Australia's Warrego Energy responding to shift to unconventional gas
Owain Franks, Warrego Energy, Perth, Australia
Industrialists, economists, analysts, and politicians worldwide agree that with increasing energy consumption, comes the risk of a serious supply shortfall. Business models that served us well in an age of cheap and easy oil and gas, may struggle to be viable or competitive as the energy landscape evolves.
In parallel, as the supply side tightens, the issue of energy security becomes an ever more political as well as commercial consideration. Secure access to a commercially viable and environmentally acceptable source of energy is one of the most challenging dilemmas of our time. The impact of almost exponentially increasing demand for energy from huge hyper growth economies, such as China, only exacerbates the dilemma.
The stark reality is that our reliance on oil and gas to meet our energy demands will continue for the foreseeable future. Few would argue that renewable energy is unquestionably the only meaningful solution in the longer term. Hydrocarbons are a finite and depleting resource and have a significant impact on the environmental wellbeing of the planet. Inevitably, though, the renewables solution is some way off, perhaps decades.
It is hard to find agreement as to which new technologies to develop. The rate at which renewables increase market share is driven by economics, government subsidies, and global politics. Renewables also face continuing technological, infrastructure, and engineering challenges.
The 21st century world needs a transition fuel. In our view it is undoubtedly unconventional gas that will bridge the gap between growing energy demand, depleting conventional hydrocarbon resources, and an apparently unstoppable move away from nuclear power stations. Some would say the future of the major industrialized economies will be dependent on unconventional gas, though they may not yet realize it. Urgent investment in infrastructure is required to avoid a significant energy shock due to the lead time on major shale gas developments.
Global interest in unconventional gas has developed significantly over the last 12 to 18 months. The International Energy Agency has described the next 20 years as the potential "Golden Age of Gas."
In April 2011, this prediction was reinforced when the US Energy Information Administration (EIA) published an extensive report concerning the global outlook for shale gas mapping the 48 most important prospective basins in 32 countries. The EIA estimate that the countries examined may contain 5,760 tcf (trillion cubic feet) of technically recoverable resources. In Australia, it reports there may be 396 tcf of technically recoverable shale gas.
Anticipating a global shift to unconventional hydrocarbons four years ago, we founded Warrego Energy to acquire and develop onshore unconventional gas opportunities. In 2008, we acquired the rights to a promising unconventional gas property block (EP 469) in Western Australia, which contains the West Erregula tight gas field.
West Erregulla was discovered in 1990 and is held within Exploration License in the North Perth Basin. It is about 12 miles from both the Dampier-Bunbury and Parmelia pipelines, through which gas will be exported to market in 2014 following successful field development. The Perth Basin is one of four Australian basins identified by the EIA with major shale gas potential, extending to approximately 20,000 miles2. It contains two main organic-rich shale formations with gas development potential: the Permian Carynginia and Triassic Kockatea shales. Both of these shales are present across the 224km2 of License EP469.
"Conventional gas fields are now in decline, long-term contracts for cheap gas have ended, and coal is increasingly a less viable option due to greater environmental pressure and a carbon tax due to be implemented in 2012. New developments on the North West Shelf are predominantly committed to LNG with reserved gas insufficient to meet demand."
Western Australia or, more commonly, WA, is Australia's largest state covering an area of one million miles2. Despite the global financial crisis, the state's economy has experienced unprecedented economic growth over the last decade growing by an average of 4% per year. The economic boom is inextricably linked to the abundance of natural resources and the extraction and processing of a diverse range of mineral and petroleum commodities, and the capital city of Perth (metro population about 1.7 million) is set to double in size within the next 10 years.
Until recently, plentiful cheap gas from conventional sources in the North West Shelf, plus coal, have underpinned the burgeoning resource sector. However, conventional gas fields are now in decline, long-term contracts for cheap gas have ended, and coal is increasingly a less viable option due to greater environmental pressure and a carbon tax due to be implemented in 2012. New developments on the North West Shelf are predominantly committed to LNG with reserved gas insufficient to meet demand.
The well-regarded DomGas Alliance in WA has researched the gravity of the local energy situation. According to their data, WA is set to experience a severe energy shortfall between 2014 and at least 2020. The recent publication of the Dampier to Bunbury Natural Gas Pipeline report has highlighted an even bigger gap between supply and demand for domestic gas, predicting a shortage through to 2030.
The stakes are high. In 2010, the DomGas Alliance reported that new resources projects reliant on gas could deliver AUD $46 billion (one Australian dollar equals about US$0.9999) in capital investment, AUD $25 billion a year in economic output and employ 19,000 people. There are currently AUD $107 billion in advanced resource projects underway in WA with another AUD $194 billion planned or possible.
The 2011/12 budget saw Treasurer Wayne Swan pin much of Australia's economic future on a mining boom. The mining industry is predicted to invest a historic $76 billion over the next financial year, around eight times the annual level previously. Many mining firms rely on coal and diesel for baseload power generation and most resource processing. Both are in increasingly short supply and even before carbon tax impacts are no longer affordable power sources on an industrial scale. Without gas, the mining boom will stall.
Recognizing the grave economic consequences of a gas shortfall, the government has initiated measures to stimulate exploration and development of unconventional gas, including, for example, a 5% reduction in the state royalty and the launch of the Exploration Incentive Scheme (EIS), a state government initiative that aims to encourage exploration in Western Australia for the long-term sustainability of the state's resources sector. It is hoped this AUD $80 million initiative stimulate will increase private-sector resource exploration and ultimately lead to new mineral and energy discoveries.
WA clearly has the natural resources necessary to transform its energy landscape. Thriving shale gas production would relieve dependence on the North West Shelf, on diesel, and on coal. However, such a monumental shift in the energy mix will take time. In the US, shale is now quick and relatively easy to develop from an infrastructure and permitting perspective. It may be viewed as an overnight success some 20 years in the making. The situation in WA is similar to that in the USA 20 to 25 years ago.
Expansion of infrastructure and support services is urgently required to keep pace with developments in the sector and the enormous shale gas opportunity that is opening up. WA does not have a mature services sector, and the cost of extracting the gas is high due to lack of competition. In parallel, there is a requirement for streamlined regulatory processes and meaningful progress towards recruiting the 150,000 or so skilled workers required over the next five years. I believe these are hurdles that can be overcome.
With geographical and industry conditions resembling those of the USA and Canada, WA is poised to commercialize its shale gas resources on a large scale. In the US, shale gas now accounts for more than 20% of all gas production. It has been a real game-changer, and I would expect to see the same outcome in WA.
Shale gas, particularly in the Perth Basin due to its close proximity to market and infrastructure, represents a tremendous opportunity for experienced operating companies, service businesses, and technology providers. Effectively applying new technology to unlock the shale gas is key.
A cornerstone of Warrego's strategy is the successful definition, field application, and validation of key enabling technology. Our commitment to new technology has become a tangible point of difference in a competitive market.
Traditionally, the energy sector has a poor record in the introduction of technology. Of the eight new to WA technologies that will be utilized in the West Erregulla field, six come from the UK. These include low-invasion drilling fluids to mitigate reservoir damage and increase productivity, seismic processing technology to optimize well locations and maximize productivity and ballistics technologies that have the proven capability to dramatically reduce fracture breakdown pressure and improve productivity in suitable reservoirs by 20%. Warrego is looking to set the benchmark for rapid deployment of technology in a focused and efficient way to increase the technically available tight gas reserves across our acreage.
Throughout our initial work quantifying and evaluating the potential gas-in-place resource, our original expectations are being met and even exceeded. The Kockatea shales underlie the entire 224 km2 of Licens EP469 and estimates indicate it may exceed 9 tcf in place over the license area. Additional shales present within the block give us confidence that the in-place number is considerably higher. The gas potential of these shales will be evaluated in mid-2012 when we come to drill West Erregulla-2.
Warrego has early mover advantage in the North Perth Basin with all necessary approvals complete and preliminary technical work done. Blending excellent local knowledge and skills with our international experience, technologies, and innovation, all that remains is to drill. I believe we are witness to the beginnings of a new era in the WA oil and gas sector and there has never been a better time to invest in unconventional gas in Western Australia. OGFJ
About the author
Owain Franks spent 21 years as a partner at PricewaterhouseCoopers (PwC). He has tax, legal, accounting, and strategy qualifications. During that time he was managing partner of the PwC UK, European, and global human resource consulting practices. Franks spent seven years as a member of the PwC UK Management Board, including serving as head of strategy. For many years he has consulted within the oil and gas sector on business strategy, performance improvement using lean manufacturing theory, business structuring, and transactions. He joined Warrego Energy in March 2011 as chief financial officer.
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