Petsec to Sell Chinese Interests to Fund U.S. Shale Oil Development

Australia-based Petsec Energy will sell its interests in China's Beibu Gulf in order to fund its exploration efforts for unconventional shale oil on the U.S. Gulf Coast.

Petsec Chairman Terrence N. Fern said the company's board has determined that the US $37 million of funding required to develop the Mmbbl net to Petsec in the 6.12/12.8W oil fields would most likely deliver superior and earlier returns if applied to shale oil operations in the U.S. Fern anticipates the process and completion of a sale could take four months. The 6.12/12/8W oil fields are located in Block 22/12.

The company has developed a number of potentially large conventional oil subsalt plays in the Gulf Coast and near onshore areas which the company hopes to test later in 2012. However, Fern said during a presentation Wednesday that the company believes the quickest and least risky acquisition of sizable oil reserve additions is through shale oil onshore Louisiana and Texas.

"The advanced of horizontal drilling, fraccing and completion technologies which has given us a glut of gas, has in recent years allowed the investigation of profitable extraction of oil from shales."

The company has formed a joint venture with an experienced Eagle Ford shale player and has been conducting a regional review over the past nine months to identify areas of shale oil potential which are not being actively explored. In the past two years, the Eagle Ford has developed into a viable oil play, indicating reserves of 250,000 to 400,000 bbl/well for each 120 acre spacing. The play also has had highly repeatable success, $20/bbl finding and development costs, and operating cost of less than $3/bbl.

"Our strategy is to be an 'early mover' in areas where the shale source rocks are liquid rich and to acquire high quality acreage before it becomes extremely competitive and costly to lease," Fern said. "Initial leasing in a trend may take place at rate of $100/acre (more or less), but once a play has been proven and competition becomes heated, rates can climb to $10,000/acre (or more)."

The global financial downturn, weak U.S. gas prices, and the impacts of Hurricane Ike and the Macondo oil spill has prompted Petsec to refocus its business plan from the Gulf of Mexico and towards a exploration and production focus onshore Louisiana and Texas, and to pursue unconventional shale oil plays. As part of this strategy, Petsec has also repaid its debt, increased its exploration targets size, and increased its exposure to oil.

As part of its 2011-2013 business plan for the U.S., the company will target conventional oil and gas/condensate prospects with net reserve additions of more than 100 Bcfe, and has 10 prospects of 20 Bcfe to 200 Bcfe each on which to focus. The mapped potential of these 10 prospects ranges from 400 to 750 Bcfe, which Petsec plans to test over the next three years.

For unconventional shale oil, Petsec will target prospects with net reserve additions of over 35 MMbbl and will focus on lease acquisition and drilling activity in the second half of 2011.

The company will participate in three to five conventional wells in 2011 in the Gulf Coast and on the Gulf of Mexico shelf, with most activity to take place in this year's fourth quarter. One to two wells will be drilled on the Marathon gas/condensate discovery made in October 2010, and at least one high impact Gulf of Mexico well will be drilled as well.