Background

Falcon Oil & Gas Australia Limited (“Falcon Australia”) is a 98% owned subsidiary of Falcon. Falcon Australia holds 22.5% 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.

Location of the Beetaloo JV permits in the Northern Territory, Australia.

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.

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.

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  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.

Location of the JV wells drilled in the Beetaloo permits.
Middle Velkerri correlation across the Beetaloo permits
The stimulated section of the Middle Velkerri B shale in the Amungee NW-1H horizontal well.

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)

 Gross
Best Estimate		Net Attributable
Best Estimate (2)
Area km2 (3)16,1453,564
OGIP (TCF) (4)496109
Combined Recovery / Utilisation Factor (5)16%16%
Technically Recoverable Resource (TCF)8519
OGIP Concentration (BCF/km2) (6)3131

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

Measured and Estimated ParametersUnitsBest Estimate
Area (2)km21,968
Original Gas In Place (OGIP) (3)TCF61.0
Gross Contingent Resource (4)TCF6.6
Net Contingent Resource (4)(5)TCF1.46

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.

Plays

In addition to the Velkerri shale dry gas play tested during Stage 1 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
Source: Côté 2018

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.

For details of Stage 2 please refer to the updates outlined below.

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

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.

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 confirmed:

  • 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.

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 had commenced, along with the advancement of the vertical well evaluation.

2020 Updates

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

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.

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 had been successfully completed.

The well was 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.

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

On  26 March 2020 Falcon provided the following operational in light of COVID-19.

Given the unprecedented circumstances brought about by COVID-19, 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 observing health authority requirements.

Following the implementation of the necessary control procedures, the JV elected to temporarily pause activities at the Kyalla 117 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 planned 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 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”), had 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. Full details are outlined above.

21 September 2020 – Beetaloo  Operational Update

On 21 September 2020 Falcon noted that operations had recommenced at Kyalla 117 N2-1H ST2 with the fracture stimulation of the well.

02 October 2020 – Beetaloo  Technical Update

On 02 October 2020 Falcon provided a technical update on the Beetaloo project regarding the hydraulic stimulation of the horizontal Kyalla 117 N2-1H ST2 well.

Highlights of the preliminary results from the Kyalla 117 well:

  • Completion of 11 hydraulic stimulation stages along the 1,579-metre horizontal section in the Lower Kyalla Formation
  • Stimulation treatments were successfully executed
  • Activities have commenced in preparation for the flowback and extended production test
  • Early stage gas flow rates are expected in the coming weeks

04 November 2020 – Operational Update 

On 4 November 2020 Falcon noted that operations continued following the hydraulic stimulation at Kyalla 117. Following a short initial flow back of hydraulic fracture stimulation fluid to surface the well was subsequently shut in and production tubing was successfully installed and tested. Flow back operations recommenced in late October, with the well flowing back fracture fluid at a rate of approximately 500 bbl/d with minor gas breakthroughs observed to date.

25 November 2020 – Operational Update 

As announced on 4 November 2020, flowback operations of the fracture stimulation fluid commenced in early October before Kyalla 117 was shut in and production tubing was successfully installed, with flowback operations recommencing in late October.

Kyalla 117 continued to flow back fracture stimulation fluid, with some gas shows; however, a measurable gas breakthrough that would allow the commencement of extended production testing to assess the extent of the resource that may be present had yet to occur.

Data collected and analysed to guide ongoing operations showed greater pressures in the horizontal section of Kyalla 117 than in the surrounding reservoir, due to the saline content and density of the flowback fluid and the hydrostatic column weight of this fluid in the vertical section. This pressure difference can prevent the flow of gas from the reservoir into the fractures and then to surface and it is not unusual in shale plays to observe the salinity and density of the flowback fluid to increase as salt easily migrates from the formation.

Operations were planned to re-enter Kyalla 117 with coiled tubing and apply nitrogen lift techniques to lower pressures in the Well and assist with achieving and sustaining gas breakthrough that, if successful, will allow extended production testing to commence. This technique is not uncommon and was applied to the successful Amungee NW1-1H well in 2016.

The timing of coiled tubing activities and the nitrogen lift were considered as the wet season approaches, with health, safety, environment and cost considerations in mind.

As is the nature of exploration and appraisal, Falcon and Origin, continually respond to the data gathered through operations to inform ongoing activities.

Other data collected to date remains positive. In particular, core analysis indicates mature hydrocarbons and good permeability (natural pathways for gas to flow) and mud logs indicate liquids rich gas. The fracture stimulation of the well was successful and the integrity of the well remains.

10 December 2020 – Operational Update 

The JV decided to execute operations without delay with all of the necessary equipment and consumables for the nitrogen lift being prepared to mobilise to the well site.

24 December 2020 – Operational Update 

The coiled tubing unit and all necessary consumables have arrived at the wellsite and the rigging up of the equipment were in progress.

2021 Updates

19 January 2021 – Notification of Discovery – Kyalla 117 N2-1H ST2

19 January 2021 Falcon announced that Origin, has submitted a notification of discovery and an initial report on discovery (“Notification of Discovery”) to the Department of Industry, Tourism and Trade of the Northern Territory (“DITT”) on the Kyalla 117. The Notification of Discovery is a requirement under s64(1) of the Petroleum Act 1984 (Northern Territory) and the NT Guidelines for reporting a petroleum discovery.

Details of the Notification of Discovery from Origin to the DITT are as follows:

  • The Notification of Discovery is supported by preliminary production test data and petrophysical modelling.
  • This follows the introduction of nitrogen to lift the fluids in Kyalla 117, which has enabled Kyalla 117 to flow unassisted for a period of seventeen hours.
  • Unassisted gas flow rates ranging between 0.4-0.6 MMscf/d over seventeen hours were recorded.
  • Flow back of hydraulic fracture stimulation water to surface over the same period, averaged between 400-600 bbl/d.
  • Initial analysis suggests a liquid-rich gas composition with less than 1% CO2.
  • Condensate shows were also observed.

Further Information

  • These early-stage flow rates are preliminary indications of well performance, and an extended production test (“EPT”) will be required to determine the long-term performance of Kyalla 117.
  • Longer-term measures will be put in place to flow back sufficient hydraulic fracture stimulation water to allow Kyalla 117 to flow continually without assistance and enable an EPT to continue in the coming months during the dry season.

22 January 2021 – Gas Composition Data Confirm Kyalla Liquids Rich Gas Play

On 22 January 2021 Falcon announced details on the first gas composition data obtained during the 17-hour unassisted flow period of Kyalla 117.

The initial analysis of natural gas by gas chromatography confirms a liquids-rich gas stream low in CO2 as follows:

  • C1 = 65.03 mol%
  • C2 = 18.72 mol%
  • C3 = 8.37 mol%
  • iC4 = 1.29 mol%
  • nC4 = 2.03 mol%
  • C5+ = 2.73 mol%
  • CO2 = 0.91 mol%
  • N2 = 0.92 mol%

The elevated C3+ gas component of 14.42 mol%, meets pre-drill expectations, confirms the Lower Kyalla Shale as a liquids-rich gas play. Gas composition data also support the view that the Kyalla gas stream will have elevated LPG and condensate yields.

As announced on 19 January 2021, longer term measures will need to be put in place to flow back sufficient hydraulic fracture stimulation water to allow the Kyalla 117 to flow continually without assistance. This work is expected to commence at the start of the dry season in Q2 2021 and if successful would allow an extended production test (“EPT”) to commence.

19 March 2021 – Planned 2021 Work Programme – Beetaloo Sub-Basin

On 19 March 2021 Falcon provided details of the 2021 work programme.

The 2021 work programme is expected to include the following:

  • Resume clean-up operations of Kyalla 117 and commence an EPT
  • Drill Velkerri 76 S2-1 vertical well (“Velkerri 76”)
  • Perform a production test at Amungee NW 1H

2021 Work Programme Detail

 Kyalla 117

  • Resumption of reservoir clean-up operations using an artificial lift technique.
  • If the Kyalla 117 clean-up is successful, progress to an EPT.

Velkerri 76

  • Drill a vertical pilot well to acquire core and log and run diagnostic fracture injection test data across the Velkerri.

Amungee NW 1H

  • A production test to be carried out to determine if all frack stages contributed to the initial EPT conducted in 2016.

 22 June 2021 – Commencement of the 2021 Work Programme – Beetaloo Sub-Basin

On 22 June 2021 Falcon announced the commencement of the 2021 work programme, starting with operations at Kyalla 117.

On-site operations at Kyalla 117 begun, with rigging up complete, and clean-up operations resumed.  These operations, if successful, will result in an EPT being carried out to determine the expected longer-term performance of the well.

20 July 2021 – 2021 Work Programme Update– Beetaloo Sub-Basin

As noted on 22 June, operations recommenced at Kyalla 117.

Activity has focused on the continued clean-up of Kyalla 117 in preparation for extended production testing, using nitrogen to support operations.

This has allowed the Kyalla 117 well to begin flowing again without assistance for intermittent periods, however, production has not been sustained and there is evidence of a potential downhole flow restriction.

Operations will now be temporarily paused while the cause of the restriction is investigated, the results of which will inform the development of a new go-forward plan for Kyalla 117.

In the meantime, the JV’s focus will continue on other elements of the work programme. The JV remains on track to drill the Velkerri 76 well and commence a further extended production test at Amungee NW 1H in the coming weeks.