Stephen Bartholomeusz
Gas rises on demand
The gas rush occurring in Queensland as some of the world’s largest energy groups scramble to secure feed for export LNG plants fits within a bigger picture of soaring demand for energy and the increasingly carbon-driven appeal of gas.
As Santos’ acting chief executive, David Knox, said today, the combination of increased demand and pressure to reduce emissions not only means gas will have an increasing share of the fuel mix, but also that unconventional resources will increasingly be tapped.
The rapid speed with which coal seam gas has gone from being a curiosity to becoming the hottest commodity in the country – at least in terms of the number of deals being struck – has to do with both the increased maturity of the nascent sector and soaring energy prices. Which have pushed LNG pricing towards parity with oil and is starting to flow through to domestic gas pricing.
The Queensland gas story isn’t, however, as novel as it might appear. Santos vice president of gas marketing and commercialisation, Rick Wilkinson, told the investor seminar that US unconventional gas production – "tight gas" sands, coal seam methane and gas shales – had doubled since 1992.
He said demand for eastern Australian gas would double within a decade and that prices would rise as the arbitrage between export and domestic markets closed, driving both conventional and unconventional reserves growth.
Santos, separate to its conventional gas reserves and coal seam resources, has potential resources of shale gas, tight gas (gas trapped in tight formations underground) and deep coal gas in the Cooper Basin.
The economics of unconventional gas are radically different – but not necessarily either inferior or superior – to conventional gas.
A recent comparison of conventional LNG projects with coal seam gas projects by Deutsche Bank analysts illustrated the differences neatly. They compared Woodside’s Pluto project with Santos’ Gladstone LNG (GLNG) project, which will source gas from its Fairview resource.
Pluto will drill five wells to support its initial LNG production. GLNG will drill 540. Pluto will increase its number of wells to 8, while GLNG will be adding about 60 wells a year.
The ramp up period to first production is about five days for Pluto, but two years for GLNG, while production per well is about 120 million cubic feet of gas a day for Pluto and only about one million cubic feet per well for Fairview. Total production for Pluto would be around 614 million cubic feet where Fairview is expected to produce 526 million cubic feet.
So, at face value, coal seam gas involves far more drilling for significantly less production and, because coal seam gas contains no liquids, significantly less valuable production.
The capital expenditure on the upstream phase of the development to bring Pluto into production, however, is about $5 billion, whereas Fairview will cost only about $1.2 billion – that’s the difference between an offshore development and an onshore project.
Moreover, where Pluto faces a petroleum resource rent tax rate of 40 per cent, as an onshore project Fairview will only pay royalties of 10 per cent – the upstream tax take, the analysts say, will be $6.7 billion for Pluto but only $2.3 billion for Fairview.
As Santos says, the growth in Australian coal seam gas production is following a similar path to coal seam gas in the US, although average production from the Queensland fields is substantially greater than from the average well in the US – Santos says the Australian resources are of better quality than those in the US.
The reason there is excitement about the prospects for the sector is the ability to tap into the global gas market and gain exposure to LNG prices. If the coal seam resources were devoted purely to the domestic market they might benefit from the impact of carbon pricing but, in the near term at least, would over-supply the domestic market and dampen price growth.
With four export LNG plants planned in Queensland, the market for the gas would suddenly become a global one. Exports of the gas as LNG will generate greater value and inevitably pull domestic prices up to narrow the arbitrage opportunity, putting a rising floor under the economics of the coal seam gas sector and bringing other unconventional sources of gas into play.
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