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Queensland CBM to LNG projects could see gas prices surge

Rush for gas reserves for Queensland’s CBM-to-LNG projects "may triple Australian gas prices"

Damon Evans, SINGAPORE: Australia’s coal-bed methane (CBM) to liquefied natural gas (LNG) export projects threaten to triple long-term domestic gas prices and leave local users short of gas.

Australia’s biggest gas supplier, Santos, said domestic gas prices in the eastern state of Queensland – which is pioneering a string of CBM-LNG export plants to tap lucrative Asian gas markets – could triple on the back of unprecedented demand. The LNG projects are forecast to boost regional gas consumption by at least 1,500 petajoules (PJ) a year (around 4 billion cubic feet a day) by 2020, more than trebling east-coast demand, according to Adelaide-based consultancy EnergyQuest.

Santos said that strong overseas appetite for LNG and Australia’s transition to a low-carbon economy – with carbon pricing and increased gas-fired power generation – has triggered a permanent structural shift in the east-coast gas market. Prices will trend towards oil-linked parity of about A$6 ($5.7) to A$9 a gigajoule (GJ), Santos’s vice-president of eastern Australia, James Baulderstone, claimed. This compares with east-coast prices today of between A$3 and A$4/GJ, which is low by international and even western Australian standards.

Feeling the pinch

Queensland’s industrial gas users are already feeling the pinch. On the back of higher demand for gas from the CBM-LNG export plants being built in Gladstone, which are due to start coming on line between 2014 and 2015, industrial gas users have been forced to pay higher prices to seal long-term gas contracts.

Origin Energy, BG Group and Santos are each building CBM-LNG export plants and are also the main domestic suppliers. A fourth plant is proposed by Arrow LNG, a joint venture between supermajor Shell and PetroChina.

And there are real concerns that the CBM-LNG export projects are short of reserves. The expansion in proposed CBM-LNG production has not only sparked a scramble for gas resources, it has stoked fears of a domestic supply shortage. The state’s biggest domestic users – which include miners Rio Tinto, Orica and Xstrata, as well as chemicals and fertiliser player Incitec Pivot – have raised concerns over gas availability because of pending exports.

Meanwhile, Queensland’s industrial gas users are struggling to fix long-term contracts unless they agree to pay up to double present prices, or link contracts to international oil prices. According to the government of Queensland’s 2011 Gas Market Review, the netback price of Gladstone LNG – the LNG price minus the cost of converting CBM into LNG – is A$7.45/GJ. Sources at some buyers said long-term domestic gas prices are now trending closer to A$6-$7/GJ for deals beyond three or four years.

EnergyQuest expects long-term contract prices in Queensland will be around LNG netback levels – around A$7/GJ in 2011 dollars – for much of the decade.

Although the long-term price gains mirror trends in Western Australia (WA) – where domestic gas prices have been two to three times those in the east, and more recently linked to oil prices as conventional LNG-export projects compete for supply – in WA, 15% of any gas project’s production is reserved for domestic markets.

But the Queensland government says it has no plans to set aside CBM fields for domestic use only. Officials claim that, based on modelling, there is no need to activate the Prospective Gas Production Land Reserve policy, put in place in May this year, which allows the state to demand that gas from certain fields is supplied only to domestic markets.

Ample supplies

Both the 2010 and 2011 annual Gas Market Reviews indicated there will be ample supplies to satisfy both Queensland’s demand and LNG export needs in the medium to long term, according to a government spokesman. But the state’s gas commissioner, Kay Gardiner, is concerned that unless domestic resource-appraisal plans are in place, available gas reserves may not be sufficient to underpin new domestic sales agreements.

Consultant SKA MMA warns that even if there is enough gas, it is not certain reserves would be made available to the domestic market. The Gas Market Review supports this, saying customers have reported a universal inability to engage in meaningful supply negotiations with gas producers for the period 2015-20. The review said that while LNG developers focus on building gas reserves to support further production trains and improve their project economics, this offers strong disincentives to supply domestic markets, which would require reserves dedication.

The jump in east coast gas prices was always expected once the alternative of lucrative exports to Japan, China and South Korea was opened up through the Gladstone processing facilities. But the speed with which the market has tightened has surprised many analysts and industrial users.

The looming disadvantage for industrial gas users highlights the flip side of the A$3.14 trillion of export revenue that ANZ Bank claims will flow into the Australian economy over the next 20 years thanks to the Gladstone export projects. And the CBM-LNG developments do have short-term benefits for domestic buyers: prices have dropped as low as A$2/GJ for gas supplied before 2014-15, as the producers ramp up output – which cannot be exported yet – in the lead up to commercial LNG operations.

Shale surge

And surging prices could help support further development of Australia’s unconventional-gas sector, bringing more reserves into play. Santos chief executive David Knox said gas prices over $6/GJ could be enough to trigger shale-gas production in the onshore Cooper basin, which straddles the South Australia and Queensland borders.

Santos, which is eyeing initial shale-gas production in 2015, said it has one of the most comprehensive shale appraisal campaigns in Australia; and – significantly – its pilot programme is near existing gas-processing facilities. The company is targeting the Roseneath, Epsilon and Muturee (REM) shale zones in South Australia.

Santos said it has the only independently certified 2C contingent shale and unconventional resource bookings in the Cooper basin. It has a 2C resource potential totalling 2,345 PJ for its REM shale zones, tight sands and deep coal plays. And it is targeting a 2C resource of 4,800 PJ by 2015.

However, says EnergyQuest, although successful development of shale gas offers the opportunity for substantially increased supply, estimated costs of production of A$6/GJ will further reinforce the imminent upward pressure on gas prices.

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