Strike Announces Quarterly Report

Source: www.gulfoilandgas.com 10/22/2021, Location: Not categorized

Comments from Managing Director & CEO Stuart Nicholls:
“Strike has had another busy quarter as it concluded its CY20/21 West Erregulla drilling and testing campaign and completed the pre-FEED on Project Haber.

“At the end of the reporting period Strike announced its maiden Perth Basin gas reserve at West Erregulla.

This report from certifier NSAI reflects a point in time of the resource maturation and is based on only 3 well penetrations for the field. Importantly, the reserves booking is sufficient to progress towards the FID of the West Erregulla Phase 1 development, which is a positive outcome and provides a pathway to Strike’s first cashflows.

“In the coming months the Company will drill the Walyering and South Erregulla exploration wells, where positive outcomes have the potential to create significant value.”

Highlights

West Erregulla
• Netherland, Sewell & Associates, Inc. (NSAI) has certified 300 PJ 2P and 372 PJ 3P gross gas Reserves at the West Erregulla gas field in the Kingia Sandstone alone.1
• Considerable upside has been identified by NSAI in the West Erregulla gas field with a further 128 PJ of gross 2C Resources and 198 PJ of gross 2U Resources2.
• The NSAI Reserve certification supports progression of the West Erregulla Project into its Phase 1 of development.

South Erregulla & Permian Gas Fairway
• As part of the West Erregulla Reserve certification, NSAI has delineated a continuous gas resource to the southern boundary of the permit supporting Strike’s high degree of confidence in the potential of the 100% owned South Erregulla prospect.
• South Erregulla 140km Maior 2D seismic program completed.
• Non-binding and indicative MOU for gas supply from South Erregulla entered into with a Goldfields downstream developer for 15-20 TJ/d for 5 years starting in 2024.

Walyering
• Civils completed with rig mobilisation expected in late October for spud in November.

Project Haber: Mid-West Fertiliser Development
• Strike completed 7-month pre-FEED with Technip Energies.
• Technip Energies capital estimates decreased 6% on a like for like basis from feasibility study estimates. Adoption of Haldor Topsoe’s SynCOR Autothermal Reformer technology resulting in a 24% reduction in carbon intensity from previous estimates.
• Round 2 of Project Haber’s 1.4mtpa urea offtake process closed heavily oversubscribed with 4.75mtpa of firm proposals. Offers received were up to 15 years in length which can support future bankability of the proposed development. Shortlisted offtakers are now in negotiations to enter binding term sheets.

Mid-West Geothermal Power
• 5-month heat needle survey has been completed and data retrieved.
• Submission to convert geothermal acreage to full exploration permit underway.
• Strike was awarded Exploration Incentive Scheme grant to execute seismic inversion modelling with leading geophysics consultancy, Delft Inversion.
• Independent inferred resource assessment has commenced.

Corporate
• Entry into the ASX300 following the September rebalance.

Domestic Gas Business

West Erregulla
During the quarter Strike’s field operations centred on the production testing at WE5 and suspending the other WE wells readying them for production operations in 2023.

The results of the appraisal campaign to date support the engineering and development work done for the Phase 1 development and underpins sufficient reserves to service the existing gas offtake agreements. Consequently, Strike is preparing to move the asset into construction and proceed to first company cashflows post a Final Investment Decision.

Additional near term planned and funded drilling and seismic activities at West Erregulla have the potential, on success, to grow the reserve and resource base to support a second phase of development at the asset.

West Erregulla – Certified Reserves & Resources
At the end of the reporting period Strike released NSAI’s estimates and report for the West Erregulla reserves and resources. This report was based on the exploration and appraisal data from the field as at August 2021. The full dataset for West Erregulla is yet to be compiled with additional appraisal activities at West Erregulla currently planned to take place in 1H/22.

However, based on this limited dataset NSAI has certified a gross 2P gas reserve of 300 PJ (150 PJ net to Strike) which is sufficient to satisfy the existing offtake arrangements and proceed into development of the field.3

NSAI has recognised substantial growth potential in the West Erregulla gas field with a further 128 PJ of gross 2C Contingent Resources (64 PJ net to Strike) and 198 PJ of gross 2U Prospective Resources (99 PJ net to Strike) in the Kingia, High Cliff and Wagina/Dongara Sandstones.4

The NSAI Reserves and Resources report was based on the drilling, coring, log, seismic and production testing data from the various strata and exploration and appraisal wells drilled throughout the field.

Strike still retains a strong upside view of the potential in West Erregulla and there are several other areas where Strike assesses and observes upside in the fields recoverable resource potential versus that of NSAI. These include:
• Improved time depth conversion of the seismic and inclusion of the existing 2D seismic could add back up to 130 PJ of P50 recoverable volume. This will also be supported by the planned and funded Natta 3D seismic program which may start in Q1/22 subject obtaining the required regulatory approvals.
• Defining and reducing the size of the perched water zone. This area is limited by only a single data point on the eastern flank of the field where additional well penetrations or even longer-term production data from WE4 could inform the areal extent of the lens. This could add back some of the 180 PJ of P50 recoverable gas that has been risked out due to the conservative position taken on the size of the perched water zone.
• Deeper gas in the Kingia Sandstones where core analysis, seismic amplitude anomalies and gas gradients indicate further potential for gas prone reservoir. These possible volumes could add up to 155 PJ of P50 recoverable resource but would require a well penetration into this deeper rock or a production test of the High Cliff in WE2 in order to provide confidence that is externally certifiable.
• Recovery factors used by NSAI were inherently conservative, where a P50 recovery factor of 70% was applied due to the depth of the field and the lack of extended production data from any equivalent deep penetration in the Basin. P50 recovery factors of 75% or more have commonly been used for the Permian gas discoveries of the Perth Basin, which may be possible at West Erregulla once additional production data is available. An increase in recovery to 75% would see a P50 incremental recovery of 30 PJ.

West Erregulla Appraisal Operations
WE5 was perforated and flow tested during the quarter. The program was conducted in two steps to test the similar depths at WE5 as the water bearing units at WE4 separately. Gas production was initiated from the lower interval which confirmed these sands were not water bearing and have formed part of the subsequent resource calculation.

After perforation of the larger primary interval the well achieved an instantaneous rate of 13.1 mmscf/d from the two perforated zones over a combined 31m interval in the Kingia Sandstone, between 4,840m and 4,874m measured depth (4,613m to 4,647m subsea). The test program indicated a production barrier that the reservoir was unable to overcome through prolonged flow testing. This is interpreted to be skin from the filtrate from cement and mud invasion resultant from the drilling which has been amplified via the depth of penetration and ineffectiveness of the existing completion. The primary flow period was conducted over 77 hours at a rate of 5.1 mmscfd through a 64/64” choke, with 260 psig flowing well head pressure.

The flow rates and pressures were stable throughout the extended flow period and in conjunction with pressure build ups show no evidence of depletion from the test which is positive to dismiss compartmentalisation of the field. Gas sample analysis indicated WE5 has a similar gas composition to the other well results from the field, and WE5 produced minimal associated water which was measured at less than 5.9 bbls per mmscf on average.

Strike is preparing to re-enter WE5 to recomplete and retest the well which will be completed via a rigless intervention. These activities are planned to be campaigned along with the other wells in the region that require testing such as WE3 and possibly Walyering 5, South Erregulla 1 and Lockyer Deep 1.

The proposed West Erregulla Natta 3D seismic campaign is subject to feedback from the EPA, which is expected in the coming quarter. Subject to the level of assessment required, Strike could look to acquire the seismic data in Q1-Q2/22.

West Erregulla – Development
The EPA is continuing to review Strike and AGIG’s respective environmental permit submissions with the level of assessment determined as ‘assessment on referral of information’. Strike is now preparing to provide the additionally requested information and will recommence the approvals process towards the end of October. Strike currently expects the EPA to approve and issue the environmental permits in mid-22, subject to satisfying the information requests.

During the quarter Strike continued funding its share of the security required for the AGIG procurement of the gas plant long lead items required for the proposed 87 TJ/d Phase 1 gas processing plant. Security now totals ~$3m Strike share with a total expected commitment of up to $16m prior to AGIG making their construction undertaking and then taking the procurement processes onto their balance sheet.

West Erregulla - Finance
At the end of the quarter Strike had fully drawn its $12.5 million pre-development debt facility with Macquarie Bank. The finalisation of the West Erregulla reserves allows Strike to proceed to enter mandates with the selected banking institutions and engage in formal due diligence for the proposed project financing for the West Erregulla Phase 1 development project.

South Erregulla
South Erregulla-1 is scheduled to spud using the Ensign 970 rig after completion of the Walyering-5 appraisal well.

NSAI’s West Erregulla resource report identified 1C (P90) Contingent Resources to the far south down to the permit boundary of EP469. EP469 borders EP503, Strike’s 100% owned and operated permit that contains the South Erregulla prospect.5

Strike’s interpretation that West Erregulla is connected to South Erregulla6 is further supported by NSAI’s work. NSAI’s booking of P90 high confidence resource to this arbitrary point bodes well for the probability of success in the South Erregulla-1 well and, as a result, Strike has sought approval from the regulator to add a second South Erregulla well into its Environmental Permit to facilitate timely appraisal and faster reserves conversion on success.

Base line flora and fauna studies for the proposed Minjiny 3D seismic campaign are also underway where Strike will look to execute the survey off the back of a successful South Erregulla-1 well.

Eneabba Deep
During the quarter Strike submitted for approval its permits to progress the Eneabba Deep 2D seismic campaign in EP506. These submissions were not referred to the EPA as the campaign has been designed using Strike’s methodology of ‘new data sooner’ utilising only roads, firebreaks, gaps in paddocks and previously cleared land to constrain the 2D source lines. Strike expects feedback on the approvals process in the coming quarter.

Eneabba Deep is a Permian aged structure sitting adjacent to the Eneabba mineral sands mine and location of the proposed Iluka rare earths refinery. Strike will look to progress the exploration program of Eneabba Deep with a view to identifying a rig slot in FY23.

Walyering
Strike is preparing to spud the Walyering-5 appraisal well upon receipt of the Ensign 970 rig from the Lockyer Deep joint venture. Based on current estimates mobilisation will occur towards the end of October and spud is now likely to occur in November of this year. Strike and Talon Energy Limited (Talon) will share the first $9 million of costs on a one-third (Strike) two-thirds (Talon) basis under the terms of the Farmin Agreement in which Talon earns a 45% interest in EP447. The drilling pad and all civils works are complete and awaiting the arrival of the rig. The additional time prior to commencement of operations has been used for drilling rehearsals and improving procurement and supply chain readiness for the upcoming campaign.

Walyering is an excellent test-case for the geotechnical work Strike has carried out across the Jurassic Wet Gas Play in the Cattamarra sequence resultant from the 3D seismic acquired in December 2019. Should the appraisal drilling prove up a commercial development, then Strike expects this will be a catalyst for a material uplift in valuation of its 1,853 km˛ acreage position across the play, which includes the large Ocean Hill structure where a significant contingent resource has been booked. As such the Ocean Hill 3D seismic program has been submitted to the Federal and State regulators for environmental impact assessment before commencing formal approvals processes.

WA Gas Market
During the quarter WA spot gas prices continued their strong rise to the mid $5.00/GJ range. Spot market volumes trended sharply downward reflecting seasonal drawing on gas and further tightening of supply and demand conditions.

The lack of gas market supply replacement was reflected in a net 2.7 PJ of gas withdrawals from the State’s two major gas storage hubs for the quarter. Again, this indicated strong demand for gas that could not be sourced from the market. Material withdrawals from gas storage has now become an ongoing structural trend since mid-2020, evidencing that that the required supply to balance the market is not becoming available as demand is maintained or increases.

Changes in the WA domestic market dynamics were dwarfed by the activities of a significant tightening in international (LNG and European) gas markets. LNG spot market prices firmed in the US$30/mmbtu range, as WA domestic gas LNG netback prices reached $25/GJ. Whilst international markets reached new highs, significant WA domestic gas and LNG plant processing ullage remained unutilized. Strike anticipates that the price incentives offered by international markets may lure more gas supply to LNG over domgas backfill for producers that have the optionality. This may then provide significant upwards momentum for WA domestic gas prices as we enter into 2022. These market dynamics bode well for robust market demand as Strike looks to monetise some early gas from its high impact well, South Erregulla, expected to spud late Q4 2021.

In WA downstream markets, ACIL Allen issued their WA Gas and Downstream Opportunities report to the Department of Jobs, Tourism, Science and Innovation, noting that downstream processing of Western Australia’s natural resources has been a long-held ambition of successive governments looking to support the development of new industries and diversify the State’s economy. The report also indicated that gas suppliers who support and enable downstream development may be considered for exemptions to the domgas policy and allowed to access LNG export capacity. On top of downstream proponents can expect that the Government will facilitate downstream investment via building of critical infrastructure and streamlining approvals through the allocation of funds for industrial land development ($50m) and investment attraction and new industries ($100m). Strike’s Project Haber fertilizer development is well placed to capture this opportunity and benefit for Strike as it looks to support downstream processing, regional job creation, agricultural decarbonization, improved competitiveness and supply chain resilience for the State’s broadacre farmers.

Project Haber

Pre-FEED Completed
Engineering firm Technip Energies completed the base scope Pre-FEED during the quarter for the 1.4 mtpa ammonia to urea production facility to be located in Narngulu Industrial Area of Geraldton, Western Australia.

The Pre-FEED study has delivered a 6% reduction on the expected capital cost compared to the original Technip Energies feasibility report completed in January 20217
. Pre-FEED capital estimates represents a base cost estimate of US$1.64 billion, which includes the engineering, procurement and construction of the Haber plant delivered on site in Narngulu8
. Urea Market Pricing and Offtake Process Strike concluded the second round of its urea offtake process in July of this year. This process attracted 4.75 mtpa of firm proposals with attractive pricing formulas for Project Haber’s planned annual production of 1.4 mtpa of urea. The offers received were for up to 15 years in length which can support future bankability of the proposed development.

Strike subsequently short-listed parties to proceed with negotiation of binding agreements and Strike is currently continuing negotiations with its shortlisted offtake partners and expects to progress and formalize a binding term sheet for the entire production volume (1.4 mtpa) in the coming months.

International urea pricing is now at 12-year highs with global energy prices, in particular gas, now reaching record levels as supply issues dominate markets and the world accelerates out of the COVID-19 pandemic.

In Europe, record high gas prices has forced several plants to either close or reduce output. While production in the United States is still feeling the effects from shutdowns due to Hurricane Ida in conjunction with similarly rising US Henry Hub prices, rapidly increasing the cost of feedstock.

China, fearing a global supply crunch, has continued to increase restrictions of fertilizer exports from key manufacturing provinces driving further tightness in supply.

These global conditions are now reaching breaking point for the fertiliser market, with dramatic effects being felt on the cost and availability of nitrogen for broadacre farming in Australia.

Australian farmers are now having to lock in supply with international nitrogen suppliers for 2022 deliveries well ahead of their respective growing season.

With urea reaching up to US$800/t and the cost of shipping from the Arab Gulf to Western Australia costing more than ~US$70 /t, the landed cost of urea into WA currently sits at around ~$1,200/t. This is a 220% rise in prices and a >400% rise in the cost of shipping since Q1/20 on pre COVID levels and is evidence the tightening global energy market conditions, the renewed national investments in food security and the strategic importance of domestic supply chains of critical commodities.

Equity & Debt Processes
Strike, together with its advisors Azure Capital and ANZ, has recently completed a Strategic Road Map to clearly define Project Haber’s structuring and financing options to maximize the projects commercial outcomes. Once binding offtake agreements are in place, Strike will then move to market and sell down equity in the project. Project Haber has continued to attract significant unsolicited interest for both equity and debt participation.

Green Hydrogen & Carbon Benefits
During the quarter the Company announced that in parallel to the Pre-FEED study, it has progressed additional engineering by Technip Energies to incorporate Haldor Topsoe’s SynCORTM Autothermal Reforming (ATR) technology for ammonia production. This state-ofthe-art technology is reported to have the following production advantages compared to the traditional and widely used steam methane reforming9:
• Up to 30% reduction in Carbon Dioxide (CO2) emissions
• More than 50% reduction in Nitrous Oxides (N2O) emissions
• Up to 50% reduction in water consumption

The adoption of ATR technology is estimated to also reduce gas feedstock requirements of the plant by ~7% from 86 to 80 TJ/d with only 552 PJ now required to underwrite the first 20 years of operations.

Once operational, Project Haber via its ATR technology, lower carbon Perth Basin gas, shorter supply chains and green hydrogen inputs, will be able to produce some of the lowest carbon urea in the market at 0.37t CO2e per ton of urea initially and reducing overtime as green hydrogen imports increase. Strike estimates Project Haber’s urea will drastically reduce the carbon intensity (compared to current imports) of the agriculture industry it services by approximately 780-885k CO2e tonnes per annum or 60% from 2019 imported baselines.

Environmental Approvals
Environmental baseline survey, technical studies and environmental impact assessment for the Haber processing facility progressed during the quarter and are scheduled for completion at the end of 2021. Drafting of the Haber processing facility primary approvals commenced towards the end of the quarter with submission to the regulator scheduled for Q2 CY 22.

Strike engaged pipeline engineering company OSD Pipelines to complete a Pre-FEED study for a raw gas pipeline to feed the Haber processing facility. The study included an overarching strategy and master plan identifying the most efficient approvals pathway and supporting studies required to deliver the raw gas pipeline regulatory approvals. Strategen JBS&G has been engaged to commence desktop assessments and reconnaissance surveys for flora, vegetation and fauna for the raw gas pipeline which are scheduled to commence in Q4 2021.

Mid-West Geothermal

Power Project
During the quarter Strike completed the deployment of 12 heat needles across Strike’s geothermal acreage in the Perth Basin to map surface thermal gradients. These heat needles have been retrieved and the data recovered is currently being processed by Dr Graeme Beardsmore at Hot Dry Rocks Ltd.

With the completion of the heat needle survey, Strike has the right to apply for a Geothermal Exploration Permit (GEP) over up to 50% of the 3,500 km˛ Geothermal Special Prospecting Authority (GSPA) area, equating to up to 1,750 km˛. Strike will use its basin modelling and once booked, Inferred Resource (due CY 22) in order to identify and select the highest quality areas that best support the subsurface conditions required to generate the most electrical power and in turn the preferred GEP area. Strike intends to make application for the GEP during Q4/21 and, subject to grant of the GEP, will be in a position to consider future commercial opportunities for potential partners to participate in the proposed testing and development.

Corporate
During the quarter Strike’s expenditure focused on payables from the appraisal drilling and testing program for the West Erregulla gas resources, progressing its various seismic and exploration drilling programs, executing strategic transactions and pre-development activities at Project Haber. Strike finished the quarter with $52.1m of cash on hand, $16m in liquid investments and $3m of secured long lead items for the proposed Phase 1 gas plant.

As noted above, during the quarter Strike increased its economic interest in the West Erregulla gas project to ~54% via acquisition of ~8% of Warrego Energy Limited. Strike is Warrego’s largest independent shareholder as a result of acquiring the shares and looks forward to progressing the field through to construction and first production.

Also of note during the quarter, Strike divested it’s interest in Cooper Basin permit PEL96 (Klebb & Jaws) to Greenflame Energy Pty Ltd (Greenflame), majority owned by ASX listed Talon Energy Limited (by way of the sale of all the shares in Strike Energy 96 Pty Ltd to Greenflame).

Subject to satisfaction of certain conditions, Strike is proceeding to complete this transaction in the coming weeks.

As outlined in the attached Appendix 5B (section 6.1) $144,000 in payments were made to related parties for director fees.

With the completion of the heat needle survey, Strike has the right to apply for a Geothermal Exploration Permit (GEP) over up to 50% of the 3,500 km˛ Geothermal Special Prospecting Authority (GSPA) area, equating to up to 1,750 km˛. Strike will use its basin modelling and once booked, Inferred Resource (due CY 22) in order to identify and select the highest quality areas that best support the subsurface conditions required to generate the most electrical power and in turn the preferred GEP area. Strike intends to make application for the GEP during Q4/21 and, subject to grant of the GEP, will be in a position to consider future commercial opportunities for potential partners to participate in the proposed testing and development.

Corporate
During the quarter Strike’s expenditure focused on payables from the appraisal drilling and testing program for the West Erregulla gas resources, progressing its various seismic and exploration drilling programs, executing strategic transactions and pre-development activities at Project Haber. Strike finished the quarter with $52.1m of cash on hand, $16m in liquid investments and $3m of secured long lead items for the proposed Phase 1 gas plant.

As noted above, during the quarter Strike increased its economic interest in the West Erregulla gas project to ~54% via acquisition of ~8% of Warrego Energy Limited. Strike is Warrego’s largest independent shareholder as a result of acquiring the shares and looks forward to progressing the field through to construction and first production.

Also of note during the quarter, Strike divested it’s interest in Cooper Basin permit PEL96 (Klebb & Jaws) to Greenflame Energy Pty Ltd (Greenflame), majority owned by ASX listed Talon Energy Limited (by way of the sale of all the shares in Strike Energy 96 Pty Ltd to Greenflame). Subject to satisfaction of certain conditions, Strike is proceeding to complete this transaction in the coming weeks.

As outlined in the attached Appendix 5B (section 6.1) $144,000 in payments were made to related parties for director fees.





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