ucg the next big thing.

Today's business journal.



ON a hilltop about 10km south of the southeast Queensland town of Kingaroy, just over the road from the ancestral home of the Bjelke-Petersen clan, a small blue flame flickering on and off above a small metallic plant has been visible at night for the past few weeks.

What is now a flickering flame is a light on the hill for a potential new industry because the flame is the burn-off of synthetic gas that has come to the surface through a process called underground coal gasification, a possible whole new coal industry to rival the fast-approaching coal seam gas industry and liquid natural gas industry.

The CSG industry showed there was more than one way to use a coal seam.

Traditional coal mining involves digging the stuff up and sending it to a power station to burn it, or putting it on a train to a port and sending it overseas.

CSG involves harvesting the gas that comes with a coal seam and piping it off to market or, in the coming scenario in Queensland, piping it off to Gladstone, freezing it into liquid, then putting it into a ship and sending it overseas.

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Related Coverage

* Dollar zooming to parity and beyond Herald Sun, 10 days ago
* Driving that synthetic fuel message Adelaide Now, 11 Mar 2011
* UCG produces cheap diesel from coal The Australian, 4 Mar 2011
* Cougar to appeal coal gas ruling Courier Mail, 1 Mar 2011
* Cougar challenges shutdown Adelaide Now, 1 Mar 2011

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UCG is another process altogether. Essentially, it is similar to the standard process of burning coal to create power, but in this case the burning is done with the coal still underground.

Setting fire to a coal seam while it is still underground leads to a mix of hydrogen, carbon monoxide, carbon dioxide, methane and other gases and is known as synthetic gas. That's the stuff coming out of the plant at Kingaroy.

UCG advocates claim the process can produce 20 times as much energy as CSG, quite possible because the UCG process actually creates gas underground, whereas CSG merely harvests what is already there.

The two processes can be used on the same coal seam but not at the same time. A coal seam can be mined for coal-seam methane gas, then set alight, with the resultant gas harvested through UCG. But the process cannot work the other way around because after a coal seam is set alight, there is only a burnt-out husk left underground.

The only possible upside here is that such a deposit would be perfect for clean-coal technology, which involves carbon capture and storage, this being the storage part. It's not a new process, but it's not one with a good reputation.

The only place where it has been widely used is the old Soviet Union, notably the Ukraine and Uzbekistan, where for 40 years it has been the raw material for commercial power plants. It's fair to say neither of these jurisdictions are known for their tough environmental or worker safety regimes.

But CSIRO has been researching the technology for years and there has been more work done around the world, notably in Africa and Canada. An international association for UCG has been set up in London and in the past few months there have been several developments in the UCG industry in Australia, most involving listed companies.

Ross Paul, chief investment officer for alternative energy research firm Bakers Investment, says the present UCG industry is similar to the CSG industry a few years ago. "When the majors get involved, it all changes," he says.

"If you look at the CSG industry a few years ago, it was all local players, but since then, you've had big international companies like Shell and British Gas get involved.

"This has happened as the reserves in the resource have been proven up. UCG is still a way behind, but it's on the same track.

"If everything with UCG gets proven up, then it could be a bigger industry than CSG."

At the moment, the main focus of Australia's UCG industry is in Queensland, where the state government is monitoring the progress of three pilot projects: the one at Kingaroy being undertaken by Cougar Energy; one near Chinchilla being undertaken by Linc Energy; and one near Dalby run by Carbon Energy, which came out of CSIRO.

Share price movements in these companies have been somewhat erratic, particularly for Linc, but investors who missed out on the CSG boom are taking a closer look.

Of these companies, Linc has the longest history. It was set up in 1998 by Len Walker and partnered briefly with government-owned CS Energy in the last decade.

Walker has since left Linc -- which is majority owned by former coal miner Peter Bond -- to set up Cougar Energy.

But some big players have recently become involved in the industry. Pacific Road, the energy based investment bank backed by the Singapore government-owned Temasek, grabbed a 15 per cent stake in Carbon Energy last week while Incitec Pivot has also been topping up its stake in the company.

Incitec Pivot has an obvious interest because the synthetic gas produced through the UCG process is cheaper and better than the natural gas being used by the company to manufacture its core product, fertiliser.

The Queensland government will watch how the three pilot projects progress until the technology is proven.

There are still several problems with UCG. Like CSG, it is a process that uses a lot of water, and farmers beside the Kingaroy project are concerned about the impact of mining on their property.

There is also the matter of mining tenements. Mining leases are granted under the Petroleum and Natural Gas Act, and UCG leases are granted under the Minerals and Resources Act.

In one case, Linc Energy had a lease over the same piece of ground as the BG Group, near Chinchilla, but the government decided in favour of CSG.

Brad Glynne, general manager of corporate finance at Cougar Energy, says that unlike the CSG industry, which is geared for export, the UCG industry is aiming purely at the domestic market.

"What we are looking at is ironing out all the bugs in the system, then actually putting a small generator on the Kingaroy site that will produce enough energy to power that site and maybe sell whatever's left over into the grid," Glynne says.

In Victoria, Clean Global Energy will pursue a UCG project in the Gippsland Basin, where it aims to eventually produce a power station, while Cougar has signed a joint venture with Ignite Energy Resources to develop a UCG project in the Gippsland region.

In South Australia, Linc Energy has a project under way in the Walloway Basin. And in Western Australia, the Department of Mines and Petroleum has recently issued a discussion paper on UCG, the start of a process that may eventually allow UCG to be legally undertaken there.

There is already a listed company, Eneabba Gas, which has tenements in the Sargon region to the north of Perth, keen to use UCG to supply the Perth market.

But in practice the other states are waiting for the Queensland government, which has said it will decide by the end of next year if there is an industry or not.