The Rising Influence of Rising Affluence

[DewDiligence]

Coal-Bed Methane: Industry Whose Time Has Come?

http://www.ft.com/cms/s/0/723090a2-b6c5-11de-8a28-00144feab49a.html

›By Peter Smith
October 13 2009 00:34

Converting coal-bed methane into liquefied natural gas is a fledgling industry but one that has attracted heavyweight oil and gas groups to the Australian state of Queensland.

Royal Dutch Shell, ConocoPhillips of the US, the UK’s BG and Petronas of Malaysia have all made big bets on Queensland CBM – natural gas produced from coal deposits that is known in Australia as coal seam gas – either alone or in partnership with domestic groups such as Santos, Origin Energy and Arrow Energy.

If Australia is to fulfil its promise of becoming the world’s dominant LNG supplier within a decade, a claim made by industry executives and analysts in recent months, then CBM will be fundamental to that goal.

Most of the CBM is located in the Bowen and Surat basins in Queensland’s interior, and once extracted from coal seams it has to be transported hundreds of kilometres overland to the port of Gladstone. From there, the plan is to convert the methane into LNG, which is supercooled to about minus 160 degrees centigrade, so it shrinks in volume and can be transported by tanker to Asia.

Joseph Marushack, Australia chief of ConocoPhillips, last month told an Australian LNG conference in Darwin that CBM could account for one-third of Australia’s gas projects by 2020.

Queensland’s CBM industry has been a vibrant sector for mergers and acquisitions, marked by friendly and hostile takeover approaches and strategic alliances.

ConocoPhillips last year agreed to invest up to A$9.6bn ($8.7bn) to jointly develop CBM with Origin Energy, a group that had fought off a hostile A$13.8bn takeover from BG.

BG later acquired Queensland Gas Company in an A$5.6bn deal and then Pure Energy for about A$800m. The two other main groupings are a consortium between Santos and Petronas, and a venture between Shell and Arrow Energy.

However, BG this year advanced the industry’s prospects when it signed a deal with CNOOC of China to sell LNG from its planned Gladstone plant. CNOOC said it would buy 3.6m tonnes of LNG a year for 20 years, as well as agreeing to take small stakes in BG’s LNG plant and some of its gas fields. The supply agreement represented about 5.3bn cubic metres of gas a year, roughly 8 per cent of Chinese demand.

The preliminary deal, China’s first commitment to gas imports for Queensland CBM, underscored hopes that a new supply route between Gladstone and Asia would soon be open. Singapore, South Korea and Japan are also potential customers for Australia’s CBM and are being actively courted.

Tony Regan at Tri-Zen International, a consultancy focused on the oil and gas industry, says that, for years Australia’s CBM was considered a “mom and pop” business, populated by many small independent producers. “But once the majors realised that many of the constraints are manageable, they started to invest heavily and CBM to LNG has become a reality,” he says.

Although converting coal bed methane to LNG uses well-established technology, it is yet to be fully proven as a large scale commercial proposition. CBM is different from natural gas in that you need far more wells to extract the gas and it comes in far more slowly.

“The verdict thus far is that these are not serious issues. With new technologies, you can get more gas faster,” says Mr Regan. “You still need to remove water [from the underground coal seams] but that is not taking as long as was first thought.”

The bigger problem for the multiple groups, however, is that there are too many projects and consolidation is needed. Analysts say two main groupings are likely, although one says that, under a radical plan, the various groups could collectively own the land and infrastructure but independently operate LNG processing systems.

David Knox, CEO of Santos, has already held out the olive branch, saying he would welcome “collaborative discussions” with rivals. Earlier this year, he singled out BG, which analysts say has built the most valuable coal seam gas portfolio, and the ConocoPhillips-Origin Energy consortium as the “key ones”.

Although the massive North West Shelf Gas Project remains the most valuable LNG asset in Australia and Chevron’s recent “final investment decision” on the Gorgon LNG project, which is also off western Australia, have stolen the headlines, few doubt that CBM will have its day.

The problem will be building the infrastructure, the local industry’s capacity to build enough LNG processing trains (systems), and finding contractors and engineers.

There is also emerging competition from other parts of the world, with China, Indonesia and India all looking to expand their CBM industries. Finally, developing Queensland’s CBM resources will takes tens of billions of dollars and it is not yet certain that the projects will be signed off.‹