Todays smh
( I see an opportunity here for cooper basin shale gas)
Another block was removed from the path of Australia's coal seam gas boom a fortnight ago, as the NSW government stepped away from pre-election commitments to protect prime agricultural land from mining with no-go areas.
The draft NSW strategic regional land use policy, like Queensland's strategic cropping laws before it, sets out the conditions under which coal seam gas or other mining can go ahead on farmland.
Shares in Santos and AGL Energy - the big listed coal seam gas companies with the most regulatory risk in NSW - staged a relief rally as investors calculated they had dodged a bullet. At a London conference, the AGL chief, Michael Fraser, and chairman of Santos, Peter Coates, reportedly said they were not unduly concerned by the new regime in NSW.
Some potentially tough decisions were transferred to a new national Independent Expert Scientific Committee, set up with $150 million at the behest of federal independent MP Tony Windsor, as a condition of support for the mining tax, to advise on the potential groundwater impacts of coal seam gas extraction, including the controversial practice of fracking.
The industry complains about ''regulatory creep'', but as approvals pile up, lights flash amber and work is started, the focus is shifting to execution and project delivery. It is becoming a race, albeit on a tight track full of potholes, and some operators are better placed than others.
Investors, meanwhile, are obsessed with development risk.
The International Energy Agency believes we are entering a ''golden age of gas'' as coal and nuclear energy, particularly post-Fukushima, gradually lose market share and the penetration of renewables rises.
Australia is on track to become the world's biggest supplier of liquefied natural gas, overtaking Qatar, perhaps as soon as 2017. Our LNG boom is happening all over: from Chevron's $43 billion Gorgon project at Western Australia's Barrow Island (the country's biggest resource project, ever), to Woodside's $35 billion Browse project on the Kimberley coast, to Inpex's $US34 billion ($32.4 billion) Ichthys project at Darwin and on to Queensland, where coal seam gas for export has taken off. Woodside and Oil Search also plan big projects in the Timor Sea and Papua New Guinea. In total, well over $200 billion of LNG projects are in the pipeline.
These LNG projects are being launched into an increasingly competitive gas market as the United States lurches towards an oversupply, courtesy of new drilling techniques for unconventional resources such as shale gas which promise to deliver energy independence and may turn the country into a significant LNG exporter.
In Australia, unconventional drilling has so far focused on coal seam gas (although we have potentially vast shale gas reserves as well). Coal seam gas took off in Queensland from 2000, mandated by then premier Peter Beattie, and accounts for 90 per cent of the state's gas supply. What's new is the rapid scale-up of four massive projects to pipe the gas from the Surat and Bowen basins to Curtis Island, at Gladstone, where it will be cooled into liquid and shipped overseas. The hundreds of coal seam gas wells now will become tens of thousands.
QGC, bought by Britain's BG Group in 2008, was first out of the blocks, getting approval for its $US15 billion Queensland Curtis LNG project and reaching a final investment decision in October 2010.
Santos, in a joint venture with Petronas, approved its $US16 billion Gladstone LNG project the following January and Origin, together with ConocoPhillips and Sinopec, sanctioned the first train in its $US14 billion-plus Australia Pacific LNG project last December. Arrow Energy, owned by Shell and PetroChina, has yet to gain approvals or reach a final investment decision.
All three approved projects have forward-sold their gas, often to the Asian customers who are their joint-venture partners, and have begun construction. But any multi-billion-dollar construction project carries the risk of delays and cost blowouts - it is easy to lose a billion dollars, as Woodside discovered with its Pluto LNG expansion in WA - and the proponents are competing for workers in an industry stretched to capacity by the resources boom, with big coal and iron ore projects also slated for the next five years.
For the three approved projects at Curtis Island, these downstream risks have been managed by choosing the one contractor, Bechtel, to build near-identical LNG plants (each comprised of processing units called trains). This is efficient: the QGC, Santos and Origin projects are staggered roughly six months apart, and Bechtel is able to swing workers from one project to the other in a complicated sequence as the construction process rolls on.
''It means Bechtel can offer workers jobs for, say, six years rather than two or three,'' QGC's government affairs manager, Rob Millhouse, says. ''There's quite a lot of symmetry. You won't have three plants being built at the same time.''
The coal seam gas companies are also at arm's length from the biggest dredging operation in Australia, being carried out by the state-owned Gladstone Ports Corporation with funding from the gas and coal industry. With implications for the world heritage status of the Great Barrier Reef, and with UNESCO inspectors in town only last week, this is no trivial issue.
Anti-coal seam gas campaigner Drew Hutton, president of the Lock the Gate movement, says the harbour is in ''ecosystem collapse'' and the gas industry will come under pressure there. Quick fixes such as excising Gladstone from the Great Barrier Reef Marine Park will not solve the problem, he suggests.
But for now most investors assume the dredging at Gladstone will proceed as planned. QGC's Millhouse says: ''Without getting into hypotheticals, we share the port's point of view, and the government's view. It's already been through environmental impact assessment over the last couple of years. A lot of the work being done now is an extension of dredging projects that the port has been doing for years.''
From an industry point of view, dredging at Gladstone is a shared risk. It's upstream, at the point of extraction, that the differences between the various coal seam gas-LNG projects start to emerge.
The risks are many in this unprecedented coal seam gas boom, from groundwater contamination or depletion, to dealing with massive quantities of salt left after treatment of produced water.
One issue is central - getting access to rural land to drill hundreds of wells and pump, compress and transport the gas. The obstacle is not the regulatory framework but the companies' desire to get access without taking reluctant farmers to court to enforce legal rights under exploration permits. Each company has its own exploration acreage or permit areas. Some are going to be harder to exploit than others. As one executive explains, imagine development getting easier as you move east to west across the Surat and Bowen basins.
In the east are the highly productive small holdings of the fertile Darling Downs, mainly cropping land. This is where Arrow Energy's acreage is concentrated, and the executive (who would not be named) reckons Arrow's acreage would take in thousands of rural properties. West of Dalby is QGC and Origin's acreage, on land generally used for grazing rather than cropping. Out towards Roma, into Santos's acreage, the country is more marginal and holdings are larger. Santos has far fewer landowners to deal with, and they are more ready to talk.
Reliable information on the number of access agreements that each gas company has signed, or hopes to sign, is difficult to get.
Arrow's spokeswoman says the company has not tallied up how many properties its acreage covered, but rejects a back-of-the envelope figure of 8000-10,000. Arrow expects to sign access agreements with only between 400 and 500 landholders, she says, ''a significant number'' of which are already in place. Arrow says its exploration acreage stands at 67,400 square kilometres, of which intensively farmed land represents less than 15 per cent. That's high in itself, given the government's trigger maps mark only 4 per cent of the state as strategic cropping land.
At QGC, Millhouse says the company has about 3000 landholders to deal with across its domestic and export operations and has agreements with about 1000 of them. ''We'd prefer to have agreements with them all,'' he admits. A small army of QGC negotiators is combing the countryside, talking to farmers.
Origin has never disclosed the number of properties its acreage covers - one source estimates 1000-1400 - but a spokeswoman says it has more than 600 active compensation agreements in place with farmers, covering coal seam gas exploration, appraisal and development.
Santos's eastern states vice-president, James Baulderstone, says the company has 500 agreements in Queensland with more than 200 landholders (many of whom have multiple properties).
''We're very happy with where we are, because we're the incumbent,'' Baulderstone says. ''The Roma region was the heartland of the first oil and gas industry to be developed in Australia.'' The Big Rig at Hospital Hill, site of Australia's first petroleum strike in 1900, is a local icon. ''We have a very strong connection with the community,'' he says.
Lock the Gate's Hutton has a very different perspective on the industry claims and reckons companies such as Arrow and Santos are getting pinned down. ''I talk to a lot of people,'' he says. ''Nobody is signing.''
Without greater transparency, it is a war of words. What the market watches for are the reported figures on gas reserves, particularly rising estimates of proven and probable reserves that follow from a successful drilling program. Here is where some of the players are beginning to fall short, and access difficulties with recalcitrant farmers may prove part of the problem.
Santos, with a little more than 6000 petajoules including top-up gas from the Cooper Basin - the lowest reserves of the three sanctioned coal seam gas-LNG projects in Queensland - is a case in point.
Investors expect more Cooper Basin gas will have to be fed into Gladstone LNG. Santos's Baulderstone says there is little doubt the company can supply a two-train LNG plant, from a ''portfolio of supply options''.
That portfolio may eventually include shale gas from the Cooper Basin, a trump card up Santos's sleeve, but certainly does not include the northern NSW operations of Eastern Star Gas, bought by Santos for $924 million last November. Last month, reports of toxic spills into the Bohena Creek, in the state's Pilliga woodlands, from a coal seam gas water treatment plant formerly run by Eastern Star, prompted Santos to review the operations and commit $20 million to an upgrade of sites and procedures.
One broking analyst tells the Herald Santos has to ''re-earn a licence to operate in NSW'' and speculates it may need to take a writedown on Eastern Star, saying it is an ''open question as to whether they can carry that for ever''.
Santos's Baulderstone dismisses any suggestion of a writedown: ''We didn't buy that company for the water treatment plant, or development plans, or the sheds they've got on the ground. We bought it for the 1500PJ [of proven and probable reserves] they have in the ground. The entire state of NSW uses 150PJ a year. There's a lot of gas there, and that's what we've bought.''
But Santos is taking it slowly in NSW and will spend $500 million on a 50-well drilling program in the next three years, just gathering information. A Newcastle LNG terminal is off the agenda. The aim is to supply coal seam gas into a domestic market that could face shortages by 2015-16.
''We're years out from having a large-scale commercial development,'' Baulderstone says. ''It's not like we're in a situation where we're in a mad rush to drill holes in the ground.'' But Santos will not cede to calls for a moratorium on new developments of coal seam gas.
Baulderstone says continuing exploration is key to improving the science. ''What a moratorium does is simply shut the industry down. It's a catch-22. You can't get evidence to prove you operate safely, and therefore you'll never get over that hurdle.''
AGL, also keen to supply coal seam gas to the NSW market, is treading as carefully. With projects on Sydney's outskirts, at Camden, and among the vineyards and horse studs of the Hunter Valley, AGL is keeping its head down and would not comment for this story, except to welcome the state government's draft land use policy, which it was considering closely.
The NSW Farmers Association was not so cautious last week, with president Fiona Simson issuing a call to action to farmers across the state. It accused the O'Farrell government of breaking an election promise, and called on it to restore certainty by defining areas where mineral, coal and coal seam gas activities could occur, before exploration licences were granted. ''Today the NSW government has failed,'' she said.
There are ways to manage community opposition, of course. Origin, for example, is trialling the use of treated coal seam gas water for irrigation and hopes to train and pay farmers to monitor gas wells and other infrastructure - meaning fewer strangers coming onto properties.
BG Group is still battling legacy issues it inherited when it bought QGC in 2008. A 2011 audit of coal seam gas well-head safety by the Queensland government found QGC was responsible for more than 70 per cent of the leaky wells it identified.
Millhouse was one of the first BG people to come up to QGC, when it had only about 100 employees. It now has 1500. ''A lot of the operating practices used by the old QGC are no longer used,'' he says. ''Some wells visibly leaked. Those wells were drilled in a way we would not have drilled them. All the wells have been fixed.''
Can the coal seam gas industry keep the gates open? With years of negotiation, drilling and construction ahead, UBS energy analyst Gordon Ramsay cautions it is ''very early to make these calls'' on which companies are better placed.
But revved up by powerful backers such as broadcaster Alan Jones and wealthy donors with rural landholdings, Hutton warns ''people would be really silly to minimise the importance of the popular movement here. It's a real game changer. They think it's going to go away. It's not. It's getting more militant.''
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