Central Petroleum

Central Petroleum takes its massive Australian oil, gas & coal acreage to the TSX

While these are grimy times for the financial markets, oil and gas onlookers had cause for celebration when tenacious Australian conventional/unconventional onshore frontier oil and gas explorer Central Petroleum (ASX: CTP) (“CTP”) announced further oil shows at its Surprise-1 well in the Amadeus Basin in November.

The company, in possession of a 270,000 square kilometres package of acreage in central Australia’s Pedirka, Amadeus, Southern Georgina and Lander Trough Basins in the Northern Territory, South Australia, Western Australia and Queensland, has been quietly posting encouraging results from the Surprise well since late-2010.

When the team announced plans to carry out horizontal drilling at the well—the first time the practise will take place the Company’s central Australian acreage—the news bolstered market interest in the company. And when it imminently lists on Canada’s Toronto Ventures Stock Exchange (TSX.V) and progresses plans for both a 2012 farmout on its vast landholding and securing a worthy partner on either/or of its oil and gas and coal ground packages, we’re going to hear plenty more.

“This company has possibly made an oil discovery at Surprise-1 and we think that it may be the first commercial scale well that we’ve drilled,” managing director John Heugh says.

“We are developing our knowledge of central Australia to such an extent that there’s an increasing flow of majors and mid-caps beating a path to our door, looking for information, but we don’t want to do a deal for doing a deal’s sake.”

Ongoing market turbulence, Eurozone upsets and working to get the right kit to drill has not deterred CTP. The short-term focus remains to be on oil discovery and production offering early cashflow. Medium-term interests are gas into mini LNG (liquefied natural gas) for the transport industry, condensates and helium.

And these interests—coupled by longer-term sights set on natural gas into GTL (gas-to-liquids), LNG, and piping gas to the Australian eastern coast domestic market—suggest that unlike various other juniors who have sold acreage for next to nothing under financial pressures, when Central Petroleum signs the dotted line, we’re going to see a deal well worth doing.

Pleasant ‘Surprises’ & U.S. interest

For the team in charge of Australia’s biggest exploration spread, like many another junior and mid-cap operating in the nation, 2011 has been tough. However, turning attentions to North America—where the company has been received from New York to Toronto—the decision was made to aim for a TSX.V listing in February 2012. In July, CTP announced that two of Canada’s leading investment banks have been brought in to manage the listing, CanaccordGenuity and Cormark Securities; well-timed given that ensuing interest in partnering on CTP’s oil and gas ground has stemmed largely from North America.

“The listing on the TSX.V will give us access to a pool of capital that nominally is about five times bigger than that which we can access through the resource sector as a junior company on the Australian Stock Exchange,” Heugh explains.

“The Canadians in particular understand frontier onshore basin plays and they’re very enthusiastic about them. They’re real pioneers and once they have a good story, they tend to market it through North America.”

Recent successes will make it an easily marketable tale to tell, especially when it comes to the Surprise well where the oil shows encountered stemmed from drilling that hit a depth of 2,599 metres. Heugh says that following electric log analysis, the well may host a 17 metre hydrocarbon column, including one section with very high permeabilities up to 420 Millidarcys.

“We aim to case the oil zone off with seven inch casing now that we have run electric logs. There are another five deeper targets below that 2,732 metre casing shoe—five very promising targets indicated by seismic—and the top of a salt zone that we want to drill into at 3,450 metres,” he says.

“We will make decisions about drilling ahead deeper after we have drilled a horizontal wellbore out to about 700 metres from the existing wellbore within the interpreted 17 metres of gross oil column that shows some promise of producibility.”

CTP’s plans to carry out horizontal drilling speak volumes about the team approach at Surprise. While a first in terms of activity in central Australia, horizontal drilling is well known in North America and recent team additions reflect the company’s preparation for this—in place of previous ideas about drilling a sidetrack section ahead of going about vertical completion and production.

Petroleum engineer Dalton Hallgren has been brought in as Chief Operating Officer for CTP’s drilling, and brings in bountiful experience in major shale gas and shale oil plays across the Marcellus, Bakken, Haynesville and Barnett provinces in the U.S. And new exploration manager, Trevor Shortt, has worked everywhere from Australia’s Cooper Basin to the Bakken and the Timor Sea.

Describing the works carried out since December 2010—including full analysis of 25 core plugs from a nine metre core which reveal that the zone may flow at between 500 to 1,000 barrels per day (bpd) depending on the pumping system used—Heugh says that by running horizontal wells off the main well bore, CTP may as much as quadruple potential production.

These plans reveal why CTP has strategically refrained from embarking on a deal commonly seen by juniors in possession of such plentiful and prospective ground at this juncture, and Heugh explains that the attention mounting around the group’s progress is a fundamental part of readying for the right opportunity.

“Unfortunately, a number of junior companies have sold out too cheaply—farmed out vast amounts of exploration acreage for a song at between $12 to $30 an acre which is practically zero—and that’s not what we want to do,” he says.

“We want a deal that values our land, at least initially in smaller increments, at more like $300-500 per acre.”

And it isn’t only CTP’s oil and gas haul that’s garnering international interest.

Secondary goals for CTP coal

In the Pedirka basin, home to CTP’s coal acreage, market mutterings have taken place since mining multinational Rio Tinto made mining lease applications close by in May 2010. Previous independent estimates have given JORC exploration target category guidelines in the region of plus-300 billion tonnes above 1,000 metres for CTP’s tenements, and Heugh says that the goal is now to prove by drilling that the company has extensive shallow coal that may be amenable to open cut mining.

“We’ve also done a deal with a local Australian group, Allied Resource Partners, whom in order to earn a small percentage interest in the project have agreed to find funding and technical partners for a 60,000 barrel per day UCG-GTL plant based upon some of the deeper coal in the basin,” Heugh says.

Announced in June 2011, the US$7.5 billion partnership with Allied Resource Partners Pty Ltd. (“ARP”) was praised by Mining Minister Tom Koutsantonis. Heugh says that with regards to CTP’s designs on possible GTL and UCG (underground coal gasification) projects, there’s clear merit in the company retaining a sizeable interest while allowing a mining specialist group to manage and execute the project—possibly monetised by debt funding after the completion of a bankable feasibility study (BFS).

“We’re looking at UCG-GTL, CTL, coal mining beneficiation and export, and we’re also looking at groups that want to do UCG into fertiliser and ammonium nitrate explosives production from the coal measures,” he explains.

“The coal is shaping up to be a very important resource for us, but because our expertise lies largely in conventional and unconventional hydrocarbons, we want to focus on that and leave coal monetisation and operatorship to other incoming partners.”

Interests in monetising this project stem largely from Asia; and it’s no wonder, as China looks to increase its thermal coal imports from 130 million tonnes per year last year to around 200 million tonnes by 2015, and India—currently importing around 50 million tonnes per annum of steaming coal—needs to increase its imports to 200 million tonnes per annum of steaming coal to keep up with demand.

“Both countries seem to care less about making a profit from coal mining operations, than they care about simply getting the required supplies. That makes our coal perhaps a little more attractive, given the vast tonnages available,” Heugh reflects.

Approaching the (i)deal

It’s a sublime balance; assisting a junior like CTP with acreage too large for its own in-house resources, and providing fair pricing in the process. Astute when it comes to the mistakes made by other juniors who have farmed out good ground too cheaply—but realistic about the need to bring in the right major partner—Heugh and the CTP team have a lot of cards left in their deck. As each one laid on the table continues to reveal favourable options towards production and further exploration, it appears that the TSX.V listing may open the floodgates for North American investors, whose appetite for onshore frontier hydrocarbon plays is markedly more honed than many another.

It is hoped that operational news into 2012 will be largely led by the Surprise-1 well, and despite some slowdown caused by days of weather interference and rig mobilisation issues, the turn of the 2011 year-end remains to be the deadline as the current round of drilling wraps in late-December.

“If the results indicate that horizontal sections are justifiable, depending on how many we drill, it might be through January before we complete, case and drill them, then begin to flow test the well,” Heugh says.

“It’ll really depend on the log evaluation and pressure and fluid samples that we aim to collect fairly soon.”

These results look set to deliver some positive outcomes mere weeks ahead of CTP’s proposed debut on the TSX.V; favourably-timed for the company’s access to such a larger pool of capital. Meanwhile, interest rages on in both this ground and the coal tenements, and Heugh says it is “almost inevitable that [CTP] will do a series of farmouts in the near future.” Since 1998 this determined explorer has agglomerated and retained an outstanding, highly prospective frontier portfolio, and the coming year may well offer ideal investors a fledging chance to take up on longstanding market interest in the company.