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re: i like org http://www.theaustralian.news.com.au/story/0,20867,20979892-643,00.html


Coal seam methane on the nose no more

* Santos saw the potential of an ignored energy source - now it's a popular investment, writes Nigel Wilson
* December 28, 2006

IN July last year, when managing director John Ellice-Flint announced that Santos had paid $612 million to buy US-listed independent energy group Tipperary Corp, many people wondered why.
The deal gave Santos a 75 per cent working interest in the Fairview coal seam methane (CSM) field north of Roma in Queensland known as the Comet Ridge project, one of the biggest CSM producers in the country.

Santos had just nudged out AGL and Origin for the parcel. Ellice-Flint was pointing to a coming of age.

And so it has transpired in the succeeding 18 months, with CSM poised to become the new energy source of choice for Queensland industry and power generators particularly.

As problems beset the PNG Gas partners' hopes to supply the eastern seaboard with more than 100 petajoules of gas a year from the New Guinea Highlands, CSM has moved from being a technical curiosity to an industry that may have a multi-billion-dollar future.

Ironically, it is Santos's hostile $606 million bid for Queensland Gas Company that led to claims that CSM's potential is undervalued.

But perhaps that just reflects that the market has been slow to catch up with reality.

In August 2002, the Australian Bureau of Agriculture and Resource Economics expressed concern there might be insufficient natural gas supplies to keep pace with demand over the medium to longer term, particularly in the eastern states.

ABARE then suggested that, unless significant infrastructure investment was undertaken, the eastern demand/supply balance would deteriorate quickly.

An ABARE study found:

* Despite a fourfold increase in CSM production from 1999-2000 to 2019-20, supplies to Queensland needed to be supplemented in the near future.

* Demand for gas in NSW, South Australia, Tasmania and Victoria was expected to continue to be met by existing sources until 2019-20, in combination with increased production of CSM in NSW.

ABARE said known eastern Australian gas resources were expected to be nearing depletion by 2019-20.

This month ABARE formally predicted that Queensland would pass Victoria to become Australia's second-largest energy-consuming state in 2012-13 and then pass NSW for top spot in 2017-2018.

In the years to 2029-30 the substitution of gas for petroleum products will continue.

ABARE predicts a faster rate of substitution in the medium term than over the long term.

"The share of natural gas in final energy consumption is projected to increase to 21 per cent, while the share of electricity is projected to increase to 24 per cent," ABARE says.

In the absence of new natural gas fields being developed to serve the eastern seaboard, that essentially means a huge market for CSM.

That remains true even if Australia goes down the nuclear route because, according to the Switkowski report, there will be few functioning nuclear power stations before 2025.

"The main projected change in the (electricity) sector's fuel mix is an increase in the share of electricity generated from gas from 14 per cent in 2004-05 to 23 per cent in 2029-30," ABARE said.

The commodity forecaster notes that the two largest natural gas production basins in the eastern states are projected to have declining supplies over the next 25 years.

The decline in Bass Strait and the Cooper Eromanga basins will be "partially offset by growing supplies from the Otway Basin (western Victoria) and CSM," ABARE says.

"CSM currently accounts for more than 60 per cent of the Queensland gas market. Reflecting in part major supply contracts, CSM production is projected to reach 339 petajoules by 2029-30, close to six times the amount produced in 2004-05."

The commodity forecaster predicts that constraints on gas trade between the states will be eased by new infrastructure.

A number of projects now being considered would deliver Queensland CSM to northern NSW and, potentially, into the gas network that was served by the Santos-owned Moomba gas hub in north-eastern South Australia.

For example, Hastings Diversified Utilities Fund's 100 per cent-owned offshoot, Epic Energy, is undertaking a front-end engineering design study into a gas sales pipeline between Ballera in southwest Queensland and the Moomba plant.

The interconnect covering about 180km would most likely cost between $60 million and $120 million, depending on the volume of gas it was contracted to ship.

A study by Grahame Baker and Ross Skerman for Brisbane consultants RLMS, notes that certified proven and probable (2P) gas reserves in eastern Queensland in 1996 were less than 100 petajoules, with gas demand then estimated at around 40 petajoules a year and growing at 5 per cent a year.

"A decade later, the independently certified 2P gas reserves in the Bowen and Surat basins of eastern Queensland are 4123PJ of which coal seam gas accounts for about 93 per cent," the study says.

"The current level of certified CSM reserves in the Bowen and Surat basins are the largest onshore reserves in Australia, being nearly twice the size of the remaining 2P conventional gas reserves in the Cooper-Eromanga Basin."

Considering Santos is the Cooper-Eromanga Basin operator, perhaps it should not have surprised anyone that Ellice-Flint believes CSM holds one of the keys to the company's long-term future.

AGL and Origin have also taken the long view, with Origin cleaning up the minorities in CSM producer Oil Company of Australia and AGL doing a deal with QGC's management which might just frustrate Santos.

Whatever happens with QGC, which claims to have the potential to become Queensland's biggest CSM producer, there's no doubt the gas - which was despised and seen as a threat to coal development - will be supplying major customers for decades to come.