I think this is the PostThis was posted by Brian on ESG thread....

I think this is the Post

This was posted by Brian on ESG thread. Just highlights the benefits of CTP having several different commodity targets as well as a %$#^ load of coal.

"Eureka Report article today. Food for thought

Coal seam gas: caution required
By Tim Treadgold
February 11, 2009


PORTFOLIO POINT: Explorers offer an exciting ride to investors interested in coal seam gas; when those explorers turn to production it could be time to bale out.
If coal seam gas is such an attractive investment why are Australia’s two biggest producers of oil and natural gas, Woodside Petroleum and BHP Billiton, avoiding the sector?

That’s a question with only two possible answers: either they have missed the chance to jump aboard the next generation of Australian energy projects or they have looked and walked away.

True believers in coal seam gas argue that it’s a case of missing the boat, especially in light of the latest raid on the sector by the big British gas company BG, which this week launched a $796 million bid for Pure Energy, effectively thwarting a cosy merger between Pure and another coal-seam leader Arrow Energy.

The BG raid has re-ignited interest in the coal seam sector, and its close associate, the embryonic underground coal gasification industry.

As well as pushing the Pure share price up by 28%, from $5.28 to $6.76 (well above BG’s offer price of $6.40), other players in the coal seam industry have attracted support.

Blue Energy, a small gas player in the Queensland coalfields, saw its shares jump by 25% from 14¢ to 17.5¢ after the BG move on Pure. Metgasco added 25% to 42¢. Eastern Star Gas rose by 14% to 57¢, and the most prominent of the underground coal gasification stocks, Linc Energy, rose by 29% to $1.45.

None of those stocks ranks as investment-grade. All are speculative, and while that should not inhibit a red-blooded opportunist, their status as explorers highlights the point that coal seam gas is an industry in its infancy and even though fat profits can be made trading explorers, and takeover targets, there is not a well-trodden road of profits and dividends.

That note of caution is at odds with the massively expensive investments in coal seam gas by earlier entrants with impeccable “old oil” credentials such as Malaysia’s Petronas, which has teamed with Santos; ConocoPhillips of the US, which is working with Origin Energy; and Europe’s biggest petroleum producer, Royal Dutch Shell, which is working with Arrow.

Between them, these different syndicates have committed the best part of $20 billion to either buy into the coal seam business, or have plans to develop a liquefied gas (LNG) business centred on the Queensland port of Gladstone.



The involvement of some of the world’s biggest oil and gas companies in Queensland’s coal seam gas business should encourage investors to take an interest in the sector. But, the participation of some of the big boys of oil should also help small investors formulate an investment strategy, which is one of trading the explorers and selling when they make the move into production, or get involved in an expensive and unproven LNG venture.

The problem for most investors is that while they obviously do not want to miss the game they should be aware of the uncertainties about coal seam gas, especially the costs and risks associated with making the jump from domestic sales to LNG exports.

Analysts at Goldman Sachs JBWere pointed out the risks in a note to clients last month, before BG reignited interest in the sector, which hit a peak in mid-2008 when the oil price was above $US100 a barrel.

Five key points for analysis were listed in the Goldman warning note Coal Seam Methane – A Risky Business. Those points for investors to judge, in the form of questions, are:


How much gas is present in a coal deposit?
What is the relative permeability of the coal (ie, will the gas flow)?
How easy is it to remove water trapped in the coal?
Is there suitable technology available to exploit the coal seam gas, especially in the very expensive drilling phase?
What is the quality of the gas and is it suitable to produce LNG?

ConocoPhillips, with its $8 billion joint venture with Origin, and BG’s $5.6 billion takeover last year of Queensland Gas, are reasons to believe that astute professionals have assessed these issues when making their investments – although perhaps with a time frame in mind that is much longer than that of the average private investor.

For a casual outside observer lacking answers to the questions posed by Goldman Sachs, the divergent positions taken by oil majors Woodside and BHP Billiton are out, while ConocoPhillips, Santos, Shell and Petronas are in – poses a dilemma.

Quite simply, someone is right and someone is wrong.



One possible solution to the quandary is to apply the same logic used earlier this week when trying to pick possible winners from the iron ore sector. In that report (see Iron ore’s heartening signs) two of the stocks highlighted, Ausquest and Golden West, were the picks of Cleveland Cliffs, the biggest iron ore miner in the US.

The fact that Cleveland Cliffs, which had previously made a correct decision to buy another Australian iron ore stock, Portman Mining, at a bargain-basement price, was seen as sufficient reason to follow its next possible targets.

The same logic flows into coal seam gas, though the game here is infinitely more complex, if the Pure situation is analysed. Here we have a case where Arrow is bidding for Pure, Shell has invested in Arrow, and BG is now bidding for Pure.

However, somewhere in that mix lies an investment once held by BHP Billiton in a coal seam gas business called CH4, which was acquired by AGL and Arrow – with the salient point being that BHP Billiton had a chance to be a coal seam gas player but sold out in mid-2006, just as the boom was starting.

Why did BHP Billiton sell? Only the directors know the answer to that question, and perhaps they got it wrong, as they did with their $3 billion investment in the Ravensthorpe nickel project.

The point is that both BHP Billiton and Woodside have turned their corporate backs on coal seam gas, and it would be a wise investor who takes note of that action – while also watching with interest how the oil companies which have become involved progress their commitments.

The core message is that for smaller investors, coal seam gas remains something of a mystery.

Woodside, which has never come close to coal seam gas, is a vocal critic of the industry, with its executives pointing out that it’s too difficult to produce, and if liquefied into LNG will attract a big discount from buyers because of its low calorific (heating) qualities.



The Woodside view, apparently reinforced by comments from potential gas buyers in Japan, is reinforced by the collapse in the oil price to about $US40 a barrel (and less in the depressed US market).

The argument is not that LNG made from coal seam gas will not sell, it is that the price will be much lower than that obtained from conventional gas, which has the calorific kicker of other gases liquids in the end product.

Coal seam gas, after all, is sometimes referred to as coal seam methane because that’s what it is: almost pure methane, a gas without the same heating qualities as the ethane, propane and butane found in conventional gas.

There could be, of course, a touch of sour grapes in the position of both BHP Billiton and Woodside but it is the position taken by two companies that represent more than half of Australia’s oil and gas production.

If you must invest in the coal seam game, do it at the exploration phase. This is where fat and fast profits can be made … plus there is the excitement of being involved in the modern-day equivalent of a wagon race across the Queensland outback.

But, once a coal seam gas company makes the move into the difficult business of gasfield development, and the even more difficult business of converting coal gas to LNG, get out.

Or, as Goldman Sachs said in its warning note: “We believe global demand for energy will drive the coal seam gas theme. However, we caution investors to beware of the risks involved; in particular where unrealistically high premiums are paid for coal seam gas assets that are yet to be exploited.”