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The sunburned plains of the Northern Territory’s McArthur Basin have never been so hot. The top of Australia’s Top End stole the collective gaze of the world’s investment community back in August when it was announced that American Energy Partners (AEP), led by Oklahoma billionaire Aubrey McClendon, had agreed to a US$100 million farm-in to Brisbane-based Armour Energy’s acreage in the basin. Since then, it’s been quite a saga.
When Armour Energy’s shareholder voted overwhelmingly to team up with AEP on 30 October, it ended a dramatic roller coaster ride over the last few months that saw the deal fall into jeopardy when Chinese-owned Westside stepped in with an offer that caught the attention of Armour’s board.
Earlier in October, the board had voted to recommend a Westside offer of 20 cents a share that valued Armour at $60.9 million. But McLendon, the Chesapeake Energy Corp co-founder and former chief executive, and one of the pioneers of shale exploration in the U.S. sweetened his own offer and Armour shareholders approved a US$130 million AEP offer that puts 25 cents per share in their pockets.
It was a long, winding road to get to where the two companies are today. Now, the pair will further exploration and development of Armour’s extensive oil and gas prone McArthur Basin Project. Some industry observers have likened the basin to the prolific Haynesville Shale in Louisiana, where production peaked at 100 billion cubic feet per day (Bcf/d).
The deal is a first for McClendon, who has always stayed close to home and remained staunchly focused on U.S. oil and gas plays, even as his rivals searched further afield for opportunities. So his move to invest in Australia’s burgeoning onshore gas industry is seen by many as a possible boon to the future of shale gas drilling in the Lucky Country.
The making of a deal
Former Shell International and Arrow Energy executive Robbert de Weijer, now Armour’s CEO, was instrumental in sealing the deal with McClendon.
Speaking with Oil and Gas Investor Australia about the deal, de Weijer said he heard about American Energy after a Wall Street Journal article reported on McClendon’s interest in entering the Australian energy landscape.
“From that moment onward I tried to get in contact with Aubrey and I managed to do that through a contact of mine in Houston who put in a good word in for me and Armour,” Weijer said. “I happened to be in the States at the time and ended up flying to Oklahoma City to meet Aubrey and the team. I saw how they operated first hand by visiting the fields and then 46 days after the first time we met we signed a binding agreement.
“That is very, very fast, and that’s even fast by American Energy standards.”
He said AEP ticked all the requirements it was looking for in a farm-in partner, including expertise, reputation and the need for it to retain a meaningful working interest under the partnership.
“We think American Energy is a great partner for us. There’s very good chemistry between the two companies as well,” de Weijer said.
There is phenomenal potential
In the McArthur Basin, Armour has an independently certified mean prospective resource of 18.8 Tcf of gas and 1.2 billion barrels of liquids.
“The phenomenal unconventional shale potential of our acreage in the Northern Territory has been supported by significant gas flows from the conventional Coxco Dolomite reservoir adjacent to the Barney Creek shale formation and more than 500m of oil shows in the overlying shallower zones,” de Weijer said. “The challenge is identifying the basin sweet spots and cracking the codes as to how we can produce gas at commercial rates.”
In April, Armour provided a market update on recent analysis of the emerging Tawallah Group source rock play in the McArthur Basin, which underlies and extends well beyond the Barney Creek shale. A CSIRO study commissioned by Armour confirmed oil and gas generative potential in two Tawallah Group shale horizons, the Wollogorang and McDermott Formations. A third-party prospective resource assessment is underway, and it is expected that it will show some very encouraging results.
“It is early days in Armour’s evaluation of this exciting new oil and gas play, but we are encouraged by the results to date and also look forward to new [proposed] pipeline infrastructure between the Northern Territory and Queensland becoming a reality,” de Weijer said. “There is a good chance that the northern route between Tenant Creek and Mt Isa will be selected because it is about half the cost of the more southern route and has much less environmental impact. That would be great news because the northern route will traverse our tenements.”
Armour Energy chairman Nick Mather, a seasoned resources veteran who founded Arrow Energy sees similarities in paths between Armour and in the early days of Arrow, before oil giants Shell and PetroChina paid $3.5 billion in cash to acquire the company in 2010.
“The market is troubled about the path from concept to project delivery, but I have absolute total faith,” Mather said.
They’re not alone
While McClendon’s farm-in deal with Armour may have now put the Precambrian-aged McArthur Basin on the world map, there has been a line-up of well-heeled international bigwigs and local players who have already ploughed millions of dollars into the McArthur over the past few years. They all are targeting prospective shale gas resources of up to 200 trillion cubic feet (Tcf), more than all of Australia's identified conventional gas.
Among the additional companies chasing the basin’s enormous potential is Pangaea Resources, which before the Armour deal became public was the subject of wayward speculation that it might become the farm-in partner of AEP. The exploration company is owned by Paul Fudge, who became a rich lister when he sold his coal seam gas acreage in Queensland’s Surat Basin to Origin Energy for $660 million in 2009. Fudge is seeking to repeat his success in the McArthur Basin where his company has three permits.
The company drilled its first well last year following extensive 2-D seismic and airborne gravity surveys.
Fudge, who has been dubbed one of the mystery men of Australian resources, has kept his private company as just that, very private. But Pangaea has been one of the McArthur’s longest tenants.
Empire Energy is also sharpening its drill bit in the McArthur. Through its subsidiary Imperial Oil and Gas, Empire has conducted some shallow shale stratigraphic drilling in-between Tamboran and Armour’s acreage. Work programs to date have provided the company with sufficient proof that the Barney Creek shale formation and the Meso-Proterozoic Velkerri Formation is worth backing for a gas, liquids and oil trifecta.
In May 2014, shares in British based explorer Falcon Oil and Gas surged 25 per cent after it announced Origin Energy and Sasol had each taken a 35 per cent stake in the company’s Beetaloo Basin shale acreage in a deal worth A$200 million. The Beetaloo is a separate satellite of the McArthur Basin.
In July 2014, Origin Energy confirmed the spudding of the Kalala S-1 well, the first of three onshore wells to be drilled by the joint venture. It is expected the well will be drilled to a total depth of approximately 2800m and will target the Middle Velkerri formation to assess hydrocarbon saturation and reservoir quality.
Canadian investment dealer GMP Securities reported Falcon Oil & Gas investors should be “very encouraged” by growing positive sentiment towards Australia’s Northern Territory.
“That this play has caught the interest of a major shale player and pioneer [McClendon] should be taken as very encouraging for sentiment towards Falcon Oil & Gas, whose shares have already enjoyed a 90 per cent run in the past month,” the Canadian broker said in a note.
Whether McClendon’s fancy turns into a full blown love affair in the Northern Territory is still up in the air but on the ground, the experienced steel-toed shoe brigade kicking up dust in the McArthur remains starry-eyed despite oil price slumps and strangling purse strings.
“We’ve done this before and we’re very confident that although it may not happen overnight, it will happen,” Armour’s Mather said.
Additional reporting by Lauren Barrett
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