Vintage Energy lines up potential cash generating projects for east coast gas supply

Oil and gas explorer Vintage Energy (ASX: VEN) is on track to deliver its first cash flow in 2021 as offtake talks continue for its Vali Field gas.

In the short space of two years since listing on the ASX, the exploration junior has acquired a range of assets in key prospective onshore petroleum basins and struck success with its first operated gas discovery at the Vali field in Queensland’s Cooper-Eromanga Basin at the start of 2020.

Another prospect tipped to be a potentially cash-generating asset is the Nangwarry carbon dioxide discovery made earlier this year on the South Australian side of the onshore Otway Basin.

Underpinned by a highly experienced team of Cooper Basin explorers, Vintage has lined up a stream of activities next year to kick this first cash flow goal and supply gas into Australia’s east coast gas market.

Formed by experienced alumni of Beach Energy

Established in 2015 and listed in late 2018, Vintage was formed by ex-executives of $4 billion Australian oil and gas major Beach Energy (ASX: BPT) including former managing director Reg Nelson as Vintage chairman and previous chief operating officer Neil Gibbins as Vintage’s managing director.

Speaking with Small Caps, Mr Gibbins said Mr Nelson’s attraction to starting this new venture stemmed from the belief that there was still opportunity to tap into the east coast gas market at a time when the LNG projects in Queensland are exporting gas offshore.

“We saw the evolution of LNG projects and it was pretty clear that most of this gas was going offshore under contracts. Reg thought, if he could get the right people on board and pick up some good permits, the move could pay off with high returns if discoveries are made,” he said.

And it did – Vintage took one crack at finding gas on ground that had been previously held by Australian gas major Santos (ASX: STO) and its Cooper Basin partners and bang, gas was found at what’s now called the Vali Field.

“Vintage has a really high quality management team with a wealth of experience, particularly in the Cooper Basin. It’s not easy finding oil and gas these days, yet with our first well in the basin we’ve already found success which is a real positive,” Mr Gibbins said.

Asset highlights

Vintage has a 50% operating stake in the Vali Field, located within the Queensland permit ATP 2021 and is partnered by Metgasco (ASX: MEL) and Bridgeport, which hold 25% each.

Vintage is also earning a 42.5% interest in an adjoining permit on the South Australian side of the Cooper-Eromanga Basin by drilling a “Vali lookalike” prospect called Odin.

Other assets include the wholly-owned EP 126 permit in the Northern Territory, containing the Cullen oil and gas prospect, a 30% stake in the Galilee Basin Deeps joint venture (the Albany gas field) with Comet Ridge (ASX: COI) as operator, and an agreement to earn a 30% interest in the Cervantes oil prospect in the Perth Basin in joint venture with Metgasco and private company RCMA.

But the company’s second priority to Vali is the perhaps underrated Nangwarry carbon dioxide discovery made earlier this year.

It lies in proximity to the Caroline-1 well, which produced carbon dioxide for about 50 years before the reserve depleted in 2017 and is regarded as the most profitable well in South Australia’s history, including oil and gas wells.

While some carbon dioxide is captured from power stations and sold into various industries, a big problem is the stop-start nature of these sources. And readers may be wondering why producing more carbon dioxide would be a profitable business in today’s world as we head towards greener energy sources, but in fact, carbon dioxide is demanded by the medical and firefighting industries and for beverages such as beer, wine and soda.

Interestingly, Pfizer’s new COVID-19 vaccine requires storage at minus 70 degrees Celsius so to achieve this, significant amounts of carbon dioxide are needed in the cold storage process to create dry ice. In which case, Mr Gibbins said timing “couldn’t be better” to bring the Nangwarry discovery into the spotlight.

“We’re seeing that as another possible added advantage in providing this supply to the market,” he said.

“We’ve had discussions with a number of parties around the supply of this gas. Since Caroline stopped around 2017, there are few pure (>90% carbon dioxide) and stable sources of supply. So, it could be a really good cash generator for the business,” he added.

Plans for 2021

Following the successful fracture stimulation and flow testing of the Vali-1 ST-1 well in August, which achieved a stabilised gas flow rate of 4.3 million cubic feet per day, Vintage moved to the front end engineering design (FEED) stage. This involves refining cost estimates for connecting the Vali well to the Moomba gas gathering system .

According to Mr Gibbins, the work remaining before first cash is generated from Vali includes connecting that flowline and negotiating access agreements with Santos (Moomba’s operator), as well as securing a buyer for the gas.

“We’re in discussions with a number of parties and based on our development concept there could be up to nine wells in this field over time.

“We did a capital raising recently and some of the funds will be used for appraisal drilling into the Vali Field to further assess future field performance and assist with negotiating a long term contract (or contracts) with a gas buyer on the east coast”, Mr Gibbins said.

“We will target an initial short-term contract off the back of the first well. Then we’ll effectively be flowing gas into the Moomba system and getting cash in the door,” he added, giving an estimated timeline of the second quarter of 2021 for first production and cash flow.

Meanwhile, Vintage this week announced a target start date of late January or early February for the flow testing of the Nangwarry-1 well and said the procurement of long lead items has commenced.

Once testing is completed, and if a commercial outcome is achieved, the company is aiming to rapidly move the project toward commercialisation.

The east coast gas market outlook

The catalyst for the creation and subsequent ASX listing of Vintage was Australia’s east coast gas market supply crisis. At the time, gas prices had reached levels ranging between $8-$10 per Gigajoule and there were serious concerns of a significant gas shortage by the mid-2020s.

While spot prices recently softened to average around $4-$5.50/GJ, the concerns still remain with the Australian Energy Market Operator (AEMO) recently forecasting “potential supply gaps during peak winter days from 2024” due to operational constraints including depleted reserves and a lack of new developments.

AEMO also issued warnings just this week that due to the heatwave shortly set to spread across Australia, there could be temporary supply issues in parts of Queensland and New South Wales.

Mr Gibbins said future supply issues remain and will become more apparent as the world economies recover from the impact of the COVID-19 pandemic. When LNG exports recover supply will tighten, which will have an associated impact on pricing.

“Victoria is the state at biggest risk of being short-gas as field reserves start to decline in the offshore Gippsland Basin.”

He also mentioned that gas is an ideal transition fuel in the process to move to greater levels of renewable energy, such as solar and wind. This transition is not going to happen overnight and will require careful planning and appropriate policy settings to ensure stability of energy supply.

“All of these things create a perfect storm of shortages and potentially higher gas prices,” Mr Gibbins said.

He added, “we are confident that we will be able to secure a strong long-term price for Vali gas based on the demand and supply outlook. The company is keen to get approvals and processes in place to kick off our planned work on the Vali Field and also assess the Nangwarry carbon dioxide discovery. There are exciting times ahead for Vintage as we move towards our first commercial production.”