5min read
PREVIOUS ARTICLE Dogs (Dingoes) of the ASX NEXT ARTICLE Aussie stocks to win and lose from the rising AUD/USD

Coal seam gas was barely talked about 10 years ago but a combination of rising gas prices globally and demand from Asia means it is going to be a hot spot for the resources sector in coming years.

Energy-hungry Asian markets are the prize that has drawn Shell, BP, Britain’s BG and Petronas of Malaysia into Australia’s growing coal seam gas business and seen stock prices jump as the industry is re-rated.

Most of the activity in coal seam gas (CSG), also known as coal bed methane and coal seam methane, is in Queensland, where government policy has encouraged the industry. CSG now supplies 30% of the state’s gas from the Bowen and Surat Basins but much of the forecast growth is directed at processing CSG into liquefied natural gas (LNG) at Gladstone and shipping it north. Asian consumers are paying around $14 a gigajoule for LNG, compared with $2.50 – $2.70 for sales in Australia.

EL & C Baillieu estimates the export market out of Gladstone could be worth $100 billion by 2013 if all the five LNG plants planned and being built there are in production. Head of research, Ivor Ries, says the global market for gas is growing and rising prices will flow through to the domestic market, giving all producers a lift.

Ries says the global gas market is rising by 3 – 3.5% a year “which does not sound like much but the volume of that is extraordinary, trillions of cubic feet. “At the same time, a lot of the old fields around the world are in decline, particularly in North America.”

He has a buy recommendation on Molopo, which produces from Queensland’s Mungi field, describing it as “asset rich” from its holdings in Australia, South Africa, China, the US and Canada. The company has an exceptional amount of territory and it is good acreage, says Ries.

He also likes the bigger players, even though CSG is a small part of their portfolios. Ries says Santos has significant reserves to supply its proposed Gladstone plant, which has the potential to be a goldmine. He says there is not much risk in Santos when its share price is under $18.

John Young, senior resources analyst at Wilson HTM, also likes Molopo, saying the geographic diversity of its acreage stands out, along with its project timeline. “They have a pipeline of projects at various stages of maturity, you can see how the company will grow over a period of time.”

Wilson HTM, which focuses on the mid-cap sector, has buy recommendations on Molopo, Queensland Gas Corp (QGC), Arrow Energy and Sunshine Gas.Young says they are all quality companies with viable business plans which they are actively executing.

He says the industry is in for an exciting time. “We are really just at the start of it. We have seen the interest of a number of international energy companies who have invested significant amounts of capital here. We will see this industry continue to grow very strongly.”

Origin Energy is Australia’s largest CSG producer and used an increase in its CSG reserves as a reason for rejecting BG’s takeover offer in May. Origin said two important stgelopments factored into the rejection were an increase in its CSG reserves of 3P (proven, probable and possible) gas by 121%, and Petronas paying $US2.5 billion for 40% of Santos’ LNG plant in Gladstone. Origin said its reserve increase gave it the largest CSG reserves and contingent resources in the country and the Santos announcement established a “new and higher benchmark for the value of CSG.”

Apart from the Santos-Petronas plant, BG has signed a deal with QGC to stgelop an $8 billion LNG export market out of Gladstone. Other companies planning LNG plants there include Sunshine Gas, which has signed a heads of agreement with Japanese trading house Sojitz, and LNG Impel, a subsidiary of the Canadian company Galveston LNG.

Arrow Energy has signed a heads of agreement with LNG Ltd to stgelop an LNG plant at Gladstone. Arrow produces more than 20% of Queensland’s total gas and in June Shell bought 30% of its Australian tenements for $776 million. Shell will supply expertise and research facilities to Arrow.

CSG production in New South Wales is also growing although so far seems focused on the domestic market. Eastern Star supplies a power station from the Gunnedah Basin in and Sydney Gas supplies AGL from the Sydney Basin.

The re-rating of CSG is prompting major exploration work and raising reserves.Queensland Gas announced in June an 80% rise in its Surat Basin 2P “proved and probable” reserves. Metgasco this month increased its reserves in the Clarence Moreton basin, saying it now had the largest 2P gas reserves in NSW and planned to supply electricity generators in northern NSW and Queensland, where there was an opportunity to plug some of the last energy market gaps on the east coast. Molopo is looking at delivering gas to Newcastle from its reserves in the Gloucester Basin.

The domestic market will get a boost from the Federal Government’s carbon tax scheme, which will provide a real incentive to generate electricity from gas, and from higher prices globally flowing onto Australia. CSG occurs naturally and is the gas that causes coal mine explosions. Miners have to remove methane but it adds to greenhouse gases when vented from mines so there are environmental benefits in capturing and using CSG.

Questions for investors include whether an area being explored will contain CSG, whether it can be extracted commercially, and its proximity to pipelines. Producers typically have to drill 200 – 1,000 metres for supply. Large amounts of water are pumped out of the gas seams and there can be issues around disposing of waste water and concern about salt water contaminating water tables.

Company debt levels and access to funds are going to be important given the funding requirements of some of the planned projects, however the smaller players are showing they can attract partners with deep pockets if they can prove up reserves. The demand for gas is such that if they cannot stgelop their projects, it seems likely that someone else will.