An energy market researcher says exploration around the world is getting “its mojo back”, but in Australia the bag is mixed.

Happily, it’s small caps where the exploration trend is likely to be your friend.

A survey of global exploration intentions and expectations for 2019 by Wood Mackenzie suggests confidence is up this year but pure explorers are still leery. They are preferring to look in less challenging areas that are cheaper to explore and can be developed quickly.

In Australia, just a handful of large companies are looking at undertaking new exploration this year, including Beach Energy (ASX:BPT), Santos (ASX:STO), ExxonMobil, and Origin (ASX:ORG).

Vertium Asset Management director Jason Teh says memories of the 2014-15 oil price crash are still strong, and large companies are still in the business of preserving capital.

“The big guys are in lock down, from a CAPEX perspective,” he said.

Still, the exploration that is happening is a major step up from prior years, according to consultancy Energy Quest’s March report.

“Australia is set for its biggest year in exploration since the collapse in oil prices… Exploration activity will be largely focused in the onshore basins of South Australia, Northern Territory and Queensland, with activity geared towards finding new gas resources for LNG export and the east coast gas markets,” the report said.

It’ll cost you

New exploration is a sign that oil or gas prices are high enough to support risky and expensive studies and drilling, or that companies are at a point in their life cycle where they need to beef up reserves or face decline.

Generally it’s viewed as a signal that the sector is flush with cash and confident about where future commodity prices are going.

Right now the Brent oil price, the global benchmark, is at $US70.36 a barrel, around average for the last 12 months, while the Australian competition regulator is forecasting east coast gas prices to hit $10.70/gigajoule next summer, slightly lower than the summer peaks of the last few years but still a major hike on the $3/gigajoule of the days of old.

Drilling activity is bubbling in the Perth Basin in WA, the Otway basin offshore from South Australia and Victoria, the Cooper Basin in Queensland and South Australia, and the Bowen Basin in Queensland, according to Energy Quest.

Oil analyst Peter Strachen, from StockAnalysis, says anecdotally land based rigs are working harder than two years ago and the prices are definitely rising.

“Work in the Cooper Basin has been ramping up in search of gas while in the Bowen and Surat Basins, there is a lot of CSG field development on going,” he told Stockhead.

“This dry season will see three or four wells drilled in the Canning Basin after a number of years of no action at all, and Strike Energy is drilling West Erregulla in the Perth Basin at present and Cooper Energy is preparing to do some exploration work offshore Otway later this year and next year.”

As of lsat week there were 26 active onshore rigs in Australia covering both conventional and unconventional operations, compared to 20 at the beginning of the year, according to Australian energy information service Pex Publications.

Most of the increase has come from development or appraisal in mature fields, rather than wildcat exploration wells, the industry expert says.

Offshore exploration is less advanced with the Santos/Carnarvon Dorado-2 well and Woodside Petroleum’s (ASX:WPL) Achernar-1 being the only ones of note right now.

There are seven active offshore rigs across development/appraisal and exploration now compared with five at the beginning of the year, according to Pex.

Triangle Energy (ASX:TEG) managing director Rob Towner says life has come back to the Perth Basin, driven by AWE’s large Waitsia gas discovery in 2014.

He said the Strike Energy (ASX:STX) and Warrego (ASX:WGO) drilling campaign this month will be the first drilling rigs in the basin since 2017.

In April, Key Petroleum (ASX:KEY) boss Kane Marshall told Stockhead they were running into a rig shortage in the Cooper Basin, but later that month they managed to secure one for their Perth Basin activities.

Small caps back themselves

Among the small caps, a number of others also have active exploration drilling campaigns under way or planned.

Central Petroleum (ASX:CTP) has a piece of Santos’ Southern Amadeus ‘Dukas’ well in the Northern Territory.

Last year’s breakaway success Carnarvon (ASX:CVN), which made one of the largest offshore oil and gas discoveries in Australia in the Bedout sub-basin off the coast of northern WA, is currently drilling more holes to see what else is under the sea.

Cooper Energy (ASX:COE) and Vintage Energy (ASX:VEN) are both due to launch offshore drilling in the Otway basin this year.

Metgasco (ASX:MEL) is promising at least one well in the Cooper Basin in the second half of 2019, while Comet Ridge (ASX:COI), Vintage, and Galilee Energy (ASX:GLL) are all planning to hunt around the Galilee Basin, an area that is close to the Queensland coast but little explored as yet.

Buru Energy (ASX:BRU) is consistently active in the Canning Basin.

What’s been the hold up?

What has held exploration back are a series of factors.

Severe restrictions on exploration in all states, from heavy environmental rules in Queensland to absolute moratoriums in NSW and Victoria, have hampered new campaigns.

Triangle’s Towner points to the onshore bans on fracking for unconventional oil and gas has having a flow-on effect for the conventional sector, because there simply wasn’t enough work to sustain an industry just looking for conventional oil and gas.

Other factors include the price crash in 2014, which wiped out a number of small drillers as well as a swathe of oil and gas companies, leaving a few Santoses and Woodsides at the the top and a handful of small caps scratching out a living at the bottom.

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