Energy giants seek coal gas pay-off By Andrew Symon
SINGAPORE - ConocoPhillips, British Gas (BG), Shell and other major
international energy companies are scrambling to gain a foothold in Asia's and
Australia's nascent coal bed methane (CBM) business.
CBM is chemically similar to petroleum natural gas and is exploited by tapping
methane trapped in the aqueous surface of coal seams. Industry players say the
fuel could provide a huge new gas source for power generation, industrial
boilers and residential use from the bountiful and relatively tapped coal
reserves in Australia, China, India, Indonesia and Vietnam.
While the CBM industry is well established in North America, where it produces
9% of the total gas supply for the US, it is still
in its infancy in Asia. That's set to change if big international energy
players follow through on big new investment plans, particularly in Australia.
There the industry is concentrated in the northeastern state of Queensland and
has developed rapidly since commercial CBM production started in 1998.
About 7% of Australia's gas production for domestic markets is now derived from
CBM. Now large energy companies have tabled plans to take that business
regional through large-scale CBM liquefaction plants geared for exports to
Asian markets. Last September, US petroleum major ConocoPhillips outmaneuvered
Britain's BG to sign a US$8 billion CBM-LNG deal with Australian producer
Origin.
That deal included plans for two Queensland-based 3.5 million tonnes per year
CBM-LNG plants scheduled to come online in 2014. ConocoPhillips chief executive
officer Jim Mulva said at the time that the investment would give the company
access to the leading CBM resources in Australia. "Moreover, the company has
enhanced its LNG position with the creation of an additional Australian LNG hub
serving Asia-Pacific markets."
In October, BG purchased CBM-endowed Queensland Gas, in which it already held a
minority stake, through a $3.4 billion friendly takeover. BG has since said it
plans to invest $8 billion in two 3.4 million tonnes per year CBM-LNG
facilities. Both plants are scheduled to open in 2014 and some of the output
may be dedicated to filling BG's LNG supply contract signed last year with
Singapore.
Earlier, Malaysia's Petronas took a 40% stake in another major CBM-LNG venture,
led by Australia's third-largest petroleum group, Santos. Last May, the two
partners announced $5 billion plans for a 4 million tonnes per year plant also
to be located in Queensland. Anglo-Dutch Shell, meanwhile, formed an alliance
with Australia's Arrow Energy, which apart from new CBM production facilities
planned for Queensland has the rights to CBM exploration blocks in Vietnam,
Indonesia and India .
Whether all these deals will hold up in the current global economic crisis is
questionable. Industry analysts and players note that the frenzy of CBM
activity took place last year when global oil prices were near peak highs of
$150 per barrel. (Natural gas prices are indexed to oil prices.) Now that
prices have collapsed to around $35, some are raising old questions about the
fuel's reliability compared with conventional petroleum fields.
Peter Cockcroft, chairman of Brisbane-based Blue Energy, a company that
combines its conventional petroleum business with CBM development, said in an
interview with Asia Times Online that it's hard to imagine that last year's
Queensland deals would have taken place in the current global price context. He
said one major issue for any company's business planning is whether CBM fields
can deliver a high enough volume of gas over a sustained period of time.
This is an important consideration in light of the massive and
capital-intensive CBM-LNG projects now planned for Queensland and other areas.
Where CBM is piped into existing markets, smaller scale facilities are viable,
as Queensland's experience shows. However, new LNG facilities geared for high
volume exports must lock in long-term contracts in order to raise the finance
needed to build the expensive plants.
Industry analysts note that a conventional LNG capacity of 3 million tonnes per
year requires a supply of 4.25 billion cubic meters of actual gas and that such
a fuel flow would need to last for at least 20 years - the normal length of an
LNG supply contract - to be viable. The need to find and maintain several large
operating wells to generate sufficient volumes makes CBM ventures particularly
capital intensive, they say.
On average, nearly 10 wells are needed to produce the same volume of gas that
might be supplied by a conventional gas well - though CBM wells are simpler to
tap and drilling depths are shallower. Any project, therefore, will likely need
to continually add new wells to ensure sufficient gas flow over the course of a
sales contract. "It's a completely different business model," Cockcroft said.
That model is complicated by the long lead times - typically two years or
longer to drill and de-water the wells - needed to ramp up production to meet
new sales contracts. That often means that private companies are unable to
generate positive cash flow for several years after beginning production, a
tricky proposition in the current contracting financial environment.
In the US and Australia, that obstacle has been at least partially offset by
government-provided tax incentives. Yet, Cockcroft, with more than 20 years in
the Australian and Asian energy business, said, "It's pretty hard right now for
a company to go to its shareholders and argue for finance on the basis of $100
a barrel oil."
Despite these risks and hurdles, CBM is still viewed as a fashionable new fuel
source for Asia. China, which began producing CBM in the mid-1990s, is ramping
up its production of the fuel. In India, Indonesia and Vietnam, CBM exploration
and development blocks are being allocated in growing numbers to domestic and
foreign companies.
At an industry conference this month in Jakarta, Evita Legowo, director general
of Indonesia's oil and gas section of the Ministry of Energy and Mineral
Resources, said CBM's potential was "even bigger than our natural gas
resources". The ministry estimated the country had as much as 12.8 billion
cubic meters of potential CBM resources, compared with its almost 10 trillion
cubic meters of natural gas.
So far seven different CBM development contracts have been signed in Indonesia,
with the first production of the fuel anticipated in 2011. It's still a wild
card, however, whether big energy firms will in the current economic
environment have the incentive to follow through on their previous ambitious
CBM plans.
Andrew Symon is a Singapore-based analyst and writer specializing in
energy and resources. He may be reached at andrew.symon@yahoo.com.sg
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