Estimating Dorado’s Recoverable Reserves
by David Archibald
17 August 2018
Australia has a security problem concerning liquid fuels. We now import half of the petrol, diesel, aviation turbine fuel, etc. that we consume. Even if we produced as much oil as we consumed, we wouldn’t be able to refine it with only four refineries still operating.
That is why the Dorado oilfield, recently discovered 100 km north of Port Hedland in 80 meters of water, is so promising. The field has two partners: Quadrant Energy (formerly Apache Energy’s Australian operations) with 80%, and the ASX-listed Carnarvon Petroleum with 20%. With respect to the potential size of the field, Quadrant group executive subsurface Fred Wehr has been quoted as saying:
It’s just staggering what we’ve got here.
Carnarvon Petroleum has described Dorado as ‘a truly spectacular discovery’.
How big is staggering and spectacular likely to be? We can get in the ballpark ourselves. The first zone to have oil in the well is the Caley Formation, with net pay of around 80 meters, 20% porosity, 82.5% oil saturation, permeability of 100 to 1,000 millidarcies and an API gravity of 49.6°. Porosity of 20% is good for 3,000 meters depth. Normally a sandstone might have 75% oil saturation. The rest of the pore volume is water around each sand grain. Oilfields can produce down to about 40% oil saturation. The high oil saturation implies that the sands of the Caley Formation in Dorado-1 are very clean, with a low clay content. The high permeability of up to 1,000 millidarcies also implies that the sands are very clean. The API gravity of the oil is equivalent to petrol. Diesel has an API gravity of about 32°. This means that refining this crude will be simple with a high yield of diesel and petrol.
Those field parameters will also mean that individual wells will be very productive. There was a production well on one of the Bass Strait fields that started life at 20,000 BOPD. The Dorado wells promise to be similar. Another indication of the potential well productivity was the drill stem test in Roc-1, 20 km to the north, of the Caley Formation which flowed at 51 million cubic feet per day.
We have enough information to calculate what each square kilometer of the oilfield should hold. The gross rock volume is one million square meters multiplied by the net pay thickness so that is 80 million cubic meters.
Of that 20% is pore volume, so 16 million cubic meters. The oil saturation is 82.5%, so the oil-in-place is 13.2 million cubic meters. So far we have relied upon data released by Carnarvon Petroleum. The next step is the recovery factor, which is subjective. Normally 35% of the oil-in-place might be recovered. But this reservoir promises to be somewhat like the Bass Strait oilfields in which, because the sands were so clean, recovery ended up being about 75%. Let’s assume 60% recovery for the Caley Formation in the Dorado oilfield. That makes recoverable oil about 8 million cubic meters per square kilometer. The next step is determining the shrinkage. Oil in this reservoir will be at 110°C and so will contract when it is at surface temperature. It also has LPGs and methane dissolved in it. These come out of solution at surface pressure. The LPGs etc. sell for about 60% of the oil price in energy content terms. This is another revenue stream but we will leave it aside for this exercise.
For Dorado let’s assume a conservative 20% shrinkage, which takes the recoverable oil per square kilometer to 6.3 million cubic meters. There are 159 liters in a barrel, so that becomes 40 million barrels per square kilometer.
The Dorado field is a stratigraphic trap formed by a 500 meter deep canyon eroded where it has a north-south orientation cutting across the regional dip. The Caley formation is a slab of sediment with a slight tilt to the west with the updip seal provided by shales filling the canyon.
We can determine how wide the field is by two facts. One is that Mr Wehr from Quadrant Energy stated that the total oil column height is 175 meters. Secondly Carnarvon Petroleum published a map showing the depth to the top of the Caley Formation with a horizontal scale:
The 3,000 meter subsea contour passes through the Dorado structure near its crest. From that map the top of the Caley Formation is falling 500 metres vertically for 20 km horizontally. That is a slope of one in 40 or 1.43°. Now we can draw a cross section of the field in which the horizontal and vertical scales are the same:
The field width should be about 3.5 km. Importantly, 2.0 km of that is separated from the oil/water contact. This has great advantages in the way the field is produced because water sweeping in to replace the produced oil has to come from perhaps 3.0 km away. Also, no trap-geometry correction has to applied to the width to where the oil/water contact starts. The remaining 1.5 km of field width would have a trap geometry correction of 0.5.
From the same map above, the field width of 3.5 km equates to a field length of about 10 km for a total area of 35 sq km. There would be edge losses so let’s assume that the area is more like 24 sq km. Of that area, 60% doesn’t need a trap geometry correction applied to it and the balance is corrected by 0.5. That totals an effective area of 19 square kilometers at 40 million barrels per square kilometer for total recoverable reserves from the Caley Formation of 750 million barrels.
Below the Caley Formation in Dorado-1 there is a gas sand and below that two more oil columns. The Crespin Formation has a net column of 22 meters with porosity of 14%; the Milne has an 18 meter net column with porosity of 13%. No more is known in the public domain. The areal extent of these oil pools would shrink considerably towards the bottom of the seal provided by the canyon shales. So making a number of assumptions the recoverable reserves combined of these two pools is estimated at 58 million barrels.
Combined with the 750 million barrels from the Caley Formation, the total recoverable reserves are estimated to be of the order of 800 million barrels. If anywhere near correct, this field is staggering and truly spectacular. Carnarvon’s share of that is 160 million barrels.
There is some support for this number from Carnarvon’s past announcements. This figure from a presentation from early 2017 has potential gas and condensate reserves at Dorado at being 600 million barrels of oil equivalent:
Gas takes up more space in the reservoir than the energy-equivalent quantity of oil so, all things being equal, much more oil than gas can be trapped in the same rock volume. So reserves beyond 600 million barrels are not out of the question.
What is oil in the ground worth? A report from the broking firm Hartleys dated 14th August, 2018 suggested that a Dorado development of 200 million barrels at a Brent oil price of US$75/bbl would be worth $720 million for Carnarvon’s 20% share. That equates to $36 per barrel in the ground. That is possible but let’s be more conservative at $20 per barrel.
Carnarvon’s net 160 million barrels would then be worth $3,200 million equating to $2.67 per share.
Does Carnarvon have anything else? Carnarvon has a 20% interest in the Phoenix South oilfield which has been forgotten about. This field was discovered in 2014 by the drilling of Phoenix South-1 in 130 meters of water. From the announcement at the time:
Wireline and formation pressure tools have confirmed at least four discrete oil columns ranging in thickness between 85 and 151 feet (26 to 46 meters) in the Triassic Lower Keraudren formation, within an overall, sand-rich section between 13,648 and 14,763 feet below sea level (4,160 to 4,500 meters).
Six light oil samples have been recovered from three intervals to date; permeability measurements from the sampled zones indicate a productive oil reservoir with preliminary estimates that there might be as much as 300 million barrels of oil in place.
Then Phoenix South-2 was drilled, which didn’t have the oil columns penetrated in Phoenix South-1 but did encounter a 25 meter thick oil column in the Hove Formation, as shown by the following figure provided by Carnarvon Petroleum. Carnarvon’s graphics tend to be disfigured by ellipses and this figure has two of them:
The figure shows that the oil column has considerable area extent though no horizontal or vertical scales are provided. This oil column was also intersected in Phoenix South-3. The only information released by the company is:
Oil shows recognised in the Hove in PS-2 were also encountered in PS-3, albeit in better developed sands, however Carnarvon is not proposing further investigation of these sands in this well.
If oil in place is as much as 300 million barrels then a third of that might be recoverable. Of that 100 million barrels possible, Carnavon’s 20% would be worth $400 million or $0.33 per share. Dorado has made the Phoenix South oilfield more valuable by cutting the development costs considerably. A subsea completion of this field could be tied back to the platform on the Dorado field, 50 km south, rather being a standalone development with its own FPSO. It is very likely that the Phoenix South oilfield will be developed to backfill production capacity when the Dorado field starts declining. So potential development is no longer in the never-never. And the field is now worth something.
Closer to Dorado is the Roc gas and condensate field 20 km to the north. Now that a platform at Dorado is a certainty, this field could also be a developed by a subsea completion tied back to the Dorado platform. Suddenly the capital costs of developing gas and condensate potential of this acreage is reduced significantly and can be funded from the Dorado cash flow. But the partners are no longer chasing gas and condensate in an attempt to get to critical mass for a gas-focused development. As the Carnarvon’s announcement of 14th August said, “the oil in Dorado and potentially successful adjacent structures will now become our immediate focus.”
The next oilfield in inventory is the Buffalo field, with reserves in the attic left behind by BHP and Newfield of 31 million barrels recoverable. At $20 per barrel that is worth $600 million, equating to $0.50 per share.
Most of the benefit from the Dorado oil discovery is not the discovery in itself, but what it enables the company to do from here. Until that discovery the cost of drilling a well would have been a significant proportion of the Company’s market capitalization.
Now that Carnarvon’s market capitalization is rising towards, and most likely beyond, $1,000 million, drilling a $50 million well that might find 382 million barrels net to the Company – the potential of the Zebra prospect rated at 13% chance of success – will become a matter of course. Using $20/bbl in the ground, that $50 million well will find, on average, close to a billion dollars’ worth of oil.
In Carnavon’s deepwater Bedout Basin acreage eight prospects costing perhaps $400 million to drill are expected to find, on average, 236 million barrels worth close to $5 billion. If equity is raised at $1.00/share to pay for those wells then the incremental value added to each Carnarvon share fully diluted is $2.95. In the Company’s shallow water acreage in the Carnarvon Basin nine wells costing $90 million to drill add a further 95 million recoverable barrels, on average, for a further $1.20 per share. There is also other potential yet to be counted in the Company’s prospect inventory.
Finding costs are expected to be of the order of $1.70/bbl in the Bedout Basin and $0.95/bbl in the Carnarvon Basin.
In the meantime there are at least three Dorado look-alike prospects to follow the Dorado discovery. Given that all four sands in Dorado contained hydrocarbons, three of which were oil, means that these very large exploration prospects all have a good chance of success.
This is the promise of the Dorado discovery. Fully funding a $50 million well is no longer an existential threat. Carnarvon’s share price growth from this point is only limited by rig availability and that is not seen as a problem. Incremental value creation per share with further discoveries will outrun dilution to pay for the drilling program by a wide margin.
Carnarvon Petroleum’s Prospect Inventory as at March, 2018:
On what has been found to date this is how I see Carnarvon Petroleum:
Back on the national security implications, ideally a topping refinery will be built at Port Hedland, perhaps on the old BHP Hot Briquetted Iron site, to supply the northwest. It could be sized at about 60,000 barrels per day. This will be a low cost partial solution to Australia’s fuel security problem.
Disclosure: David Archibald is a true believer in Carnarvon Petroleum. The purpose of this article is to fill a gap in the public’s understanding of the potential size and implications of the Dorado oil discovery.