Strike Oil managing director Simon Ashton, who is addressing the the US Oil & Gas Downunder Conference at the Sheraton Hotel in Perth today, said well testing and drilling on the company's Mesquite project were proceeding favourably.

"The first commercial test has been achieved on the Shefcik-3 well," Ashton told the ASX this morning.

"This result coupled with the commercial tests on the Shefcik-1 and Webernick-1 wells has now confirmed all of the first three wells will flow at commercial rates. Final flow rates for each well will not be known until the remaining zones are tested.

"Daily production rates of test gas being sold are in the range of 2 to 7 million cubic feet per day depending upon the individual zone being tested."

The fourth well in the program, Webernick-2 well, has spudded and was drilling ahead at 1181 metres as of yesterday.

Strike is not interested in Australian gas plays. With gas prices in Australia at about $2-3 per thousand cubic feet, Strike has fled for greener pastures in the strong US gas market, which has been experiencing prices as high as $US13 per thousand cubic feet.

The company says its Australian oil projects, along with US projects in the Rocky Mountains (oil and gas) and on the Gulf Coast (gas) are all close to hungry markets, in established production regions and subject to strong commodity prices.

“A key part of our strategy is to be in areas that are already proven, producing areas with established infrastructure and have ready access to markets for the product that we find,” Ashton said.

Through his experience and contacts, and those of his fellow board members, Ashton was able to negotiate an interest in a gas play in the onshore Gulf Coast of Texas that has provided Strike with its first discovery and initial cash flow.

The Mesquite project, the Gulf Coast Texas play in which Strike holds a 26.25% interest, generated its first commercial discovery in December last year.

The Shefcik-1 gas discovery by US-based project operator Cypress E&P Corp was followed soon after with the Webernick-1 well, which was confirmed as a commercial producer in February.

Around the same time, Strike announced that Shefcik-1 had increased daily production to 7.1 million cubic feet of gas and 170 barrels of oil condensate. Ashton said the Webernick-1 well was likely to perform similarly to Shefcik-1.

“These are outstanding flow rates,” Ashton said.

“I haven’t seen any other Australian explorer in onshore US report rates this high in the past two years.”

Ashton said he was “exceptionally pleased” with the discovery, and dismissed the suggestion that the successful well was a long time coming after Strike’s August 2004 listing.

“If you started a company and hoped to have a success within a year or two, you’d have to be extremely optimistic,” he said.

“Our business is exploration – it’s normal to have dry wells. What you need to do is have some successes along the way and we have that now. People have to look at the whole picture.”

Ashton also emphasised the capital investment in the dusters drilled compared to the successful wells of late.

“In the US we drilled four dry holes but the risk dollars we put into those four holes was less than $1 million and our interest in those was only 10%, while we have a 26.5% interest in our discovery holes.

“So from a risk point of view, where we have put our risk dollars has been in the successes. We have drilled a good balance of high and low risk opportunities.”

Ashton lamented general market ignorance of this fact, saying it was often difficult to relay the point to investors.

“When somebody reports a dry hole, people often don’t take too much notice of how much was spent – a dry hole is a dry hole. When you drill a dry hole there’s often an overreaction and your stock gets hit for six.”

Test results indicate that the third well in Strike’s Mesquite project, Schefcik-3, is likely to be commercial. The fourth well, Webernick-2, is due to spud in the next week or two.

The testing program on the first two wells is progressing, with Shefcik-1 and Webernick-1 testing multiple zones at commercial rates, according to Strike. However, both wells still have further zones to test before combined flow rates can be released.

Ashton plans to have four wells in production by June.

Conservative estimates released previously by the company plotted a course to a $1 million net revenue per month by the end of June, based on three to five wells producing 15 millions of cubic feet per day using an $US8 price.

“The reality is we’ll probably have four wells all operating at over 5 million cfd so the expectation is we’ll have over 20 million cfd,” Ashton said.

The Mesquite project will have connections into three local pipelines, giving Strike several market options.

The company will increase its processing facility in preparation for four flowing wells by duplicating the current processing unit. Ashton would not be drawn on the cost of the new facility other than to say it was not “onerous”.

The wells will likely have a life of 15-20 years, with most of the reserves to be produced in the first four to five years.

Strike has upping its stake in future Gulf Coast projects from 10% to 25%.

The company is also in the midst of a $10 million rights issue to fund the ongoing exploration.

“There is an ongoing generation of new prospects in the Gulf Coast that we’re hoping will generate two or three more Mesquite look-alike type opportunities,” Ashton said.

The Mesquite discovery highlighted the advantage the US had over Australia for companies keen to move rapidly into production. The time from the discovery at Schefcik-1 to production was just 60 days.

“There would be very few places in Australia you could do that,” he said.

The difference between operating in the US and Australia came down to access to ready markets, access to infrastructure and red tape, according to Ashton.

Once a lease is granted and a discovery is made in the US, companies can move straight into sales, but in Australia separate licences were needed.

The Tow Creek oil project in Colorado is also set to move ahead with drilling to begin in the next quarter.

Strike holds 37.5% in the joint venture with Comet Ridge.

Ashton said the 1990s downturn in the oil industry left the region untested by the latest technology, with the majors forced to retrench many of their exploration teams to save on costs.

He said as a small company, Comet Ridge had been able to move quickly to pick up the lease and the joint venture now planned to use new drilling technology to exploit the project.

“Our strategy in the US has been to use our networks to work closely with competent and reliable operators who have good local networks to focus on niche opportunities,” Ashton said.

This article was originally published in another form in RESOURCESTOCKS