Is This Australia's Next Woodside?

Oil and gas company secures funding for drilling.

Mike King
Mike King
Sep 20, 2012 at 12:00AM

SYDNEY-- Karoon Gas (ASX: KAR.AX) has announced that it has secured funding for the drilling of oil and gas wells in the Santos Basin, 112 kilometers off the coast of Brazil. Canadian company Pacific Rubiales will take a 35% interest in four of Karoon's exploration blocks with an option to acquire another 35% in a fifth block. In exchange, Pacific Rubiales will pay Karoon US$40 million and fund up to US$210 million in drilling wells.

The Santos Basin has already shown that it contains significant amounts of oil and gas. Estimates have suggested the oil fields could contain many billions of barrels of oil equivalent. Just one field, The Lula (previously known as Tupi), is estimated to hold 5 billion barrels of recoverable oil by itself.

Karoon holds five blocks in its own right, totaling a gross area of 865 square kilometers, and 20% of another block. In 2010, Brazilian oil company Petrobras found an oil reserve confirmed to contain 550 million barrels of oil equivalent, just five kilometers northeast of Karoon's blocks.

Drilling is expected to start during the fourth quarter of this year, but wells are not cheap, hence the reason for Karoon to seek a partner to help fund exploration. Each well can cost up to US$100 million, as the oil reserves are located deep, sometimes up to four kilometers below the ocean bed, and are technically very complex to reach and extract.

Karoon also holds interests in exploration permits off the coast of Peru and in the Browse Basin, offshore Western Australia close to Woodside Petroleum's (ASX: WPL.AX) Torosa field. Santos Limited (ASX: STO.AX) is also exploring for oil and gas in the Browse Basin, with its permits surrounded by three different LNG projects (Browse, Ichthys, and Prelude).

The next 12 months could make or break Karoon. If it's unsuccessful with its Brazilian drilling program, the wells may have to be plugged and abandoned. The company would then need to decide if it was going to raise more capital to drill more wells, or sell off the permits, and concentrate on its other interests. However, if it finds oil or gas, they are likely to be large fields, and we could see Karoon become one of Australia's largest oil and gas companies.

Currently trading around $5.55 and with a market cap of more than $1 billion, investors appear to be pricing in at least one decent discovery.

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