Strike Energy (ASX: STX, Share Price: $0.12, Market Cap: $100m) is our preferred ‘unconventional’ energy play. Strike’s focus is on defining the commercial viability and overall resource extent of its emerging Southern Cooper Basin Project, with the ultimate aim of delivering gas under long-term supply arrangements to growing and energy-starved markets in Eastern and Southern Australia.
Strike has advised in its December Quarter Report that excellent progress towards commercial gas flows has been made by the Klebb pilot, with particularly pleasing rates achieved by the Klebb 2 and 3 wells. Strike expects the wells will demonstrate productive capacity exceeding threshold commercial gas rates.
Market Significance
The 12-month price chart above is significant because it reflects the robust share price performance of Strike Energy (black line) compared to three other oil sector independents – Beach Petroleum (ASX: BPT), Santos (ASX: STO) and Oil Search (ASX: OSH) – which have recorded share price falls of between 20% and 60% over the same period. Strike is one of the few ASX-listed energy success stories at the present time – a reflection of its methodical approach to project selection, proximity to energy markets, exploration and appraisal activity, as well as securing of significant cornerstone gas customers.
Announcement Detail – Klebb Production Test Update
In our most recent coverage we provided a very positive update with respect to Strike’s operations within its Southern Cooper Basin Gas Project in PEL 96 (Strike 66.7% stake and Operator, Energy World Corporation (ASX: EWC) 33.3% stake) in South Australia.
In its just-released December Quarterly, Strike has provided a further update with respect to continued successful progress in terms of commercial gas flows from its Klebb pilot, with particularly pleasing rates achieved by the Klebb 2 and 3 wells. The Klebb 2 and Klebb 3 wells have performed well – with strong, consistent gas flows and stable water production.
Technical Significance
Firstly, the Klebb pilot is reducing the average reservoir pressure over a much larger than expected area around the wells – which will likely lead to increased ultimate gas recoveries per well.
Secondly, gas flow rates have increased sharply following incremental increases in water production above a threshold reservoir inflow rate. Assessment of the test data indicates that the increase in gas production is sourced from a limited volume of coal very close to individual well bores.
The gas flows being generated by relatively small coal volumes around the wells, when extrapolated to the large reservoir volumes the wells are actually seeing, indicates that the full productive potential of the wells is well above threshold commercial rates.
Next Steps
Strike’s focus is on accelerating field activities to demonstrate the full potential of the reservoir. As gas rates have built, the company is now reaching the limits of its existing pump capacity and has accordingly completed planning for a low-cost upgrade of pump capacity, with work underway and scheduled for commissioning in March. The upgrade will enable increased water production rates to be maintained as gas rates build.
The scoping and preliminary design phase for the Demonstration Facility has also been completed, confirming that construction and operation of an independent, low-cost gas processing facility within PEL 96 is technically and commercially feasible. Discussions with a leading midstream gas infrastructure owner and operator regarding the development, funding and operation of the Demonstration Facility have also been progressed, with finalisation of these discussions anticipated shortly.
Strike has also progressed discussions for the sale of gas from the Demonstration Facility with strong interest from customers in the South Australian gas market, where gas prices have been steadily increasing.
During January a new well, Klebb 4, commenced drilling to support the next phase of development of the project. Once completed and tied in, the well will accelerate progression to production growth from the Klebb pilot.
Project Background
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 maintains one of the largest exposures to the Cooper-Eromanga Basin, comprising approximately 15,000 sq km across its seven permits.
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.
Three of the Cooper Basin permits (PEL 94, 95 and 96) are 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 liquids-prone and may contain significantly less CO2. The projects are ideally positioned to supply the Eastern and Southern Australian gas markets with open-access pipelines passing through the permits.
Summary
Few companies can offer investors such high quality exposure to the huge untapped potential of unconventional energy within the Cooper Basin. Importantly, the company’s exploration and appraisal costs for the foreseeable future are fully-funded and it is lining buyers up for future gas production. The positive results from the company’s ongoing flow-testing program have flowed through into a robust initial resource estimate and solid share price performance. Given Strike has the operational and funding capacity to achieve commercial gas-flow rates at the Klebb and Le Chiffre pilot-wells, commercialisation activity with its Southern Cooper Basin Gas Project will be maintained at an active pace. Strike Energy will therefore remain firmly held within our Portfolio.
