Adelaide-based Beach Petroleum has a colourful history. In 1988 the company was one of the victims of a major fraud which affected a group of Australian companies and resulted in the loss of more than $200 million of shareholders’ money. According to Beach Petroleum’s Chief Operating Officer, Hector Gordon1, who was not involved with the company at that time, Beach was “taken over, had its assets stripped out of it, nearly went broke and was involved in all sorts of litigation.”

History

“Beach Petroleum was founded in 1962 by one of the pioneering Australian petroleum geologists, Reg Sprigg”, explained the company’s Managing Director, Reg Nelson. “He was a student of Sir Douglas Mawson, the famous Antarctic explorer who was Professor of Geology at Adelaide University.” In 1946 Dr Sprigg discovered the world’s oldest (620 Ma) ‘Edicarian’ fossil animals and became one of Australia’s best known geologists - one of the real characters in the industry. He was a founder of what is now APPEA. “That is reflected in APPEA’s Reg Sprigg Award every year”, said Mr Nelson, who is also the current Chairman of APPEA. In the mid 1950s Dr Sprigg was a technical advisor to Santos and eventually managed to persuade the company to explore in what is now known as the Cooper Basin. He was instrumental in bringing Delhi Taylor from Texas to joint venture with Santos in exploring that basin, now Australia’s premier onshore petroleum production province.

“With Delhi as operator, Reg’s services became surplus to requirements and Reg went off to do other things”, explained Mr Nelson, mentioning one project in particular: The founding of Beach Petroleum. “Beach then went on to become involved in discoveries of gas onshore Victoria and oil in Queensland, so by the mid 1980s it had become probably amongst the top 10 of Australian oil and gas companies. That was when the fraud was perpetrated.”

As one of the few companies with any money following the 1987 stock-market crash, Beach was targeted by what Mr Gordon jokingly labelled “the evil empire”, a group of independent companies fronted by Independent Resources Ltd (IRL). Beach had moved to Melbourne in the mid 1970s and by the mid 1980s was taken over by Claremont Petroleum NL and again relocated to Sydney. In 1986, Claremont Petroleum and Beach were taken over by IRL.

An investigative report by ABC’s Four Corners revealed that IRL had invested more than $200 million of shareholders’ money in shady projects and subsequently ‘lost’ them. The Australian Stock Exchange suspended trading and thus shareholders were denied the chance to sell out. Beach had unfortunately been subjected to IRL’s last major fraudulent transaction, which involved the purchase of a minority share of the Burbank field in Oklahoma, USA. This acquisition cost the Beach shareholders US$28 million.

“Back in 1988, that represented $36 million [Australian], which was quite substantial in those days”, explained Mr Nelson. This was, according to Four Corners, one third of all the money Beach had. Shareholders were told that an independent expert had valued the field at US$77 million. The Burbank field was however a 70 year old field and past its best production. Several wells had been shut down and the daily production had decreased from 20,000 bbl to 1,000 bbl. There was a promise of “magical” new methods, but these methods turned out to be far from new and were actually abandoned six years earlier due to being uneconomical. Experts approached by the ABC valued the field from US$8 million to as low as US$6 million; one person familiar with the field even suggested US$2-3 million. The IRL representative who sold it to Beach was believed to have bought it for just US$7 million, and IRL undertook minimal enquiries and evaluation of the field before buying it. “The Burbank field may have a famous past, but it doesn’t seem to have much of a future”, concluded the ABC reporter. “We suspect that possibly up to a quarter of a billion dollars had been plundered from Beach and other companies within IRL control”, said Mr. Nelson.

“Reg [Sprigg] – because there had been a takeover at Beach – was on the outside as a shareholder looking in and becoming very concerned about the various actions that were being undertaken on behalf of the board at that time, to the extent that he had gone to the authorities”, said Mr Nelson. Dr Sprigg went to the ASX and claimed there was something wrong, but no-one was prepared to listen. “At the same time, some of the other shareholders of these companies were getting concerned, amongst them AGL and Westpac … So there was a gathering of the forces”, he recalled. “Eventually, I think in 1991, there was sufficient concern amongst the existing shareholders to be able to vote out IRL-connected directors and replace them with new directors. The new board uncovered the fraud. This then led to a long trial, which we won [convincingly on every count], but all the money had now gone.”

Beach was awarded $44.5 million damages and about $8million costs plus interest. Over time, Beach recovered a small portion of this and, though forced to sell some key assets, was able to repay a significant bank debt and the lawyers’ costs. “We sold off quite a few things in the meantime and got to the stage where, I guess, we had spent most of the 1990s winning the trial and sorting out all the problems we had inherited”, explained Mr Nelson. “Then we said: ‘How do we rebuild this company?’ We decided that for an Australian company of this size we needed to be in onshore Australia. Prospective acreage was very limited, but I was well aware that the Santos/Delhi joint venture had to relinquish its Cooper Basin acreage after 45 years … and I knew that was due in 1999.”

Beach Petroleum was relocated back to Adelaide in 1995 and started building up a team of competent people – according to Mr Nelson, “people who understood the area.” Hector Gordon was the first, followed by Neil Gibbins, who is now Beach’s Exploration Manager. Beach then put in some competitive bids and established a good acreage position in the Cooper Basin.

Exploration, production and acreage

Although Beach has had some gas discoveries in the Otway Basin, the company has been mostly focused on oil. In the formative years, “Santos got better acreage and ended up a lot bigger that Beach”, said Hector Gordon, laughing. “But Beach did alright and made the first discoveries in the Otway Basin around Port Campbell, as well as participating in discoveries at the Bodalla South and Kenmore oil fields in Western Queensland.”

When Mr Gordon joined the company, its only producing assets were the Bodalla and Naccowlah blocks in Western Queensland. “One of the reasons Reg wanted to move the company back to Adelaide was to focus on the South Australian Cooper Basin … so we cleaned up our exploration portfolio and did that,” he explained. In the last ten years Beach has been involved almost exclusively in oil exploration and production in the Cooper Basin in South Australia/Queensland; only in the last year has the focus been extended elsewhere to any significant degree. However, according to Mr Gordon, probably around 80-90% of the company’s business is still Cooper Basin oil. “But we’re doing other things now. We’re exploring in the Otway Basin, we’re exploring offshore WA and more recently we bought into a Gippsland oil development project, Basker-Manta”, he said. Beach currently holds a 25% interest in the Basker, Manta and Gummy fields, whereas the remaining 75% is held by the operator, Sydney-based Anzon Australia.

According to Mr Gordon, Beach Petroleum was fortunate to get some blocks in the Cooper Basin in the first round; fortunate to have made some discoveries; and then fortunate again a few years later when Origin wanted to sell out of the Bodalla and Kenmore fields, in which Beach had previously held a 22% interest: “Origin wanted to sell, so we bought Origin and Santos out at what was a fair price at the time, but the oil price started to rise almost immediately after the purchase. We were also able significantly increase reserves at Kenmore through the use of 3D seismic and subsequent drilling.”

At the moment we produce somewhere between 3 and 4,000 bbl a day and most of that comes from the two blocks that we operate”, said Mr Gordon. Bodalla/Kenmore is, according to him, the most significant project at the moment. “I don’t want to use a cliché, but I’m going to end up doing it: That’s what makes all the money for us … the ‘economic powerhouse’”, he laughed, and added that the second most important is the Christies field.

Mr Gordon said that last year probably about half of the exploration funds were spent in the Cooper Basin, while the other half was split between the Otway and Carnarvon basins. The upcoming Basker-Manta project is likely to become another major producing asset for Beach, although the company hasn’t spent much on these fields yet. “But we’re going to be rapidly spending money [on them] in the second half of this year … and of course if those [fields] come on line as we hope, they’ll be our most important producing assets for the next few years”, he said. Beach is currently producing about 1 MMbbl a year and this will probably double for a year or two if the Basker-Manta project is as successful as the company hopes it will be.

Beach Petroleum will drill 17 wells in the 2004/05 financial year and will be drilling just over 20 in the following year. “About 15 of which will be in the Cooper Basin”, explained Mr Gordon. A well soon to be drilled is Basker-2 in the Basker-Manta project: “It’s going to be drilled in August and be put on extended test for three or four months starting in October. Then, later this year and early next year, Basker 3, 4 and 5 and Manta-2 will be drilled. These wells will start producing in the middle of 2006.”

According to Mr Gordon, the company’s significant growth in the past few years was a result of “the discovery of Christies and the acquisition of the additional interest in Bodalla/Kenmore, which added to our reserves base. Then we found some more oil in the Bodalla/Kenmore fields.” The acquisition of an interest in Basker-Manta increased the company’s reserves further by adding another 5 MMbbl. “When I got here 10 years ago the reserves base was about 1 MMbbl and it has gradually grown since then … from one to three to five, and now to ten [MMbbl]”, said Mr Gordon.

The Cooper and Eromanga basins are the foundation of the company, keeping it profitable and generating cash “to invest in higher reward activity somewhere else.” Mr Gordon explained that the Basker-Manta project was an example of that, although still in the development phase: “Then the cash that comes out of Basker will probably let us do some higher risk/reward exploration somewhere else – it might be in Australia, it might be elsewhere.”

Mr Gordon jokingly labelled the transition from being an exploration company to a production company as... “painful. We had to hire engineers! No, it wasn’t really, it wasn’t anywhere near as bad as we feared it would be, but it was a big change”, he admitted. “Now we have an engineering and production group which is nearly as big as the exploration group. We’ve been very fortunate with the people we’ve hired: all our engineers are very reasonable people”, he laughed.

Conclusion

Beach is growing from a small company mainly focused in the Cooper Basin to a stronger and larger company which is now moving out of its comfort-zone. Although still focusing new exploration in areas they know such as the offshore Otway, Gippsland and Carnarvon basins, Mr Gordon outlined the possibility of further high risk/reward exploration in the near future: “Primarily, we’re still going to focus on those areas, but we hope to start looking either elsewhere around Australia or internationally”.

With today’s oil price, Beach Petroleum’s revenue is more than $65 million a year, while the company’s costs are around $20 million. “So Beach is making a lot of money for a little company at the moment”, said Mr Gordon. “We were lucky that we made our discoveries and acquisitions mostly in advance of the booming oil price and, because of that, we’ve been maybe half a step ahead of the other smaller companies.” He also mentioned that the company was capitalised at about $10 million when he joined, whereas now it is capitalised at close to $200 million.

“We’ve made some good discoveries, we’ve got substantial cash-flow and profits, and we’re now putting that back into somewhere we hope will repeat our experience in the Cooper Basin – offshore Gippsland in Bass Strait … where there is still a lot of good potential”, concluded Managing Director Reg Nelson. “After that … with a good, solid cash-flow, I hope we can move on and grow bigger and better.”