Dash for Perth basin gas
There has been a heightened interest in the onshore gas assets in Western Australia’s Perth basin in recent months. ASX-listed Strike Energy and Australian billionaire Gina Rinehart’s Hancock Energy are locked in an intense bidding war for Warrego Energy. Also, Mineral Resources wants to buy out Norwest Energy, another Perth basin-focused independent gas company. Rystad Energy believes the interest in the region is because most of the new domestic gas supplies over the next decade are expected to come from the Perth basin.
“The Western Australia domestic gas market is already tight, and we expect further potential shortfalls over the next few years, peaking in 2024-25, primarily driven by natural decline at legacy offshore gas fields,” said Krishan Pal Birda, senior analyst in Rystad Energy's upstream research team. “Most of the new domestic gas supplies over the next decade are expected to come from the Perth basin, while the biggest new source of offshore supply – from the Scarborough project – already has a major domestic contract in place for ‘new demand’ through Perdaman’s proposed urea plant.”
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According to Rystad, the Perth basin contributed roughly 4% of Western Australia’s domestic gas supplies in 2022, and this is expected to rise to about 30% by the end of this decade, highlighting its growing significance to the west coast domestic gas market.
The Perth basin’s relatively low-cost gas resources, which are located close to existing infrastructure, are proving to be quite lucrative and offer potential upside in resources as significant exploration and appraisal activity is planned in the near term, Rystad said.
Further bolstering the basin’s position is the potential opportunity for more Waitsia-like exemptions to the ban on onshore LNG exports and the upside to domestic gas demand going forward.
Western Australian government has banned the export of gas produced onshore except for the Waitsia project, which is owned by Beach Energy and Mitsui.
Birda believes vertical integration opportunities offer another commercialisation pathway for Perth basin developments, such as cases of mining companies getting involved in upstream developments to secure their gas supplies (for example Mineral Resources) or upstream players pursuing downstream opportunities (for instance Strike Energy’s proposed Project Haber).
“The Perth basin offers plenty value on this front, and this could drive investment decisions going forward. Many of the development projects in the basin have yet to commence production and are owned by relatively small entities, thus equating to attractive investment opportunities for larger players,” Birda added.
Battle for Warrego Energy
Warrego, whose primary asset is the West Erregulla discovery in exploration permit EP469 in the Perth basin, is being wooed by both Strike and Hancock. Strike, which is an equal partner in EP469, first made an all-scrip offer to Warrego in early November. Later, Beach and Hancock also joined the race. Beach in early December withdrew from the competition.
Strike on January 6 said its all-scrip offer represents the best value for Warrego shareholders. Strike said its all-scrip offer of A$0.375 ($0.25)/share represents a 33.9% premium to Hancock’s current offer of A$0.28/share and a 4.2% premium to Hancock's proposed offer of A$0.36/share based on Strike’s closing share price on January 5 of A$0.375/share.
Hancock had on January 5 announced a fresh offer of A$0.36/share for Warrego, higher than its previous bid of A$0.28/share. The new offer is conditional on Hancock achieving 40% or more total acceptances under its offer.
Meanwhile, Mineral Resources might have entered the Warrego takeover battle by reportedly acquiring 15% of the stock at $0.35/share.
“Warrego is an attractive investment due to its stake in the West Erregulla discovery. As mentioned earlier, Perth basin gas is becoming increasingly valuable given the current market dynamics and West Erregulla is a prime example,” Birda said. “Located onshore, close to existing infrastructure, with relatively low costs and rising commodity prices, amid potential market supply shortfalls and multiple commercialisation pathways, West Erregulla is shaping up to be an attractive investment.”
The Perth basin gas makes a lot of sense for big mining players in the region as they look to power their downstream operations. The Perth basin will have a direct connection to the Goldfields mining region through the Northern Goldfields Interconnect (NGI) pipeline that is currently under construction.
What are the odds that an upstream company like west coast-focused Woodside enters the competition to acquire Warrego? Birda believes that this scenario cannot be ruled but chances of that happening is low.
“A traditional upstream player could still enter the fray as well, but seeing as this battle has already driven up the value of Warrego to quite high levels compared to the initial bid, along with the greater importance it has for mining companies in the region, we believe the most likely outcome is that Warrego will indeed be acquired by a mining player,” he said.
“Given that most of the lucrative Perth basin acreage has already been gobbled up, we are likely to see further consolidation in the region through M&A activities,” Birda added.
Bidding war for Norwest?
As the battle for Warrego was raging on, Mineral Resources on December 19 announced it had made an off-market takeover bid for Norwest. Mineral Resources has offered one fully paid ordinary share for every 1,367 Norwest shares. This implies an offer price of A$0.06/Norwest share. Norwest is Mineral Resources’ minority joint venture partner in the Lockyer Deep gas project in the Perth basin.
“Mineral Resources already holds a majority stake in this project, and it is hardly a surprise that the company wants to extend its position to complete ownership,” Birda said.
“Given that there is an extensive drilling programme planned for Lockyer Deep to define and firm up the resource base, it would be hard to comment on the comparative value of Mineral Resources’ bid – or that of other bidders for Norwest – until the resource base is defined. In any case, we wouldn’t be surprised to see Norwest attract another bidding war, given the allure of Perth basin gas,” he added.
Gas price cap spooks the industry
Australian parliament on December 15 passed the bill to cap gas prices at A$12/gigajoule for 12 months and set up a A$1.5bn ($1.03bn) fund to deliver relief directly to electricity bills. The federal government had on December 9 announced its decision to cap gas and coal prices in an effort to “provide targeted energy bill relief for households and businesses”.
The east coast spot gas prices last year averaged around A$22/GJ on the Declared Wholesale Gas Market (DWGM).
Australia’s peak oil and gas body Appea has slammed the decision saying the energy reform package will push up gas prices for households and businesses after the intervention “smashes" investment confidence in Australia.
Appea criticised the lack of consultation with industry before the Australian government announced it was introducing the intervention of a gas price cap and mandatory code of conduct.
Australia’s biggest gas producer Woodside on December 13 said that the federal government’s plan to cap gas prices will not meet the objective of bringing down the cost of living pressures for households and could make matters worse.
“In our view, while the terms of the price cap are not unreasonable, the extent of potential intervention and the perceived possibility of the east coast gas market facing a plethora of regulations could have long-term adverse impacts on gas production and investments,” Rystad said in a report published on December 22.
What is really bothering the industry is the mandatory code of conduct, the scope of which is yet to be developed.
“Without more details on the mandatory code of conduct, it is too early to suggest an exodus of upstream investment. However, in an environment already gripped by long-term demand uncertainty, convoluted regulations could discourage producers from proceeding with major capital expenditure (capex) decisions,” Rystad said.
All the uncertainly may have already begun to impact investment decisions. Senex Energy, majority-owned by Korea’s POSCO International, on December 22 said it will suspend the A$1bn ($670mn) expansion plan for its Atlas gas project in Queensland amid the federal government’s decision to cap gas prices.
Senex CEO Ian Davies said the company will honour existing commitments to customers, however given the new laws it is not possible to finalise any new gas agreements.
“Until we know the scope of future government actions under the yet-to-be-developed code of conduct, and the potential for retrospective application of measures, including the breaking of agreed contracts, it is prudent to review all investment,” Davis said.