I Don’t Get To Keep Nice Things
by David Archibald
16 November 2018
Initially the Dorado oilfield joint venture partners, Quadrant and Carnarvon, were going to develop the field by the book with two or three appraisal wells followed by engineering design to optimise recovery over the life of the field. This approach minimizes the potential for negative surprises, but it also delays cash flow by a few years.
The bulk of the oil in the Dorado field is in the Caley Formation, with a big, blocky sand contributing most of the 79 meters of net pay in that formation. The oil is nearly as runny as water with an API gravity of 49°. Combined with the average porosity of 20% and high permeability, this means that individual well productivities will be very high, as high as 20,000 bopd each and perhaps higher. The field geometry is kind too, with the oil/water contact way down dip about three kilometres to the west of the crest of the field.
This means that development of Dorado will be riskless in that that it will be very profitable no matter what. Produceable reserves would have to be less than 15% of what the JV partners think they are for them not to recover their capital outlay.
So the JV partners have seen the light and Carnarvon shareholders were told at their AGM that there would be an early development of Dorado based on the Caley Formation.
Maersk Drilling has now announced that it is in the process of selling a jackup rig, the Maersk Giant, to “an Australasian-based independent oil and gas operator” and that “the transaction is expected close by the end of the year.” The Maersk Giant is ultra-harsh environment jackup rig designed for year-round operation in the North Sea in water depths up to 107 metres. It was built in 1986 and refurbished in 2012.
Figure 1: The Maersk Giant jacked up and drilling
No Australian oil company operates their own drilling rigs, so that means that the Maersk Giant will used for production. The last time a jackup was so utilised in Australia was Western Mining’s development of the North Herald and South Pepper oilfields in the Carnarvon Basin using the Vicksburg jackup.
The only field that the Maersk Giant could be applied to is the Dorado oilfield. The water depth at Dorado is 80 metres, so the rig could be jacked more than 40 metres above the sea surface. Santos is expecting to settle on its acquisition of Quadrant Energy some time in December. So Santos probably has an option on the Maersk Giant, which will be exercised once the Quadrant acquisition is complete.
Drilling at Dorado could start in mid-2019 and be finished by the end of the year. This would likely be four or five production wells and one injection well. The injection well might be drilled first to confirm the oil/water contact. The only drawback with the Dorado field is the high gas content of the oil. The processing facilities might include a de-ethaniser to get the Reid vapour pressure of the oil to within spec. It is important in reservoir management of a field like Dorado to keep the pressure in the producing horizon above the bubble point of the oil, or otherwise the gas bubbles formed will want to be preferentially produced. So re-injecting the gas will be a useful thing to do.
Once the wells have been drilled then the drill pipe, mud tanks etc. can be taken off the rig and the separator and gas compression station can be placed on the deck space created.
Figure 2: Maersk Giant main deck and drill floor
Assuming the field is brought on at 100,000 bopd, at US$65 per barrel the joint venture will have an annual profit of about $1.4 billion. The Federal Government will be on board because they will be making $2.0 billion per annum from the petroleum resource rent tax and corporate tax. The capital cost may be of the order of $550 million. The IRR on this outlay is more than 450%. And by spending that money Santos will be getting at least $3.0 billion two years earlier than if they develop Dorado by the book.
It seems that Santos realises the time value of money. The aggressive schedule suggested by the Maersk Giant purchase means that they are likely to also be aggressive in capturing value where then can find it. The logical conclusion from that is that Santos is likely to bid for the 20% of Dorado that it doesn’t own, thus a scrip bid for Carnarvon is possible early in the New Year. A scrip bid won’t add to Santos’ debt and Carnarvon shareholders won’t be taxed until they sell the Santos shares they receive.
I don’t get to keep nice things. My shares in Carnarvon will be taken from me by compulsory acquisition once Santos gets to 90% of the issued capital.
These are opinions only and not a recommendation to buy or sell anything. Do your own research.
The author retains a holding in Carnarvon Petroleum.
David Archibald is the author of American Gripen: The Solution to the F-35 Nightmare.