Drillsearch Signs Deals to Work with Santos in Australia

Drillsearch Energy Limited (Drillsearch) announced that it has entered into a series of binding transactions with Santos Limited (Santos) accelerating Western Cooper Wet Gas commercialization and expanding Drillsearch’s Cooper Basin oil Reserves and production.

Drillsearch believes the transactions with Santos deliver a material result for the Company and offers an attractive outcome for the shareholders of both companies and builds on the productive relationship that Drillsearch has developed with Santos over the past several years.

Wet Gas Transaction

Material Exploration and Field Development Work Commitments - Under this transaction, Santos will earn a 60 percent interest and Operatorship in the Western Cooper Wet Gas Project (PEL 106A and PEL 513) through the following:

• PEL 106A – funding a $68.3 million (AUD 75 million) firm work program of exploration, appraisal and field development works; and

• PEL 513 – funding a firm work program valued by Drillsearch at $41 million (AUD 45 million) covering all of the outstanding firm permit work commitments including acquiring 38.6 square miles (100 square kilometers) 3D seismic, drilling six firm commitment exploration wells plus one additional contingent exploration well

PEL 106A and PEL 513 contain conventional 2C wet gas resources of approximately 62 billion cubic feet (gross) over six discoveries, conventional wet gas prospective resources over 100 billion cubic feet (Best estimate) and additional unconventional gross prospective resources of over 7 trillion cubic feet (Best estimate).

In addition, Santos has agreed to provide further field development assistance for construction of surface production facilities to export production from PEL 106A and PEL 513. Drillsearch believes this assistance provides significant benefits to the Company and in so doing, mitigates the risk of having to secure additional funding for field development.

Long-term Gas Sale Agreement - Additionally, Drillsearch has entered into a firm Gas Sales Agreement (GSA) covering expected production from PEL 106A and PEL 513 through 2025. The GSA will be for the sale of raw gas with separate pricing for the condensate, LPG and sales gas components. Condensate and LPG pricing will be linked to international product pricing, less specific transport and processing charges. Under the GSA, initial gas sales by Drillsearch are targeted to be up to a maximum daily quantity of 70 million standard cubic feet per day raw gas.

Gas sales pricing is confidential, however, the agreed pricing provides for both fixed-price Consumer Price Index indexed gas pricing and oil-linked gas pricing. The gas pricing is structured to maximize the alignment between Drillsearch and Santos, both as a Joint Venture partner and as gas buyer. Importantly, Drillsearch expects to derive a significant value for the sale of the gas and associated liquids

Drillsearch believes Santos will be an effective Operator of these permits given Santos' long and successful record of Cooper Basin oil and gas development and commercialisation. Additionally, Drillsearch believes that the potential for gas from PEL 106A and PEL 513 will assist with underpinning gas sales both into the Eastern Australian domestic and export markets.

The Western Cooper Wet Gas Project discoveries in PEL 106A and the exploration commitments going forward on PEL 513 are not currently in production and will require a substantial capital investment to fund exploration and development within a reasonable timeline. Through this transaction with Santos, a substantial amount of risk relating to the ability to fund a full field development has been mitigated. Entering into the GSA will also enable Drillsearch to convert existing Contingent Resources into Reserves.

Oil Transactions

Drillsearch increases interest in Tintaburra Block Oil JV to 40 percent - Drillsearch currently owns an 11 percent interest in the producing Tintaburra Oil Field with Santos (Operator) holding the remaining 89 percent of the Joint Venture. As part of this series of transactions, Drillsearch will acquire from Santos a further 29 percent interest in the Tintaburra Joint Venture for $33.6 million (AUD 36.8 million) increasing its interest to 40 percent.

Drillsearch has been in discussions to acquire a more significant interest in the Tintaburra Joint Venture since 2009 and this transaction is the successful conclusion of those discussions. The Tintaburra Block currently contains gross 2P Reserves of 5.2 million barrels and gross 2C Contingent Resources of 10 million barrels (gross 3C 18.5 million barrels). The Tintaburra Block Joint Venture is in the process of committing to an expanded work program and enhanced oil recovery program to increase oil production and to improve overall oil recovery rates with a view to converting a significant portion of the Contingent Oil Resources to Reserves.

This acquisition will provide the Company with a more meaningful economic interest in the Tintaburra Block Joint Venture. The acquisition will also lift Drillsearch's 2P oil Reserves by 1.4 million barrels to 20.1 million barrels, an increase of 7.5 percent, and result in an immediate increase in oil production of approximately 150,000 barrels per annum.

Santos acquires Drillsearch's 25.8 percent interest in PEL 100 - Santos has agreed to pay $13.7 million (AUD 15 million) in cash for Drillsearch's 25.8 percent share of PEL 100. While the price reflects the strategic value of this permit to Santos, Drillsearch is pleased with this outcome as PEL 100 was a non-core asset obtained by Drillsearch through the recently concluded takeover of Acer Energy.

Santos farm-in to ATP 549P (West block) - Drillsearch currently has an interest of 66.66 percent in ATP 549P W located in South West Queensland in the area known as the Inland-Cook Oil Fairway, due north of the Cook and Cusinier Oil Fields. Santos will farm-in to ATP 549P W by drilling a commitment exploration well and by carrying Drillsearch in relation to this well cost. Santos will earn a 33.33 percent interest in ATP 549P W through this farm-in.

Conditions to the transaction and expected completion

The transactions are conditional upon completion of mutual satisfactory due diligence which is expected to be concluded within approximately eight weeks. Additionally, customary consents and regulatory approvals will also be necessary. Overall, transaction completion is expected to take place by the end of September 2013.

Managing Director's comments

Commenting on the transactions, Drillsearch's Managing Director, Brad Lingo said, "We are delighted to be entering into this series of important transactions with Santos. Santos has long been regarded as the pre-eminent Cooper Basin Operator and for several years, Drillsearch and Santos have enjoyed a strong and constructive relationship and these transactions are a testament to our good working relations with Santos.

Specifically, Santos' role as Operator and Joint Venture partner in the Western Cooper Wet Gas Project will materially accelerate the development of both conventional and unconventional wet gas resources in these permits. Santos brings its technical expertise, capacity to commercialise and access to capital to an appropriately balanced and aligned Joint Venture structure. Other elements of the transactions will provide for Drillsearch balance sheet strengthening and increased oil production potential, both of which we believe are of particular value in the current environment. We feel fortunate to be partnering Santos on this multi-faceted initiative and we look forward to a successful ongoing relationship with Santos."



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