Major breakthrough in shale gas for Santos

Santos’ (ASX: STO) Vice President for Eastern Australia, James Boulderstone recently stated that “a large number of international experts see the Cooper Basin as the pre-eminent shale resource outside of the United States”.

He was commenting on a second successful drilling of a shale gas well, which will result in commercial production and a “potentially material” extension of its Moomba North gas field. Additionally, the well “is well-positioned, only 2 kilometres from existing infrastructure and Santos expects to rapidly tie this well into our production network”.

Santos operates in the exploration, development, production, transportation and marketing of natural gas, crude oil, condensate, naptha and liquid petroleum gas. Santos produces natural gas for Australian, Indonesian and other Asian markets. Santos has also developed oil and liquids businesses in Australia, Indonesia and Vietnam.

The Cooper Basin is the only region outside the United States that is commercially producing shale gas. Should one want an enjoyable way to learn a little about the extent of the boom in the US, I recommend the movie The Promised Land.

Commercial production has been made possible by recent rises in gas prices on the east coast. Mr. Boulderstone declared that the next big challenge would be to determine both the size of the shale gas resources and how big the reserves were in the Cooper Basin.

Another way to gain exposure to the well is via Origin Energy’s (ASX: ORG) 13.19% holding and Beach Energy’s (ASX: BPT) 20.21%, with Santos having 66.6% ownership. Another alternative for exposure to both local and international shale gas is an investment in mining services company WorleyParsons   (ASX: WOR), which has developed a high level of expertise in unconventional oil and gas (shale) and is well positioned to benefit from the expected strong growth in activity in this sector.

Another positive for Santos is its ability to take advantage of local and Asian demand for liquefied natural gas (LNG). It currently has interests in four LNG projects and the infrastructure spending for three of them has been completed within budget, which will allow cash flow to increase further going forward.

Foolish takeaway

While I have been a long time critic of Santos given that it has promised so much over time, yet still remains more than $5 below share price levels of 2008, I have changed my mind.

The unconventional gas boom in the US is testimony to the potential for Australia and in particular Santos. At current share price levels of around $14.30 it is an opportune time for the medium- to long-term investor to buy.


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Motley Fool contributor Mark Woodruff does not own shares in any of the companies mentioned in this article.

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