Future is hale and hearty for shale gas John Beveridge From: Herald Sun February 23, 2011 12:00AM ---------------------------------------------------------- Shale search: Future is hale and hearty as concept comes of age Source: Bloomberg
WHEN BHP Billiton forks out a lazy $4.75 billion in cash for a big US shale gas field, it means the whole shale gas concept has come of age.
While shale gas development is in its infancy in Australia, releasing gas by horizontal drilling and fracturing shale is predicted to eventually supply 45 per cent of the US gas market.
The revolutionary concept at a time of rising world energy prices mirrors the rapid development of coal seam gas in Queensland and NSW.
Shale gas exploration is being heavily encouraged in China and other countries eager to increase their energy self-sufficiency.
There is nothing to stop similar developments in Australia once domestic gas prices are high enough.
And that may happen sooner than we expect, given that world parity pricing will become a fact of life once the big LNG plants being planned at Gladstone and elsewhere become a reality.
BHP buys shale gas assets in $4.6bn deal The Australian, 1 day ago BHP makes $5bn move into US shale gas The Australian, 1 day ago BHP buys $4.7bn US natural gas assets Herald Sun, 1 day ago Takeovers on the table for two Gas supply -- like any other natural resource -- will gravitate to the highest price, so Australian domestic gas prices will gradually become the world price minus the cost of shipping and liquefaction.
So which companies will benefit from the development of unconventional gas reserves? Mostly, they hold exploration and production rights to existing onshore oil and gas basins, given that shale gas is usually found underneath existing conventional gas basins.
At the top of the list are Santos and Beach Energy, which together speak for large areas of the Cooper Basin.
Beach chief Reg Nelson has been particularly aggressive, funding pressure and fraccing tests on Lakes Oil's unconventional sandstone "tight" gas play in Gippsland together with associated company Somerton Energy.
Reg is also keen to exploit the potential of shale gas in the Cooper Basin, given the gas pipeline network already in place.
The comfort for investors comes from Santos and Beach's existing and highly profitable oil and gas production, which separates them from the penny dreadful explorers and earns each a buy rating on the outlook for higher energy prices alone.
AT THE smaller end of the scale, there is no shortage of possibilities. Somerton Energy and Lakes Oil are both speculative buys on the basis of their unconventional gas potential. Somerton's sparely tested leases in the Otways could be particularly interesting.
AWE Ltd is another speculative buy which has the benefit of very promising conventional and unconventional gas acreage in the Perth Basin, a big positive given Western Australia's high domestic gas prices.
Further north, Buru Energy is looking for gas and oil in the Canning Superbasin which has been lightly explored and also earns a speculative buy.
Alcoa has prepaid Buru $40 million for the delivery of up to 500 petajoules of gas if it is successful.
Central Petroleum is probably the best-value speculative buy pick with a stunning 270,000sq km position across central Australia's Amadeus Basin.
A recent independent report commissioned by Central estimated a mean prospective recoverable resources of 26 trillion cubic feet of gas and a billion barrels of oil in the basin -- though finding and extracting it economically is another matter entirely.
The important thing to remember about all of these smaller exploration plays is that some of them are rarely traded and illiquid and at least some will run out of money or come to nothing.
And it could be a long time before any of them know exactly what they are sitting on.
The idea of playing in the junior exploration space is to get in on the ground floor before the rush and takeover activity we saw with the early coal seam gas players, so a portfolio approach using small amounts of risk capital is most appropriate.
Conservative investors who like the gas shale story should stick to the majors.
The Herald Sun accepts no responsibility for stock recommendations. Readers should contact a licensed financial adviser.
RAVI
LKO Price at posting:
0.6¢ Sentiment: Hold Disclosure: Held
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