COAL SEAM DEAL SIGNIFICANT FOR INDUSTRY, Inside Business, Marxh...

COAL SEAM DEAL SIGNIFICANT FOR INDUSTRY, Inside Business, Marxh 29 2009

ALAN KOHLER, PRESENTER: BG group's 20-year LNG sale contract with China national offshore oil corporation transforms the Queensland coal seam gas industry, finally adding some commercial credibility to the hype that's been building ever since the big global energy players moved in two years ago triggering a wave of consolidation.

And this week there was more consolidation with Arrow Energy's board recommending that shareholders accept a higher $3.4 billion bid from Royal Dutch Shell and PetroChina.

So today we've got a series of three interviews on the subject - an analyst, an economist and a player.

First, the analyst - Wilson HTM's John Young.

Well John, this is the first big sales contract for Queensland Coal Seam Gas. I guess it was just a matter of time before one was signed, but is this significant though?

JOHN YOUNG, RESOURCES ANALYST, WILSON HTM: Well I think it's significant from the point of view that finally an agreement has been signed.

But we've believed for some time that that would occur and that belief has been on the back of the interest from foreign companies in this industry and the fact that they've been operating in these markets for some considerable period of time.

ALAN KOHLER: And does the details of the deal change your view of value of the players, particularly the listed players, that are in the game in Queensland?

JOHN YOUNG: No I think it just supports the view that we've had, that this is going to be a very significant industry that will grow over time and that there is demand for coal seam backed LNG in Asia.

ALAN KOHLER: But there has been a view that there wasn't room for all the projects you know I think there was five on the drawing boards.

There wasn't room for all of those and that it was really going to be a matter of first in first gets now BG is first in but is that still the case or can they all get up?

JOHN YOUNG: Well I think there's potentially room in the market for that. At the moment expectations are that there will need to be about another 140 million tonnes a year of LNG produced by 2020 and that's a very significant amount of LNG.

ALAN KOHLER: So how much of that 140 million tonnes a year could Australia supply?

JOHN YOUNG: There are four large scale projects that are proposed, they are all roughly the same size, they differ a little.

ALAN KOHLER: This is in Queensland but there's also the North West Shelf of course.

JOHN YOUNG: In the North West Shelf there's certainly a number that are in construction at the moment and some that are proposed.

I think one needs to be realistic and not all projects will proceed at the same time and at the time that they've been proposed.

ALAN KOHLER: But do you think that the sort of construction that's needed to supply this market, has there been any precedent of that sort of construction task apart from perhaps the development of the Pilbara in the sixties?

JOHN YOUNG: Well it's probably not in Australia but I think one needs to recognise it's a global industry, the LNG industry, and there've been very large scale projects that have been developed in say for example the Middle East, and some of these resources can move around, some of the construction work can be undertaken offshore, modularised and brought in.

So, all that said, it's still going to be a very significant construction task.

ALAN KOHLER: Are there any pricing and supply implications for Australian domestic gas in the developments both in Queensland and in the North West Shelf?

JOHN YOUNG: Well we think that's the case. I think at the moment we have a gas industry in Australia at least on the east coast, that is disconnected from world energy markets and so we typically have gas bought and sold between in a single buyer and a single seller and they're long term contracts and if anything they'll have some indexation in there for inflation but they aren't directly linked to global energy markets.

However when a large export LNG industry develops then I think there will be a linkage created between international energy markets, principally oil markets, and through that into LNG, and Australian gas markets.

I think the net result of that is we will see pressure on gas prices. I think gas prices will rise over the longer term to support, because the economics of these projects will encourage further acquisition of gas to produce more LNG.

ALAN KOHLER: And what's the price per gigajoule is implied in the LNG export prices to China? Im just wondering the extent to which gas is likely get sucked out of the domestic market into the export LNG market given that price differential.

JOHN YOUNG: Well I think the first thing is, I don't think there's necessarily going to be a shortage of gas around.

If one looks at the quantities of reserves and resources that are available and the scale of the projects there, I believe there's going to be adequate gas to meet both export requirements and domestic requirements.

However I think what we'll see is because the gas that is being sold into Asian countries will be linked to oil prices in a manner and we think oil prices are likely to be reasonably strong going forward, then we would expect prices in Asia maybe, given an example, it may be around $10 or so a gigajoule and when you work through the economics of that, gas prices in Australia in our view perhaps have the potential over a period of time in the second half of this decade, to perhaps double from where they are now.

ALAN KOHLER: Is this sales contract BG's got likely to increase the interest by local investment managers in the coal seam gas industry in Queensland?

JOHN YOUNG: I think that's the case. There has been some concern amongst some parts of the investment community that coal seam gas to LNG may not occur, that there were a number of reasons why that may not happen.

The announcement by BG I think, goes a long way towards alleviating the concern that customers would be uncomfortable subscribing for long-term contracts backed by a new source of supply.

ALAN KOHLER: So you'd expect an uplift of share prices of stocks in this game?

JOHN YOUNG: Directionally it's supportive of improved prices and I think we've seen that over the last couple of days obviously there's a lot of activity in the sector at the moment but broadly speaking it's supportive of further investment in the space.

ALAN KOHLER: And what are your favourite stocks?

JOHN YOUNG: Favourite stocks until recently were Arrow, obviously it had a very large material resource base and I think had a very promising future, that processes, the acquisition processes is now rolling forward. We still like that stock.

In the emerging producers we are focussed on companies like Bow Energy, that's a small coal seam gas company with a growing reserve base, Comet Ridge is a company that is at an earlier stage of development but I think shows potential.

ALAN KOHLER: Thanks for joining us John.

JOHN YOUNG: Thank you.