After thoroughly investigating several options and acquiring the services of corporate finance expert Jon Stewart in December 2004, the company took its $2 million and acquired a 12.5% interest in a Texas gas project, becoming Aurora Oil & Gas in April this year.

The project that relaunched the company and that standing board members used to lure Stewart’s services (and his individual investment of $1.35 million), was the Flour Bluff gas play near Texas.

Aurora and its partners have now confirmed Flour bluff has 3P (proved, probable and possible) reserves of 127.8 billion cubic feet compared to pre-drilling estimates of 90.5Bcf.

With infrastructure already in place, production from the project is going straight into the hungry US market.

Success at Flour Bluff helped the company recently complete a $5 million equity raising at 38c, a slight discount to market, to provide a more robust working capital facility.

That facility is destined primarily for securing new projects but would also be used in part for the developing Flour Bluff project, and the recently farm-in at the Sugarloaf gas prospect (also on the Texas Gulf Coast) in which Aurora acquired a 12.5% interest.

The funds will also allow Aurora to push forward with its strategy of growth.

“We are looking for conventional gas plays, ideally large in potential size, in which we can secure meaningful equity positions and participate alongside local operators”, Stewart said.

This pretty much describes Sugarloaf, which Stewart considers to be world class.

Aurora is in partnership at Flour Bluff with two other West Australian firms, Sun Resources and Victoria Petroleum (who have similar interests to Aurora), with US investors holding the balance of which operator Texas Crude Energy is the largest stakeholder.

TCE is an experienced gas explorer and producer in a region of ready-made gas markets.

The project consists of the adjacent West Flour Bluff and East Flour Bluff fields. The Flour Bluff gas field in the south of Texas historically delivered gas from shallow reservoirs between 1980m and 2600m deep that are now largely depleted.

The aim of the current project was principally to test for deeper potential and develop those reserves – a tactic that proved successful in other similar US gas fields, according to Stewart.

The initial program in 2005 has involved drilling three wells to test reserves – BG Webb-1 in the West Flour Bluff area, and EFB D-24 and EFB D-10 in East Flour Bluff. All three have been drilled and cased for production.

The second and third wells are of particular interest to Aurora with the company upping its stake in the East Flour Bluff portion of the project to 16.667% in May.

BG Webb-1 is producing at about 1.7mmcf with 26 barrels of condensate a day, while EFB D-24 is producing about 1mmcfd and is expected to be fracture stimulated. EFB D-10 was still being completed for production at the time of writing.

A workover program of three previous wells – EFB 17-D, D-19 D and D-19 F – was completed in October as the final part of the Phase 1 redevelopment program.

Stewart said more wells would need to be drilled over the next few years as the company progressed from current production of about 5 million cubic feet per day to peak production of between 40 and 50 million cubic feet per day.

Peak production would generate $US10 million net to Aurora annually, assuming long term gas prices of $US6.50, and remain near that level for about four years – depending on the joint venture’s ability to identify further reserves, according to Stewart. Economic production would last about 15 years.

With gas prices hovering around record levels – currently at $US13 per thousand cubic feet – production from Flour Bluff will generate further funds to embrace other exploration opportunities, as it has at Sugarloaf.

After the initial success at Flour Bluff, Stewart had considered the pros and cons of acquiring production projects as opposed to exploration projects. With top dollar on offer currently for production or near production oil and gas projects he saw little obvious upside and preferred to expose shareholders to potential discoveries through advanced exploration plays.

“We think at this time it makes sense to try to identify exploration projects that can add significant value to our shareholders – and that’s exactly what Sugarloaf is,” he said.

Aurora announced its farm-in agreement at Sugarloaf (also operated by TCE) in September, claiming it had the potential to host several trillion cubic feet of gas.

“By any standard in the Gulf Coast region, this is a major undrilled structure and represents an outstanding opportunity for Aurora to participate in a company-making prospect in onshore USA,” Stewart said.

A well to test the prospect is anticipated to be spudded by January 2006 once long lead-time items such as high-pressure casing and a suitable rig are available.

“That well is predicted to take about three months to reach target depth (5200-6400m) and will cost $US5.8 million dry hole and a further $US2 million to complete the well for production,” Stewart said.

Aurora’s share will be just under $US1.242 million, but this has the potential to add ‘dollars rather than cents’ to the share price, according to Stewart.

The company Aurora would be patient with future acquisitions, making sure they met the company criteria and being careful not to stretch its resources too thinly, he said.

But he was doubtful whether an opportunity of Sugarloaf’s size and quality would present itself again.

However, Stewart is committed to the strategy and sees strength in the company’s focus on onshore US gas, particularly when compared to other gas-producing environments such as Australia.

“The US market is the world’s largest with annual consumption of more than 22 trillion cubic feet of gas representing about a quarter of all US energy and it is forecast to grow further,” Stewart said.

The gap between supply and demand within the US market would continue to widen until the shortfall was alleviated by LNG imports, which would incur high costs through the liquefaction, transport and re-gasification processes, he said.

This would underpin a floor in the gas price at around $US5-6 per thousand cubic feet, and at that price, onshore US operations would enjoy healthy margins long term.

“We will take a bit of the exceptional cash flow or profits that we will generate from production over the next year and putting it into a huge upside play at Sugarloaf. It is really a fantastic value adding opportunity for our shareholders from that perspective.”

*This profile, first published in a different form in ResourceStocks, was commissioned by Aurora Oil & Gas