Newly formed Perth-based junior oil explorer Merlin Petroleum Limited is ready to get stuck into the South Australian portion of the Cooper Basin, hoping activities there will provide cash flow to fund other riskier – but potentially more rewarding – ventures in the Northern Territory and across the border in South Australia.

Merlin Chairman, Jock McGregor, said the company was predominantly seeking oil in the Cooper Basin but there would be gas in some areas.

"The strategy is to put together farm-in arrangements in the Cooper Basin, a known area where a lot of drilling is taking place because of the old Santos leases that have been relinquished, and there is acreage available", McGregor said.

McGregor said the company was entering the basin with partners on a cost/revenue/share basis. The partners are: Victoria Petroleum subsidiary VP Oil Exploration 1977 Pty Ltd; Impress Ventures subsidiary Springfield Oil and Gas; Roma Petroleum subsidiary Permian Oil Pty Ltd; ASX listed Lion Energy; and Tacnas Pty Ltd.

He said the company was seeking $15 million to fund the program – which is admittedly around three times more than what many junior oil explorers are seeking for their programs.

McGregor said the short term goal was to move very quickly on an aggressive drilling program and hopefully get some results which would lead to cash flow, enabling the exploration of high risk/high reward Northern Territory leases in the longer term.

Merlin was founded by Managing Director John Heugh, who said some of the Cooper Basin blocks were better than others in terms of their proximity to already-producing fields. "The Squadron block in PL115 is a big slice of the country – 245 km² and it contains eight prospects of which we believe three are ready to drill straight away", Heugh said.

"It has a common boundary with the Narcoonowie oil field and also the giant Toolachee gas and oil field. In fact, some of the 3D seismic survey that was acquired over the Toolachee field extends into our boundary. We're looking at a mid-point there of about 30 million barrels of oil – that's potential recoverable reserves – from those eight prospects.

"What makes these prospects a little bit different from many of the other prospects in the Cooper Basin is that a lot of them incorporate some stratigraphic component in addition to more conventional structural culminations. There are two types of traps mapped which incorporate a stratigraphic component: flanking Permian sands about partially denuded palaeohighs and Permian sands onlapping Warburton Basin sediments.

"There's another two blocks on the western side, the Flight and Formation Blocks, and between them they are approximately 600 km², situated in between the Fly Lake, the Brolga and Tirrawarra producing fields. So we're in the right area and we're talking formations with primary target zones that are deeper – somewhere between 2,500 to 3,300 m.

Heugh said the whole of that basin between the Fly Lake and Tirrawarra fields could rightly be charged with hydrocarbons because it is the source, or 'the kitchen', for the oilfields either side. "Wherever we are in that part of the basin, we're in mature source rock", he said. "Everything should be fully charged… we're trying to find structures that have the right timing but also, because we're deeper, we're trying to find structures that have the right sort of porosity."

Heugh said Victoria Petroleum planned to use Jim Dirstein's frequency response based seismic analysis "… whereby you get attenuation of the higher frequencies on reflection coming back from a gas field reservoir."

"Two of the blocks don't have 3D [seismic] but they do have 2D [seismic] coverage", he said. "In both of the Flight and Formation Blocks, they're undergoing reprocessing as we speak. Certainly, after that has been completed, we've got two prospects there that are ready to drill and there should be a third prospect ready to drill in about three to four months time.

"There's also some more seismic acquisition going on in both of those areas. In fact, the farm-in deals call for this for all of the blocks combined, which is about 800 km², and we're looking at a total of six wells plus $2.5 million worth of a mix of existing seismic reprocessing and acquisition of new 3D and 2D seismic.

"We're funding all of that at the 60% level."

Heugh said there were five different joint venture partners involved on the ground in the farmin areas. "We're actually farming in to three permits on those blocks – 115, 104 and 111 – and we'd like to think we're farming in to the better portion of those blocks, particularly in the western blocks which are the Flight and Formation blocks", he said.

"We're in about Year-2 of the permits and, under the program, the joint venture people have already approved five wells, so we'll be about a year in front on what the minimum commitments are.

"We don't have anything specific planned for next year under the existing farmin arrangements but if the results of this year are good, we'll want to follow that up. And if results are bad, we'll have an, surplus in our budget able to be applied to the drilling of other wells."

It's a fairly complex joint venture: a requirement of the agreement is that Permian and Victoria have to vote to complete the wells in Merlin's ground to allow the company to complete its six-well program by July 2005.

"I would say, though, that at least three or four of those wells will be drilled before Christmas this year – that's going to be on average one well every two months or so, which is about right", Heugh said.

"Two are probably going to be drilled back to back in the Squadron Block, so you might see them being completed by August/September. Hopefully, we'll get a winner out of one of those."

Blocks are only 5-15 km from the nearest gas pipeline. Heugh said with Santos fairly hungry for gas, securing a deal shouldn't be difficult.

"As far as oil is concerned, most of the oil that is being produced in the Cooper Basin at the moment is being trucked to Moomba and then sent down the pipeline to South Australia, so we would being doing the same thing", he said.

"So if it is oil, we could get into production more or less instantly and if it's gas, it depends upon the economics of the individual field and the proximity of other potential fields close by."

McGregor said funding arrangements should be in place by late July.

The company's long term Northern Territory and South Australian ambitions are based on 32,000 km² of acreage that Heugh has acquired rights to. McGregor said the areas had not seen any significant exploration since the 1980s when the Sydney Oil Company was active there and was stymied by a combination of low oil prices and the general stockmarket crash of 1987.

"You'd appreciate that the tech-nological and geological require-ments in the area were quite different in those days, so John staked his claim there, which became the basis of what we want to do as a long-term goal", McGregor said.

He said Merlin would do things a little differently to other companies of its ilk. "I would say that quite often people try to fund these arrangements by getting backers, saying 'we've got this idea, we're going to drill a few wells', and what happens next? Well, we've got our next step planned already.

"We have two other points of difference as well. One relates to the board, which was put together quite independently."

McGregor said Heugh and some independent consultants had worked together to find appropriate board members, who all have quite different backgrounds but seem to have predominantly managerial experience, as opposed to, say, being geologists who've worked their way up.

"The board that we have now is truly independent – none of us knew each other before", McGregor said.

"We have a woman, Emma Stein, on the board and I think that would be unique for a junior explorer. She's highly qualified and emigrated to Australia in September last year."

To be part of Merlin, Stein left behind a considerable career that included stints as managing director of Gas De France Energy and of British Fuels, both petroleum retail concerns. She was seeking a non-executive director position and had heard about Merlin through a venture capitalist.

McGregor's distinguished career in the petroleum industry began 40 years ago with BHP. From 1994 to 1998, he was company secretary and head of global investor relations, followed by four-years heading up BHP Billiton with the double title of Japan and North Asia President.

"Denzil Griffiths, also an independent director, has worked for the Federal Government in the area of business and consumer affairs and also as Regional Director of Customs in the State of Victoria", McGregor said. "He then worked for the State Treasury Corporation and ended up running their superannuation funds.

"Then, they were seeking a chairman and contacted Paul Anderson, the previous Managing Director of BHP, who suggested I become involved."

McGregor said the plan was to become a mid-sized company in five years, having an annual production base in excess of 5 MMbbloe. "It's a well thought-out strategy with a target in mind that is significant in the total scheme of things", McGregor said.

Heugh said inde-pendent geologist, Norrie Hamilton, was the mainstay of the process to investigate the acreage. He said Hamilton's report on the prospectivity of the ground, for internal use only, gave the project a fairly resounding 'thumbs up'.

"I've looked at a lot of the seismic cross sections and contours, and looked at some of the completion reports of wells that have been drilled, for example, in the Squadron Block area where four previous wells have oil shows and/or gas shows in them, so we know there's oil in the system", Heugh said.

"And the same thing in the Flight formation blocks: there's a group of wells that have been drilled that are not really commercial, but certainly they show that the system is charged with oil and gas.

"One of those, Spectre-1, had in excess of 12.2 m (40 ft) of pay zone in the Permian, Patchawarra – fully gas charged, but porosity was a problem in this particular spot that they drilled. We're working hard, or rather Ron Prefontaine (contracted to Victoria Petroleum) is working hard, with the desire to develop a better understanding of where the porosity may be better developed."

Prefontaine, who formerly worked with Oil Company of Australia (which went on to become Origin), conducted all of the prospect generation alongside Dr Mike Swift, who has worked for MIM, a number of Cooper Basin operators, and OMV internationally. Heugh said Prefontaine was also ex Santos, so "… he already knows this area quite well."

"We believe that this represents a new paradigm for Victoria Petroleum, who, it's fair to say, had some difficulty in the past with their exploration success", Heugh said, adding that it was a good thing Victoria was increasing its focus on the Cooper Basin permits.

Heugh said that in the Northern Territory, drilling of the first well (EP 93) is already budgeted for regardless of success in the Cooper Basin – although some cash flow is definitely required to fund other work in the Territory.

He said the 32,000 km² held by the company were relatively grassroots, high risk but high reward frontier basins that are prospective for various reasons.

"If we get some success in these areas, we stay there. If we don't, obviously we'll be looking further afield for other prospective or more prospective acreage – somewhere that holds these big, company-maker type prospects that Merlin is targeting as part of its corporate growth strategy", he said.

Heugh said EP 93 should be granted by mid-July to August. "We've now signed off on all the relevant access agreements with the Central Lands Council and the native title side of it has all being finalised", he said. "We've done an equitable deal with them and are just waiting for the final govern-ment side of the paperwork to be done. (Subsequently, word has come from the NNTT that there are no objections to the grant so it will proceed)

Heugh said that in EP 93 the company had two prospects ready to drill.

"We've got unrisked preliminary, low, or P90, oil in place figures combined of 130 MMbbl, so we're talking very big structures. The primary risk there, from drilling down to the east of the actual permit concerned, is seal. We don't know if there is going to be a seal there although seismic analysis indicates better developed sealing horizons at top Poolawanna horizon levels than wells drilled through similar sequences to the east of the permit area.

"It's a matter of some debate as to whether there's sufficient seismic to warrant drilling the first well or whether we should be acquiring more seismic, and the best advice we've got is that, sure more seismic may better define the prospect more accurately, but it's not going to tell us whether we've got a seal.

"We've got a valid structure and no matter how much seismic we acquire, we won't be able to tell until we drill a hole in the ground. We're sold on the idea, hopefully in joint venture with another partner but depending on cash flow, might end up doing it alone."

Heugh said EPA 93 and PELA 77 combined covered prospective ground with deep Permian troughs, larger than the Patchawarra or Napamerri troughs.

"We're talking a total of 16,000 km², which is a big slice of turf that hasn't been drilled yet", he said.

"There's been some drilling close by to the troughs – I think the closest well drilled would be PELA 77 about 10 km from the edge of the trough. And they struck good source, good seal, good reservoir, and they did have a good structure, but what they were missing out on was maturation profiles. That area was the uplifted side of the McDill's fault and very clearly in-situ generation of hydrocarbons was just not on.
"So we want to drill further to the west at the other side of the bounding fault for structures where we've got access to the deeper part of the kitchen area in the troughs themselves…

"There's a lot of data out there, so all the right prerequisites are there for generation and entrapment of large volumes of oil. It's a matter of 'is there a seal?' – that's the primary question on our mind and others who have written about it."

The company would like to be close to spudding its first well by December 2004/January 2005 in EP 93.

"On the budget that we're planning, we've funded 50% of that well regardless of results in the Cooper Basin although, clearly, if we've drilled six wells in the Cooper Basin and haven't got a strike, we may reconsider our options in terms of drilling that somewhat higher risk well", Heugh said.

"We would farm out up to 50% in principle at this stage – we don't have a deal on the table. We're talking to a few different people: they'd like to see a bit more seismic reprocessing and maybe the application of Dirstein's frequency response based approach.

"… it's not infallible, though. Even if we get negative results, we still may feel justified in drilling, but if we get positive results, we'd definitely drill. If frequency results don't give us the results we're looking for, there's a whole raft of geophysical methodologies we can apply and attempt to find some direct evidence of hydro-carbons prior to drilling."

Heugh concluded that success in PEL 93 could provide an opportunity to open up a whole new petroleum province. "We wouldn't want to get ahead of ourselves, though, because we've got a planned strategy which we will follow", laughed McGregor.

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