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Interview

with Peter Munachen, Chief Executive and Director, Norwest Energy

01.06.2010 / Energyboardroom

You started as CEO in December 2008 amidst the global financial crisis, volatility in the commodity prices, and instability in the capital markets. How has Norwest Energy regrouped and re-strategized after a difficult 2009 for many junior exploration and production companies?

Yes, at the end of 2008 we were in the midst of the global financial crisis with debt of around $2 million and our CEO at the time had left the company to go back to New Zealand. We had a good project in the southern gas basin of the North Sea which we sold to pay off our debt. At the same time, other Australian E&P players were reviewing their portfolios and they relinquished some permit interests in the northern Perth Basin that Norwest was able to acquire. For instance, this time last year we had a very much minority interest of 1.278% in one project, EP413, and saw opportunities that others did not recognize. We went about increasing our interest in that permit and now have 55.6%. Today it is one of our major projects with its considerable shale gas potential. If our EP413 acreage was in the US in the likes of the Barnett or Marcellus shale, it certainly would capture someone’s attention and attract a serious price tag. However, the northern Perth Basin is yet to be fully recognized for its shale gas potential, but as work progresses in the region the attention will come and so will the value. Leading Australian E&P player AWE is currently evaluating the basin’s shale gas potential at its Woodada project, which borders our acreage, and the results to date are very encouraging. Another key license in which we increased our interest during the GFC is TP/15, which runs along the coast. We previously held 10% in this block and now we own 100%. We also increased our interest in the EP426 and EP368 licenses further inland in the Perth Basin with 20% interest in each of those licenses compared to just 10% in EP368 last year. We are about to drill TP15 and EP413 before the end of this year.

So by capitalizing on opportunities we have significantly increased our acreage from where we were at the beginning of 2009.

Did retiring the debt free up significant cash flows that allowed you to make the move for increased interest in the licenses?

We had limited cash flow to draw on so we raised a small amount of money here in Perth that kept the door open and then we raised $1m from shareholders that financed our operations whilst we went about increasing our exploration portfolio. . We managed our money tightly and then raised further funds earlier this year. We also have an office in the UK and projects in southern England. Whilst we were increasing our equity in projects in Australia we also farmed into another license in southern UK – the Hurst Castle project. All of this activity has resulted in Norwest holding strategic positions in two underexplored basins-northern Perth Basin and the southern England Wessex Basin. The foundations have been laid for future growth.

What first attracted Norwest Energy to the UK where it now runs core operations?

One of our former CEOs had worked abroad including the UK and saw the opportunity there. He took us into the UK through the prime asset – the Cobra project – in the southern gas basin of the North Sea which was potentially a sizeable gas project. We drilled there in May 2008 and it produced gas although not necessarily at commercial flow rates. That gave us an initial masthead in the UK. As we got more familiar with the geology of the UK we saw other opportunities that took us into the Wessex Basin. The Wessex Basin in southern England is very significant because it hosts the BP-operated Wytch Farm project which is the largest onshore project in Europe at 500 million barrels of original oil in place.. Our work to date has provided encouraging results although it is still early days.

Norwest Energy prides itself on venturing into overlooked or underexplored basins, which suggests a type of uniqueness having the tendency to look where others shy away from. What is the unique edge that allows Norwest to execute this strategy?

We are small and nimble. In Perth, Andrew Sutherland, a geophysicist, is our technical man and in the UK we have John Michaels, a geologist. We have a number of international and local consultants that we draw on to provide the additional skills that we require. My background is finance and I also bring to Norwest the business and commercial attitude.

Management is supported by an experienced board of directors. Chairman Michael Fry is also the chairman of Red Fork Energy which has shale gas activities in Colorado. Dave Kennedy founded the company and is a senior man here who has been around oil and gas for a long time. He is also the chairman of Pan Continental Oil and Gas. We are small and nimble opportunists who are not weighed down by large overheads of the big company bureaucracy. A prime example of this in action is how we were able to pick up on the opportunities to increase our acreage in the northern Perth Basin.

Having acquired new acreage and licenses what are the timetables and necessary steps to explore, produce, and commercialize?

TP15 has two prime drill targets, Redhill south and Xanadu. We will drill one of those targets this year, or possibly both. These drill targets are off shore but in the transition zone running along the coast. These targets will be drilled from onshore using deviated directional drilling technology. We are in discussion with several parties to farm-in into the permit by funding drilling costs.

We also plan to drill EP413 later this year to recover core to evaluate the potential for shale gas. Of significance the northern Perth Basin has three shale sequences all of which have potential for gas and are up to 1,000 meters in some sections. At the beginning of this year AWE announced their intention to evaluate their Perth Basin Woodada Deep 1 well for its shale gas potential. Their activities have been quite successful so far and Norwest is watching AWE with interest given that EP413 is approximately 125,000 acres, so it is a decent size and in a prime location with high potential for shale gas.

If you compare its shale potential with the Barnett Basin, then our acreage is potentially very significant. With our 55.606% interest we have enough equity to farm out a reasonable % to a well funded group and still retain a decent position. Whilst the current focus on EP413 is shale gas, it still has potential for conventional oil and gas.

Do you see shale gas as the future of this company’s activities and success?

Whilst it is early days for shale gas in the northern Perth Basin we do see that shale gas could be the way of the future for Norwest.. The possible shale gas resources in our acreage is potentially greater than conventional gas. The shale sequences – the Kockatea, The Carynginia and the Irwin River Coal Measures – exist throughout the basin, which includes the whole of EP413. This certainly provides the basis for a shale gas business to be developed in the Perth Basin.

A major gas pipeline starts in Dampier in the northwest and comes all the way down through the northern Perth Basin to Perth and down further south to Bunbury about 200km south of Perth. Between these domestic and industrial markets, there is a long-term unmet demand for gas and the development of a shale gas business in the Perth Basin is well placed to provide gas to those markets. In addition to the Perth and southwest markets there is nearby Geraldton to the north, which is the port city to the emerging mid west iron ore province. The Western Australian State Government, in conjunction with private enterprise plans to build the Oakajee deep water port just north of Geraldton. All of this will bring further demand for energy in Western Australia.

The state is hungry for energy. A major gas discovery between Perth and the Midwest mining region can feed that market. If we come up with large volumes then we could also be looking at potential exports.

Does Norwest Energy stand to benefit from the exploration rebate that was announced alongside the super profits resource tax and drawn up specifically for junior companies?

I think you have to view all of this as work in progress. It is still very unclear as to how this will work if it is finally enacted. Time will tell, but in the meantime it is being met with considerable resistance, particularly from the mining fraternity.

What do you consider the main company achievements during your brief time so far as CEO?

I have to say it is the increased acreage position. Also, that we are heading into drilling this year. This will be the first time in the history of Norwest that it has operated and managed a drilling program. Historically we have been a junior minority partner in joint ventures managed by others. Although it was painful at the time, in the midst of the GFC we managed to sell our Cobra project to clear debt. It got the monkey off our back. It is satisfying that we have achieved all of these, and, whichever way you look at it, either by design or default, the EP413 permit has the potential to contribute to Norwest becoming a major gas player in the North Perth Basin.

In addition to increasing our acreage position we are using innovative technology to increase the odds of identifying additional prospects. Our TP/15 coastal block is in what is called a transition zone. It has a lot of reefs and heavy fishing in the area making it difficult to get in and do seismic. To overcome that, we have used an airborne survey process called full-tensor gravity gradiometry imaging (FTG). In effect it measures the gravity gradiometrics – the effect of gravity in any environment. It is a high-resolution gravity technique, or, aerial gravity with a difference.

It is a technology that is more commonly used in the mining industry. It was developed by the US military for submarines and Geo Space worked with them to commercialize it. They gave one license to BHP Billiton who used it for diamond exploration in Canada and called it the “Falcon process.” The petroleum industry then began using it on a limited basis. Our use of it in the UK has accelerated our exploration activity by giving us results in a matter of days that would take months to acquire if we used seismic. The interpretation process is also much faster than with seismic.

Given its efficacy, why isn’t FTG more prevalently used in the petroleum industry?

It’s still new and other companies remain skeptical. Perhaps it seems too easy to them. We are also in a unique situation. What gravity essentially does is measure contrasts in density. The big contrast is the basement rocks below the sedimentary layers. Our reservoirs are reflected by what is happening in the basement. By defining basement we can quickly assess reservoirs. In a lot of areas you don’t get that. It is applicable in our positions, but probably not in the Northwest Shelf.

However, there is no one stand-alone technique. FTG needs to be integrated with other geological data. For us, this technology has been useful and has eradicated some surveying issues.

With its prime acreage, innovative technology, and nearby markets, where will Norwest Energy be in five to ten years time?

We aim to be a major gas producer. We also have the opportunity for many offshore oil discoveries in TP15 to be added to the shale gas play in EP413. The potential for shale gas exists throughout the basin. It is not as if we have to look through complex geology because that has already been done by other companies. The shale sequences are several layers thick and we have three sequences of them in the Perth Basin. We are very optimistic and are doing various studies of past drillings. Within three to five years we could very readily become a gas producer in the basin. The great thing in our areas is that the price of gas is $7 per mmcf which is pretty favorable compared to the prices achieved by companies on the east coast of Australia.

We have two footprints – the Perth Basin Wessex Basins – both of which have the potential, as we stand today, to deliver. It is a bit like real estate – location, location, location. People ask if we are looking for other areas. Not really. If an opportunity emerges we will always examine it. But right now with limited resources, a small team, and serious commitments to these projects, we have enough on our plate about which to be optimistic.

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