Over the last year, CSG production in Queensland and NSW grew by 40.2 per cent to reach a record 113 PJ and now comprises about a quarter of the entire gas production of Australia’s east coast. CSG exploration and production shows no sign of slowing down, demonstrating that the once-small CSG market is now a major player in Australia’s gas industry, with CSG producers claiming that there is sufficient gas in Queensland’s Surat and Bowen basins to supply the eastern states for decades.

Two major factors have been driving the rapid growth of CSG in Australia. Firstly, the decline of mature gas basins in eastern Australia, including the Cooper Basin, have opened large and mature gas markets to CSG producers. Secondly, the proximity of these CSG resources to markets has made it more economical to develop CSG than conventional gas provinces further afield, with Victoria being the primary exception.

However, ultimately, the industry has evolved to cater to demands in major markets and the trend that this year has seen has been a shift in focus from small-scale projects with power stations located near the CSG resources to larger export projects, either to other states using major pipelines or potentially abroad with the prospect of LNG.

At the leading edge: QLD’s CSG growth

While CSG production in Queensland has achieved phenomenal growth over the last five years, the state will continue to remain at the forefront of CSG exploration and production, looking at pursuing markets further afield through pipelines and LNG developments.

CSG currently supplies around 80 per cent of the gas market in Queensland, with production increasing from 2 PJ in 2000, to 105 PJ in 2007.

“I believe the Surat Basin has the potential to rival Bass Strait within five years and QGC has the best position within this world-class gas resource,” said Richard Cottee Managing Director of Queensland Gas Company (QGC), Australia’s third largest CSG producer, producing approximately 14.8 PJ in 2007 and with 2P reserves of 1,120 PJ.

The Queensland Government has backed the state’s long-term potential by recently releasing 110,000 sq km of both petroleum and CSG acreages around the Adavale and Georgina basins, and the Bowen-Surat and Cooper-Eromanga basins. Queensland Mines and Energy Minister Geoff Wilson said that the move would likely attract more than $500 million of investment for exploration of the basins.

“There’s a lot of untapped potential for new discoveries in those areas. Today’s exploration will yield tomorrow’s jobs,” Mr Wilson said.

Established CSG companies like Mosaic, Origin Energy and Arrow Energy have been tapping the whole supply-chain of tomorrow’s CSG, recently announcing major expansions to drilling campaigns as well as projects that have already started supplying.

Mosaic Oil has successfully raised $4.4 million as part of a strategy to accelerate its 2008 to 2010 drilling campaign in the Waggamba field in the Surat-Bowen Basin, which will see the company expand its 10-well 2008 drilling program in the Surat-Bowen Basin to 15 wells.

Mosaic has also recently signed an agreement with CS Energy, which will assist the company to develop approximately 6 PJ of committed 2P gas reserves in the Waggamba field and in converting a part of approximately 14 PJ of 3P reserves to 2P reserves for incremental gas sale under a revised gas supply agreement.

One of the biggest expansions announced this year was Origin Energy’s $760 million plan for the Spring Gully CSG field in Queensland’s Surat Basin. A chief component of the expansion includes construction of a 200 km gas pipeline to connect the gas hub at Wallumbilla to the Talinga field and Darling Downs Power Station.

The expansion to 150 PJ/d capacity will occur to meet the Darling Downs Power Station load. The field was originally to have a capacity of 85 PJ/d, however an extra 60 wells, increased gas processing capacity and water treatment plant will now be developed in order to handle Darling Downs’ 44 PJ/a load and a Rio Tinto contract for 22 PJ/a. The Spring Gully field will be supplemented by the development of the Talinga field in the Walloon coal seams.

Origin, which is Australia’s biggest CSG producer, has said that construction of the $90 million pipeline is expected to commence in the second half of 2008 with completion in the second quarter of 2009.

Increasing production from Arrow Energy’s fields in the Surat Basin have spurred a deal to develop the estimated $545 million, 450 MW Braemer 2 Power Station and associated high pressure gas pipeline. The power station will be located approximately 40 km west of Dalby in Southern Queensland adjacent to the Braemer 1 power station, and is in close proximity to Arrow’s Daandine and Stratheden gas fields.

Under the deal, Arrow has agreed to supply 11.5 PJ/a of gas over a 12-year period to the power station from the fields, and with initial development of the Stratheden field poised to start. Development work has started on the 100 km 16 in. Class 900 gas pipeline with contractor Delco estimating that construction will be completed by January 2009.

Interstate CSG pipelines promoting export potential

Major progress has also been made by Epic Energy, QGC and Hunter Energy on gas pipelines that will supply CSG from Queensland to the southern states.

In February, Epic Energy awarded Nacap Australia the contract to construct the Queensland to South Australia/New South Wales Link (QSN Link).

The QSN Link will comprise approximately 180 km of DN 400 Grade X70, Class 900 pipeline, with a Maximum Allowable Operating Pressure of 15.3 MPa.

The QSN Link project will also include the provision of several metering and pressure reduction stations at selected locations above ground and buried pipeline facilities and hot taps into South Western Queensland Pipeline, Moomba to Adelaide Pipeline and Moomba to Sydney Pipeline.

Site works have started and are expected to be completed by December 2008.

Earlier this year, QGC and AGL reached an agreement to develop a 115 km gas pipeline linking QGC’s Berwyndale gas fields with Wallumbilla, providing increased capacity for the transport of QGC’s gas into western Queensland and, ultimately, the southern states.

The high pressure pipeline will be 400 mm in diameter and will run from a point approximately 8.5 km east of the township of Miles adjacent to the Condamine Power Station, to the Wallumbilla gas hub. The $70 million pipeline is planned for completion in January next year.

Route selection and refinement of Hunter Energy’s $850 million Queensland-Hunter Gas Pipeline are underway and consultants have been engaged for approvals. The 820 km pipeline, which aims to secure additional gas supplies for the Hunter Region, will connect Wallumbilla in Queensland to Newcastle in NSW.

The pipeline will be connected to the HEZ pipeline at Rutherford in NSW. Project approvals have been secured from the Queensland Government and an environmental assessment is underway in NSW.

Recently, an agreement has been reached to transport 50 PJ/a of gas for 20 years for a 400-600 MW power station proposed by QGC, ANZ Infrastructure Services and Toyota Tsusho Corporation. This will be approximately one-third of the pipeline’s capacity.

Construction of the pipeline is anticipated to start late next year. Gas flow is expected to commence in the first quarter of 2011.

While many pipelines have been developed to transport gas from the booming Queensland CSG projects to the southern states, 2008 also saw major progress on one project that aimed to do just the opposite.

February saw Metgasco’s Casino – Ispwich pipeline declared a major project by the New South Wales Minister for Planning. The 145 km pipeline will supply gas from its CSG project near Casino in northern NSW to the southeast Queensland energy market.

The declaration means that the Department of Planning will assume control of planning and development consent for the portion of this project that will be within NSW state borders.

Metgasco said that this approach will streamline and expedite the project’s environmental assessment and approvals process. The Director General’s requirements for the environmental assessment of this project have been received and this work is now underway. Construction of the pipeline is expected to commence in 2010 and finish in 2011.

In March, Metgasco has announced a further increase in the company’s gas reserves from the Clarence Moreton Basin, which will supply the Casino – Ipswich pipeline.

Estimates of project operator Metgasco’s 2P reserves have been revised to 247 PJ, a 27 per cent increase from the 195 PJ assessed in September last year. The recent assessment has increased Metgasco’s 3P reserves by 20 per cent to 1,389 PJ from 1,156 PJ in September last year.

Corporate deals promote NSW CSG

The year saw spin-offs and corporate alliances spur the development of a number of CSG projects based in NSW.

AJ Lucas intends to ‘spin off’ its CSG focussed subsidiary Lucas Energy within the next 12 months. The subsidiary was established to identify develop and commercialise CSG and other unconventional gas assets with initial investments including NSW’s Gloucester Basin.

Recently, Lucas Energy and Molopo Australia received an initial reserves certification for 1P CSG recovery of 14.9 Bcf at the companies’ Gloucester Basin Project. Located approximately 100 km north of Newcastle and covering an area of 1,050 sq km, the project is estimated to have 170.2 Bcf of 2P reserves and 359.2 Bcf of 3P reserves. Lucas Energy said that the certification identifies a potential 525 Bcf of recoverable gas from a mapped volume of approximately 1,600 Bcf of gas in place.

“This certification represents a significant milestone for the project and confirms its economic potential. CSG projects traditionally commence with relatively low levels of 2P certified reserves and increase significantly over time as greater production confidence and additional data coverage are obtained,” said a Lucas statement.

Route selection and refinement are underway for Lucas’ proposed pipeline which will connect the Gloucester Basin project to Hexham, near Newcastle. Consultants have been engaged for approvals with Lucas planning to get first gas to Hexham via the pipeline by 2010.

Lucas’ corporate dealings have also promoted development of CSG potential at Sydney Gas’ Hunter gas project. Chief among them, the deal between AJ Lucas and Sydney Gas, is expected to enable the two companies to prove up more gas reserves and commercialise the CSG potential at the Hunter Gas Project. As part of the deal, Andrew Lukas resigned from his executive director, engineering and technical, position at Lucas and joined Sydney Gas as CEO. Mr Lukas will become a non-executive director of Lucas.

“Our directional drilling technology has already been instrumental in identifying CSG at Camden and we look forward to applying our drilling technology and expertise in other areas within the Sydney Basin, most likely Hunter,” AJ Lucas Executive Chairman Alan Campbell said.

Sydney Gas is developing gas production in the Hunter and Newcastle regions, in a three phase, 300-well drilling program over five years, which is expected to produce up to 40 PJ/a of gas to the Singleton-Muswellbrook and Newcastle regions for up to 10 years.

Finally, a deal between Eastern Star Gas and Gastar Exploration with electricity generator Macquarie Generation is likely to result in the acceleration of the companies’ Gunnedah Basin work program.

As part of the deal, which will see the two companies potentially sell 500 PJ of gas, the companies are investigating the installation of a 250 km high pressure gas transmission pipeline linking Narrabri to Bayswater.

“It could provide us with a large gas market that will underpin development of gas pipeline infrastructure and act as the foundation for the large scale development and sale of natural gas within NSW. The gas pipeline linking the gas project to the Bayswater Power Station could bring gas within 100 km of Newcastle and provide potential additional gas sales into the greater Newcastle-Sydney-Wollongong area. NSW will at last have a truly major, indigenous source of natural gas,” said Eastern Star Gas Managing Director Dennis Morton.

Exporting CSG further afield: LNG projects at Gladstone

One of the most significant developments in the Australian CSG market has been the progress achieved on six CSG-powered LNG export projects in Gladstone. These developments have not only spurred a flurry of activity relating to the LNG plants, but a considerable amount of investment CSG drilling and development, in both core Queensland basins and further afield.

Santos’s Gladstone LNGTM project

Some analysts have suggested that Santos’ Gladstone LNGTM (GLNG) proposal is at the forefront, with the recent award of two parallel front end engineering and design (FEED) contracts to Foster Wheeler and Bechtel to each undertake a six month study of the 3-4 MMt/a GLNG project. Santos is the country’s second-largest CSG company, both in production, producing 23.4 PJ in 2007 and 2P reserves of 1,330 PJ.

The award of these contracts enables Santos to maintain its project schedule, with a decision to move to a formal FEED process anticipated by the end of this year or early next year, a Final Investment Decision by the end of 2009, and first LNG cargos early in 2014.

Santos has said it envisages scope to build a second LNG plant within a few years of starting production at the GLNG Project, with the aspiration to export 10 MMt/a to the Asia Pacific market.

“Since announcing the project mid-last year, Santos has made significant progress in terms of growing our upstream gas resources, securing a freehold liquefaction plant site in Gladstone, lodging key environmental approval documents, and commencing a process to secure a potential partner for the GLNG project,” said acting Chief Executive David Knox.

The company recently announced the selection of Asia’s largest LNG producer, Petronas, as Santos’ partner for the project. Petronas will acquire a 40 per cent interest in the project and a third of Santos’ CSG 2P reserves.

Project SUN LNG

In April this year, Sunshine Gas and Sojitz Corporation announced plans to undertake multiple feasibility studies for the development of their 500,000 t/a LNG facility at the Fisherman’s Landing Wharf in Gladstone.

Sunshine said that selection of an Engineering Procurement and Construction contractor is expected in the June quarter, which will trigger the commencement of a formal FEED study.

The Fisherman’s Landing Wharf was nominated by the Gladstone Port Corporation as a preferred LNG site and it is situated 5 km from the Queensland Gas Pipeline. A pipeline survey licence for the required 5 km feed gas pipeline has been lodged with the Department of Mines and Energy and has been granted ‘environmental authority’.

The project, dubbed Project SUN LNG, remains on track to make a Final Investment Decision by December 2008 with its first delivery scheduled for first quarter 2012.

In March, the company had awarded the FEED contract for its Lacerta CSG Field, which will fuel the proposed LNG plant.

The contract, awarded to a consortium of GHD and Delco Australia, is part of the company’s plan to commercialise the CSG field, located north of Roma in Queensland. The Lacerta Project currently has 3P reserves of 1,097 PJ, including 469 PJ of 2P reserves and 44 PJ of 1P. The company’s objective is to significantly increase Lacerta’s 1P and 2P reserve volumes as it moves into the development phase of the project.

Sunshine has said that Lacerta’s existing 2P reserves would support the first LNG train and further reserve upgrades would provide a platform for expansion of the plant.

Gladstone ‘Fisherman’s Landing’ LNG Project

While LNG Ltd’s 1 MMt/a Gladstone ‘Fisherman’s Landing’ LNG project has not progressed to the stage of conducting preliminary engineering, it has diversified potential CSG sources beyond Queensland.

In March, LNG Ltd and Arrow signed a cooperation agreement for the identification and potential development of LNG projects utilising CSG as the feedstock for LNG production.

The CSG-LNG opportunities will focus on Queensland, northern New South Wales and Southeast Asia, where Arrow already holds significant CSG-bearing and producing tenements and/or is in the process of pursuing further potential CSG exploration and production prospects.

LNG Ltd will have primary responsibility for all LNG project development activities and Arrow will have primary responsibility for all associated CSG project development activities.

LNG Ltd’s Gladstone LNG plant is estimated to cost $410.5 million for the first phase of development. The LNG plant site and design will provide for additional LNG trains of similar size, subject to the availability of further gas, with the overall LNG plant storage facilities and infrastructure to be capable of handling production of at least 3 MMt/a.

Arrow’s CSG to LNG Project

In addition, Arrow Energy and Shell Exploration Company, a subsidiary of Royal Dutch Shell, have signed a preliminary agreement to develop Arrow’s Australian and international coal seam gas (CSG) projects via a 1 MMt/a LNG facility.

The $776 million deal will see Shell take a 30 per cent interest in Arrow’s Australian upstream tenements for up to $644 million and a 10 per cent stake of Arrow International, which holds all of Arrow’s international assets for up to $132 million.

Shell will have the right to off-take LNG produced utilising gas from the Arrow/Shell upstream tenements, subject to the execution of a binding agreement for such off-take, on market based terms with the LNG sellers.

The Southern Cross LNG Project

Canadian company LNG Impel has announced plans to develop an open access LNG terminal in Gladstone, Queensland.

Queensland Premier Anna Bligh told state parliament that estimates for such a project would be in the order of $3-$5 billion worth of investment.

Queensland Curtis LNG Facility

QGC’s recent agreement with the British Gas (BG) Group highlights another key component of the gas export chain – an international partner with access to infrastructure in an end-market with substantial demand, such as India.

The two companies have agreed to cooperate in the exploration and development of onshore CSG as well as in the development of domestic market opportunities and a new LNG production and export facility on the Queensland coast. The proposed LNG facility will produce 3 to 4 MMt/a of LNG, all of which will be purchased by BG under a 20-year agreement. The project comprises construction of a processing plant and a 380 km pipeline from QGC’s Surat Basin tenements to a port site. Commissioning is scheduled for 2013.

QGC has previously said that it would ramp up activities in preparation for the project and recently three new reciprocating compressors arrived in the Surat Basin for installation and commissioning to take place early next quarter. The new compressors are expected to increase QGC’s gas processing to 160 TJ/d.

BG Group is not the only international investor with access to the Asian market in Australian CSG tenements. In March, Indian company Petronet LNG revealed that it plans to invest $1.5 billion to $3 billion to join one or more Australian CSG projects with the view to export the gas as LNG.

“We expect to firm up our decision to invest in an upstream project in the next six to eight months,” said Petronet LNG Managing Director Prosad Dasgupta. “One of the conditions for the investment is that Petronet be a preferred buyer of gas. We are looking for projects between 7 Tcf and 15 Tcf.”

Toward frontier projects

Industry analysts have hoped that the international interest in Australian CSG developments, not just core and well-developed areas but also in undeveloped frontier fields such as Western Australia and Tasmania, will help the development of new fields.

Western Australia’s Deputy Premier Eric Ripper hopes that international investment in petroleum exploration will boost gas production in the state, highlighting the role of CSG.

“Potential exists for production of CSG from coal resources in the southwest of the state. The Department of Industry and Resources has been involved in research aimed at enhancing the petroleum prospectivity of the state – this research includes assessing the potential areas for CSG exploration and production,” he said.

Whereas Western Australia’s attractiveness lies in its considerable experience in conventional oil and gas development, Tasmania is attractive as a CSG target because the converse is true. With little indigenous energy sources of its own, the island-state has primarily relied on gas from Victorian gas fields. CSG exploration might allow the state to become a gas producer and reduce its dependence.

Pure Energy, one of the largest CSG acreage holders in Queensland, has lead the search for Tasmanian CSG prospects, having recently completed work on wells in SEL 32/2003 northeast Tasmania.

The Tasmanian Basin tenement covers 11,295 sq km and is a mature coal-mining production province, with significant coal resources, which the company believes to have significant potential for CSG because of coal-mining exploration and development in the region. Pure Energy has said that the relatively high density of coal mining drill holes makes the Tasmanian tenements particularly attractive for rapid progression from appraisal into pilot and development, in addition to the relative proximity of the CSG areas to the Tasmanian Gas Pipeline (TGP) and related gas distribution networks.

CSG projects spurring water pipeline developments

Industry analysts have long-emphasised the substantial role they predict gas to have in providing clean energy to offset greenhouse gas emissions. CSG provides a further advantage in drought-afflicted Australia since water is produced as a by-product of extraction.

The environmental potential of CSG has been recognised with Origin having won Australian Petroleum Production & Exploration Association’s environmental honour award for the commissioning of Australia’s first CSG water treatment facility. Instead of constructing hectares of evaporation ponds to manage the water by-product, Origin commissioned the largest CSG water treatment facility in the world, which produces 9 ML/d.

Last October, QGC and Origin started work to secure funding for a 3 ML/d water pipeline and reverse osmosis water purification plant to supply the town of Chinchilla with drinking water from QGC’s existing CSG operations in Chinchilla Shire.

QGC’s Richard Cottee said that a joint project team is working to determine the optimum purification method, water pipeline route and commercial terms. He said that the team is also holding discussions with Queensland Government agencies to secure necessary approvals to proceed.

In January this year, QGC and the Murilla Shire Council agreed to a long term arrangement to supply more than half a billion litres of potable water each year to the town of Miles in southern Queensland from its CSG fields in the Surat Basin.

Under the agreement, QGC will provide up to 1.5 ML/d of purified water to the town utilising proven reverse osmosis technology, over a 20-year term.

The Murilla Shire Council will construct an 8 km pipeline linking QGC’s plant at Condamine Power Station to the Miles water supply network. QGC said that pending approvals, construction of the pipeline is scheduled to begin soon, with first water supplies to be delivered to Miles in early 2009.

Challenges

The very strengths of CSG that have spurred its growth, from the proximity of CSG prospects to major cities, to its low environmental impact, also serve to highlight the major challenge for the industry – that being it is not growing fast enough to service projected demand and to accrue the substantial gains of which it is capable.

With gas demand projected to reach up to 22,000 PJ by 2030, and conventional gas and CSG expected to serve about 16,000 PJ of that demand, there is a considerable short-fall for the CSG industry to potentially tap. ACIL Tasman Executive Director Paul Balfe has estimated that if CSG is to meet half of that short-fall, Australian producers would need to drill over 5,000 wells by 2030, requiring an investment of $2.5 billion. The year so far has demonstrated that Australia’s CSG industry could meet this target and that further growth within the industry is likely.

However, the extent of this growth may be tempered or intensified by policies designed to promote clean energy and the extent to which gas is considered a transitional source. The Federal Government’s plan to introduce a national emissions trading system is considered by some industry analysts to further underpin the long-term financial sustainability of the industry, especially since CSG generally only contains about 3 per cent carbon dioxide, and that may be pumped back into the coal seam as part of the gas extraction process. This depends on the exact nature of the emissions trading model used and whether the Mandatory Renewable Energy Target or other similar schemes – which specifically exclude natural gas – would still operate.

Although it is not without its challenges, given the wealth of new projects and consolidation of existing companies involved in the industry, it seems likely that the burgeoning industry will build on its current momentum to substantially transform the Australian energy and pipeline landscape in the near future.