drilled by Santos in the Cooper Basin of South Australia.
Slugcatcher on Santos' seasonal bonus Slugcatcher on Santos' seasonal bonus Slugcatcher on Santos' seasonal bonus Slugcatcher on Santos' seasonal bonus Slugcatcher on Santos' seasonal bonus

ENB's infamous Slugcatcher

Tim Treadgold

Not many other observers of this latest shale success connected the dots that link the discovery well with the value of the company behind it.

But for anyone who sees petroleum as a business as much as a geological mystery tour, Moomba-194 is a “rain-maker” for Santos – and possibly for Australia.

On December 18, the day before the discovery was announced, Santos shares traded down to $13.72 – at which point they started to rise and rise and rise, briefly hitting $14.73 on Friday, which represented a gain of $1.01 over five trading days, or an increase in the stock’s market value of $980 million.

Other factors could have been at work. Brent crude, for example, added $US3 a barrel over those five days before and after Christmas to trade at $112/bbl.

The key, however, to the 7% rise by Santos is Moomba-194 and its earlier lookalike well, Moomba-191, which will forever have a place in Australian oil exploration history as the first commercially successful shale-gas producer.

Moomba-194 is more than simple discovery flowing at roughly the same 3 million cubic feet a day as Moomba-191.

It is:

  • Proof of a theory;
  • A game changer for Santos; and
  • Potentially, a “get out of jail” card for the moribund Australian economy.

The theory first because while there have been many academic papers written about the potential for Australia to become a world-class producer of unconventional gas from shale and other tightly packed rocks in a number of basins, the proof of concept requires exploration success.

First step along the proof path was the Moomba-191 well drilled last year some 10km southwest of the Moomba-194 well and within sight of the central gas and oil processing facilities that have been operated by Santos in the Cooper region for the past 50 years.

When Slugcatcher took a close-up look at Moomba-191 in July it had been flowing for the best part of 12 months and not showing any sign of fading, an exceptionally positive pointer to the potential for Cooper shales (and coal seams) to become commercially significant.

Moomba-194 confirmed the gas-saturated nature of the shales and their willingness to flow after standard fracture stimulation.

For Santos the shale-gas wells effectively represent the discovery of a revenue stream that will ensure the long-life of its Cooper Basin assets.

Or, as company spokesman James Baulderstone said: “Santos’ deep understanding of the Cooper Basin plus our access to critical infrastructure enables us to lead the way in realising Australia’s unconventional gas potential.

“Moomba-194 is well positioned, only two kilometres from existing infrastructure and Santos expects to rapidly tie this well into our production network.”

For Australia, which has suffered a series of recent economic setbacks, the success of Moomba-194 represents an opportunity to develop a source of energy at just the right time – much as has happened in the US.

On the other side of the Pacific, unconventional oil and gas is playing a critical role in revitalising the world’s biggest economy, thanks to the way its abundant availability has driven down the price of all forms of energy.

Australia can repeat that trick because the Santos discoveries (and with others to come) have elevated the Cooper Basin to the status of being the only region outside the US that is producing commercially significant volumes of shale gas.

Discovery is one thing.

Delivery is now the key and, while that is likely to generate increased gas (and oil) sales for Santos and its partners in the Cooper Basin (such as Beach and Origin Energy), there is a two-edged sword aspect to a shale gas rush – production might soar but the price of gas might not.

In the US, the shale rush triggered a flood of gas into a flat market with the resultant collapse in the Henry Hub gas price from around $13 per million British thermal units to $2/MMBtu.

The gas price has risen since to around $4.28 but that’s due to a combination of a cold northern winter and rapidly rising demand for gas by industrial users who are switching from other sources of higher cost power.

Australia could easily follow the US thanks to the Moomba discoveries and their status as the world’s second source of commercially viable shale gas, which will be in strong demand from industrial customers super keen to lower production costs.

In effect, the Moomba unconventional discoveries could dramatically alter the future of Santos – and Australia.