Santos and Carnarvon Petroleum say they have confirmed the discovery of a "major oil and gas resource" off the coast of Western Australia.
The Dorado-2 appraisal well, drilled two 2km from the Dorado-1 well that struck oil last July, hit high-quality oil at 4km and what is believed to be gas at a deeper level.
Wireline pressure testing has confirmed that both wells hit the same reservoir, the companies said on Thursday.
"This is a great result which indicates the Dorado discovery is larger than anticipated and which significantly de-risks a future development," Santos chief executive Kevin Gallagher said.
"The value of the discovery is greatly enhanced by the high quality reservoirs and fluids and the shallow-water setting, which should facilitate a cost-competitive development."
A new 3D seismic survey is in progress to find more opportunities for drilling.
Dorado is located in Australian waters about 160 km north of Port Hedland.
Santos owns 80 per cent of the rights to the exploration area and operator Carnarvon owns 20 per cent.
Carnarvon Petroleum managing director Adrian Cook said the discovery had the potential to transform the ASX300 oil explorer with just 20 employees into a significant oil producer.
"There's an enormous amount of pride, we've taken the idea from geoscience 10 years ago to a successful business model," he told AAP from Hong Kong.
"We hung in there and hung in there and hung in there, and bang."
Mr Cook said the plan is now to do front-end engineering work on developing the discovery, with a final business decision to be made at the end of next year.
Oil fields generally take three years to develop so Dorado could be producing oil by 2024, he said.
The oil reservoir ranks around the 15th largest discovery in the last four years, but few of the others are located in such a low-risk country for development as Australia, nor at such a shallow water depth as 85 to 90 metres which simplifies plans for development, he said.
"We're loving what we're doing at the moment," he said, adding that all the employees of Carnarvon owns shares in Carnarvon, including the receptionist.
At 1035 AEST Santos shares were up 6.5 cents, or 0.98 per cent, to $6.715 on a day when most other oil companies were down.
Carnarvon shares were up two cents, or 3.7 per cent, to 56 cents - nearly quadruple their level of a year ago.
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