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With 2008 marking its 62nd anniversary, Melbourne-based Lakes Oil NL is the oldest Australian oil and gas explorer still operating in the country. Lakes has also kept alive the pioneering spirit of a once larger band of optimistic junior explorers willing to tackle programs in which more cautious major companies have declined to take part.

 

For Rob Annells the relationship with Lakes Oil began one day early in 1984 when sifting through a pile of papers concerning old shell companies given to him by Woodside Petroleum Chairman, Geoff Donaldson. Woodside had been cleaning out its 'bottom drawer' following a decision to sell off a number of former acquisitions which had out lived their usefulness as subsidiaries to the company. At the time Donaldson had an office within the Melbourne headquarters of the sharebroking frim May & Mellor and he offered first refusal on the shell companies to Annells - one of the firm's partners.  

Looking through the paperwork, Annells quickly saw that a file marked Lakes Oil Limited contained the most appeal. Woodside still had 89.5 per cent of the company and there were only about 300 other shareholders on the books holding 1 shares which, with the metrification of Australia's currency, had nominally taken a value of $2 each. Glancing at the early documents he saw that Lakes had been formed back in 1946 and he guessed many of these shareholders would now be un-contactable.

`To cut a long story short, I decided to organise a takeover offer, bidding 0.6 cents a share and using a May & Mellor company called Venture Petroleum Pty Ltd as a vehicle for the bid,' he says. `Woodside agreed. As expected there were no other acceptances and, on 5 October 1984, Venture Petroleum became the controlling interest holder in Lakes Oil Ltd.'

During the following 12 months Annells immersed himself in the business of restructuring the company so that he could apply for its re-admission to the official listing of the Australian Stock Exchange. In addition, he took time to delve into the minutes of the original board meetings to gain a feel for the company's early management.

`The old records, contained within several foolscap-sized ledgers books of the period, were handwritten with fountain pen in a clear, painstaking style,' he recalls. `During the first years Board meetings were held once a month and from a historical point of view the minutes make fascinating reading. They present a vivid picture of the days immediately after World War II when Australia was struggling to set up petroleum production of its own instead of relying on overseas imports of crude and product. The biggest surprise for me though was that Lakes Oil in 1946 was working at the frontiers of technology and, years ahead of its time, the company actually helped pioneer the art of horizontal drilling.'

Taking its name from the Lakes district of Gippsland in south eastern Victoria, Lakes Oil plunged straight into a project to produce oil from shallow glauconite sands at the town of Lakes Entrance via a series of wells drilled from the base of a specially dug mine shaft.

(View of Lakes Entrance Oil Shaft Area and Tanks, Lakes Bunga No.1 Well Site, Lakes Entrance)

Unprecedented in concept, the task involved completing a work chamber and drilling horizontal wells for about 1200m within a reservoir sand that was only about a metre thick. The so called `Lakes Entrance Shaft Project' had actually begun five years earlier as part of the Federal Government's attempts to ease the problem of an increasingly uncertain supply line of oil shipments from overseas during World War II. Gippsland had been an intermittent and minor producer of crude oil (albeit a viscous heavy variety) since the 1920s and it was the logical location for the emergency project.

In 1941 Government Geological Advisor, Harold Raggatt, called in Leo Ranney and Charles Fairbank - two American engineers who had experimented with a horizontal drilling technique for enhanced recovery in shallow oil fields in the US. After visiting Lakes Entrance, they recommended sinking a vertical concrete-lined shaft about 3 m in diameter and 400m deep to reach the known oil rich glauconite sands. The shaft base could then be widened to serve as a chamber from which to drill the horizontal wells and as an area to collect the crude hopefully flowing from them, before hauling it to the surface in buckets.

Accepting this advice the Federal and Victorian Governments pooled resources, used the National Security Regulations to take over an oil lease at Lakes Entrance held by the private Austral Oil Drilling Syndicate and began work. However shaft sinking was slow and it was June 1945 before the miners reached the top of the glauconite reservoir. At that time new estimates of potential oil recovery were made and the Governments found to their embarrassment that the likely oil production would be worth less than half the funds already spent on the project. What's more, further sums would be needed for drilling before any oil could be brought on stream. Canberra called an immediate halt to operations, aided it its decision by the fact that the war had ended and a resumption of regular fuel supply lines to Australia was in sight. The oil lease was handed back to Austral on 15 May 1946 along with management responsibility for the unfinished shaft.

Most observers expected Austral to simply fill the hole in and get on with some conventional oil exploration. But they had not reckoned on the tenacity and enthusiasm of one of the syndicate members - a consulting engineer named Charles Demaine. He reasoned that as the Government had released the virtually completed shaft for a new operator to run the drilling program were very favourable. On 6 May 1946, a week before the official Government handover, Austral signed an agreement for the sale of all its shaft equipment and assets for cash and shares in the newly formed Melbourne-based Lakes Oil Limited. After convincing the new company's principals of the project's potential, Charles Demaine backed his judgement by joining the Lakes Board as Managing Director.

He found himself among himself among prominent personalities in Melbourne business circles of the immediate post war era. Chairman of Lakes was Major General (later Sir Clive) Steele, a qualified surveyor and engineer. Fellow directors included C.N. (Cecil) McKay, General Manager and director of agricultural company H V McKay-Massey Harris Pty Ltd; Colonel G I Stevenson, Chairman of Austral Oil Drilling Syndicate; and W J F Humphris.

Taking charge of the day-to-day running of the shaft project, Demaine planned to investigate the ground beneath the glauconite reservoir with a vertical pilot hole and double the original number of Ranney's horizontal wells from 24 to 48. Lakes retained the workforce originally under Government employ and by September 1947 the miners had completed the shaft, widened the base to about 6m in diameter and concreted the floor in readiness for the drilling program. In the boardroom Demaine cautioned that care should be taken when drilling into the glauconite and gas might be present and the company was dealing with an unknown quantity. At the time, however, he had no way of knowing the extent of difficulties and frustrations that lay ahead.

Indeed the future looked rosy because the company had already received requests from oil refiners and a paint company for a few sample barrels of crude to determine its manufacturing potential. Late in 1947 Lakes was able to comply when nine test holes were drilled at shallow angles a short distance into the glauconite zone and allowed to flow oil under gravity into the collection drums in the shaft.

  (Cable Tool Rig originally used to drill several of the Lakes Entrance oil field wells, 'Old Well Head' believed to have been drilled in the 1930's)

Yet, even at that early stage, there were troubling signs. Water inflow as high and the average oil yield was only half that required for a commercial operation. What's more, drilling was agonisingly slow and the hot, humid working conditions below ground did nothing to aid the miners' efforts. Management rationalised the difficulties by pointing out that horizontal drilling was a novel technique with few precedents around the world, let alone in Australia, and therefore bound to have teething problems.

Demaine and his team persevered, slowly drilling further and further from the shaft and tapping a zone of slightly higher production near the base of the glauconite layer. By the end of 1948 production had struggled up to 1200 litres (a mere 7.5 barrels) of net oil a day. Water cut remained very high. Nevertheless oil was being sold (some to Melbourne publishers David Syme and Co. for making printers ink) and Lakes Oil optimistically began construction of concrete storage tanks at the surface and discussed plans for cottage accommodation at the field.

However the illusion could not last. By 1950 it had become clear that the company was losing irretrievable ground in its battle with water inflow, difficulties with drilling and the general lack of parts and equipment in Australia during these immediate post war years. As a result, expenditure was running well ahead of revenue.

After an abortive attempt to win a financial grant for oil production from the Federal Government during 1951, Lakes had little option but to cease operations in the shaft at the end of the year. All wells were sealed off and the equipment and buildings auctioned. At the end of the day the total tally of oil won came to just under 5000 barrels of poor quality crude valued at no more than 10,000 - a dismal, if not surprising, end to a bold frontier project.

Despite the disappointment, Lakes Oil management had no intention of quitting the oil patch and, at the beginning of 1952, the company looked around for a new challenge. In 1949 it had financed a geo-physical survey around Lakes Entrance - the first such program ever conducted in the region - and results indicated the presence of a number of structures with oil-bearing potential within the company's leases. Placing these data on the table Lakes began discussions with a number of other explorers in an effort to attract farm-in partners.

Unfortunately it did so without Charles Demaine who died suddenly in June 1952, the strain and frustration of the previous four years having taken a heavy toll on his health. In his place the Lakes Oil Board retained geologist Professor Eric Rudd from the University of Adelaide on an `occasional' basis to review its operations.

In 1954 Lakes succeeded in enticing the Frome-Broken Hill Company (a joint venture of Esso, Mobil, BP and the Zinc Corporation originally set up in 1947 to explore the Frome Embayment in South Australia/western New South Wales) to the negotiating table. The resultant deal, set up in 1954 just as the Rough Range oil discovery in Western Australia roused the nation to the real possibility of commercial indigenous production, call for the formation of a joint operating company to be known as Frome-Lakes Proprietary Limited. Frome-Broken Hill took a majority 52 per cent share as well as operatorship and immediately began an exploration program near the Ninety Mile Beach in Gippsland, west of Lakes Entrance.

At the same time Lakes Oil used the occasion for corporate consolidation and, with shareholder approval, merged the company with its largest shareholder - the Austral Oil Drilling Syndicate. Once this had been achieved, Lakes directors decided to take further advantage of the Rough Range-inspired oil optimism in Australia by applying to list the company's shares on the Stock Exchange for the first time. This application was granted on 19 April 1955, nine years after the company's formation.

Unfortunately shareholders found once again that boardroom optimism did not necessarily translate to success in the field. Frome-Lakes' first well Darriman 1, drilled to 1442m without finding any sign of oil or gas. A succession of shallow follow-up wells drilled during 1956 and 1957 were equally dry and in March 1958 Frome-Broken Hill gave notice of its intention to quit the permits and wind up the Frome-Lakes joint venture altogether.

Although this move left Lakes in a perilous financial state, the company decided to make one more exploration attempt. Searching the coffers for every penny, directors found sufficient funds to finance a well without outside help provided it did not go deeper than 500m. In the event depth did not matter. At the end of January 1959 the East End Bore near Lake Tyers, east of Lakes Entrance, drilled into bedrock at 375m without a hint of hydrocarbons.

With its funds exhausted Lakes Oil displayed little resistance to a takeover proposal which quickly followed from fellow Australian explorer Woodside (Lakes Entrance) Oil NL. Woodside Chairman, Geoff Donaldson, explained at the time that his company was conducting negotiations with US independent Phillips Petroleum and he wanted a broad and contiguous spread of exploration acreage under on company name to aid an overall evaluation of the Gippsland region. Thus the end of the 1950s marked the close of a bold pioneering era as Lakes Oil shares were delisted and the company became a wholly owned subsidiary of Woodside...

`And that's how it was presented to me 24 years later.' Rob Annells points to the ledgers on a shelf in his office. `It's an intriguing story,' he says. `But, more to the point in the fast moving 1980s, the shell contained no complications and we were able to restructure the company by way of a share split and a 20:1 non renounceable share issue at par. Lakes Oil Ltd was then relisted on the Stock Exchange on 5 December 1985.'

Annells and his co-directores - John May, Chairman of May & Mellor; geologist, John Linley; and solicitor, James Syme - set off into the field with an enthusiasm to match that of their predecessors. They adopted what Annells describes as a low over-head, `money-in-the- ground' approach that included a vigorous exploration program and an association with companies of proven experience and success.

The effort began in several onshore Australian permits within the Cooper/Eromanga, Perth and Otway Basins close to existing infrastructure. But Annells was also keen for the company to try its luck in overseas plays, particularly those onshore USA. In common with other Australian explorers during the 1980s he saw unusually good opportunities for a junior explorer to pick up high potential acreage in the US at lower premiums than any available in Australia. In addition, the US oil patch was favoured with a much more developed infrastructure and higher net returns on discoveries.

With this in mid Lakes began an aggressive approach, joining programs in California, Kansas and North Dakota, servicing them via a wholly owned subsidiary - Lakes Oil Inc. - set up in Denver, Colorado. By mid 1987 the company had built up a modest oil and gas production from its US operations and a satisfying drilling success record of around 50 per cent.

To this point the re-vitalised Lakes had attracted little attention among Australian investors. However when, in August 1987, the company popped up with a 50 per cent interest in a small, but strategic, permit in the highly fancied southern highlands of Papua New Guinea, the industry suddenly took notice. The permit, about 50km east of the early 1980s Iagifu and Hedinia oil discoveries, lay in undulating open terrain rather than the dense precipitous jungle of adjoining leases. It was also connected by the Highlands Highway to Lae on the coast which meant that a truck-mounted rig could be used rather than the expensive heli-rig operations considered the norm in Papua New Guinea. Lakes immediately began a work program which included two years of geological mapping, seismic work and slim hole core drilling. A full exploratin well was not required until the third year of tenure.

As it turned out this was a high point of the 1980s. In common with a number of companies, Lakes was suddenly swept from financial security by the stock market crash of late 1987 and the long-running general depression of the Australian economy which followed. Cash in had saved an immediate crisis, but with its work programs spread over three countries, Lakes began to struggle to meet commitments.

The first public sign of problems came when in April 1990 the Papua New Guinea Government suddenly cancelled the promising highlands permit, citing non compliance with the set work program. Annells protested that there were still six months to run on the lease tenure and that negotiations were in hand for a farm-in partner to drill the obligatory exploration well. His protests fell on deaf ears.

Back in Australia financial difficulties closed in rapidly. The low point came early in 1991 when Chairman Annells had to reach into his own pocket to provide the company with a personal loan. Clearly something had to give - a change of pace and emphasis was needed if the company was to survive.

In response to this crisis Lakes decided to sell out of its US operations and bring the proceeds home. Its strategy for the 1990s, as Annells explains, became on of refocusing the significant part of its interests and future efforts within Australia.

`We decided that the lynchpin of this new strategy would be the Otway Basin straddling the South Australia/Victoria border. It wasn't a snap choice because we'd been working away at the onshore Otway since reviving the company in 1985. Our results, although not commercially successful, convinced us the region had the best untapped geological and market potential of any petroleum province in Australia.

`We still think so,' he adds a little ruefully, bearing in mind that all the recent significant Otway discoveries have been found in the permits of others.

Lakes' lack of commercial success in the region so far is not for want of trying. Displaying all the hallmarks of a frontier explorer, the company continues to tread where others of larger size hesitate. A prime example is the momentous decision in 1992 to participate offshore.

`We took up a 10 per cent interest in the BHP Petroleum-operated Troas 1 wildcat located in 100m of water off the South Australian coast of Beachport,' Annells recalls. `It was the first well in the region for 18 years and the prospect had been delineated using modern seismic. It looked pretty good - but it was an expensive throw of the dice for us. An we had to come up with the cash up front - about $800,000 - before the well was drilled.'

Lakes announced a share issue aimed at raising $3.3 million for Troas and its other programs, setting out the details in a prospectus during July 1992. But, in the depressed economic climate in 1992, acceptances were slow in coming and, with only a few days before deadline, the company was still well short of even the Troas target sum.

`Things got pretty hectic that last week,' Annells says. `We called on every contact we could think of, continuing after business hours on the last day - a Friday - to cover the cheque to be drawn after the weekend. We made it by the skin of our teeth.'

Unfortunately the effort was in vain. Troas did find gas indications, but the sands were tight and BHPP decided not to go to the expense of a test program. Shortly afterwards it withdrew from the permit altogether.

However Lakes remained undaunted. Having obtained shareholder approval in 1994 to change the company's status from a `limited' to a `no liability' company, it lined up offshore again in mid 1995 to participate with new operator Sagasco Resources in nearby prospect, Sophia Jane. The structural style of this feature was similar to Troas, but extra seismic work indicated that target reservoirs were likely to have greater permeability. There was also the possibility of an oil leg. Although Lakes' share of the permit had risen to 13 per cent with the withdrawal of BHPP, a better financial climate made fund raising less problematic.

Drilling at Sophia Jane began with high hopes and a flurry of media hype in June 1995. But, within a month hopes dashed when this potential `company-making' well was declared dry. In his Melbourne office a glum Rob Annells expressed his deep disappointment, particularly as the well had encountered the target sands with, as forecast, excellent reservoir characteristics. The Otway Basin continued to tease and frustrate, he said at the time, and future plans offshore would be held over till the results of a post-mortem were known. Nevertheless Annells has no reservations about Lakes continuing the search onshore.

`The possibility of a gas pipeline coming through the Otway region from Victoria to Adelaide, sourced from new finds like Minerva off the Victorian coast, provides an added incentive for third party producers. Even a small discovery along such a pipeline route could become economic,' he says.

However, he is quick to add that Lakes is not about to put all its eggs in the one basket. The company has considered, and will continue to look at, other medium risk opportunities around Australia and overseas as they arise. In the last two years these have included a return to Papua New Guinea and a diversification into Australian gold prospecting.

But perhaps the most intriguing new venture as the company enters it fifty first year is the regaining of an exploration licence over the Lakes Entrance oilfield in the onshore Gippsland Basin - scene of the company's entry into the petroleum industry back in 1946. Aware of this apt symmetry Annells, nevertheless, has more than sentiment on his mind. The limited technology of half a century ago, although innovative and ahead of its time, had been unable to provide an economic field development. But, with today's modern enhanced recovery techniques, a commercial operation may be possible.

(Sampling crude oil Lakes Entrance, November 1995)

 

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