Strike me lucky: gas, fertiliser and renewable geothermal power
If the ambitions of the Strike Energy team come off, there will be a major new energy player developing a vast, low-cost gas resource.
If the ambitions of the team at Strike Energy come off, there will be a major new energy player in the country developing a vast, low-cost gas resource with downstream manufacturing, producing homegrown fertiliser for Australia and generating 350MW of dispatchable renewable power from geothermal. And all done with a commitment to net zero carbon by 2030, just 8½ years away.
This is quite an elevator pitch, which gets more traction in a market where gas supply in Western Australia is expected to tighten.
Strike CEO Stuart Nicholls is a former Shell executive. On the board of Strike sit two of the highest-profile names in the West, Nev Power, ex-CEO of Fortescue and former Covid Commission tsar, and business veteran John Poynton who chairs the company.
The game-changer for Strike came with the accidental discovery of vast quantities of new gas in the Perth Basin with the Waitsia resource. For years until then, Strike was having difficulty living up to its name, focusing on the tight sands in the southern Cooper Basin.
When the Perth Basin news broke, Strike pivoted to a tenement at West Erregulla, close to Waitsia and about 350km north of Perth. Nicholls was convinced there was more and started drilling.
“It wasn’t a wild cat so much, but pretty high risk,” Poynton says of the $25m spend.
“The company’s market cap was well under $100m at the time. It was the deepest well ever drilled, the degree of difficulty high, but the upside for a discovery was very strong. We could do something that was transformational for the energy sector.”
This time, a strike it was. “The results support a very large productive good quality, high pressure gas field which will ultimately underpin our gas as being affordable, abundant and competitive, both in terms of cost base as well as the carbon base,” Nicholls said. “It has very low impurity.”
West Erregulla is owned 50/50 with Warrego Energy. Nicholls set about buying all the acreage next to Waitsia (which is now owned by Beach Energy and Mitsui). Today, he believes that the wholly owned acreage contains as much or even more than in West Erregulla.
Poynton jokes they lured Nev Power onto the board at a weak moment for him in 2019. Power was impressed by the pivot to the Perth Basin.
“Like John I recognised that it was relatively high risk but saw the potential that we could have if we were successful,” Power says. “I really liked Stu’s approach to it – very technical but very entrepreneurial and bold and that resonates very strongly with me.”
In late 2019, independent energy research firm Rystad said the Perth Basin would be producing more gas than the Cooper by 2025, a strong prediction which Nicholls says looks to be coming true. Nicholls says the Cooper Basin found 6 trillion cubic feet of gas, which underpinned manufacturing on the east coast over 60 years.
“You think about the Cooper Basin in the middle of nowhere. Between Beach, Mitsui and Strike we have already found more than 3 trillion cubic feet of gas and that is growing. We have major pipelines and distribution networks that run directly over Waitsia and West Erregulla. We sit in between two major populations in Geraldton and Perth and we are also already inside the electricity transmission network.”
The Perth Basin will compete with both Qatar and the US on cost of production.
For Power, who has been calling for a manufacturing-led recovery, this is a new opportunity. Strike plans to build a urea plant at Geraldton. “We have a tremendous cropping industry in Australia, yet we import pretty much all the fertiliser we use. By doing that here at home, we develop our manufacturing and downstream industries here to help an export product to create that greater diversity in our economy.”
The urea plant Project Haber will help Strike deliver on its net zero 2030 target, which Poynton says is the most aggressive of any energy company. That is because Strike will be using its gas endowment of today, to leverage itself into the hydrogen economy.
“We will be using our gas to build the largest hydrogen-consuming facility in Australia,” says Poynton. “800,000 tonnes of ammonia capacity and 1.4 million tonnes of urea capacity, which are going to be a cornerstone of the successful hydrogen revolution, which positions us perfectly through our technology choice to integrate green sources of hydrogen over time as costs come down.”
Strike advised investors of a “transformational second half” this year. Gas is expected to come online from West Erregulla in early 2023, supplying two big customers, Alcoa and Westfarmers, on long-term contracts of about 50 petajoules a day.
The market in the west is favouring Strike too. Nicholls points to the uncertainty of gas supply, from the reserves written down by Santos to delays in Scarborough and deferral of Browse. On the demand side, a new pipeline to the Gold Fields accesses a growing gas market for gold, lithium, rare earths and nickel producers.
So given the incredible discovery at the heart of this story, why has such a resource been hiding in plain sight of geologists for so many years? “There were 12 wells drilled over the top of Waitsia and they never discovered them,” says Nicholls.
The reason is also the reason why Strike has a third opportunity: renewable energy that is 100 per cent depatchable. In the Perth Basin, coastal limestone sitting above the hydrocarbons created so much noise on seismic data sets that they went unnoticed.
Strike gas is 5km underground. And so is about 350MW worth of geothermal power, something Nicholls also discovered by accident. Drill off the structures that contain the gas in the basin, he says, and you will find yourself in a highly permeable hot aquifer.
“It means you don’t have to pump water underground, get it heated and bring it back up again,” Power says. “Geothermal power right in the centre of that infrastructure that allows us to connect back into the Project Haber (urea) development, to make hydrogen, put into power systems and help develop the industrial economy of WA further. It has low environmental impact and it is 24/7 dispatchable.”
Strike has 100 per cent of the geothermal rights in the Perth Basin. Once again, says Nicholls, this is building on Strike’s core competency. “If we can provide our own zero carbon power into the fertiliser plant, we can actually drive the carbon footprint of Australia’s urea consumption down to 15-30 per cent of what it currently stands today. That’s an enormous amount of carbon offset that could be generated through Project Haber.”
Of course, much has to go right for Strike but progress to date is impressive. “I keep saying every six months the next six months is really critical. I turn my mind back in August 2019 and the drilling of the West Erregulla discovery well and that was the thing that really needed to go right,” Nicholls says.
For investors, Poynton believes they have a big story to tell. “The market is not giving us much if any value on geothermal and not as much value for Haber as we think at this point they could. Having Nev involved is fantastic because of the track record with Fortescue where again, the degree of difficulty was quite high, then all of a sudden bang, here we are.”
“The amount of cash generation per investor dollar of capital is quite low compared to other bulk commodities like iron ore,” Power says. “We are definitely a growth stock right now but the time frame to first gas and the time frame into Project Haber and development of geothermal puts us on a very solid earnings trajectory.
“Do you remember Fortescue? We also didn’t pay a dividend for a while.”