It’s been touted in the Australian press as a potential AUD20 trillion boon to the domestic economy and the solution to energy problems Down Under.

The dimensions of the find have headline writers in the Great White North contemplating the diminution of the Canadian oil sands in the global crude reserve scheme.

It’s yet another factor for Organization of Petroleum Exporting Countries (OPEC) to consider, in addition to recent developments in the US, as the cartel finds its way in a rapidly evolving energy environment.

The share price of the company that owns 100 percent of drilling rights has gone parabolic, rising from AUD0.54 on the Australian Securities Exchange (ASX) on Nov. 1, 2012, to a close of AUD2.85 on March 14, 2013.

Excitement around Linc Energy Ltd (ASX: LNC, OTC: LNCYF, ADR: LNCGY) began to build in November for another reason: The company was reported to be in talks with Russian billionaire Roman Abramovich about a possible combination of efforts on Linc’s coal-to-liquids program.

This news obscured an Oct. 31, 2012, Australian Financial Review report that Linc had engaged Barclays Plc (London: BARC, NYSE: BCS) to help it “sell…shale gas assets.”

Linc didn’t confirm until Dec. 20 that it was indeed seeking potential partners for development of its petroleum assets in the Arckaringa Basin, which, it noted then, had “excellent resource play potential” based on internal technical analysis. This announcement provided more momentum for Linc’s share price.

The Abramovich story drove the stock past AUD1. The Barclays confirmation pushed it near AUD2.

It sits where it does now–approaching AUD3–because of what happened on Jan. 23, 2013: Management released the results of an independent petroleum engineering report that confirmed Linc’s Arckaringa resource compares favorably in terms of “total organic carbon (TOC) levels, permeability, porosity and thickness” to prolific US unconventional petroleum plays, including the Bakken Shale and the Eagle Ford Shale.

Linc Energy Managing Director Peter Bond has distanced his company from the “AUD20 trillion” figure, noting that this estimate was probably made not by an expert but by a reporter who probably simply multiplied the number of barrels of oil equivalent potentially available in the Arckaringa by the current per-barrel price of oil. That’s not how the industry establishes the potential value of a resource.

Mr. Bond has stated, however, that “if it comes in the way the reports are suggesting it could well and truly bring Australia back to (oil) self-sufficiency.”

It could also put Australia among the top ranks of countries in terms of oil reserves.

Australia’s oil production declined by 14.5 percent to 484,000 barrels a day, according to BP Plc (London: BP, NYSE: BP), the lowest level since 1983 due to the depletion of conventional fields. As of 2011 the US Energy Information Administration (EIA) pegged total reserves Down Under 3.3 billion barrels of oil on a proved basis.

If Linc Energy’s high-end figures are sound, Australia is second only to Saudi Arabia in terms of reserves. Even if the less-awesome estimate proves correct, it’s a top 10 oil country.

Of course, Linc still must prove the quality and economic viability of the resource.

The Discovery

According to its statement released Jan. 23, 2013, the independent petroleum engineering report it commissioned determined that “the Stuart Range formation and the underlying Boorthanna and Pre-Permian formations” in Linc’s Arckaringa play “are rich in oil and gas prone kerogen that may form the basis of a new liquids-rich shale play.”

Source: Linc Energy Ltd

Analysis by petroleum consultants DeGolyer and MacNaughton (D&M) and Gustavson found that the “unrisked prospective resources for unconventional reservoirs in the Arckaringa Basin have been estimated by Gustavson to be 233 billion barrels of oil equivalent (233 BBOE) and by D&M to be 103 billion barrels oil equivalent (103 BBOE).”

The independent experts approached the evaluation of the unconventional resources in the three formations within the Arckaringa Basin in different ways. Gustavson considered the data gathered to date and assigned the prospective resources in all three formations to the “oil generation window” of thermal maturity but acknowledged the potential for gas in the deeper parts of the basin.

D&M assigned gas-liquids ratios to the various depth intervals in each formation, resulting in estimation of prospective resources of oil in the shallower depths and gas in the greater depths.

D&M was also commissioned to provide a risked estimate of prospective resources by applying a probability of geologic success. Gustavson also identified the potential for conventional hydrocarbon resources.

The Gustavson report includes prospective resource estimates for a portion of the deeper parts of the Arckaringa basin. These estimates suggest the balance of the basin may also include conventional deposits.

Linc’s licenses cover the majority of the Arckaringa Basin, amounting to more than 16 million contiguous acres. Barclays is advising the company on “strategic options,” including the possibility of bringing in “an experienced shale operator” with know-how and deep pockets to form a joint venture.

Comparisons to the Bakken and the Eagle Ford will certainly encourage prospective joint-venture partners, as Australia is known to be a difficult place for energy companies to operate.

Australia is a unique market due simply to its distance from the rest of the world. There are high barriers to entry because mobilization costs are significant, the regulatory system is as onerous as you would expect in a developed country and normal costs of doing business, such as wages, are high relative to other potential venues such as Africa.

In another, crucial way is Australia different from an energy exploration and development perspective: unique geology.

North American shale production is from marine basins, while Australia’s sedimentary basins are terrestrial, with source rocks primarily in coal and lacustrine shales.

The general physical characteristics of rocks in the Bakken are sandstone and carbonate, in the Eagle Ford bituminous shale. Linc’s Arckaringa acreage is characterized by marine shale and siltstones.

Kerogen types are consistent across all three, however, and the petroleum engineers’ conclusion that permeability and porosity suggest that the differences between lacustrine–or lake-based–marine formations won’t be significant hurdles given the potential of the resource.

Other factors that endure, however, include Australia’s vast empty spaces, small and aging onshore rig fleet and lack of fracking services. And on a notoriously hot and dry continent, the universal issue of water is going to be even more taxing.

And there are factors not unique to Australia that will determine whether Linc’s Arckaringa shale oil plays build wealth for investors.

The abundance of new oil reserves apparently coming to market would theoretically work to bring down the floor price, or the price of extraction plus some profit and an insurance margin as well as transportation costs relative to the physical location of the various consumer markets.

That’s to say nothing of potential additional costs imposed by governments, through royalty regimes or regulatory burdens.

The oil from the Eagle Ford and similar fields of tightly packed rock can be extracted only by using hydraulic fracturing, a method that uses a high-pressure mix of water, sand and chemicals to blast through the rocks to release the oil inside.

The technique, also called fracking, has been widely used in the last decade to unlock vast new fields of natural gas, but drillers only recently figured out how to release large quantities of oil, which flows less easily through rock than gas, primarily through the introduction of horizontal drilling, which exposes more of the well to the shale.

There are environmental concerns with the process, most notably the fact that the fluid used in fracturing contains toxic chemicals. There is little evidence so far that subterranean fracturing can directly contaminate groundwater, and this risk may never materialize. The layer of shale that is fractured is usually thousands of feet below the water table, with a buffer of dense rock or clay in between.

But there are other ways in which fracturing might contaminate groundwater, including surface spills of fracturing fluid, improper handling of waste, and the migration of natural gas into water wells. Some of these risks are familiar from decades of conventional oil and gas production, while others are new.

Production from oil shale can be boosted quickly when enough capital is invested, which is why Linc is seeking companies with both experience and deep pockets to participate in and fund development.

But here’s a development where Australia’s location seems to work in its favor: In December 2012, for the first time ever, China surpassed the US as the world’s leading oil importer. Part of this has to do with rising domestic energy production in the US.

The other part highlights the advantages of Australia’s proximity to the Middle Kingdom and the possibility that Arckaringa can satisfy domestic requirements and also fuel the increasingly voracious energy appetite of the second-biggest economy in the world.

Oil prices have remained at high levels, suggesting that the depletion of reserves such as those found in Saudi Arabia has brought an end to “easy” oil and the onset of an era where crude has reached a new normal plateau. The Canadian oil sands and the various shale oil projects in process around the world are more expensive, but their output is increasingly important in a world that’s still energy-hungry.

The technology for shale oil extraction has also improved significantly in recent years, with the potential to bring costs of production down even further.

Nevertheless, the opportunity must be long-term before companies will commit financial, capital and human resources. Ultimately it will come down to economics.

The Producers

Linc Energy management has said it’s received “about 70 inquiries” regarding potential partnerships to develop its massive shale oil resource in South Australia. It has not named names, though we can make some educated guesses about who is likely to be involved given Linc’s main criteria, shale oil experience and know-how and deep pockets.

AE Portfolio Aggressive Holding BHP Billiton Ltd (ASX: BHP, NYSE: BHP) made a USD20 billion investment in onshore US shale oil and gas in 2011. The company’s first move, the USD4.75 billion purchase of the Fayetteville dry gas assets in Arkansas, effectively cost then-CEO Marius Kloppers and BHP’s head of petroleum operations Michael Yeager their bonuses after US gas prices plummeted.

Mr. Kloppers recently retired due to this and other miscalculations.

BHP is now focused on the oil potential of the Eagle Ford Shale assets acquired with the USD15 billion purchase of Petrohawk Energy Corp. But it has reined in capital expenditures in recent and is also planning to sell non-core assets.

According to The Australian, CFO Graham Kerr confirmed in closed briefings to sell-side analysts that BHP’s divestment program was focusing on a minimum of 10 businesses. The company recently announced the potential sale of its Gregory-Crinum coal operation in Queensland as well as its 80 percent stake in the Ekati diamond mine in Canada. BHP’s assets sales could raise over USD25 billion.

BHP posted a 57.8 percent decline in net profit after tax to USD4.238 billion for the first half of fiscal 2013, as revenue sagged 14.1 percent to USD32.204 billion.

Net profit excluding items fell 43.4 percent to USD5.683 billion. Underlying earnings before interest and tax (EBIT) for the half sank 38.3 percent to USD9.782 billion. Net operating cash flow was off by 48 percent to USD6.4 billion. Management had previously announced a USD0.57 per share interim dividend, which compares to USD0.55 paid a year ago.

Management ascribed the profit decline to lower prices for iron ore and other commodities in 2012.

Management, however, presented an upbeat forecast, noting the strong operating performance of its various commodity segments. “In summary,” BHP’s presentation noted, “the global economy is expected to strengthen over the next 12 months, providing support for commodities demand and pricing.” Management also pointed to a “robust” longer-term outlook.

BHP’s low-cost, upstream strategy and broad diversification positions it well for a turnaround in the near-term fortunes of the global economy and for a longer-term return to trend rates of growth.

Management remains optimistic about new Chinese leadership and its commitment to policies that support stable growth and also noted that the US was benefiting from relatively low energy costs as it continues to crawl out from under the mess of 2007-09. Also of note is the fact that euro zone markets had stabilized following the European Central Bank’s commitment to provide additional support for troubled peripheral nations.

BHP did, however, caution that despite current high iron ore prices the addition of low-cost supply in many markets and a maturity in China’s infrastructure-led growth would eventually dampen pricing for iron ore and metallurgical coal.

BHP remains a buy under USD40, or about AUD41, on the Australian Securities Exchange (ASX).

BHP also trades as an American Depositary Receipt (ADR) on the New York Stock Exchange (NYSE). BHP’s ADR, which is worth two ordinary, ASX-listed shares, is a buy under USD80.

Woodside Petroleum Ltd (ASX: WPL, OTC: WOPEF, ADR: WOPEY), Australia’s second-biggest oil producer, has significant cash on its balance sheet–AUD2.4 billion as of Dec. 31, 2012–but its focus of late has been on natural gas, LNG specifically, with eyes also on expanding its business beyond Australia. Oil exploration is concentrated on offshore assets.

It’s a remote possibility. But given the modest figures Linc Energy is discussing for an initial piece of its Arckaringa assets–as much as AUD300 million–Woodside can’t be completely written out of the discussion.

Driven by an impressive start-up for its Pluto LNG project, Woodside reported 2012 underlying net profit surged by 25 percent to USD2.06 billion, while statutory net profit after tax (NPAT) was up 98 percent to USD2.98 billion.

Overall production for 2012 was up by 31 percent to 84.9 million barrels of oil equivalent, while annual sales climbed 31 percent and revenue ticked up by 30 percent to USD6.22 billion.

Management boosted the final dividend in respect of 2012 by 18.2 percent. Woodside Petroleum is a buy under USD42 on the ASX using the symbol WPL and on the US over-the-counter (OTC) market using the symbol WOPEF.

Woodside also trades as an American Depositary Receipt (ADR) on the US OTC market under the symbol WOPEY. Woodside’s ADR is also a buy under USD42.

Santos Ltd (ASX: STO, OTC: STOSF, ADR: SSLTY), the third-biggest oil producer Down Under, effectively led the Australian shale charge by tapping into large gas flows at its Moomba Big Lake tenement in the Cooper Basin, which is about 150 miles east of Linc’s Arckaringa assets.

Santos holds a 14 percent stake in Tamboran Resources, which owns permits or has applied for tenements spanning more than 27 million acres that it believes contain unconventional oil and natural gas. These blocks are located in areas including the Ngalia, Pedirka, Beetaloo and McArthur shale basins of Australia, Botswana’s Karoo Basin and Ireland’s Lough-Allen Basin.

Santos will be the company’s joint venture partner at the Beetaloo and McArthur basins. In December 2012 Santos made a three-year commitment that could lead to a 75 percent interest in the Beetaloo and McArthur acreage in return for more than USD70 million in exploration spending. Santos also has the right to increase its direct equity stake in Tamboran to 20 percent.

Santos reported a 34 percent rise in 2012 net profit to AUD606 million, as production grew by 10 percent to 52.1 million barrels of oil equivalent, paced by a 33 percent boost in oil output.

Santos has more than AUD3 billion in cash and ample liquidity to fund growth projects, though like Woodside its efforts seem to be oriented toward LNG, specifically the Gladstone LNG and PNG LNG projects.

Santos–which held its dividend rate steady for 2012–is a buy under USD13.50 on the ASX using the symbol STO and on the US OTC market using the symbol STOSF under USD13.50.

Santo also trades as an ADR in the US OTC market under the symbol SSLTY. Santos’ ADR is also a buy under USD13.50.

Major oil and gas companies outside the AE How They Rate coverage universe that have shale oil experience and deep pockets include Chevron Corp (NYSE: CVX), ConocoPhillips (NYSE: COP), Norway’s state-owned energy company Statoil ASA (Norway: STO, NYSE: STL) and France’s Total SA (France: FP, NYSE: TOT).

In Service

Perhaps the best way to position your portfolio to benefit from Australia’s potential shale oil boom is to have exposure to the service providers whose cash flow will be based on contracts that won’t necessarily depend on the movements of crude oil prices.

AE Portfolio Aggressive Holding WorleyParsons Ltd (ASX: WOR, OTC: WYGPF, ADR: WYGPY) is extremely active in unconventional oil and gas production, primarily through the Canadian oil sands but also in the US shale gas sector.

It has existing relationships with Super Oils ExxonMobil Corp (NYSE: XOM) and Chevron Corp to provide engineering services for their respective shale gas efforts. The bigger players tend to use bigger companies such as WorleyParsons to provide services in shale gas and shale oil.

These relationships suggest that, should one of the majors partner with Linc, WorleyParsons will be involved.

Apart from the present Arckaringa hysteria, WorleyParsons is establishing its own expertise in shale oil. The engineering consultant was recently contracted by Xtract Energy Plc (London: XTR, OTC: XEGYF) to provide a technical study on the various technologies being used or developed around the world to extract oil from shale.

Xtract is focused on the exploitation of its Julia Creek tenements in Queensland and other oil shale resources.

Expanding in unconventional energy sources is a key part of WorleyParsons’ growth strategy. Although its minerals, metals and chemicals division was its fastest-growing business in fiscal 2012, WorleyParson’s biggest division is hydrocarbons. And customers are increasing spending on oil and gas.

For the first half of fiscal 2013 aggregated revenue rose 14 percent to AUD3.879 billion. Earnings before interest and taxation (EBIT) was up 2 percent to AUD252 million. Net profit after tax (NPAT) was up 2 percent as well, to AUD155 million. Operating cash flow, meanwhile, surged 95 percent to AUD125 million.

Hydrocarbons was the primary driver of EBIT growth during the period. The segment generated sales of AUD2.672 billion, up 14 percent, and accounted for 69 percent of the company’s overall revenue. Hydrocarbons EBIT was up 11.9 percent to AUD301 million.

Management noted a “high level” of unconventional oil and gas development activity around the world.

Management boosted the interim payout from the AUD0.40 announced last Feb. 29–which itself represented an 11.1 percent increase from the fiscal 2011 interim rate–to AUD0.415. This 3.8 percent increase follows the 2 percent increase–from AUD0.50 per share to AUD0.51–announced last July along with fiscal 2012 full-year results.

WorleyParsons trades on the ASX under the symbol WOR and on the US OTC market under the symbol WYGPF.  It also trades on the US OTC market as an ADR under the symbol WYGPY. The ADR is worth one ordinary, ASX-listed share.

WorleyParsons is a buy on the ASX using the symbol WOR and on the US OTC market using the symbol WYGPF under USD30. WorleyParsons’ ADR is also a buy under USD30.

The Cardno ENTRIX unit of Cardno Ltd (ASX: CDD, OTC: COLDF) is quickly becoming the environmental impact statement (EIS) contractor of choice for industry and government in the US. Forces opposed to oil and gas extraction cry foul at what is in their eyes too cozy a relationship fraught with conflicts of interest.

The facts are, however, that very few companies possess the type of expertise required to conduct such studies and that industry pays the bill for studies rather than taxpayers. Yes, some of Cardno ENTRIX’ checks are signed by oil and gas companies. And, yes, its long-term viability depends on it delivering accurate, reliable information.

Like WorleyParsons Cardno ENTRIX has existing relationships with the world’s major oil and gas producers, including Exxon Mobil, and it has experience with shale oil.

In October 2012 the environmental consulting firm released a report commissioned by Plains Exploration & Production Corp (NYSE: PXP) in connection with the latter’s Inglewood oil field, the largest urban oil field in the US. The report, “Hydraulic Fracturing Study: PXP Inglewood Oil Field,” concluded that fracking could be done safely in the area and seismicity could be mitigated.

Cardno ENTRIX, incidentally, had previously been hired by TransCanada Corp (TSX: TRP, NYSE: TRP), which was acting according to US State Dept protocol, to do the environmental impact statement (EIS) for the Keystone XL Pipeline.

Cardno’s expertise also includes the effective management of water resources, which will be useful should water-intensive fracking unlock Australia’s shale oil reserves.

For the first half of fiscal 2013 Cardno reported company-record net profit after tax (NPAT) of AUD40.1 million, an increase of 11 percent over the prior corresponding period and at the upper end of profit guidance provided by management in November 2012.

Revenue was up 34.7 percent to AUD599.9 million, while operating cash flow was AUD40.0 million. Earnings before interest, taxation, depreciation and amortization (EBITDA) rose 11.3 percent to AUD69.6 million. Basic earnings per share were AUD0.2887, down 11.8 percent AUD0.3274 a year ago due to the issue of new shares in March 2012 and tighter margins across the business.

Management declared an interim dividend of AUD0.18 per share to be paid on April 5, 2013, to shareholders of record as of March 22, 2013. The payout ratio for the period, based on basic earnings per share, was 62.3 percent, up from 54.9 percent a year ago.

Cardno’s balance sheet remains strong, with a net debt-to-equity ratio of 25 percent and cash of AUD86.7 million as of Dec. 31, 2012.

Cardno is a buy under USD8.05 on the ASX using the symbol CDD and on the US OTC market using the symbol COLDF.