Although as the name suggests, Cooper Energy was originally formed and floated in 2002 with a view to focusing on exploration and production in the Cooper Basin, South Australia, the company is now looking outside Australia for substantial growth, while still maintaining its domestic interests that are providing valuable cash flow.

Chief Executive Officer Michael Scott was head-hunted from Woodside to join Cooper Energy in 2004. One of the things that attracted him to the company was the independence of a smaller organisation. ''I had the once in a lifetime opportunity to build an oil and gas exploration and production company from the ground up and the autonomy to do so within the frames of the Board governance'', he said, further explaining that, ''it was refreshing to join a small company where the decision process is very clear and quick and where you have ultimate responsibility and accountability for the outcome.''

Mike Scott is a petroleum engineer by profession but he has worked the whole length of the hydrocarbon value chain during his career. ''I've worked in business development, I've worked in the exploration world and in the development world'', he said. ''I've actually also worked as a production operator and done gas marketing as well … so I've got a pretty good idea of how the whole industry works.'' This was one of the reasons he was approached by the Cooper Board: ''They wanted somebody with a breadth and depth of experience in the oil and gas business; with 20 years of global experience obtained in Woodside, Esso Australia, Esso UK and Texaco, they saw me as a good fit.''

Mr Scott noted that being in a small company had a flipside to the coin as well. ''Despite the enormous benefits of working in a small company, the current workload is just phenomenal. We're looking at opportunities in up to eight countries at the moment and we are operating in the Cooper Basin – all this with only four technical staff. Luckily our technical staff has the same sort of wide ranging and global experience as me so we are managing to keep our heads above the water – you really have to focus on what is important.''

Cooper Basin interests

The company has interests in PEL 88 (30% - operator), PEL90 (25%), PEL92 (25%), PEL93 (30%), PEL100 (28.33% - operator) and PEL110 (25%).

Although having every intention of staying in the Cooper Basin, Cooper will probably farm down in some blocks in the future. ''Even though we are small we still follow rigorous risk management practices. For higher risk acreage we need to reduce our risk slightly and manage the company's cash reserves.'' He said that it's important to remember that the current surge in oil price doesn't make exploration any less risky: ''The price of oil doesn't practically speaking increase the chance of success, although a rising oil price will make a discovery more economic and will shift the economic cut-off slightly the fundamental prospectivity of acreage is practically unchanged. This is something people are forgetting judging from current bid levels.''

Exploration

Cooper currently has a large exploration portfolio of over 90 leads and prospects spread over the six exploration blocks.

Mr Scott thinks the York prospect in PEL 100 is their most significant exploration prospect at the moment, but the drilling is delayed due to the current shortage of rigs: ''Drilling schedules are a bit tight in the basin … We can't get York on a drilling schedule, we've been trying for about six months. We rate York as one if not the best prospect in the basin at the moment so we're keen to get York on a drilling schedule as quickly as possible.'' Cooper did look into buying a rig with a few other companies, but ''couldn't get the commitments required to bring a rig in.''

Mr Scott hopes York will be drilled in 1Q06 and Cooper is currently securing government approvals to enable this if a rig slot becomes available.

Production

Cooper currently has production from the Christies, Sellicks and Worrior fields in the Cooper Basin with development about to commence on the Arwon field. ''We're currently producing roundabout 1000-1500 bbl a day, depending on the weather and the status of the development'', said Mr Scott. ''We've got 1 MMbbl of P50 recoverable oil left, so we've got plenty of reserves. We've got good production levels and still have some upside potential in terms of development.''

As an example of upside from development activities, the Joint Venturers are considering a Worrior-3 development well in PPL 207, Christies-4 and -5 development wells in PPL205 and a Sellicks-2 development well in PPL204. These should be matured for drilling in the next few months if they are shown to be economically viable.

In the company's search for growth they have looked at a large number of deals in other areas of Australia, but soon found that it was too expensive and that most of the acreage was already locked up. ''Expensive farm-ins for high risk low volume targets did not fit the growth strategy, so Cooper decided to look outside Australia. The business model that we wanted to adopt didn't really suit what was left in Australia'', stated Mr Scott.

Moving abroad: the road to growth

The company made three discoveries within the first two years in the Cooper Basin, which are now providing it with a decent cash-flow. According to Mr Scott, Cooper was lucky to make the discoveries early on, putting the company ''ahead of the game.'' However, the Board soon realised that the targets in the Cooper Basin, mainly between 1 and 3 MMbbl, and a realistic long term exploration success rate of about 10% for oil wells in the basin did not fit the company's new vision to grow. When Mr Scott came on board he stated that ''I want this company to have 50 MMbbl on the books.'' Cooper Energy has got 1 million at the moment and ''if you want to meet that aspiration you're not going to do that in the Cooper Basin.''

''There is a lot of competition for acreage in Australia and there are a lot of good technical people out there trawling through the various Australian basins. With a lot of the acreage locked up'', explained Mr Scott, ''the entry cost is too high. ''We made a conscious decision that if we want to grow we have to go international, to places where there's a little less competition. We're very small so we can fly under the radar a little bit and pick up opportunities quickly. We think that's how we're succeeding overseas.'' He listed North Africa and South East Asia as the two areas Cooper has identified and believe these fit with the company's growth strategy – South East Asia even more so than North Africa.

Cooper is following a couple of business models:
(i) Secure acreage at 100% or high equity levels then farm down to cover risk and costs and,
(ii) Acquire smaller equity levels of very large prospects thereby giving the company low cost exposure to company making targets.

In both models they try to partner with like-minded low cost operators or non‑operators that are innovative and hungry to make discoveries.

Mr Scott noted that ''We're not adverse to any s equity level as long as the costs and risks are manageable. Ideally we'd like 30-40% equity in most of our interests. We're on about 30% in the Cooper Basin.

Cooper will stay onshore or shallow shelf for this phase of its growth. ''Deep water is too much exposure for us at this stage'', he explained. ''We think there are still a lot of opportunities onshore in the world that a lot of people have walked away from, because they have a perception that offshore is probably easier and less risky. Some of the onshore and shallow shelf areas that we have been looking at have exploration targets in the 50-100+ million recoverable barrels, which is obviously attractive to us.''

South East Asia

Although preferring not to say what the company is looking at in this region, Mr Scott admitted that South East Asia is obviously one option for a growing oil and gas company. ''The prospectivity in South East Asia is just phenomenal and if you get a decent block you have a good chance of making a discovery which is greater than 50 MMbbl'', he stated, adding that 30% of such a prospect would take the company a long way towards its vision. ''There are about five countries in South East Asia we're looking at. We have made some very good progress and hopefully we'll have something firmly secured in the near future.''

North Africa

In North Africa Cooper is focussing on Morocco and Tunisia, rather than the slightly more prospective Libya and Algeria. ''The competition is a little bit less in Morocco and Tunisia and the terms are very good'', he said. ''Algeria is hard, we think there's too much security risk there and the terms are very poor … In Libya we are too small to compete, the entry cost is enormous and the terms are also very tight.'' The company has recently picked up a block in Morocco in the Mediterranean Sea, which is subject to government ratification.

''We are doing business development in both countries and hopefully will have something further to announce in the near future.''

Skills Shortage

Like most companies, and especially smaller ones, Cooper has had problems attracting people due to the current skills shortage. One of the problems is, according to Mr Scott, that people don't want to take the additional career risk of joining a small company because they think it will be gone in six months or a year. ''The second problem is that Perth generally has a limited pool of good qualified professionals and they don't want to move because of various types of ‘golden handcuffs' – whether that be salary, share schemes or company cars, so for small companies it's extremely difficult to attract good staff'', he explained. ''Although it has been hard, we have been fortunate to attract good technical staff that enjoy working for a smaller company. We try to give them good base salaries and we have a company bonus scheme that rewards them a percentage of the NPV of anything discovered, so they can make a lot of money with us if we get a discovery.''

''We try to make it a bit of fun as well. Most of the guys that we've attracted have worked in the bigger organisations and hated it because of the administration burden'', said Mr Scott. ''I try to keep the administration burden away from them completely and let them discover oil and gas – which if I'm not mistaken is why I employ them!''

Well funded and looking for the big bang

At the moment, Cooper is mainly focussed on oil: ''I think ideally we'd like to focus on finding oil because it is so easy to monetise. Gas generally takes longer to monetise and is usually only viable if it is near infrastructure, big enough to build its own infrastructure or big enough for LNG. However, if our gas targets have those infrastructure or size attributes then that's fine by us.'' The company also looked at Coal Bed Methane (CBM) when establishing a new vision, but decided against it. ''We looked long and hard at CBM before it became fashionable. In our opinion it was another couple of variables more technical than the normal gas business'', explained Mr Scott. ''As far as I'm concerned it's a widget business, it's not the oil and gas business. You put a lot of steel in the ground and it takes a long, long time to get your money back – if ever. Great in the US at US$6-8/GJ but pretty marginal anywhere else.''

''Cooper Energy has got a solid foundation. We've got $19 million in the bank … we've got production and reserves, we've got lots of prospects in the Cooper Basin and internationally we're starting to deliver high value opportunities – all wholly due to our excellent technical staff. For this financial year we expect to be operating on a positive cash flow and that includes bringing in a couple of opportunities, one from South East Asia and one from North Africa.'' After that the company is hoping to make another discovery in the Cooper Basin so that it can sustain production to keep paying the bills. However, the company believes that the real growth will be overseas: ''I think that's where the big bang will come.''

The company's exploration budget for the next financial year is $6 million, whereas the development budget is $3.5 million. ''Our total administration budget (corporate plus salaries) is only $2 million a year, so we're a real efficient, low-cost operator'', said Mr Scott. ''Our in-house staff are remarkably qualified for such a small company. We've got that global experience, we know how to work in different countries, we know who to talk to and we know where the basins and opportunities are. We believe we have got a great future and we are all looking forward to meeting our vision and creating wealth for our shareholders.''