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Shale prospectors in Australia’s vast Outback are homing in on oil as the lucrative prize that is easier and cheaper to exploit than gas.KACPER PEMPEL/Reuters

Shale prospectors in Australia's vast Outback are homing in on oil as the lucrative prize that is easier and cheaper to exploit than gas.

Initial hopes had been to replicate a U.S. shale gas boom, but the economics of targeting oil rather than gas derived from shale formations, once considered a mere by-product, look increasingly compelling in Australia.

Natural gas, with no large domestic customer base, needs costly pipelines and plants to chill the fuel for export. In contrast, oil can be trucked to rail lines and ports, so is potentially more immediately profitable, and large finds could reverse more than a decade of declining Australian output.

Australia also already has sufficient conventional and coal seam gas reserves to feed enough liquefied natural gas projects to make it the biggest LNG exporter by the end of the decade, so a U.S. shale gas boom that has freed up abundant, previously unrecoverable reserves and brought prices down 40 per cent since November, 2008, looks a less attractive development model.

"Oil is easy," said Peter Bond, the managing director of Linc Energy, which recently said it could be sitting on resources that could rival the Bakken shale, one of the main drivers of the United States' surge in oil production.

"It's $5 to $6 per barrel to get it to a road train from where you are to a port, with a $100 plus price per barrel of oil, that's not hard to do."

Australia's potential as a big shale gas or shale oil producer is not yet clear, with large-scale commercial production up to 10 years away by the industry's own estimates. That has not stopped some optimistic claims of the potential from emerging, with Linc Energy saying its shale acreage may hold 233 billion barrels of oil equivalent, almost as much as Saudi Arabia.

The company estimates, however, only a fraction of that – about 3.5 billion barrels – is likely to be recoverable.

Still, it's hard for developers like Linc Energy to ignore that U.S. shale discoveries may help lift oil production there to its highest level in 26 years in 2014.

New Standard Energy and Buru Energy have both said they are looking for oil rather than gas in the Canning Basin, a desert area in northwestern Australia with no energy infrastructure.

Late in 2012, New Standard abandoned the first well drilled at its Goldwyer project in the Canning Basin after finding natural gas without the liquids that would make development profitable.

"If you've got liquids associated with your gas, the economics of developing that field are significantly enhanced. The gas becomes more of a byproduct than a mainstream revenue driver," Sam Willis, director of New Standard, said in a telephone interview.

Oil output in Australia was 484,000 barrels per day (bpd) in 2011, down 36 per cent from 2001, according to data from the BP Statistical Review of World Energy. The country is a net importer and its output makes up just 0.5 per cent of the world's total oil production.

While oil is the focus for firms exploring in the furthest reaches of the Outback, those exploring shale reserves near existing gas pipelines and export infrastructure have more reason to be hopeful about gas.

Australia's government says shale could double the country's gas reserves and the sector has attracted the interest of some of the world's top oil companies. Chevron Corp. was the latest to jump in with a $349-million investment in February.

Others that have farmed into Australian shale plays include ConocoPhillips, Total, Japan's Mitsubishi Corp. and India's Bharat Petroleum. Australia's richest person, iron ore magnate Gina Rinehart, has also entered the business, buying into Lakes Oil early this year.

Big energy firms are getting involved now to avoid the risk of having to pay a lot more for acreage should reserves prove up and production begin in earnest.

Australia is already well on its way to becoming the world's top LNG exporter, with $190-billion of projects under development. Those projects rely on gas from conventional fields or from coal beds, rather than from shale.

So many plants being built at the same time has led to billions of dollars of cost overruns, so for now developers have little appetite for more export projects – but some would welcome a top-up in gas supplies from nearby shale fields.

"In the current environment, where you have all the projects being built that are getting hamstrung by their costs, it's not a real hotbed of development for further export projects to take shale out," said Noelle Leonard, an analyst with FACTSGlobal Energy in Perth.

Australia's relatively small population means there is a limited domestic appetite for more gas, so producers need access to the export market to make gas development worthwhile.

"If there wasn't the view of an export market going forward, we would not be drilling these wells," said James Baulderstone, Santos' vice-president of Eastern Australia, after the firm brought its first commercial shale gas online.

Santos plans to feed its shale gas into nearby pipelines linked to its LNG export plant on the east coast which is due to start shipments in 2015. The shale gas will likely help compensate for Santos' shortage of coal seam gas to fuel its LNG plant in eastern Australia.

Some other shale gas explorers, such as Beach Energy , are also counting on shale as a replacement for the disappointing performance of coal seam gas.

"Coal seam gas has not quite lived up to expectations, so everyone is watching this shale unconventional play quite closely," said Chris Jamieson, general manager of investor relations at Beach Energy in Adelaide.