The following review by Graeme Bethune, Chief Executive Officer of EnergyQuest, on Australian coal seam gas, provides an overview of the Australian sector and its growth prospects. This article appears in the February 2008 issue of Petroleum magazine.
Call it what you will - coal seam methane, coal bed methane or coal seam gas - the production of gas from coal fields is now big business. But seven years ago, total Australian CSM production was about 10 petajoules a year and most pundits did not expect it to get much bigger.
However, the CSM sector has surprised industry observers by growing very quickly indeed.
In 2005, total production was 53PJ, up 89% from the previous year, and the rate of growth has not slowed since then.
In the third quarter of 2007, CSM production grew by 34.1% to reach a total of 28.8PJ for the quarter and 103PJ for the 12 months to the end of September, 16.3% of east coast production.
Total proved and probable reserves booked by companies are close to 7000PJ, 44% of east coast reserves, with substantial possible reserves and contingent resources that have the potential to become 2P.
Production is still overwhelmingly concentrated in Queensland, but with considerable potential in New South Wales.
Growth drivers
Australian CSM’s rapid growth has been driven by a several factors.
The decline of mature gas basins in eastern Australia, particularly the Cooper, has opened a window of opportunity that CSM has exploited effectively.
The proximity of substantial coal seams close to gas markets has made it more economical to develop CSM than to exploit new conventional gas provinces that are further afield.
Only Victoria’s offshore gas fields can match CSM’s proximity to major markets. In addition, major gas buyers are diversifying their supply and encouraging competition.
This began in 2002 when AGL simultaneously contracted for CSM and conventional supplies from the Cooper Basin and Bass Strait. Now AGL Energy is itself a major upstream CSM player.
Queensland’s big gas buyers - CS Energy, Energex, Enertrade, QAL, Incitec Pivot and now Rio Tinto - have also played a significant role in developing the sector.
Finally, Queensland gas electricity certificates policy has encouraged CSM. The GEC scheme - announced in 2000 and introduced from January 1, 2005 for 15 years - requires Queensland power companies to source at least 13% of their electricity from gas-fired generation. (This has now been scheduled to increase to 18% from 2020). More than half of CSM production is contracted for power generation.
Aussie CSM gets smart
Technical innovations and growing knowledge of the best ways to extract gas from coal seams have also increasingly enabled the industry to produce CSM competitively.
In the last decade, Australia has gone from being a rank beginner to a world leader in CSM knowledge and technology.
Only innovative and adaptable producers, contractors and suppliers can prosper in eastern Australia’s low gas price environment. Australian companies have adapted large mineral drilling rigs for CSM rather than using small oil and gas rigs.
Unlike conventional gas, which is found at depths of 1500-plus metres, CSM is typically found at depths of 300-1000m. This enables the use of smaller, more mobile, truckmounted drilling rigs than those used for conventional gas, improving economics.
They have also developed completion techniques, such as under-reaming, cavitation and surface-to-inseam (SIS) drilling, that can be applied selectively to suit the requirements for different coal seams.
What has worked well in one seam might not be the best approach in another, but through trial and error, Australian CSM producers have not only found how to maximise production in their own acreages, they have also developed broad principles that can save time and money in greenfields projects.
This innovation has steadily reduced costs and increased production rates.
The producers
Origin Energy was an early mover and is now Australia’s biggest producer. Responsible for a quarter of production, it has over a third of Australia’s proved and probable reserves. Its main CSM interests are the Spring Gully, Fairview, Peat and Argyle fields in Queensland’s Bowen and Surat basins. Its largest CSM field, Spring Gully, began producing in June 2005. This project is one of the major contributors to the 340PJ 15-year contract that Origin announced with AGL in 2002. This was followed by contracts with QAL, Incitec Pivot and Energex.
Capacity is being expanded to 150 terajoules per day to, in conjunction with Origin’s Walloon acreage, supply gas to Origin’s new 630MW Darling Downs power station and to Rio Tinto for the expansion of its Yarwun alumina refinery. The Yarwun contract marks another vote of confidence in the capability of CSM.
Spring Gully production reached 73TJ per day in the fourth quarter of 2007.
Santos is now the second-largest CSM company in both production (23.4PJ in the 12 months to September) and 2P reserves (1330PJ). Its Fairview field, acquired from US corporation Tipperary in 2005, started producing in 1994 and now produces around 70TJ per day.
The country’s largest specialist CSM player is Queensland Gas Company, which is the third-largest producer. QGC’s Undulla Nose acreage has recorded exceptional gas flow rates compared with CSM anywhere in the world.
At the end of September last year, QGC had 2P reserves of 1120PJ and production of 14.8PJ for the 12 months.
The other major Queensland CSM specialist is Arrow Energy, which in 2006 merged with Moranbah project operator CH4 in a friendly takeover. In the year to the end of September 2007, Arrow produced 11.7PJ and had 2P reserves of 719PJ.
Since writing its 2002 CSM contract with Origin Energy, AGL has become a significant CSM player in its own right, with interests in Moranbah (with Arrow Energy) and the Sydney Basin (with Sydney Gas). AGL’s total proven and probable CSM reserves are now around 250PJ and production about 11PJ per annum. AGL is Australia’s fifth-largest CSM producer and also has an equity interest in QGC.
New players
Further success by other companies in exploration and development could accelerate CSM’s growth.
In addition to the current CSM producers there are another 20 or so companies active in the sector, some of which are now producing or will soon start production. Most of these are in Queensland, but NSW is also being actively explored and developed.
Some, such as Molopo, already have some production in place and are poised to develop more. Others, such as Sunshine Gas (with 2P reserves of 469PJ), are poised to begin producing this year.
NSW only produces around 10PJ of CSM per annum but certified reserves are increasing.
Metgasco has 2P reserves of 170PJ and a memorandum of understanding with CS Energy.
Two big power generators - Macquarie Energy and Babcock & Brown Power - have signed memoranda of understanding with another NSW explorer, Eastern Star Gas, which now has 2P reserves of 59PJ.
AJ Lucas and Molopo recently had drilling success in the Gloucester Basin, north of Newcastle.
Sydney Gas was long seen as one of Australia’s leading CSM companies, but in recent years its performance has faltered. An alliance with leading CSM drilling specialist AJ Lucas could see a revival in the company’s fortunes. In the year to the end of September, Sydney Gas achieved production of 2.4PJ.
Other emerging players include AJ Lucas, Eastern Corporation, Pure Energy, Blue Energy, Sapex and Westside Corporation.
Queensland today, tomorrow the world
Until recently there were plans to supply gas from Papua New Guinea to Queensland, and some industry observers were wondering how Australian CSM would be able to compete with PNG gas.
As it turned out, piping gas via a longdistance pipeline to serve the low-cost Queensland domestic market was not nearly as attractive as international liquefied natural gas opportunities for PNG gas.
Rather than competing with domestic gas from PNG, CSM producers are now also focusing on international markets for Queensland CSM.
Arrow Energy led the way with plans for a 2.6 million tonne per annum LNG project at Gladstone, to start production in 2011.
In July 2007 Santos announced plans for a 3-4MMtpa LNG project, based at Gladstone and starting production in 2014, using 170-220PJ per annum of CSM from its Fairview and Roma acreage.
This was followed by Sunshine Gas in December 2007, when it announced plans for a half million tonne per annum project to commence production in 2012.
The latest example is the proposed QGC proposal in alliance with BG, an international LNG player. This is a 3-4MMtpa project to begin production in 2013. QGC believes that the project will have a revenue netback twice that of its domestic gas contracts and the higher gas price will increase reserves.
The potential of CSM for LNG is gaining increasing interest. While CSM does not contain natural gas liquids, the same is true of some potential offshore LNG projects, which may also be dirty (carbon dioxide content), in deep water or distant from infrastructure, disadvantages which CSM does not have.
The longer-term
CSM looks set to continue its rapid growth. The question is how big could it be?
The future of gas-fired power generation on the east coast will affect CSM’s prospects. Queensland power demand is expected to grow strongly over the next decade, by 3.6% per annum in the medium case and up to 6.2% in the high case according to NEMMCO (National Electricity Market Marketing Company.) Emissions trading (planned from 2010) will encourage use of gas for new generation, but in competition with renewables and cleaner coal.
Success with the proposed LNG projects could lead to a quantum leap in CSM production. Total current LNG proposals add up to 500-600PJ of gas per annum, similar to total current east coast gas demand.
With the decline of the Cooper Basin, CSM also has the opportunity of meeting a greater share of gas demand in NSW and South Australia, but in competition with offshore Victorian fields.
So there is considerable opportunity. But are there the reserves? Origin Energy has spoken of reserves of 15,000-30,000PJ for the industry as a whole in the long term, around two to four times current booked reserves, so the signs are encouraging.
United States experience also shows the potential of Australian CSM. US production has grown from being around the same level as current Australian production in 1989 to producing 1.76 trillion cubic feet (1860PJ) in 2006, with proved reserves of 19.62Tcf (20,800PJ).
In these terms, the Australian CSM industry may have only just started.
www.energyquest.com.au
Author
Graeme Bethune, CEO of EnergyQuest