Clouded future of gas in WA drives Strike Energy to urea

Strike Energy's Stuart Nicholls regards the WA gas market as a dangerous place to be as new cheap supply comes in as the big resource players prepare to move away from fossil fuels.

Clouded future of gas in WA drives Strike Energy to urea

Strike Energy chief executive Stuart Nicholls said concern over big WA resource players fleeing gas to decarbonize was behind the Perth Basin explorer's move into urea manufacturing.

Nicholls said companies like Wesfarmers, Alcoa, Rio, BHP and FMG are all transitioning their energy supply to reduce carbon emissions and one day, their boards "will wake up and they will say we are getting out of gas."

"We just recognize that putting all your chips on the domestic gas market is a really dangerous place to be," Nicholls told the WA Energy Club last week.

"If you are totally and 100 per cent reliant on that being your customer base, then you're going to be left holding the can.

"How can we be very certain that the status quo…of onshore gas producer produces gas, puts it in pipeline, sells it to customer, customer pays a good price, is the right way to go?"

Nicholls' concern is backed by leading WA gas consumer Alcoa's statement to Boiling Cold in May that it was "actively seeking to reduce our energy intensity and reliance" on gas.

In addition to insufficient demand for gas, the ex-Shell commercial manager is worried about too much supply.

In stark contrast to the Australian Energy Market Operator's forecast of a possible gas shortage in WA late this decade, Nicholls said he expects "a lot of gas" to be found in the Perth Basin at lifting costs competitive with Qatar, Russia and the United States.

Strike's third problem is investors distaste for fossil fuels.

"I can tell you right now, as a public company CEO, no one wants to take a meeting with you if you're talking about an oil and gas investment," Nicholls said.

"Oil and gas is a very expensive, highly capital intensive, long payback period, sort of investment, but investors want less carbon now,

"So put yourself in my shoes as a greenfield, small business with no balance sheet, no credit rating, out there with your world-class onshore gas asset, and finding that fund managers won't take a meeting with you, because you represent an oil and gas company,

"It's a tough place to be."

Moving downstream to supply farmers, not miners

Nicholls said Australian listed oil and gas companies like Woodside and Santos had failed to deliver value to shareholders.

"We have built giant projects that have been overcapitalized and have been invested into optimistic price cycles that have ultimately gone to limit the returns to shareholders," Nicholls said.

"So we need to balance capex, cash flow and carbon."

Strike surprised the market in January with its solution to its three dilemmas: a urea fertilizer plant near Geraldton to create a new market for gas that is less carbon-intensive than other uses for gas as CO2 is consumed in the process of making urea.

ASX-listed Strike - that saw its share price surge after discovering gas at its Perth Basin West Erregulla field in August 2019 – in not leaving the business of selling gas.

Strike's 50 per cent share of the 50 terajoules a day first stage of West Erregulla has been bought by Wesfarmers CSBP, and its partner Warrego has struck a deal with Alcoa. The cashflow from Stage 1 is destined to support a further 150 TJ/day of gas supply and the urea plant.

With Australian broadacre farmers importing almost all of their crucial urea needs to pump nitrogen into the continent's depleted soils, Nicholls talks up the benefits of local county and import replacement.

Strike danced another pirouette away from the "status quo" gas producer's business model in April with the purchase of the Perth Basin geothermal rights of private company Mid West Geothermal Power.

Nicholls said the common need to understand Perth Basin geology, drill onshore wells, liaise with the local community and gain land access make the geothermal business a good match with Strike's gas capabilities.

Strike wants to generate power with the earth's heat, return the water to the reservoir, and make hydrogen with the carbon-free electricity to feed into its urea plant.

Not short of ambition, the junior explorer later plans to export geothermal-generated power to the South West grid.

Strike claims it will be a net-zero emissions by 2030 on the basis that its urea will displace more carbon-intensive imports

If Strike's urea plant, dubbed Project Haber for marketing pizazz, fails to materialize by 2030, it will not be for lack of salesmanship from its chief executive.

Main image: Graphic of proposed urea plant on the outskirts of Geraldton. Source: Strike Energy (screenshot of video).