Missed the oil boom? Hitch a ride with these junior JV targets instead

Junior JV partners benefit from their partner’s experience and credibility
Lower operating costs are another benefit
Operating agreements allow JV partners to provide input

Being the junior JV partner in an oil and gas project has its drawbacks. While you can certainly make your voice heard, it’s the operator that sets the agenda and calls the shorts – particularly if they are giving you a free carry.

You also have to live with having the smaller share of the overall resource.

However, there are benefits to riding on the coattails of a more resourced and experienced operator.

Carnarvon Energy (ASX:CVN) chief executive officer Adrian Cook told Stockhead that having a quality operator like Santos (ASX:STO) onside brought a significant amount of credibility.

“Rarely are assets like those that we hold, available to investors in mid cap companies like Carnarvon, namely quality assets, located in a quality jurisdiction operated by a quality operator,” he added.

Carnarvon has a 20% stake in the Dorado oil field that has about 150 million barrels of recoverable oil and is likely to become a central hub for other oil discoveries in the region such as the recent Pavo find (Carnavon 30%).

Keeping a tight budget

Ken Aitken, the CEO of Metgasco (ASX:MEL) – one of two junior JV partners on the Vintage Energy-operated (ASX:VEN) Vali gas field in Queensland – added that not being the operator meant being able to run a very tight ship and keep costs low.

“When I worked for Mitsui 15-16 years ago, I was the fourth of just four people that they had in Australia despite being a big Japanese powerhouse that was one of Australia’s biggest oil producers,” he noted.

“For Vali, we only have two members of the executive with myself as an engineer and our CFO.”

A capable operator also brings expertise and experience to the table, a point that both Cook and Aitken made.

“Santos brings its decades of experience and expertise to the table, with the advantage of this seen in our recent successful drilling campaign that resulted in the Pavo-1 oil discovery,” Cook explained.

“The campaign came in on time and to budget, with no unexpected surprises, which is a credit to the operator.”

He added that Santos will bring its established experience in developing and operating successful large scale oil and gas projects to the Dorado development.

Aitken agreed that picking the right operator was important, noting that Metgasco had farmed out ATP 2021 to Vintage – and it’s who’s who of Beach Energy (ASX:BPT) alumni because of their Cooper Basin expertise.

However, he argued that having an operator that was of a similar size or a little bigger to the junior JV partner but with the same objectives was a priority.

“If you have a big operator and you’re small, they tend to have 15-20 projects and they don’t necessarily prioritise the project you want to happen,” he noted.

“Having a likeminded partner on a strategic timeframe of what you want to do is important.”

He added that Vintage was a good operator that understands the Cooper Basin and that the JV was turning around the Vali gas field from discovery about two and a half years ago to production in the near term.

Having your say

Being the junior JV partner does mean playing a secondary role in the decision making process, but it is not an entirely one-sided relationship.

In the Vali JV, the joint operating agreement – a staple of most JVs – requires 75% approval for budgets.

With both Metgasco and Bridgeport holding 25% interests, this means that Vintage needs to convince at least one other partner to approve before it can proceed.

Conversely, it also means that either junior partner could be outvoted.

Thankfully for Aitken, that has yet to happen as the Vali partners have been pretty aligned to date.

He also prides himself on providing technical and strategic input for the direction of the Vali and Odin JVs in the short and long term.

Meanwhile, Cook added that Carnarvon’s relationship with Santos has been an open and collaborative one.

“This provides a constructive forum for us to share our ideas and thoughts on a range of matters related to our joint venture assets,” he noted.

“Our position is less about trying to influence the decisions of the joint venture and more about having a dialogue that ensures the decisions made are the best ones for both parties.”

It’s not all positive

Besides the potential for being outvoted or having your project lower on the priority totem pole, the other disadvantage is being liable for cash calls.

Once this is typical for joint operating agreement, the costs can spiral quickly if the operator has a large team working on the JV.

Aitken noted that it was possible to pay exorbitant costs if the operator was too big, while some junior partners wound up hiring people to review the operator’s finding.

“We are lucky not to have that problem as we are strategically aligned,” he added.

Big oil resource

As previously noted Carnarvon has a 20% stake in the significant Dorado oil development in WA-437-P in the Bedout Sub-basin offshore Western Australia, which is expected to start oil production in 2026.

While the Dorado-1 discovery well flowed condensate rich gas back in 2018, it was the follow-up Dorado-2 and Dorado-3 appraisal wells that cemented its position as a major oil field, with the latter flowing 11,100 barrels of crude per day during testing.

More recently, Santos and Carnarvon made the Pavo oil discovery in the neighbouring WA-438-P (CVN 30%) that is expected to be tied into Dorado to maintain high production rates.

Dorado is due for a final investment decision in the middle of this year and is currently envisioned as a low cost development in shallow water with Phase 1 oil production of between 75,000 and 100,000 barrels per day from early 2026.

The second phase will involve the production of gas and liquefied petroleum gas, though this is still a concept at this point.

Gas for the east coast market

Metgasco has been working with Vintage to bring their Vali gas field into production later this year since making the initial Vali discovery in mid-2020.

Vali-1 ST1 was followed by a bevy of successful appraisals and a successful exploration well at the neighbouring Odin field that might well be tied into the Vali, and the partners recently inked the pipeline tie-in agreement with the South Australian Cooper Basin (SACB) JV.

This is the final agreement required before the JV starts work on actually connecting the field into the gas grid.

Bringing Vali into production will also allow Metgasco to fund other activity without having to keep returning to shareholders for funds.

“We have got lots of opportunities in the ATP 2021 licence, there’s more gas, there’s a well called Kinta-1, which Santos drilled in the licence previously to find gas and they didn’t fracture stimulate it,” Aitken noted.

“So we would like to in the future, shoot seismic to make sure that where we drill the next Kinta well is on top of the structure.

“There’s also a lot of oil, shallow oil potential, and that will be revealed by the 3D seismic because we only have seismic over 40-50% of the block.”

The same partners are also looking at taking the Odin gas field across the state border in South Australia to market after reaching an agreement to buy out Beach’s stake in that field.

“We will be getting the ACCC approval to market gas, then doing some work to show we have a development plan before moving the contingent gas resources into reserves,” Aitken said.

He added that the Vali pipeline has a little extra capacity, so Odin gas could go through the Vali pipeline.

“We now have complete alignment so if want to take Odin into Vali, we can.”

Perth Basin a hot bed of junior JV partner activity

Talon Energy (ASX:TPD) and Warrego Energy (ASX:WGO) both share the same operating partner for their respective projects in Strike Energy (ASX:STX), which has had an enviable record in finding and drilling successful gas wells in the Perth Basin to date.

Warrego holds 50% of the West Erregulla gas field where the partners made what was arguably the most important gas discovery in the Perth Basin.

Mitsui and Beach had already been producing gas from their Waitsia gas field for a few years before Strike and Warrego drilled their West Erregulla-2 well.

This well, which flowed 69 million standard cubic feet of gas per day (MMscf/d) during initial testing, served to prove that deep gas reservoirs might be a lot more common than previously thought in the Perth Basin.

Subsequent appraisals such as West Erregulla-4 and West Erregulla-5 have served to prove that gas is widespread at this field and the joint venture are currently preparing to redrill West Erregulla-3, which encountered mechanical drilling difficulties.

Meanwhile, Talon’s Walyering-5 well with 55% operating partner Strike was also a runaway hit, flowing gas at a rate of 75MMscf/d, the third highest flow rate in the Perth Basin’s history.

To top it off, gas quality at Walyering appears to be better than that at the other Perth Basin fields and includes a small quantity of condensates at a ratio of about six to nine barrels for every MMscf of gas.

Condensates, which are similar to very light crude oil, can add significant value to a gas stream depending on their composition.

Another junior JV partner in the Perth Basin is Norwest Energy (ASX:NWE) though in this case, it is working with the energy arm of big cap miner and mining services Mineral Resources (ASX:MIN).

This seeming lack of oil and gas pedigree did little to stop the partners from drilling the extremely successful Lockyer Deep-1 well late last year, which produced gas at an eye-popping rate of up to 117MMscf/d – the highest flowing well in the Perth Basin and one of the top onshore wells across Australia.

While MinRes is no oily, it has plenty of operations in the region and has already flagged that it wants to use its gas to displace diesel. This will ensure its energy security, reduce costs and help the company transition to net zero.

For Norwest, it simply means that it will have a ready buyer for its 20% share of gas in Lockyer Deep.

High impact exploration well

Global Oil & Gas (ASX:GLV) is participating in the Sasanof-1 exploration well in the North West Shelf that targets prospective resources of 7.2 trillion cubic feet of gas and 176 million barrels of condensate.

Sasanof-1 has a 32% geological chance of success and will be operator Western Gas’ first well drilled from its extensive exploration portfolio surrounding the existing Equus gas project.

The prospect itself covers 400sqkm and is on trend and updip of Western Gas’ liquids-rich and low carbon dioxide Mentorc field.

Success will be a game changer for the junior JV partner given the potential scale of the resource.

At Stockhead we tell it like it is. While Metgasco and Global Oil & Gas are Stockhead advertisers, they did not sponsor this article.