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Central Petroleum farms out

If you’re an oil and gas exploration company with 68 million acres of exploration area in central Australia and not enough money to explore and develop all of it, one alternative is to “farm out” the work to another company whereby they pay for all the exploration but you retain the rights to royalties over any production.

Central Petroleum (ASX: CTP) has signed a farm-out joint venture arrangement with local major oil company Santos (ASX: STO) covering areas in the Amadeus and Pedirka Basins. According to the agreement, Santos will spend up to $150 million in three stages of exploration, which will earn itup to 70% of the fields.

Central CEO Richard Cottee said that, “Santos is a leading Australian explorer with the financial capability and technical expertise to rapidly advance the interests of the joint venture partners”. He also said that the agreement relieves Central of the obligation to provide substantial capital for spending on exploration, with Central shareholders retaining a significant share in any confirmed reserves. Central has flagged that it is having ongoing farm-out discussions with a second partner although there is no certainty if and when these might be concluded.

Central has had a tumultuous year with major board changes, but has also had success with oil production from its Surprise-1 well and maintains a 100% interest in more than 2 million acres in the Amadeus basin, including the area around the Surprise discovery.

On-shore discoveries of oil and gas are naturally less risky than offshore developments, so may be interesting to major companies such as Woodside (ASX: WPL) and BHP Billiton (ASX: BHP), or might attract attention from a mid-size player such as AWE (ASX: AWE).

Foolish takeaway

Central has spent a number of years accumulating licences covering a massive amount of central Australia. Farming out to other companies enables developments that could probably never otherwise be undertaken while still maintaining substantial interests in the outcomes.

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Motley Fool contributor Tony Reardon owns shares in AWE, Santos, and Woodside. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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