inground value of coal in australia

Following the new benchmark set in value of inground coal with the NHC sale of the new saraji resource in the Bowen basin, this article is a good read I think....

"A Special Announcement From The Daily Reckoning Australia

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Tinkler's Filthy Black Riches

Dear Reader,

There's nothing particularly extraordinary about 31-year old Nathan Tinkler. In his father's own words, he's a hard-working country boy.

"We certainly were not a wealthy family... not poor... but Nathan did not have anything handed down to him."

Nathan obviously loves his horse-racing though. Everyone needs a passion. His is the track.

A few months ago, Tinkler calmly walked into the yearling sales at Karaka in New Zealand. Knowing he's a racing enthusiast, you might have seen him as a window-shopper at the event. Or maybe he was bidding for a syndicate of his friends. Horses certainly aren't cheap. At a meeting of this kind, prices can run into six figures.

He wasn't window-shopping though. A few hours later, he walked out again. His wallet was NZ$5 million lighter. His racing portfolio was 16 horses richer. He hadn't borrowed a cent. And he did it all without thinking twice.

In fact, this wasn't even the first time he'd guiltlessly binged on his hobby. Last year he did the same thing at Queensland's Magic Millions auction on the Gold Coast. Nineteen million dollars. Fifty-six horses. All in a few days.

But Tinkler isn't the next James Packer. He's just an ordinary guy who made one good mining investment.


A $245 Million Profit in 18 Months

An electrician raised in Hunter, NSW, Tinkler saw a chance coal investment in November 2006. The Middlemount mine in Queensland.

Through his coal maintenance business, he put down a $1 million deposit on Middlemount. Then Tinkler set about raising the other $29 million from investors. He worked long hours, and eventually he found an Asian investor.

Last year, Macarthur Coal (ASX:MCC) paid his company $275 million for a 70% share in the mine. Suddenly, his life was different. All it took was one good move in the coal market.

But you don't have to work as hard as Nathan Tinkler to enjoy the one- time boom in the coal market. This month, coal is throwing up the next big opportunity in energy investing...


The New $17 Billion Coal Boom

British Gas (LON:BG) staked its claim on the Australian coal-seam gas market earlier this month. The global giant bid AU$13 billion for Origin Energy (ASX:ORG), the frontrunner of coal-gas reserves. This amounted to a 40% premium over Origin's then share price.

With the BG investment in place, there are now 7 companies investing almost $17 billion into making coal-seam gas an export. As soon as 2010, tankers could be lining up in port to sail valuable gas energy to voracious Chinese and Japanese buyers.

Forward-thinking investors, with foresight like Nathan Tinkler, are taking advantage of the situation now. You'd do well to be one of them. We can guide you to the companies best-placed to gain from the new gas age, plus let you in on our number one tip.

But firstly, here's a little background on the unusual business of drilling gas in a coal mine.


Coal Seam Gas: What's the Difference?

Let's clear one thing up. Coal seam gas (also called coal seam methane) is chemically almost identical to natural gas. But there are a few key differences between conventional gas and coal seam gas. You'll see why these are important later on.


Location. You'll find conventional methane trapped in small holes ("pores") in rocks like sandstone and limestone. Coal-seam gas lies in the pores of coal deposits.
Depth. Coal seams are sometimes as close to the surface as 300 metres. Conventional gas typically occurs in similar places as oil, and at similar depths to oil. That means somewhere between 2.5km and 5km below the surface of the earth.
Amount. Coal seams can hold as much as 6 or 7 times as much gas as conventional deposits.
But coal seams have a different character to sandstone or limestone. The pores are often quite small. The larger pores are, the easier it is for liquids and gases to flow through the seam.

So to liberate gas from a coal seam, you have to drill a lot of wells. In America, a typical coal seam well produces anywhere between 100,000 and 500,000 cubic feet of gas per day. Natural gas wells produce more like 1.7 million cubic feet of gas per day. To drill the same amount of gas from a coal seam, you might need 17 times the number of wells.

That doesn't mean that it's less prospective. As we said, coal deposits also tend to hold 6 or 7 times as much gas as an ordinary reserve. It just isn't all in the one place. And it doesn't flow easily.

It should come as no surprise then that, on Australia's east coast, coal-seam gas reserves actually outweigh conventional reserves. Queensland has around 5000 petajoules of "proven" and "probable" gas reserves. Coal-seam gas reserves outnumber conventional reserves 3 to 1.

More importantly, eastern conventional production is in decline. Queensland's conventional gas production peaked in 2004, and has declined 20% since.

If you include "possible" coal seam gas reserves, Queensland has more like 11,000 petajoules of coal gas. It's a huge reserve - perhaps more important than you think - and mostly undeveloped. But that's going to change, starting this year.


The New Gas Market Down Under

That 11,000 petajoule reserve will soon be vital to our gas trade.

Compared to the rest of the world, Australia has always had incredibly cheap gas. There so much of it, and so few of us to buy it. Natural gas futures in New York trade for US$11.44 per contract. Today Australian companies pay between AU$3 and AU$3.50 for an equivalent amount of gas.

A few weeks ago, global energy giant BG caused a bit of a stir when it offered AU$13 billion for energy retailer Origin Energy (ASX:ORG). If the deal happens, it'll be the second biggest Australian takeover of all time. But it's clear what BG's motive was: gain a strategic stake in Australia's coal-seam gas fields.

Why would it want one? Domestic gas demand is growing at 2.6% per year. That's not bad...it means gas demand will have doubled within 25 years. But frankly there's a better opportunity.

Exporting. Why sell gas for $3 if you can get $11 somewhere else?

Given what the global natural gas price has done in the last few years, domestic business is peanuts compared to what gas companies can earn overseas. That amounts to a big exporting incentive.


Coal-Seam LNG Exports: The Numbers



A Small Town with a Huge Future

That incentive has led to four new projects. Four different parties have each proposed LNG exporting plants at the strategic location of Gladstone.

It's a small town on Queensland's coast, near the state's massive coal basin. A pivotal shipping port for years, sending base metals, oil and grains overseas, it'll soon become the backbone of the coal-seam gas industry.

The companies involved in the four projects are willing to spend nearly AU$17 billion, just on the plants. If all goes well the four plants will churn out annual LNG production of up to 10 million tonnes.

Given that east coast gas production is already in decline, we have a problem. If coal-seam gas is leaving our shores, where will we get our domestic gas?

It might simply be a case of paying higher prices. John Durie of The Australian frames the situation well:

"The (Origin-BG) deal will almost single-handedly triple the price of east-coast gas because it will now be priced on an export parity basis. In rough terms, east coast gas wholesales at $3 a gigajoule and, in the west, where Woodside pumps it into Asia, gas costs closer to $9 a gigajoule. If you are BG and able to get $9 a gigajoule from China, that is going to be a lot more promising than $3 to fire some brick plant in Brisbane."

We agree that gas prices probably have to go up.

But even if they don't, coal-seam producers would be the first to enjoy the benefits of higher prices by bypassing domestic markets altogether. Ships sailing out of Gladstone port will make them millions in profit from Australia's new, imported gas prices.

That sounds pretty good. So where exactly is all this methane? And who owns it?


Queensland's Massive Gas Reserves

It's in the same place as the coal. Queensland and New South Wales.

Queensland, as we said earlier, has current reserves of around 11,000 petajoules. But NSW's assets are less advanced. For every cubic foot of gas NSW produced in 2006, Queensland produced six.

The first stage of the coal-seam boom is about Queensland. It's definitely the place to look for a producer.

So now you know where it is, and where's it's going... here's the CSG playing field.


Who Owns Aussie Coal-Seam Gas

Aside from Origin Energy, there are many companies with a chance to make it big in coal seam gas. Here are five of the better Queensland plays, with their vital statistics.

The table can't replace due diligence, and it won't tell you exactly what to invest in. But it should give you a firm grasp of the companies and issues involved.

It ranks the stocks in terms of coal seam gas reserves. There's also the price you have to pay for each petajoule of gas. Santos and Origin have many non-gas operations, so they're up at the expensive end. If you have no energy or gas plays in your portfolio already, you might like to consider them.

But if you're on the lookout for pure exposure to the coal-seam gas boom, the rest of the table is much more interesting.


The Playing Field


Queensland Gas and Arrow Energy have all the pieces of the puzzle. They're both producing, and both command good reserve figures. They each have equity in an LNG project, assuring them access to high overseas gas prices. They have no conventional gas assets - just coal seam.

Their only downside? They're not the cheapest. The last three are more enticing as far as price goes. Sunshine Gas is much cheaper per reserve than the four above it. This discount exists largely because it hasn't produced a wisp of methane to date. If you're not troubled by that, then it has more growth ahead of it than other stocks.

Molopo too, is selling at a bargain price compared to its rivals. But there's no guarantee it'll ever export gas from Australia. It hasn't attached itself to an LNG plant yet, and it produces conventional gas. We included it because it has better diversification than even the larger CSG players. Molopo owns assets in China, the US, Quebec and South Africa. It's the wildcard.

So you have a range of good options. But who do you want on your team? The choice, we feel, is made easier by something we've already mentioned.


Every One of Those Companies Needs This Month's Tip

Remember what we said about coal-seam gas requiring a lot of wells? Santos alone plans to drill a total of 1,350 coal-seam gas wells over the next 20 years, liberating 4,200 petajoules. That's the minimum required to run its Gladstone plant. It'll probably drill more.

That means extracting Queensland's entire gas reserve today will require somewhere in the order of 3,500 wells. It's a hefty job. Plus, reserves will grow. Energy companies don't just sit and twiddle their thumbs.

They prove up energy reserves.

Add in any development of the NSW market, and we could be talking tens of thousands of wells in total. Queensland is already drilling 400 wells a year.


Queensland's Coal-Seam Drilling Frenzy


But looking at the number of wells required doesn't even scratch the surface. Coal gas wells need maintenance. They need geophysical studies before drilling occurs. They need modelling, engineering design, regulatory approval and operating expertise.

The scheme will require its own pipeline system too. Santos and Queensland Gas will need 805 km of new gas pipelines for their contribution to Gladstone.

There's one firm providing all of these services, and more. This is a dynamic company that we believe has all the ingredients to be on the receiving end of the coal seam gas build up. "