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Baraka Energy And Resources: To Benefit From A$206M Statoil Investment Into NT Oil And Shale

Baraka Energy and Resources' (ASX: BKP) Southern Georgina Basin tenements are looking increasingly attractive with the US$210 million(A$206 million) entry of Norwegian state oil company Statoil in what is so far the largest foreign investment into Australian shale gas.

Joint venture partner PetroFrontier Corporation's (CVE: PFC) binding agreement with Statoil ensures that that exploration will continue without funding risk and that drills will turn in the quest to unlock the riches of the Southern Georgina Basin.

Statoil will earn up to 65% interest in EP 103 and EP 104 (PetroFrontier 100%), EP 127 and EP 128 (Baraka 25% and PetroFrontier 75%) as well as exploration permit applications EPA 213 and EPA 252 (PetroFrontier 100%) under a three phase farm-in.

"We think this is a fantastic result for everyone involved, especially our shareholders, this is an enormous amount of money to be spent on exploration and indicates just how massive the potential for this area could be," Baraka executive chairman Collin Vost said.

"As we understand it, this is the first investment of Statoil into Australia, and needless to say, adds huge global credibility to the Southern Georgina Basin as well as significant capital and technical capability."

Baraka added that with PetroFrontier having earned its additional 50% stake in EP 127 and EP 128, it will now meet its share of costs when and if required.

Farm-in ensures accelerated drilling program

Under the first phase of the farm in, Statoil will contribute half of a US$50 million exploration program that will be carried out from the rest of this year to 2013.

Decisions on drilling locations and seismic, which will be made partly to ensure work commitments for the permits are met, will be made subject to results from the current drilling and fracture stimulation program.

Statoil will then have the option to acquire a 25% stake in the permits by reimbursing PetroFrontier for its US$25 million contribution and committing to proceed with Phase 2.

Under Phase 2, the Norwegian major will contribute $US80 million of a joint US$100 million exploration program to earn a further 25% of PetroFrontier's working interests.

Statoil will also have the option to become the operator of the permits during this phase, which stretches from 2014 to 2015.

Finally, Statoil will fund a US$80 million joint exploration program in the third phase - currently expected in 2016 - to earn the remaining 15% working interests.

Throughout this farm-in period, Baraka will be part of all decisions made, in relation to expenditures, to its 25% interests in both EP 127 and EP 128. It will also pay for its share of costs in the permits and the 75% stake it holds in the 75 square kilometre area around the Elkedra-7 well in EP 128.

Statoil is the world's 13th largest oil and gas company with a market capitalisation of about US$76 billion and operations in 36 countries around the world. The fully integrated petroleum company has 40 years of experience from oil and gas production on the Norwegian continental shelf and is 67% owned by the Norwegian Government.

Southern Georgina Basin gains further impetus

Already seen as one of the most prospective undeveloped basins in the Northern Territory, and potentially a province that may rival the Bakken Shale in North America, the Statoil farm-in is a vote of confidence in its potential to host major shale gas and possibly oil resources.

While minimal exploration has been carried out in the past, test wells drilled in the Basin have demonstrated oil shows and good quality source rocks.

Baraka and PetroFrontier were previously targeting the hot shales at the base of the Middle Cambrian aged Arthur Creek Formation, the geology of which has been compared favourably to the Bakken.

This interval can be mapped throughout the southern Georgina Basin with the richest sections up to 25 metres thick.

Analysis

The Statoil farm-in to JV partner PetroFrontier is very bullish for Baraka. The farm-in underwrites the drilling of wells in EP 127 and EP 128 and de-risks PetroFrontier as well as Baraka while allowing Baraka to retain its holding and stakes.

The JV had significant early success in EP 127 last year with the MacIntyre-2 well reporting elevated hydrocarbon shows throughout the target Basal Arthur Creek "Hot Shale" formation with sustained and peak levels generally two to three times greater than those seen in the vertical pilot hole at Baldwin-2Hst1

Baraka and PetroFrontier are currently drilling the horizontal section of MacIntyre-2, which will be fracced and tested soon.

That Statoil - a highly regarded international explorer - is making this large investment is a massive testament to the prospectivity of the PetroFrontier and Baraka exploration permits. It also renders Baraka as very attractively leveraged to drilling success of the JV with Statoil funding exploration given it is retaining its holding in the JV's.

At current valuation, the deal provides BKP holders with significant upside potential that was laying dormant before this deal.

To put the deal further into context, Statoil's farm-in is also larger than previous foreign investments into Australian shale gas.

UK gas giant BG had last year formed an A$130 million joint venture with Drillsearch Energy (ASX: DLS) to explore for and develop shale gas in the Cooper Basin while Mitsubishi Corporation and ConocoPhillips have made A$152.4 million and US$109.5 million (A$107.4 million) deals with Buru Energy (ASX: BRU) and New Standard Energy (ASX: NSE) respectively.

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