There seems to be people in the industry who are playing down the potential of the coal seam gas industry. I would suggest these fears really highlight a lack of understanding of the industry. Consider the following:
1. LNG capacity: Of course not all those LNG projects are going to get up. The issue then is simply for those producers who develop fields is to secure LNG export capacity for their exports. This seems probable as long as there are 5 projects being considered. Also it helps that some project sponsors have consumers already, or even customers on-board.
2. Demand: What is the point of gas export capacity if there is no demand. This has always been to Australia's favour. We have a lot of gas and Asia needs a great deal. SE Asia in particular has little gas, or they are running out. They also have little gas. Consider that Thailand has a little gas, Indonesia has a lot but is small with a large population. Brunei is running out, the Philippines has little, China probably has a lot but has a huge demand. Korea and Japan have none and need a lot. Gas is roughly associated with coal, so the market is similar. We have gas at Asia's doorstep, and only Africa is able to compete with us. We might even be supplying NZ if they fail to discover more.
3. Uncertainties: The greatest uncertainties are (a) carbon credits trading schemes, or substitute tax, and (b) the prospect that 'methane seeps' might tarnish the image of CH4. I am unsure about the mechanics but if there are signs that gas extraction are resulting in the dissolution of CH4 from groundwater, then CH4 extraction starts to lose its credibility, unless its related to coal seam extraction (ie. coal mining). Methane is confined in the rock not simply by rock but water pressure. Reduce the water pressure and gas will escape. My understanding is that they pump the fluids back in, so unless there is fractures this is not likely to be a big issue, and likely to occur naturally anyway. i.e. Equilibrium maintained. Am I missing anything? Rest assured the industry is not going to study this, so it will be an academic who does. Finally (c) The science of global warming seems against coal and to a lesser extent coal seam gas & natural gas. I believe global warming is a had, and that sun spot activity offers greater correlation to these events and a far superior causal explanation. Bur emotional, tree-loving, academic scientists with 9-to-5 mind sets will not be convinced, and they have more favour with government.
4. Costs: There is every reason to suggest that new gas drilling and recovery technologies will greatly improve the efficiency of gas extraction. You can also expect cheaper components. Financing costs will also fall as the industry is better understood.
5. Opportunities: There are huge gas resources in Australia's huge coal resources in Queensland in particular, but there are also opportunities for these companies to take their technologies to China, which has a lot of thermal coal, which based on all the mine disasters they have, seem to be 'gassy coals'. Some companies are probably already looking. This will also mean cheaper components.
6. Maturity: The coal seam gas industry is a fairly new industry, but much of the engineering is already well-established from conventional petroleum engineering. Understanding coal basins does take a little bit of time, as each presents unique problems. I think these issues are quickly resolved. Sydney Gas Co's experiences probably say more about the management than the industry technical risk, having had peripheral dealing with the company in the intermediate days. In any respect, Qld coals are better than the thin coal seams they were targeting in the Sydney Basin.
On the whole I think its a very exciting sector to invest in. When you consider that some of these companies control as much gas as can be found under Bass Strait, then you start to see the upside. Of course it is more intense extraction processes, but this is offset by lower risk. CSG recovery costs seem likely to fall as conventional gas drilling costs rise....not to mention insurance costs after the BP Gulf of Mexico disaster.
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Andrew Sheldon www.sheldonthinks.com
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