Coal seam gas: the year in review

According to independent energy research firm EnergyQuest, in 2006 CSG production reached a new high of 80 PJ, an increase of 31.4 per cent in response to Australia’s growing gas consumption needs, which rose 3.4 per cent to 908 PJ. Numerous milestones were reached, with many companies making their mark upon the CSG industry. Industry transactions, farmins and takeover bids again saw the reshuffling of CSG interests, including BHP’s sale of its Australian CSG assets to AGL for $93 million in June 2006.

BHP was a co-owner of the Moranbah Gas Project, one of Australia’s most active CSG assets with a production rate of approximately 46 TJ/d. Shortly after the sale, the 2005/2006 drilling campaign was completed, bringing the total number of production wells to 72. The partners are currently undertaking an intensive period of development drilling to bring the field up to a planned deliverability of 55 TJ/d, with a view to increase this to 58 TJ/d by 2008.

Following the sale of BHP’s CSG assets, Molopo took on three members of BHP’s ex-CSG team to support its ongoing growth strategy. Molopo then proceeded to drill its Harcourt field asset, before focusing upon developing the Gloucester Basin through a drilling and appraisal program that has produced encouraging initial results in excess of 650,000 cf/d. In March this year, Molopo and its Gloucester Basin partner Lucas CSG also announced they would be enhancing their Gloucester Basin activities, following the approval of the expanded Phase II appraisal and exploration program designed to establish reserves across the Gloucester Basin and to ascertain production capabilities prior to a development decision.

Recently, the company reported that its Timmy Prospect has the potential to outstrip its Harcourt and Mungi fields, and plans to drill a production test well to establish reserves by late 2007.

Meanwhile, Origin Energy reclaimed its position as Australia’s largest CSG producer, ousting Santos who had pushed ahead of Origin last year. In August 2006 the company released estimates that projected its CSG production to increase from 78 PJ during the 2005/2006 financial year, to approximately 100 PJ in the 2006/2007 financial year.

July 2006 was an eventful month, which saw major industry players Origin and Santos making significant progress on their respective projects. Origin announced it would invest a further $114 million in Spring Gully CSG project, with a view to construct a 1,000 MW gas-fired power station near the gas plant, and received government approval shortly after in mid-September. However, with Origin’s acquisition of Sun Retail, the company gained approval to advance the Darling Downs Power Station and which is located closer to Brisbane. Origin is still considering which power station presents the best development option.

Santos also posted promising results in July due to increased production from the Fairview CSG field in Queensland, reporting a 65 per cent increase in CSG production for 2006. In April this year, Santos completed a $150 million expansion of Fairview, which the company has described as “the largest producing CSG field in Australia”, as gas production has doubled from 27 TJ/d to 55 TJ/d in just two years.

With the addition of pilot drilling at its Roma, Scotia and Fairview fields, CSG has become a “˜new legacy asset’ for Santos, according to Managing Director John Ellice-Flint, who expects Santos’ CSG production to increase by 200 per cent over the next five years.

Other CSG players have also been busy. Following a successful core-hole evaluation program at its Lacerta CSG project Sunshine Gas proceeded late last year with a $5.4 million, 26-well program focused on Lacerta’s appraisal and development. Managing Director Tony Gilby said the company was targeting certified 2P reserves of 244 PJ from Lacerta by June 2007.

Sunshine Gas has recently raised $30 million through a placement to institutions to fund development of its Lacerta CSG and Overston conventional gas projects and subsequently signed a non-binding MoU with Hunter Energy to supply 8 PJ a year under a 10-year agreement from 2010.

Also completed in July was Eastern Star Gas’ (ESG) nine-well drilling program at the Gunnedah Basin CSG project. On completion of the Bibblewindi and Bohena production pilots, ESG intends to connect the developments to the 11 MW Wilga Park Power Station via a 38 km gas pipeline, which the company hopes will give it a foothold in the NSW CSG market. As part of its strategy, in September ESG acquired an additional 32.5 per cent interest in the Gunnedah Basin Project, establishing the company as the largest equity holder. Fracture stimulation at Gunnedah was also completed in September and ESG commenced a four-corehole program in late March this year to increase the 2P gas reserve target from 50 PJ at initial reserve certification to 200 PJ by the end of 2007.

Sydney Gas and Camden project partner AGL also announced in July the launch of a $34 million exploration program to increase Camden’s reserve base. Production exceeded 4.4 PJ/a in September and the joint venture planned to drill 18 wells by the end of the 2006/2007 financial year. However, towards the end of 2006, revenue and production volumes from Camden decreased slightly. Despite this, Sydney Gas reported a 77 per cent increase in gas sales at its Camden project in November and has said its Surface to In-Seam (SIS) well program would improve production. Over the next few months, Sydney Gas drilled several SIS wells and the company recently achieved its highest quarterly production at Camden with total sales seven per cent higher than in the previous quarter, reaching 1,134 TJ.

In August, Sydney Gas and AGL commenced community consultation on its gas exploration proposal in the Broke-Bulga area located in the Hunter Valley in NSW. The proposed exploration works will involve the drilling of up to four core holes and fifteen production test wells over an 18 to 24 month period. Geological data will also be acquired and the project aims to gain an understanding of the area’s coal geology and assess the potential for the future commercial production of CSG.

During the year, AGL partnered with Queensland Gas Company (QGC), acquiring a 27.5 per cent stake in the company and effectively blocking Santos’ attempted takeover of QGC. “AGL’s cornerstone investment and bankable gas supply agreements will also provide the funding base to further accelerate the exploration and development of QGC’s gas resources,” said QGC Managing Director Richard Cottee.

In particular, AGL said it hoped to capitalise upon QGC’s Berwyndale South Gas Field, which has produced record-breaking sales of 16 PJ/a, or double the initial contract volumes of gas for customers CS Energy and the Braemar Power Project.

In September 2006, QGC announced it would be spending $60 million on expanding its CSG interests, commencing with the drilling of Berwyndale South-58. Following Santos’ unsuccessful $606 million takeover offer, QGC secured a short-term gas supply contract for an additional 2 PJ/a of gas to the Braemar Power Project from Berwyndale South. In December, QGC attained formal certification from Netherland, Sewell & Associates confirming the commerciality of QGC’s 64 per cent volumetric increase in 2P CSG reserves to 695 PJ. Mr Cottee said the reserve upgrade was part of a 52 week growth acceleration strategy which aims to increase 2P reserves to 1,000 PJ by December 2007.

During Q3 2006, Beach Petroleum continued CSG exploration at the Dalby South block of ATP 683P, with a drilling program to investigate the potential to extend CSG production into the southern half of the Dalby South Block. The company also commenced CSG sales from its Tipton West Field in February this year and said there was “substantial CSG potential beside the pipelines at Tipton West for future contracts”.

There has been no shortage of companies aiming to corner east Australia’s CSG market, including Metgasco who has outlined plans to construct a pipeline from Casino to Ipswich. The pipeline will supply gas from Casino to the Swanbank Power Station at Ipswich and is initially intended to supply 18 PJ/a of gas. Development work on the proposed pipeline will commence once CSG reserves are established by CS Energy at PEL 16. Metgasco expects to deliver gas by 2010.

Most recently in May this year, the Queensland Government decided to transfer the gas arm of government-owned entity Enertrade to Stanwell Corporation. This includes Enertrade’s plans to construct a 420 km CSG pipeline from Moranbah to Gladstone following the success of the North Queensland Gas Pipeline which runs from Moranbah to Townsville to power the gas-fired Townsville Power Station.

Epic Energy and APA Group are also working together on the North Gas Link which will join Epic’s South West Queensland Pipeline at Ballera to both APA’s Moomba-Sydney Pipeline and Epic’s Moomba-Adelaide Pipeline System. A final investment decision will be made shortly and the pipeline is expected to be operational during 2008.

APA Group Managing Director Mick McCormack said: “The CSG industry is developing and will play and will play a far greater role in the energy market over the medium to long term. APA is currently working on a project to deliver CSG to the southern markets through a new gas pipeline connecting Ballera in Queensland to APA’s Moomba to Sydney pipeline.”

In a statement, the companies said: “The Link is another significant step in the evolution of a true east coast gas grid which will provide a physical gas supply connection between Queensland, South Australia, New South Wales and Victoria. This development will allow both Epic and APA to provide a seamless transport service from the CSG fields in and around southeast Queensland to customers in the southern states.”

Meanwhile, another company that has been eyeing the CSG industry in Australia and the Asia Pacific is Arrow, who merged with CH4 late last year. Arrow is hoping to dominate the Queensland CSG market, improve margins at the Moranbah Gas Project, and investigate overseas markets for further expansion. Arrow also completed an agreement with Pure Energy to farmin to ATP 831P and ATP 759P, which is situated in close proximity to ATP 364P, where Arrow’s Moranbah Gas Project is located. Arrow’s net reserves of CSG also surged by 21 per cent after the company recorded certified 1P reserves of 77 PJ and 2P reserves of 108 PJ at its Dundee project in the Surat Basin.

In addition, there has been growing interest in demonstrating the viability of CSG production from other areas in Australia, such as the Tasmanian Basin and North Perth Basin.

Pure Energy has commenced drilling its CSG tenement SEL 32/2003 in Tasmania, focusing on the “˜attractive’ Fingal-Dalmayne area in northeast Tasmania first. Pure believes the Tasmanian Basin to contain significant potential for CSG, as “thick and extensive coal seams at the appropriate depths have been proven by over a century of coal exploration and development.”

Pure also said that there is the potential to use existing commercial infrastructure, such as the Tasmanian Gas Pipeline and related gas distribution networks, which are in place and run directly through the tenement near some of the most prospective CSG areas.

In WA, Dynasty Metals Australia has been granted a Special Prospecting Authority (SPA) license to commence CSG exploration in the North Perth Basin. The license covers Dynasty’s Irwin CSG Project, which is located 65 km east of Geraldton and Oakagee. Dynasty controls the entire Irwin Coalfield under the SPA license and commenced a seismic program in May to identify the locations of gaseous sequences below the identified coal measures. Dynasty intends to drill the generated targets once the necessary approvals are obtained.

Most significantly, the suspension of the PNG Gas Project in February this year saw a gap open up in the Australian gas market – a gap that industry insiders have predicted will be filled by CSG. Beach Petroleum said that following the suspension of the PNG Project, there has been strong interest in companies with CSG assets. With gas consumption in Australia predicted to rise over the next decade, particularly in eastern Australia, the need to source alternative supplies for the future, including CSG, has been of growing importance.

An Australian Bureau of Agricultural and Resource Economics (ABARE) report projected natural gas production from the Gippsland and Cooper-Eromanga basins to decline. However, it found that this decline would be partially compensated for by CSG and increasing reserves from the Otway Basin.

“Total gas supply in the eastern Australian market is projected to increase more modestly than CSG production, by around 60 per cent over the 25 year projection period. This is a result of the offsetting effect of falling gas supplies from the mature Cooper-Eromanga Basin and eventually from the Bass Strait,” said the ABARE report.

“From 2012-13, gas demand in the eastern market is project to outstrip local supply, providing an opportunity for supplies from outside the region to enter the market. By 2029-2030, this market is project to have grown to around 1,124 PJ.”

Grahame Baker of RLMS also said the CSG industry has also driven the need for continued investment in the nation’s gas transmission pipelines.

“The development of CSG in eastern Australia – and its recent acceptance in the market as being a reliable source of natural gas – has been a significant driver for new gas pipeline infrastructure since 2000.”

Numerous companies have also posted their predictions for future CSG market opportunities. QGC has forecast that by 2008 CSG will supply over 80 per cent of a 160 PJ Queensland market while Santos has calculated that CSG will reach 20 per cent of eastern Australia’s gas supply this year. Sydney Gas Chairman John Saunders has made similar predictions based on industry commentary, claiming that by 2020, as much as 50 per cent of Australia’s gas supply may be provided by CSG, a prediction supported by energy consultancy firm Wood Mackenzie.

Metgasco has highlighted southeast Queensland and northern NSW as major focus areas, with power demand in southeast Queensland forecast to grow by 260 MW/a over the next five years. The company is currently conducting pre-feasibility discussions over a 200 MW gas-fired power station to be located in northern NSW.

However, this year has not always been a smooth path for the CSG industry, which is also facing growing pressure to meet gas demand and satisfy potential greenhouse gas emission regimes. Increasing rates of gas consumption in Australia will require almost double the current known reserves to meet demand and satisfy potential greenhouse gas emission regimes. According to ACIL Tasman Executive Director Paul Balfe’s estimates, Australia would require 5,800 new CSG wells over the next 23 years at a cost of approximately $2.9 billion. Mr Balfe expressed confidence that the CSG industry would be able to rise to the occasion, saying that sufficient gas exists in the Bowen and Surat Basins to cope with this demand.

The past year has been a fruitful, though tumultuous, time for the CSG industry. With growing concerns over greenhouse gas abatement, the need for cleaner fuel sources, the suspension of the PNG Gas Project, and a multitude new projects and developments that emerged, there is little doubt that this burgeoning industry will be slowing down any time soon.

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