Chevron Invests in Australian Shale Gas Prospects for $349M

SYDNEY - Chevron Corp. said it will buy Australian shale gas assets from Beach Energy Ltd. for up to $349 million, placing a bold bet on the potential to replicate the U.S. boom in unconventional gas output in the Outback.

Chevron is acquiring stakes in an area covering 810,000 acres--equivalent to three times the size of Hong Kong--that is largely untested for shale gas but near pipelines connecting with several multibillion dollar gas-export facilities being built by rival energy companies on the eastern coast.

The deal for up to 60% of Beach's interests in two blocks in central Australia's Cooper Basin cements Chevron's status as one of the biggest investors in natural gas down under. It is already leading development of the Gorgon and Wheatstone liquefied natural gas, or LNG, projects in Western Australia state worth a combined $80 billion.

Global interest in shale gas is intensifying due to rapid growth in production in the U.S. where the unconventional fuel now accounts for more than a quarter of its natural gas needs. But industry executives caution that output could be slow to take off elsewhere due to factors ranging from different geology, a lack of infrastructure and concerns over technology used to get the gas flowing from dense shale rock formations.

Shale gas is likely to be more expensive to produce than conventional gas and coal seam gas in Australia, given the shale rocks have to be smashed open with sand, chemicals and water in a process known as "fracking".

Beach has drilled several wells exploring for shale gas in permits in the Cooper Basin, and has reported encouraging results. Competitors are also investing in exploring the area--Santos Ltd. (STO.AU) in August said shale gas from its Moomba-191 well flowed at a commercially viable rate of 2.6 million standard cubic feet per day.

Chevron, the second-biggest U.S. oil company behind ExxonMobil Corp, is buying up to 60% of Beach's interest in two blocks. Beach wholly owns onw block and has a 60% stake in the other where the remaining interest is held by small Australian explorer Icon Energy Ltd.

"We believe that shale gas production from the Cooper Basin will be required longer term to offset domestic supply shortfall and possible supply to LNG trains, but there is still a considerable amount of work required," says Stuart Baker, a Sydney-based analyst at Morgan Stanley.

Beach has previously estimated that there could be more than 300 trillion cubic feet of gas beneath land it holds in central Australia. That's roughly equivalent to ten times U.S. gas consumption in 2011, and dwarfs the 40 trillion cubic feet contained in Australia's largest conventional natural gas field--Gorgon--offshore Western Australia state.

"We have an industry-leading queue of LNG projects under development in Australia and this agreement provides an opportunity to explore a new, prospective basin and potentially add to our natural gas portfolio," Roy Krzywosinski, Chevron's Australian head, said in a statement.

Beach said Chevron will make an upfront cash payment and agree to fund its share of development costs to acquire 30% of its stakes in the permits. Chevron has also agreed an option to lift its holding up to 60% at a later date, depending on exploration results.

Copyright (c) 2012 Dow Jones & Company, Inc.


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