CSG, LNG, Markets, Projects, Technology

CSG – firing up Australia’s gas industry

“It’s been a juggernaut, really. It’s revealed an absolutely phenomenal resource in Queensland, and to some extent in NSW,”? said Australian Petroleum Production & Exploration Association Chief Executive Belinda Robinson.

Queensland is likely to remain at the forefront of CSG exploration and production, with the Queensland state government having recently released more than 100,000 sq km of both petroleum and CSG acreages around the Galilee and Eromanga Basins in Central Queensland. Queensland Mines and Energy Minister Geoff Wilson said that the move would likely attract more than $500 million 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.”?

Established CSG companies like Mosaic, Queensland Gas Company (QGC) and Origin Energy have been tapping the whole supply-chain of tomorrow’s CSG, recently announcing major expansions to drilling campaigns as well as projects which have already been commissioned.

Mosaic Oil has successfully raised $4.4 million as part of a strategy to accelerate its 2008 to 2010 drilling campaign 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 permit and in converting a part of approximately 14 PJ of 3P to 2P reserves for incremental gas sale under a revised gas supply agreement.

QGC’s expansion of the Berwyndale South development in the Surat Basin with the addition of new compressor units remains on track. These new units and an additional dehydration unit will expand plant capacity to up to 160 terajoules per day TJ/d.

However, one of the biggest expansions announced this quarter was Origin Energy’s $760 million plan for the Spring Gully gas field in Queensland’s Surat Basin.

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 Down’s 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.

Corporate deals promote NSW CSG

Changes to the structure of companies have also spurred development of a number of CSG projects based in NSW.

One of the biggest companies in the industry, 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 billion cubic feet (Bcf) at the company’s 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.

The current exploration data covers only part of the Gloucester Basin, and Lucas said that as the exploration program is expanded, additional areas will be included in future reserves certification exercises.

“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.

Lucas Energy’s 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.

“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.

The increase in estimated reserves in the Clarence Moreton Basin comprises the final major development that has demonstrated the considerable potential of NSW CSG reserves.

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.

Metgasco is continuing its technical testing and evaluation program and expects further reserve upgrades in the near future.

Exporting CSG: The Gladstone LNG projects

One of the most significant developments in the Australian CSG market has been the progress achieved on four 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 LNGâ„¢ project

Some analysts have suggested that Santos’ proposal is at the forefront, with the recent award of two parallel pre-front end engineering and design (pre-FEED) contracts to Foster Wheeler and Bechtel to each undertake a six month study of the LNG project.

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 acting chief executive officer David Knox said “This is clearly a significant milestone, and further demonstrates the momentum which is building around Gladstone LNG. Today’s dual pre-FEED contract awards have been achieved in line with the project schedule as previously communicated to the 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 Gladstone LNG project,”? he said.

Sunshine Gas and Sojitz Corporation’s LNG plant

In a separate development, Sunshine Gas recently awarded the FEED contract for its Lacerta CSG field, which will fuel its proposed LNG plant in Gladstone.

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 Gas 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 proposed 500,000 t/a plant.

Sunshine Gas Managing Director Tony Gilby said that preparation of the Environmental Impact Statement for the Gladstone LNG project had started and FEED was expected to begin during the first half of 2008.

Sunshine and joint venture partner Sojitz Corporation plan to have the project’s bankable feasibility study completed by the end of the calendar year 2008 and production underway during the first quarter of 2012.

LNG Ltd’s Fisherman’s Landing LNG Project

While LNG Ltd’s Fisherman’s Landing project has not progressed to the stage of conducting preliminary engineering, unlike the other developments, it has diversified potential CSG sources beyond Queensland.

Recently, LNG Ltd and Arrow Energy 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 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 1 million tonnes per annum (MMt/a) LNG plant at Gladstone 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.

QGC CSG 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, like 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 LNG project is set to ship LNG starting in 2013 from a terminal to be built in Gladstone.

QGC Managing Director Richard Cottee said that the deal will put Queensland’s gas on the world stage and transform the company from an explorer and producer to a fully integrated energy company.

As part of this development, QGC plans to accelerate its exploration program to meet 2P goals for the LNG project by drilling more than 200 exploration wells over the next three years.

BG Group is not the only international investor with access to the Asian market in Australian CSG tenements. In a recent development, 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 and 15 Tcf.”?

Toward frontier projects

Industry analysts have hoped that the international interest in Australian CSG developments, will extend beyond the established and well-developed regions including the Surat/Bowen basin but also frontier fields, in relatively underdeveloped Western Australia and Tasmania.

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

“Western Australia has become a very attractive investment destination for international companies,”? Mr Ripper said. “And there is already a record $4 billion committed to exploring oil and gas opportunities in Western Australia over the next six years.”?

“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 offers the state the opportunity to become a gas producer and reduce its dependence.

Pure Energy, one of the largest CSG acreage holders in Queensland, has led the search for Tasmanian CSG prospects, having recently completed work on wells in 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 have significant potential for CSG.

A total net coal thickness of approximately 15m was encountered in each well. Nine drill stem tests were conducted with the coals demonstrating moderate to very good permeability for CSG production. Gas desorption testing is complete and Langmuir isotherms have been performed. The company is now evaluating follow-up well locations.

Challenges

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 immense environmental potential of CSG has been recognised with Origin Energy having won APPEA’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 mega litres per day.

These strengths of CSG that have spurred its growth – from the geographic diversity and proximity of CSG prospects to major cities – and its low environmental impact 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.

Ms Robinson notes that “Projects on the drawing board don’t earn income for Australia and don’t offset carbon emissions.”?

Ultimately, the question remains whether Australia is able to drill over 5,000 CSG wells by 2030. With the wealth of new projects and new entities involved in the industry, it seems likely that the burgeoning industry will build on its current momentum to substantially transform the Australian energy landscape in the near future.

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