'Cavalry' Arrives to Help Stuart Project

Abstract: After more than 30 years of financial and mechanical delays, Australia's first oil shale project draws the interest--and wampum--of U.S. private equity investors.

Analysis: That oil shale project in Queensland, Australia--whose creators have exhibited the kind of persistence that pioneers have always wielded in order to see things through--recently dodged fusillades from a mixed tribe of raiders that have dogged its tracks over the years. But thanks to some much-needed investment from the U.S., its wagon is back on the halleluiah trail.

The Stuart Shale Project, located about 9.5 miles (15 km) northwest of the industrial port city of Gladstone on Australia's east coast, is using Canadian technology to develop an oil shale deposit that contains an estimated 2.6 billion barrels (bbbls) of recoverable oil from shale.

Southern Pacific Petroleum N.L. (SPP), with headquarters in Brisbane, Queensland's capital city, has spent more than 30 years in its quest to establish oil shale as a viable oil source for Australia, with the Stuart project as its opening stanza. Discovery of conventional oil resources in Australia so far has been disappointingly light, and the country currently is a net oil importer.

But SPP, which has the rights to 10 Australian oil shale deposits containing more than 20 bbbls of shale oil, has weathered setbacks that would discourage most larger companies--and actually did in the case of a previous investor from Canada, none other than oil sands giant Suncor Energy. But the outlook has improved considerably in recent days, thanks to the new U.S. backing.

Oil shale is a 40- to 50-million-year-old sedimentary rock that contains a solid hydrocarbon, kerogen. Oil shale is surface-mined, and in its natural state, contains no liquid hydrocarbons. The kerogen can be liberated from the crushed rock, however, by "baking" it with heat on the order of 500 degrees C (about 932 degrees F) to force decomposition of the kerogen and release the hydrocarbons as a vapor. The vapor, when captured and cooled, becomes liquid oil and gas.

Stage 1 of the three-stage Stuart project, a A$360 million (US$223 million) demonstration plant capable of producing 4,500 bbl/d (but which has averaged between 2,500 and 3,000 bbl/d since 2001), applies an adapted oil sands processing technology, the Alberta-Taciuk Processor (ATP), to produce the heat and transform the kerogen. The company believes the ATP has major economic and environmental advantages for oil shale development. Other available retorting processes are less attractive environmentally, particularly since they use "tailings" ponds, which are considered potentially harmful to ground water resources.

At the project, SPP recently incorporated a number of state-of-the-art environmental safeguards. These include one of the world's largest wholesale plantings of indigenous trees and plants over mine fills, as well as upgrading of existing air and water protection and sound abatement systems.

Long-term development of Queensland's oil shales has the potential to meet Australia's oil import needs and at full development, create an export market for the oil. The Stuart project could result in ultimate production of 85,000 to 200,000 bbl/d of kerogen products.

But the project has had a difficult gestation period. It has experienced long delays, usually due to difficulty in locating financing for an operation in an industry segment that mostly has been deemed uneconomic (see "Another 'Burn' in the Energy Ring of Fire," Oil and Gas Advisory, Sept. 23, 2002). Also, the Stuart project has drawn the ire of Greenpeace Australia, which continues to demonstrate against the whole idea, claiming shale production pollutes both Queensland's atmosphere and water resources and threatens the safety of the nearby Great Barrier Reef. In fact, Greenpeace protestors have even chained themselves to upgrading equipment at the plant site, much to the embarrassment of SPP and its other partners.

SPP does admit that the pilot plant has experienced some problems in the form of unexpected emissions, as well as odor, dioxin, and noise problems. The company says such problems have been mitigated successfully; however, it also added to overall project delays.

It was Suncor's investment and takeover as operator with a 50 percent stake in the project in 1997 that got the demonstration plant built and running. However, it's thought that the ensuing mechanical and emissions challenges, coupled with the full-court press by Greenpeace, helped discourage the Canadian company, which bowed out and wrote off its A$171 million (US$106 million) investment in early 2001. Though Suncor still maintains a minority interest in the project, its withdrawal from active participation did little thereafter to excite potential investors. In fact, SPP had difficulty raising working capital through a 2002 equity offering, which targeted some A$40 million (US$25 million) but which eventually garnered only about A$10.2 million (US$6.3 million).

Earlier this month, however, SPP heard the bugle of rescuing cavalry in the form of Austin, TX-based Sandefer Capital Partners LP (SCP), a more than US$850 million private equity fund that invests largely in energy projects. Under a bonds-for-shares arrangement, Sandefer will advance A$51 million (US$32 million) to SPP's coffers. In the future, were the bonds to be fully converted to stock, Sandefer would own about 42 percent of the Australian company. Shareholders and government regulators approved the deal a few days after it was formally announced.

The money is earmarked for both working capital needs and upping the Stage 1 plant to its 4,500-bbl/d design capacity, as well as advancing design and development of Stage 2--the "commercial" stage--which would expand productive capacity to some 15,000 bbl/d (as per Suncor's original schedule). According to SPP, the Stage 2 expansion will cost an estimated A$600 million (US$372 million).

Meanwhile, once the estimated A$600 million (US$372 million) Stage 2 project has advanced to the point of being "bankable," Sandefer has indicated it would consider leading efforts to finance construction, bringing in either Sandefer's existing investors or others, depending on its attractiveness as an investment opportunity. The company's current investors have been described as "some of the largest institutions, charitable trusts, and wealthy families in the U.S." Jeff Sandefer, a 25-year oil industry veteran whose family has been deeply involved in the petroleum industry since its beginnings in Texas in the 1920s, leads the SCP Company. Founded by Sandefer in 1998, SCP is said to have realized a 54 percent return on invested capital to date.

According to data supplied by Southern Pacific, SCP is attracted to long-life energy assets, with typical investments focused on producing properties with the potential for significant follow-on development. It also is described as being attracted to the development of oil shales, coalbed methane, fractured shales, and other unconventional hydrocarbon projects, due to their potential to deliver big production volumes for long periods of time.

Managing Director of SCP is George Lindahl III, former chairman and CEO of Union Pacific Resources Co. (UPRC), a highly successful E&P company during the 1990s that had been spun off from Union Pacific Corp., the railroad company. Lindahl became vice chairman at Anadarko Petroleum Corp. when that company acquired UPRC in July 2000. He joined SCP in 2002 and heads the company's Houston office.

Both Sandefer and Lindahl are members of the board of directors of Anadarko, an US$18 billion "super-independent" producing company with international presence along with extensive conventional U.S. and Canadian oil and gas holdings, both on land and in the deepwater Gulf of Mexico. Anadarko also has shown recent interest in developing unconventional hydrocarbon resources.

Meanwhile, the Stuart project has a new lease on its already much-extended life, and the interest shown by SCP has even prompted SPP officials to look beyond the current project to one or two of its other potential Australian oil shale projects. Jim McFarland, SPP managing director, was quoted recently as saying the company could start mining its Condor shale deposit near Proserpine, north of Gladstone on the northern Queensland coast, within seven years. That deposit alone is said to contain 4.8 bbbls of shale oil resource. Additionally, he said development of the company's 2.6-bbbl Rundle deposit near Gladstone also could begin concurrently with the Condor project.