Inflation and supply chain uncertainty cause delays for Dorado oil project

Australian energy giant Santos has informed that the inflationary cost environment and supply chain uncertainty do not support the final investment decision (FID) of its operated Dorado offshore project in Australia in 2022.

Santos revealed this in its 2022 half-year results on Wednesday and its partner Carnarvon Energy also confirmed it, saying that a prudent approach is being adopted, which does not support FID in 2022. The decision was previously targeted for mid-2022.

The Santos-operated Dorado oil and gas development is located in the Bedout Basin, offshore Western Australia. It is planned to be developed in two phases with the first phase involving the production of oil and condensate through a wellhead platform (WHP) to an FPSO.

Carnarvon said that the Dorado Front End Engineering and Design (FEED) process is substantially complete and has progressed to the point of the Dorado development being close to FID ready.

As a reminder, Singapore’s Sembcorp Marine is in charge of the FEED process for the FPSO following a contract award from Altera Infrastructure in September 2021. The shipyard has recently said it has made good progress on the FPSO FEED with the hope of securing an engineering, procurement and construction (EPC) contract.

Carnarvon now said that the main outstanding matter is the finalisation of the EPC contract for the FPSO vessel and that the joint venture has been working with the relevant contractor to ensure the contract is in an acceptable form. This requires the cost environment to be more stable and more certainty around supply chain capacity. Because the FPSO represents more than 50 per cent of the expected project cost, it is important that this work scope is carefully contracted and managed, especially in the current supply chain environment, Carnarvon explained.

According to Carnarvon, the engineering work for the WHP and FPSO is essentially complete, with a robust technical design able to extract the oil and gas from the Dorado field as planned and allowing for further tie-back opportunities such as Pavo. The initial development incorporates 10 wells being drilled into the four reservoirs (Caley, Baxter, Crespin and Milne) and the hydrocarbons being produced via a 16-slot WHP to an FPSO.

The FPSO has a design capacity to process 100,000 barrels of oil per day, along with 215 million scf/day of gas injection and storage for around 1 million barrels of oil & condensate.

Carnarvon Managing Director and CEO, Adrian Cook, said: “Carnarvon is keen to see the timely sanctioning of the Dorado development and commencement of the construction phase, and we continue to work collaboratively with the operator to achieve this. That said, given the current regional inflationary pressures and supply chain challenges, the risk of cost escalation is unacceptably high and requires fiscal discipline until this environment shows signs of stabilising.”

When it comes to Carnarvon’s share of funds for the Dorado development, a formal process is underway and the company has received a number of proposals for traditional reserve-based, non-recourse senior debt facilities and alternative funding options including subordinated debt, offtake prepayments and royalties. The financing process will be progressed once the FPSO EPC contract and other key contracts have been substantially agreed upon.

As part of the funding process, Carnarvon is undertaking a formal process to potentially divest a portion of its share of the Dorado project and associated exploration acreage prior to taking FID.

The Offshore Project Proposal (OPP) for Dorado remains under assessment by NOPSEMA. This is a key regulatory approval required for the JV to progress subsequent approvals and to sanction the Dorado development. The operator is continuing to engage closely with NOPSEMA to gain acceptance of the OPP, which was submitted to the regulator back in September 2020.

The Santos-operated Pavo-1 well, located in Exploration Permit WA-438-P, was drilled earlier this year, using the Noble Tom Prosser jack-up rig. The well proved to be “a significant oil discovery”, located 46 kilometres east of the Dorado field. This provides an option for a low-cost tie-back to the first phase of the Dorado development.

As informed by Carnarvon, the pre-development work has started for the Pavo discovery, with a Discovery Assessment report being filed with the regulator while studies are being undertaken for the development of this resource. The studies being undertaken are to ensure the current Dorado FPSO design is capable of receiving the Pavo fluids with minimal requirement for further enhancements during tie-back operations.

The Pavo-1 well discovered 43 million barrels (2C, gross) of oil as a Contingent Resource – referred to as Pavo North. The Pavo South structure is estimated to contain an additional resource of 55 million barrels of oil (Pmean, gross), and has the potential to generate significant further value. The JV is assessing options to drill this prospect as soon as possible.