The Australian Pipeliner(TAP): The last twelve months have been a rapid period of growth and expansion for the coal seam gas industry in Australia – what do you see as being the main drivers of this growth and where do you see the industry heading in the short to medium term?
Richard Cottee(RC): There certainly has been enormous growth! The prime difference has been that scepticism has disappeared about whether coal seam gas could play a major part in the energy scene. Companies like Queensland Gas Company (QGC) have proven that CSG is a reliable and plentiful source of gas and the market agrees. The PNG gas project was obviously part of that initial scepticism, with customers and the industry struggling to see how domestic suppliers could compete. In fact, a lot of contracts were engineered to be renewed in time to take gas from PNG from 2010 to 2012. So there is some irony that with PNG out of the picture, it’s the domestic CSG industry that has the wherewithal to take advantage of the enormous opportunities to meet growing demand for gas and electricity in that period.
Perhaps more importantly, perceived wisdom about future gas sources in Australia has changed. Since 1975, it was commonly held that the next major source of gas would come from Northern Australia where there was the North West Shelf, PNG or Timor Sea prospects. As a consequence, there was very little infrastructure development for domestic gas suppliers. So now there are these enormous market opportunities in NSW, Mount Isa and Gladstone, but the infrastructure is not yet capable of supplying these markets from CSG sources. It will require some investment but it will only occur if the CSG industry can continue to demonstrate that supply is reliable, and that means not only acquiring proved reserves, but also demonstrating deliverability. So the short and medium term is going to be very, very good for the CSG industry.
TAP: You’ve talked a bit about PNG and CSG, to what extent do you think that’s affected CSG?
RC: There was strong competition between the two gas supply options. To a large extent, PNG gas was a major driver for the growth of the domestic CSG industry. Now, there are three companies with 2P certified reserves of over 3,000 PJ combined: there’s Santos, Origin and QGC. The need for PNG has evaporated – something that was unfathomable some five years ago.
TAP: CSG now accounts for 30 per cent of Queensland’s gas – how do you see this figure growing over the next decade?
RC: It appears to me that CSG will become close to being the sole supplier of gas in Queensland. The demand for conventional gas will primarily come from southern markets and so conventional gas will probably be from the southwest Queensland and Roma areas. Comparatively, CSG is a lot closer to the Queensland market. So I think the Queensland gas story is about CSG.
I have been predicting a fast growth in gas uptake for a long time and I’ve also been predicting the demise of PNG gas. It is now pretty clear that the next Federal Election is going to be now fought on green grounds and that has to be very, very positive for the CSG industry. Natural gas converted to electricity creates 40 – 60 per cent less CO2 and uses 40 – 60 per cent less water. When you consider we are living in an energy-starved world you can see a bright future for the industry right across Australia, but particularly in Queensland.
TAP: In terms of developing gas markets outside of Queensland you mentioned that the mid-term will see conventional gas going to the southeastern states. How do you see the CSG industry growing outside of Queensland, say in New South Wales?
RC: I think the Mount Isa bypass will be the first thing to happen. Ballera to Moomba interconnectivity will occur, but I don’t think that’s going to be sufficient for the demand in that area. I think the Surat to NSW pipeline will also go ahead and as the greenhouse gas issue sweeps over the political landscape there will be a lot less opposition to transmission upgrades. I think the country will need to ensure that the transmission lines are upgraded so that we have minimum reserve capacity to optimise the country’s greenhouse gas situation.
That means you’re going to have a very distinct dynamic between whether or not it is cheaper to transmit CSG by pipeline or use it in situ to produce electricity. There won’t be one single answer. That’s the beauty of capitalism. Every pot has a lid and you have to make sure you put the right lid on the right pot. However it’s pretty clear in the short to medium term there is only one answer and that is natural gas. And there are really only two places that you can count on in the short term: Queensland CSG and Bass Strait.
TAP: In Queensland, the industry has been assisted by legislation which requires retailers to source 13 per cent of the electricity they sell from gas – will other states need to adopt similar mechanisms so that the CSG industry can grow in these states too? Or are other incentive mechanisms likely to be more effective, such as those pursued by the American CSG industry?
RC: It could be said that the Petroleum and Natural Gas Act is not all that much in favour of CSG. In my opinion, the Queensland and Federal Governments preferred PNG gas to CSG. We have been able to thrive despite the Government, not because of the Government. I think other incentives will help the industry develop, such as carbon targets and the increasing move towards greener options.
People are not really seeing the multiplicity of benefits of CSG. At present, you have Snowy Hydro not producing electricity because of a lack of water. You have Tarong Power Station in southern Queensland being cut back 70 per cent because of a lack of water. You have further and further threats to the power houses in the Latrobe Valley because of a lack of water. Water is going to become an issue – and CSG produces water.
TAP: How can the Australian pipeline industry establish better links with the CSG industry?
RC: The links between the industries need to expand. There was a time when the pipeline industry could assume that a volume of gas being produced at Point A would need to be transported to an industrial or residential consumer at Point B. But if gas starts to become one of the prime fuels for electricity generators, then the demand will swing according to residential requirements. You’re going to have to actually meet public needs – or fail to do so at your peril.
TAP: The last year has seen major mergers and acquisitions in the industry. Do you think that further consolidation of the CSG industry is likely, and what are some of the likely benefits?
RC: Capitalism always tends to a monopoly. The industry has basically been dominated by major suppliers in the past and proliferation is occurring. In a sense, the ACCC has declared QGC a protected species by ruling that neither Origin nor Santos can make a play for us until the infrastructure redefines the market in Queensland. But consolidation is inevitable. It’s going to be very difficult to see a consolidation of QGC from above, but it could come from overseas in the short-term. I certainly think there could be consolidation at the small end of the scale. I don’t think consolidation will occur while the industry is the flavour of the month, ironically. It will occur as the market starts to say, “I actually want to see some results”. That market may either be the gas market itself or the stock market, but eventually it will be both. At that point in time we will see further scrambling for “˜critical mass’.
Because of its location and its domesticity I see CSG (not natural gas) being a vital part of the energy equation for the eastern seaboard. That’s when consolidation will become even more interesting.
TAP: Can you tell us a bit more about the Australian Coal Seam Gas Council – what are its aims, who are your members and how do you go about achieving the Council’s targets?
RC: The Australian Coal Seam Gas Council came about as a result of all the legislation that was coming into CSG regulation. It’s primarily a lobby group to ensure that the needs of CSG companies are fully understood.
At the time, we had the coal producers in Queensland wanting to make sure that their right to the gas in the coal was preeminent to anyone extracting the gas. We had PNG gas. We had people believing that CSG was only going to be an intermediate supplier and therefore was diverting attention from the real game – conventional gas. It appeared that there was no one, or no one association, that was actually going to articulate the particular requirements of the CSG industry.
The Australian Coal Seam Gas Council was created to promote the industry but I think that’s been achieved so now it’s aimed at ensuring that its true value is recognised. We want to see appropriate legislative regimes put into place – regimes that are gateways for the CSG industry rather than barriers. At this stage we interact with bodies such as the Queensland Resource Council and Australian Pipeline Industry Association. Who we will interact with in the future will undoubtedly change. It’s such an exciting time I can’t really predict what’s going to happen in the coming years!