As domestic gas supplies tighten in WA, these three small caps are lining up for the wave of demand
Link copied to
Western Australia is home to some of Australia’s largest gas resources, but recent developments have brought the security of its domestic supply situation into question.
In its WA Gas Statement of Opportunities report released in December last year, the Australian Energy Market Operator (AEMO) warned that while the state’s domestic gas market is expected to remain well supplied until 2026, it could tighten from 2029 onwards.
This is due to a combination of gas supplies declining at an average rate of 2.8 per cent per annum between 2021 and 2030 and a forecast growth in demand during the same period of 0.7 per cent per annum due to increased demand for commodities.
Stockhead’s resident energy expert Peter Strachan concurred, noting that while WA is very well supplied in the short term, the Woodside Petroleum (ASX:WPL)-led North West Shelf will prioritise the liquefied natural gas export market post 2023/24 as fields declined.
The expected tightening has been brought starkly into the limelight after Santos (ASX:STO) announced in February that production at its Reindeer field offshore WA would cease earlier than expected.
This is due to water ingress occurring earlier than previously, leading the gas major to slash 27 million barrels of oil equivalent from the field’s proved and probable (2P) reserves.
Reindeer’s earlier than expected decline is certainly of concern given that it supplies about 17 per cent of the state’s domestic gas supply.
“This will obviously put increasing pressure on what is an already tightening west coast gas market and highlights the significance of recent successes at West Erregulla,” Talon Petroleum (ASX:TPD) managing director David Casey told Stockhead.
Not all is negative though.
While the Reindeer reserves write-off and AEMO warning might just be a little concerning, the fact remains that WA still has plenty of currently proven but undeveloped resources and potential for far more discoveries.
Offshore, Woodside’s Pluto field remains a strong performer while a final investment decision is expected on its Scarborough project this year.
With WA’s gas reservations laws that require LNG projects to set aside 15 per cent of their production for domestic gas use, these two projects could account for a significant amount of the shortfall.
Strachan notes that Santos and Carnarvon Petroleum (ASX:CVN) could also contribute to WA’s domestic gas supply from their Roc and Dorado fields past 2026 when some of the oil has been produced.
“The plan is to recycle the gas back into the oil fields to maintain reservoir pressure and keep oil production up, then the gas could be piped to Pt Hedland or used as backfill for the NWS LNG players,” he added.
Mitsui and Beach Energy’s Waitsia gas field is currently earmarked for export despite being an onshore project located within the Perth Basin.
This is ostensibly justified as being required for the project to proceed into its key second phase of development and would result in the construction of new infrastructure that would provide a pathway for the development of future gas resources in the Perth Basin for domestic use.
Regardless of the reasons why, Strachan believes that the state government remains keen for that sizeable gas field to eventually produce exclusively for the domestic market.
Waitsia is not the only Perth Basin gas field that provides hope for continued supply in WA.
Despite being forced to suspend the West Erregulla-3 appraisal well – due to an abnormally over-pressured Permian gas column that could actually be a positive once proper equipment is in place – their next well is already showing promise.
West Erregulla-4 has already observed hydrocarbon shows throughout the entire hole section through the shallower Kockatea Shale and will continue on towards the secondary target Basal Wagina Sandstone and primary target Kingia and High Cliff Sandstones.
Their West Erregulla-2 well had been a rousing success, flowing 69 million standard cubic feet of gas from the primary target Kingia Sandstone during testing in October last.
Once operations at West Erregulla are completed, the rig is expected to move on to the Walyering field, which is held by Strike and Talon.
“It was the forecast tightening of supply, which will be exacerbated by the issues at the Reindeer Gas Field, that encouraged Talon to enter the Perth Basin in the first place, by farming into Strike Energy’s Walyering appraisal well to be drilled later this year,” Casey added.
“Since then we have further expanded our footprint in the basin with the Muchea opportunity, which is a larger analogue of Walyering.
“With very low CO2 and possibly the cheapest production costs of any of the Perth Basin projects, Talon is, despite its size, ideally placed with respect to infrastructure, to sell into the looming shortfall in supply.”
Walyering-5 will test an in-place best estimate prospective resource net to Talon of up to 38.7 billion cubic feet of gas and 0.98 million barrels of condensate.
The field has already established porosity and permeability capable of producing at commercial rates – albeit for a short period.
Said gas contains less than 1 per cent carbon dioxide, which means minimal processing and lower costs while the high condensate ratio is a big value-add.
Meanwhile, Muchea is an analogue of the Waylering field though the current mapping indicates that up to 80sqkm of closure is present, making it significantly larger than Walyering.
To top it off, the reservoir targets are shallower, which means they could have better reservoir quality and be cheaper to drill.
The project is also close to existing gas pipelines, providing a proven path to the domestic gas market.