Beetaloo Sub-Basin

Background

Falcon Oil & Gas Australia Limited (“Falcon Australia”) is a 98% owned subsidiary of Falcon. Falcon Australia holds 30% interest in 4.6 million gross acres in exploration permits EP76, EP98 and EP117 covering the most prospective core area of the Beetaloo Sub-basin.

The Beetaloo Sub-basin is located in the Northern Territory, 600 kilometres south of Darwin, close to infrastructure including a highway, a pipeline and a railway, offering transport options to the Australian market and beyond via liquefied natural gas (LNG) capacity in Darwin to the north and in Queensland to the east.

The sparsely populated and remote Beetaloo Sub-basin is a relatively underexplored onshore basin of Proterozoic age within the larger McArthur basin. It has excellent unconventional hydrocarbon potential such as shale gas, shale oil and tight gas.

Work was previously undertaken by a Rio Tinto Group subsidiary company, Sweetpea Petroleum, Hess Australia and Falcon Australia. Sweetpea drilled the Shenandoah-1 vertical well, which was deepened by Falcon Australia. Hess acquired 3,490 kilometres of 2D seismic data, to date the largest onshore 2D seismic program in Australia. The seismic database, along with existing well data, provided a solid platform to elaborate and extrapolate a detailed structural and stratigraphic model for the Beetaloo Basin, concluding that the Beetaloo Basin is an active petroleum system.

Transformational Farm Out of Beetaloo unconventional acreage

In August 2014, Falcon Australia completed a A$200 million, nine-well farm-out deal with Origin Energy and Sasol each farming into 35% of Falcon Australia’s exploration permits. In May 2017, Origin acquired Sasol’s interest, bringing its overall interest to 70% in the Beetaloo JV. Origin is operator of the Beetaloo project.

The details of the exploration and appraisal programme were as follows:

• 3 vertical exploration/stratigraphic wells and core studies;
• 1 hydraulic fracture stimulated vertical exploration well and core study;
• 1 hydraulic fracture stimulated horizontal exploration well, commercial study and 3C resource assessment; and
• 4 hydraulic fracture stimulated horizontal exploration/appraisal wells, micro-seismic and 90 day production tests.
• Farminees to pay the full cost of the following two horizontally fracture stimulated wells, 90 day production tests and micro seismic data collection with a capped expenditure of A$53 million, any cost overrun funded by each party in proportion to their working interest.
• Farminees to pay the full cost of the final two horizontally fracture stimulated wells and 90 day production tests capped at A$48 million, any cost overrun funded by each party in proportion to their working interest.

In August 2018 Falcon signed an agreement to amend the Farm Out Agreement with Origin, to deem Stage 1 of the exploration and appraisal drilling programme in the Beetaloo Sub-basin complete and to commence Stage 2 with a A$15 million increase to the Stage 2 Cost Cap.

On 7 April 2020 it was announced that Falcon Australia had executed an agreement which included a restated Farm-Out Agreement and Joint Operating Agreement (collectively “the 2020 Agreements”) with Origin to farm down 7.5% of Falcon Australia’s 30% PI in the Exploration Permits.

Transaction details

• With the necessary approvals, the PI of the respective JV partners will be:
  • Falcon Australia 22.5%
  • Origin 77.5%
• In consideration of Falcon Australia transferring 7.5% of its PI, Origin increases the gross cost cap of the work program by A$150.5 million.
• The previous farm-in arrangement included a Stage 2 gross cost cap of A$65.3 million and a Stage 3 gross cost cap of A$48 million, or A$113.3 million in total. Under the 2020 Agreements, the Stage 2 and Stage 3 gross cost caps will be combined and increased by A$150.5 million to A$263.8 million (“Overall Cost Cap”).
• This Overall Cost Cap will be applied to the completion of the Stage 2 and Stage 3 work programmes.
• Amounts of the Overall Cost Cap not utilised during Stage 2 and Stage 3 will be applied to future work programmes.
• Expenditure above the Overall Cost Cap will be borne by the JV partners in proportion to their PI.
• Origin will assume 25% of the cost of Falcon Australia’s remaining call option to reduce the overriding royalties with the TOG Group. The cost to Falcon Australia, should it wish to exercise the call option, will reduce from US$7.5 million to US$5.625 million, in line with its reduced PI.

Work Programme

The Beetaloo JV has a 3 stage work program to explore and appraise the asset with the following main objectives:

Stage 1  Prove the presence, quality and continuity of the Velkerri shale play
Stage 2  Evaluate the potential of liquids fairways in the Velkerri and Kyalla shale plays
Stage 3  “Test the Best” – confirm commercial production rates and EURs in most prospective play

Stage 1 – Exploration & Discovery

Stage 1 was completed with the successful drilling of 3 vertical wells and the drilling and the subsequent multi-stage hydraulic fracturing and extended production testing of a horizontal well. The technical work in Stage 1:

• proved the Middle Velkerri shales as pervasive, stacked play fairways in various maturity windows (dry to wet gas) continuous over >80 km;
• identified three organic rich shale intervals (A, B & C shales) in the Middle Velkerri sequence;
• found the gross thickness of Middle Velkerri ~500 m, net pay in B and C shales >50 m each;
• found an average total organic carbon (“TOC”) 3-4 % in prospective shale intervals along with excellent gas shows;
• demonstrated excellent reservoir and completion quality;
• confirmed favourable geomechanics and good frackability of target shales;
• estimated gas in-place density comparable to successful North American shale plays.

The Amungee NW-1H horizontal well was completed with 11 hydraulic stimulation stages in the 1,000 m long horizontal section within the Middle Velkerri B shale zone. The production well test took 57 days. Early stage gas flow rates through 4 1/2” production casing regularly reached over 1-1.5 MMscf/d. Extended flow test rates through 2 3/8″ production tubing ranged between 0.8-1.2 MMscf/d. Test results in the Amungee NW-1H well proved up the discovery of gas accumulation in the Middle Velkerri B shale.

Notification of Discovery and Declaration of a Material Gas Resource

Following the completion of the extended production testing at the Amungee NW-1H exploration well of the “B Shale” member of the Middle Velkerri Formation, Origin submitted a notification of discovery and an initial report on discovery (“Notification of Discovery”) to the Department of Primary Industry and Resources of the Northern Territory, Australia (“DPIR”) in October 2016.

Subsequently, in February 2017 it was announced that Origin had submitted the Results of Evaluation of the Discovery and Preliminary Estimate of Petroleum in Place for the Amungee NW-1H Velkerri B Shale Gas Pool (“Report”) to the Northern Territory Government and had also prepared a contingent gas resource estimate.

Middle Velkerri B Shale Volumetric Estimates (¹)

¹ The Report and estimates included in the table above were not prepared in accordance with the Canadian Oil and Gas Evaluation Handbook (“COGEH”)

² Falcon’s working interest is 22.07% (revised as of 7 April 2020 following the farm down, previously 29.43%), net attributable numbers do not incorporate royalties over the permits

³ Area defined by a depth range at a maturity cut-off consistent with the dry gas window within the Beetaloo JV Permits (EP76, EP98, EP117)

⁴ Trillion cubic feet

⁵ The combined recovery/utilization factor range was applied stochastically to the OGIP range to calculate the range of technically recoverable resource within the Beetaloo JV permits.

⁶ Billion cubic feet per square kilometre

Assessment of 2C Contingent Gas Resource Estimates for the Middle Velkerri B Shale Pool within EP76, EP98 and EP117 as of 15 February, 2017¹

¹ Contingent resource estimates were prepared on a statistical aggregation basis and in accordance with the Society of Petroleum Engineers Petroleum Resources Management System (“SPE-PRMS”). SPE-PRMS was developed by an international group of reserves evaluation experts and endorsed by the World Petroleum Council, the American Association of Petroleum Geologists, the Society of Petroleum Evaluation Engineers, and the Society of Exploration Geophysicists. Contingent resource estimates are those quantities of gas (produced gas minus carbon dioxide and inert gasses) that are potentially recoverable from known accumulations but which are not yet considered commercially recoverable due to the need for additional delineation drilling, further validation of deliverability and original gas in place, and confirmation of prices and development costs. If the estimates were to be prepared in accordance with COGEH, Falcon is highly confident that there would be no change to the contingent resource estimates above.

² P50 area from the Contingent Resource area distribution

³ OGIP presented is the product of the P50 Area by the P50 OGIP per km²

⁴ Estimated gas contingent resource category of 2C. There is no certainty that it will be commercially viable to produce any portion of the resources

⁵ Net to Falcon’s 22.07% (revised as of 7 April 2020 following the farm down, previously 29.43%) working interest in EP76, EP98, and EP117, the net contingent resource number does not incorporate royalties over the permits

Full details relating to the above technical recoverable resource and gross contingent resource can be found here.

Additional Plays

In addition to the Velkerri shale dry gas play, considered presently as the most materially and technically mature resource, Origin has identified four additional play types in the Beetaloo Basin:

Kyalla shale and hybrid liquids rich gas plays

• Two source rock and two hybrid target intervals in Kyalla Fm.
• Estimated CGR at 15-60 bbl/MMscf
• Kyalla Fm. prospective areas confined to central part of JV permits
• Likely cost advantage over the Velkerri given it is shallower (1,500m v’s 2,500m)
• Likely to be wet gas that could also improve economics considerably
• Could lead to a ‘stacked’ play development along with Middle Velkerri shales

Velkerri shale liquids rich gas play

• Liquids rich gas play fairway along the northern and south-eastern flanks at 1,200-2,000 mTVD
• Good reservoir and completion quality in wet gas window, estimated CGR at 5-40 bbl/MMscf
• Indications that porosity and permeability are higher in these areas.

Hayfield sandstone oil/condensate play

• Regionally extensive sandstone in the northern part of permits
• Tight sand, stratigraphic trapping
• Penetrated, DST’d in Amungee NW-1 well

Stage 2 – Explore & Appraise Additional Play Types

The Stage 2 exploration and appraisal drilling program will evaluate the potential of the liquids rich gas fairways in both the Kyalla and Velkerri shales to determine the most commercially prospective play to be targeted during Stage 3. Field activities planned for 2019 will include the drilling of one vertical well and the drilling and hydraulic fracture stimulation of two horizontal wells.

An early commitment to Stage 3 capital expenditure during 2019 was also agreed, enabling an efficient transition from Stage 2 to Stage 3, in the case that Origin and Falcon agree to proceed to Stage 3.

Stage 3 – Work Program Overview

Stage 3 objective is to achieve commercial production flow rates.

Drilling operations include the drilling and hydraulic fracture stimulation of two horizontal wells targeting one of more of the three plays:

• Velkerri B shale gas play
• Kyalla shale and hybrid liquids rich gas plays
• Velkerri shale liquids rich gas play

2019 Updates

21 January 2019 – Rig Contract Signed

On 21 January 2019 Falcon announced that Origin had signed a rig contract with Ensign Australia Pty Ltd. for Rig 963 for the 2019 Stage 2 Beetaloo drilling programme, with an option to extend the contract into 2020.

Subject to relevant approvals, and implementation of the exploration recommendations of the Inquiry into Hydraulic Fracture Stimulation in the Northern Territory, the JV will evaluate the potential of the liquids-rich gas fairways in both the Kyalla and Velkerri plays. Exploration and appraisal activities include the drilling and hydraulic fracture stimulation of two horizontal wells. Together with the Velkerri B dry gas play discovered in 2016, this allows for the assessment of three plays, enabling the most commercially prospective play to be targeted for Stage 3 drilling during 2020.

As of 21 January 2019 work had already commenced at some well sites, including water bore drilling and water monitoring, with drilling targeted to commence in June 2019.

3 May 2019 –  Kyalla 117 N2 Exploration Well EMP Accepted for Assessment

On 3 May 2019, Falcon announced that the Environmental Management Plan (“EMP”) for the Kyalla 117 N2 Exploration well, for the planned 2019 drilling, stimulation, and well testing prepared by Origin on behalf of the JV, has been accepted for assessment by the Northern Territory Department of Environment and Natural Resources (“DENR”).

The EMP provides detail on how Origin will ensure the environmental impacts and risks associated with its activities are reduced to a level that is as low as reasonably practicable and acceptable. The EMP has been prepared with reference to regulatory obligations and relevant Inquiry recommendations that have underpinned the Code of Practice for Petroleum Activities in the Northern Territory.

22 August 2019 – Kyalla 117 N2 Horizontal Appraisal Well EMP Approved

On 22 August 2019, Falcon announced that the EMP for the Kyalla 117 N2 horizontal appraisal well, had been approved by DENR.

Kyalla 117 N2 Horizontal Appraisal Well

• The well is targeting the Kyalla shale liquids rich gas fairway
• Construction of the well pad and related civil works is nearing completion
• Drilling operations will commence in September

9 October 2019 – Spudding of the Kyalla 117 N2-1 Appraisal Well

On 9 October 2019, Falcon announced the spudding of the Kyalla 117 N2-1 appraisal well in the Beetaloo Sub-Basin.

Highlights:

• Kyalla 117 N2-1 is the first well in the Stage 2 drilling programme to target the Kyalla shale liquids rich gas play.
• Located within Exploration Permit 117 approx. 32 kilometres north of the Beetaloo W-1 well.
• A vertical pilot hole will target a total vertical depth of approximately 1,750 metres into the Kyalla Formation.
• A subsequent horizontal section is planned for approximately 1,000 metres that will be drilled, completed, stimulated and production tested in the prospective Kyalla shale reservoir interval.
• Origin Energy B2 Pty Ltd (“Origin”), as Operator, will drill the Kyalla 117 N2-1 well.
• Origin hold a participating interest of 70% and Falcon Oil & Gas Australia Limited hold the other 30% participating interest over the Beetaloo Exploration Permits, 76, 98 and 117.

The principal objectives for the drilling of the Kyalla 117 N2-1 well are to:

• Penetrate the Kyalla Formation to assess hydrocarbon maturity, saturation and reservoir quality.
• Provide further information on the areal distribution of the Kyalla Formation.
• Collect data for subsequent horizontal drilling, completion, stimulation and production testing; including ability to flow liquids rich gas.

Formation evaluation, including reservoir characterisation, will be carried out through petrophysical interpretation, geo-mechanical studies and core analysis.

20 November 2019 Drilling data from Kyalla 117 N2-1 Vertical Well Very Encouraging

On 20 November 2019 Falcon announced that drilling of the vertical section of the Kyalla 117 N2-1 appraisal well in the Beetaloo Sub-Basin, Australia had been completed to a vertical total depth of 1,895 metres.

Preliminary drilling data from the vertical section of the Kyalla 117 N2-1 appraisal well confirms:

• The continuation of the regionally pervasive Kyalla Fm between the Beetaloo W-1 and Amungee NW-1H wells.
• Elevated gas show with relatively high C₃, C₄ and C₅ components were observed across the carbonaceous shales.

Other work carried out as part of this drilling operation included:

• 45 metres of conventional coring was acquired in each of the Upper and Lower Kyalla reservoir sections.
• Sidewall cores and extensive wireline logging have been acquired.

Horizontal drilling, stimulation and testing:

• The JV is now preparing to drill the horizontal section within the Kyalla formation.
• Horizontal drilling will commence following the final evaluation of the vertical well results.
• Once completed, the horizontal section will be fracture stimulated, and production tested.
• The JV has prepared for continued operations during the wet season.

10 December 2019 – Kyalla 117 N2-1 – Horizonal Drilling Commenced, Evaluation of Vertical Well Advances

On 10 December 2019 Falcon announced that drilling of the horizontal section of the Kyalla 117 N2-1H appraisal well in the Beetaloo Sub-Basin, Australia has commenced, along with the advancement of the vertical well evaluation.

 Drilling of the Kyalla 117 N2-1H horizontal well has commenced

• The JV has elected to land the horizontal well within the Lower Kyalla shale, at a depth of ~1800mTVD.
• The horizontal section will be drilled for approximately 1,000-2,000 metres.
• On completion of drilling, the horizontal section will be fracture stimulated and production tested.

 Evaluation of the Kyalla 117 N2-1 vertical well advances

• Three source rock reservoir (“SRR”) sections are identified within the Kyalla Shale Formation, characterised as the Lower, Middle and Upper Kyalla.
• The thickness of the entire Kyalla Shale Formation measured almost 900 metres.
• Gross thickness of each SRR interval is between 75 and 125 metres.
• Each SRR exhibited elevated gas shows with relatively high C₃, C₄ and C₅
• Diagnostic fracture injection tests (“DFITs”) were performed on each SRR.

Ongoing analysis of conventional cores acquired in each of the Upper and Lower Kyalla reservoir sections, along with sidewall cores, DFITs and extensive wireline logging, will enable a full-scale evaluation of prospectivity of the Kyalla Formation in the central part of the Beetaloo Sub-Basin.

2020 Updates

13 January 2020 – Kyalla 117 N2-1H Horizontal Well Operational Update

On 13 January 2020, Falcon provided the following operational update on the drilling of the Kyalla 117 N2-1H well in the Beetaloo Sub-Basin, Australia.

The vertical section of the Kyalla 117 well was successfully and safely completed in late November 2019. Drilling of the horizontal production hole section with a target length of 1,000 to 2,000 metres, commenced in early December.

However, after reaching a horizontal length of 700 metres, operational challenges were experienced in maintaining adequate clean hole conditions and stability over portions of the horizontal production hole section appropriate to complete operations.

The initial horizontal production hole section will now be plugged in line with regulatory requirements. This will then be followed by sidetracking and drilling a new horizontal production hole section.

Plugging back and drilling a new horizontal section from an existing vertical well is not uncommon in an exploration drilling program such as this.

With the drilling rig and equipment on-site and in position, drilling operations will recommence on the new horizontal well section within the next month.

Fracture stimulation activity will only occur after the successful completion of drilling and the integrity of the well is tested and verified.

Results obtained from operations to date in the target shale formation demonstrate good reservoir continuity, conductive natural fractures, and continuous gas shows. The JV remains positive about the potential of the Lower Kyalla Formation, resulting in the decision to continue with drilling operations.

30 January 2020 – Kyalla 117 N2-1H ST2 Horizontal Well Operational Update

On 30 January 2020 Falcon announced the commencement of the sidetrack to drill the new horizontal production hole section of the Kyalla 117 N2-1H ST2 well in the Beetaloo Sub-Basin, Australia. This new horizontal section will again target a lateral length of 1,000 to 2,000 metres within the Lower Kyalla shale, at a depth of ~1,800mTVD.

20 February 2020 – Successful Drilling of Kyalla 117 N2-1H ST2 Horizontal Well

On 20 February 2020 Falcon announced that drilling operations, including casing and cementing, on the Kyalla 117 N2-1H ST2 well have been successfully completed.

The well has been drilled to a total measured depth of 3,809 metres, including a 1,579 metre lateral section (from 90 degrees) in the Lower Kyalla Formation. Preparatory work, including the drilling of water impact monitoring bores – a new requirement of the Code of Practice for onshore petroleum activities in the NT – will commence in the coming month ahead of the next stage of operations.

The JV will continue its in-depth shale evaluation program of all the technical data gathered from the conventional cores, sidewall cores, DFITs and extensive wireline logging, to build an understanding of the prospectivity of the Kyalla Formation.

26 March 2020 – Kyalla 117 N2-1H Horizontal Well Operational Update

On  26 March 2020 Falcon provided the following operational update on the Beetaloo project in the Northern Territory, Australia in light of COVID-19.

Following the successful completion of drilling operations, including cementing and casing, of the horizontal well section of the Kyalla 117 N2-1H ST2 well (the “Kyalla Well”), the JV had completed the installation of water monitoring bores and preparatory work was continuing towards the next phase of operations, which includes the fracture stimulation of the Kyalla Well.

Given the unprecedented circumstances brought about by COVID-19 in recent weeks, the JV made changes to its operations to protect the health and well-being of Origin Energy Limited employees, contractors and communities across the Northern Territory. Adhering to the latest guidelines and advice from the Northern Territory and Federal Government on health and safety and social distancing are of the utmost importance to the JV and all present on site are observing health authority requirements.

Following the implementation of the necessary control procedures, the JV elected to temporarily pause activities at the Kyalla Well site, reducing those on site to essential personnel only, whilst ensuring the required regulatory and environmental management conditions to monitor and maintain the site can be met. The JV plans to resume activities in the latter half of 2020 and during this interim period the JV will use Northern Territory based employees and contractors to undertake civil and other works in preparation for the resumption of activities.

The JV remains committed to the Beetaloo project which, if successful, has the potential to deliver long-term economic and social benefits for the Northern Territory, Australia and is encouraged by the positive results to date. However, the circumstances presented by COVID-19 have led the JV to conclude that the focus must be to protect the people and communities of the Northern Territory.

7 April 2020 – Beetaloo  Farm-out

On 7 April 2020 Falcon announced that its c. 98% subsidiary, Falcon Oil & Gas Australia Limited (“Falcon Australia”), has executed an agreement which includes a restated Farm-Out Agreement and Joint Operating Agreement (collectively “the Agreements”) with Origin  to farm down 7.5% of Falcon Australia’s 30% participating interest (“PI”) in the Exploration Permits in the Beetaloo Sub-basin, Northern Territory, Australia (“the Permits”). Falcon and Origin are obligated to seek the Northern Territory government and TSXV stock exchange approvals, in respect of the Agreements.

Transaction details

• With the necessary approvals, the PI of the respective JV partners will be:
  • Falcon Australia 22.5%
  • Origin 77.5%
• In consideration of Falcon Australia transferring 7.5% of its PI, Origin will increase the gross cost cap of the work program by A$150.5 million.
• The previous farm-in arrangement included a Stage 2 gross cost cap of A$65.3 million and a Stage 3 gross cost cap of A$48 million, or A$113.3 million in total. Under the Agreements, the Stage 2 and Stage 3 gross cost caps will be combined and increased by A$150.5 million to A$263.8 million (the “Overall Cost Cap”),
• This Overall Cost Cap will be applied to the completion of the Stage 2 and Stage 3 work programmes.
• Amounts of the Overall Cost Cap not utilised during Stage 2 and Stage 3 will be applied to future work programmes.
• Expenditure above the Overall Cost Cap will be borne by the JV partners in proportion to their PI.
• Origin will assume 25% of the cost of Falcon Australia’s remaining call option to reduce the overriding royalties with the TOG Group. The cost to Falcon Australia, should it wish to exercise the call option, will reduce from US$7.5 million to US$5.625 million, in line with its reduced PI.

Operational Update

Drilling operations on the Kyalla 117 N2-1H ST2 well (“Kyalla Well”) were successfully completed in February 2020, reaching a total measured depth of 3,809 metres, including a 1,579-metre lateral section (from 90 degrees) in the Lower Kyalla Formation. Water impact monitoring bore drilling was completed in March and final preparatory work continues ahead of the next stage of operations. On 26 March, in response to the COVID-19 pandemic, Origin confirmed forward operations in the Beetaloo had been temporarily paused. As a result, Origin expects a delay to the Kyalla Well stimulation and extended production test of at least 3 months to now occur in H2 2020, and the drilling of the Velkerri Flank well in H1 2021.