Find & development cost for WA gas

Reading a recent report for Buru Energy, a spin-off from the old ARC Energy absorbed by AWE Worldwide, I am inclined to think that the energy market is worth a sniff or two. The following chart is food for thought. It shows the find & development costs and revenues for gas discoveries in Western Australia (based on oil equivalent prices). The implication is that oil & gas prices have fallen almost to the level of baseline costs. This would of course scare off a lot of buyers, but I reflect on the collapse in equity prices and ponder whether its time to buy as a counter-cyclical opportunity.

Looking at the structure of the Canning Basin, one would have to conclude that the onshore area has potential, though it does remain relatively unproven in terms of prospectivity. My initial view would be that they would inevitably face competition from any gas pipeline built from northern Australia to Perth. Having said that, if such a pipeline was going to be built, you would more likely target the East Coast market given that there is an existing pipeline (half way) from Brisbane/Sydney to Roma. More likely still is a 100% focus in northern Australia on LNG exports. Why? Because northern Australia is very attractive as a gas supply point compared to less secure areas like Yemen or Oman. Australia is (less importantly given the scale of ships) is also closer to Asia.
Buru Energy might just have a lucrative opportunity in WA supplying gas to future gold mines as the gold price takes off. This company has cash reserves of $60mil, and its only capitalised at $40mil. Looks cheap to me! And based on a gas price at current costs, you would have to conclude that this stock has nothing but upside. The problem is that drilling of targets is not due until 2010. In the interim you can focus on gold. So for now I would just watch this one. I am more interested in the gas potential than the oil given the following economics and the history of discoveries from the basin.
Current production from Blina and associated oilfields:
Ultimate recoverable 2P reserves of all fields ~3 mmbbls
Discovered 1981 - first production in 1983 at ~1,000 bopd
Production of 30 bopd when Buru acquired the fields
Recent workover program increased production to +200 bopd
Energy economics:
Field opex ~$10/bbl
Blina oil production facility
Trucking costs to Perth ~$25/bbl
Current A$ oil price ~$65/bbl
Projected annual net revenue at 100 bopd rates ~$2.4 million

This is hardly attractive, but you can readily see that if they have an oil or gas discovery, this company is shaping up as a positive play. The Blina field highlights the potential, and this field is relatively untested. One to watch!
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Andrew Sheldon www.sheldonthinks.com