SYDNEY - Santos Ltd. Friday said Australia is poised to join the ranks of global shale gas producers, targeting first sales of the unconventional fuel in October following encouraging drilling results in the Australian Outback.
Reports of the drilling success came as Australia's third-largest oil and gas producer reported a 48% fall in first-half profit to 262 million Australian dollars (US $275.6 million). The decline was largely due to the company benefiting from asset sales in the previous period. Underlying earnings beat expectations by growing 20%, buoyed by higher natural gas prices.
Like many of its peers, Santos is transforming itself from relying on oil for profits into a major natural gas exporter as it seeks to ride growing demand in Asia for cleaner-burning fuels. Investments include projects in Papua New Guinea and Australia's Queensland state, starting as early as 2014.
It's already developing a first wave of unconventional fuels through a gas-export facility fed by coal seam gas in Queensland, and is now trumpeting the potential of trillions of cubic feet of gas trapped in shale formations in Australia's Cooper Basin--an area the size of Mississippi.
Santos, which has a market value of around A$11 billion, said its Moomba-191 shale gas well flowed at 2.6 million standard cubic feet per day.
"This result enables Santos to announce Australia's first commercial production of gas from a shale well," the company said in a statement.
By 0051 GMT, Santos shares were up 4% as investors welcomed the drilling results and better-than-expected earnings.
Rival gas producer Beach Energy Ltd. has drilled three shale gas test wells in the Cooper Basin with encouraging results. Santos, however, claims its well directly targeted gas in the Roseneath, Epilson and Murteree shales.
Interest in shale gas has grown sharply due to the success of U.S. producers, with the fuel now providing the world's biggest economy with a third of its natural gas needs. However, industry executives caution that replicating the boom elsewhere will be slow to achieve because of a lack of infrastructure and different geology.
Adelaide-based Santos's US $18.5 billion gas-export venture in Queensland is scheduled to ship its first cargoes of liquefied natural gas, or LNG, to Asian utilities in 2015. The plant will be fed with coal-seam-gas from Queensland's coal fields but there's concerns it and three rival LNG plants nearby won't be able to produce enough gas for their projects long term.
Shale gas in the Cooper Basin, which straddles Queensland and South Australia states, could act as a back stop. It also has the potential to meet domestic power needs and Beach says it may be able to support construction of a standalone gas-export project in South Australia.
Holding back production is a lack of knowledge about the properties of shale gas in the Cooper Basin. It's also likely to be more expensive to produce than conventional gas and coal seam gas, given the shale rocks have to be smashed open with sand, chemicals and water in a process known as fracking.
So far, Santos and Beach have only drilled vertical test wells. If they are to produce the shale gas economically they are likely to employ large horizontal drilling rigs that may be expensive to import to Australia on a large scale. Both companies are planning to drill horizontal test wells in the coming months.
Santos declared an interim dividend of 15 cent per share, unchanged from a year earlier.
Copyright (c) 2012 Dow Jones & Company, Inc.
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