Locked out of many major energy projects in Asia- Pacific, big oil and gas companies are setting their sights on a new prize: the trillions of cubic meters of natural gas trapped in the region's coal seams. A takeover offer of A$12.9 billion (US$12 billion) for Australia's Origin Energy Ltd. (ORG.AU) by BG Group PLC (BG.LN), announced by Origin on Wednesday, represents the biggest vote of confidence yet in a resource that was for decades on the margins of Asia's energy industry. High natural gas prices are making coalbed methane production more viable commercially, while rapid economic growth in countries like China and India is stimulating demand for energy. Environmental benefits are also playing a part in fueling investment as coal seam gas doesn't produce any sulfur dioxide or particulates, and emits only 50% of the carbon dioxide emitted when coal is burnt. Coal seam gas projects may also be eligible for carbon credits, making the investment case stronger. But more important for big oil companies than burnishing their green credentials is the challenge they are facing in securing access to conventional oil and gas projects in the Asia-Pacific region, as well as globally.
"There isn't necessarily a fundamental shortage of natural gas, but being able to buy into specific projects is not that easy," said John Harris, director of global LNG at Cambridge Energy Research Associates. National oil companies are tightening control over domestic resources. One recent example was Indonesia's PT Pertamina taking over control of the Natuna D- Alpha gas block, which contains an estimated 46 trillion cubic feet in recoverable gas reserves, from ExxonMobil Corp. (XOM). Nick Pennell, a vice-president of consultancy Booz Allen Hamilton, said the listed oil firms were having to diversify and seek alternative growth options such as coalbed methane, or other coal-derived energy.
"Although their profits are going up due to the increase in oil prices, the number of options in the upstream sector are limited by the national oil companies," he said. Size Matters While BG is arguably ahead in the race to build a large coalbed methane gas business in Asia-Pacific, having already sealed an alliance with Queensland Gas Co. to evaluate opportunities in India in addition to a strong foothold in Australia, a number of oil majors are also making moves. Royal Dutch Shell PLC (RDSB.LN) took a 55% stake in a coalbed methane project in Shanxi province last December - its first such deal in China - and described the potential for CBM in the country as vast. U.S. giants Chevron Corp. (CVX) and ConocoPhillips (COP) are also exploring blocks in coal-rich areas of China with a view to producing the fuel.It's not only the big western companies that are taking an interest - India's Petronet LNG (532522.BY) said last month it planned to bid for coal bed methane projects in Australia, then export gas from them to India.
CERA's Harris said big oil companies were better placed than smaller producers to tap coal seam gas resources quickly as they can absorb development costs more easily. Dozens of wells typically need to be drilled to bring CBM to the surface compared with a handful of wells for conventional gas output. According to a report by Merrill Lynch, a company drilling for coalbed methane may not begin to make money months or years after a successful well while a company drilling for natural gas generates peak revenue almost immediately. This opens the door for consolidation activity, as small specialists in coalbed methane extraction may need the financial support that a bigger competitor can bring. Significantly, shares of other Australian companies with strong footholds in coalbed methane, such as Arrow Energy Ltd., surged after BG's approach to Origin became known. Coal seam gas already accounts for about 10% of natural gas production in the U.S., but Asia has been comparatively slow off the mark in developing the resource despite holding 32% of the world's 909 billion tons of proved coal reserves.
Merrill Lynch notes that several factors have aided the commercial development of CBM in the U.S., including the presence of a fully integrated natural gas pipeline system, strong research and development capability and a favorable tax regime. Australia Ahead Australia has been an exception within Asia-Pacific and this helps to explain why BG is aiming to expand its footprint there. Four terminals are planned at the port of Gladstone in Queensland state to cool coal seam gas into a liquid form so that it can be exported by ship. Earlier this year, BG paid A$664 million for a stake in Queensland Gas Co.'s coalbed methane interests. It will also take a 70% stake in a liquefied natural gas plant at Gladstone producing 3-4 million tons of LNG a year, subject to a final investment decision being taken and regulatory approval. Announcing that deal, BG Chief Executive Frank Chapman cited the closeness of Australian and Asia-Pacific markets.
Two months later, BG was selected by Singapore to supply up to 3 million metric tons of LNG to the city-state for up to 20 years, starting in 2012.Analysts think a successful acquisition of Origin, which is Australia's biggest gas producer, by BG may provide enough gas for an additional plant to be built that could supply Singapore. "BG may see further opportunities in Origin's coal seam gas position in Queensland, which potentially allows it to expand the capacity of its LNG plant in Gladstone," noted Gavin Madson, a director in the Asia-Pacific Energy & Utilities team of credit agency Fitch Ratings. |
