canary in a coal mine

http://www.economist.com/business/displaystory.cfm?story_id=11632845
Once CXY's try is success, then $$$
A hostile bid highlights a new way of producing natural gas

MINERS and their canaries are used to thinking of natural gas as a potentially deadly impediment to digging up coal. It is present in many seams, and poses a danger to humans and birds alike. But gas is becoming increasingly scarce, while coal remains abundant, so many firms are reversing the normal pattern and harvesting the gas, but ignoring the coal. This business, known as coal-bed methane or coal-seam gas, first took off in America, but has now spread. On June 24th, in a sign that the industry had come of age, BG, a British energy firm (which shares a chairman with The Economist), offered to buy Origin Energy, Australia’s largest coal-bed methane firm, for A$13.8 billion ($13.2 billion).

That represents a premium of some 50% over Origin’s stockmarket value when BG first registered its interest in late April. But Origin’s board has already rejected the bid, on the grounds that it undervalues the firm. Traders on Sydney’s stockmarket seem to agree: they have pushed the price of Origin’s shares as high as A$16.42, well above BG’s offer of A$15.50 a share.

At the same time as Origin spurned BG’s advances, it announced that it was increasing its estimate of its “proved” reserves of gas by 20% and its “probable” reserves by 91%, on the basis of an independent assessment. It cited those revisions, along with another recent deal that seemed to value coal-bed methane reserves more highly, as reasons to demand more, prompting BG to go hostile and make its case directly to shareholders.

Australia is awash with deals involving coal-bed methane. Earlier this year BG and Queensland Gas Company, one of Origin’s rivals, agreed to build a plant to liquefy coal-bed methane and export it to Asia. Royal Dutch Shell, a huge oil-and-gas firm, and its local partner, Arrow, have similar plans. So do the pair in the deal Origin’s board spoke of: Petronas, Malaysia’s state-owned oil firm, and Santos, another Australian coal-bed methane outfit.

Coal-bed methane accounts for about 2% of the world’s natural-gas supply. But in America, where the industry is most advanced, it provides about 10%. In countries such as China and India, which have huge coal reserves but little gas, the potential is enormous, says Cyrus Mewawalla of Westhall Capital, a research firm. What is more, points out Luke Warren, of the World Coal Institute, an industry body, capturing methane from coal mines prevents it from escaping into the atmosphere and contributing to global warming, and so in some cases qualifies for carbon credits backed by the United Nations.

But the industry is not without its problems. It uses (and can contaminate) a lot of water. Coal seams, like oilfields, vary hugely in their geology. Drilling techniques that work well in one place can fail in another. Coal seams in China, where Shell and its rivals Chevron and ConocoPhillips are pursuing coal-bed methane projects, appear to be less permeable than the norm, which makes it harder to extract the gas they contain. Mr Mewawalla argues that auditors and investors have been cautious about coal-bed methane’s prospects for all these reasons. But as the industry establishes its record, he believes valuations will increase. That would give the canaries something to sing about.