25/03/2009 - 22:00

Big players dominate CSM landscape

25/03/2009 - 22:00

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INITIAL understanding of coal seam methane (CSM) was as a dangerous by-product of underground coal mining.

Big players dominate CSM landscape

INITIAL understanding of coal seam methane (CSM) was as a dangerous by-product of underground coal mining. Miners began to drill wells ahead of planned mining areas to drain methane, which was vented or flared into the atmosphere as a waste product. Only in the mid 1990s did miners in the Sydney Basin begin to capture this fuel for commercial use.

Early attempts to develop CSM as a stand-alone fuel source began in earnest in Australia during the early 1990s.

Private interests from the US set up camp around Narrabri. With the benefit of hindsight, the development methodology used was laughable.

Oilfield drilling, completion equipment and technology were applied, including cementing in steel casing and perforating through the casing and cement into coal seams, which were often fracture stimulated using water-based techniques.

Predictably, the results were sub optimal and not at all commercial, as fragile coal permeability was destroyed by this approach.

A hiatus in activity was followed by the birth of a bold new breed of corporate explorers and developers in the late 1990s. Companies such as Queensland Gas (QGC), Sydney Gas, Arrow Energy, Molopo and Eastern Star Gas began a long learning process to understand CSM and perfect its development techniques on permits pegged out in various basins in Queensland and Northern NSW. This movement was a leap of faith, considering the mixed results achieved to that point and the overhanging threat of a flood of cheap gas that was planned to arrive from PNG.

Ultimately, instead of searching for trap structures, as was common with conventional gas exploration, companies began to target areas of in situ fracturing within coal seams, where permeability within the coal might be enhanced.

Instead of the $800,000 to $1 million drilling and completion costs borne by pioneer explorers, these new-breed CSM companies developed drilling techniques using modified, lightweight mineral rigs where a favourable trade off between rate of penetration, flexibility and manoeuvrability and daily rig costs, led to a reduction in drilling and completing costs to between $250,000 and $500,000 per well.

The best results came from drilling and completion techniques that preserved as much of the natural permeability of coal as possible. Wells were under reamed over the coal sections to remove damage caused during drilling and the coal sections were cased with pre-slotted tubbing, prior to dewatering, where sections were below the watertable.

The emphasis of early work was directed towards developing the cheapest drilling and completion technology, in the belief that a commercial outcome could be achieved if favourable wells were to flow gas at between 250 and 500 thousand cubic feet (Mcf) per day. Experience has proven these expectations to be modest.

At QGC's Ulladulla Nose, several wells have shown flow rates of an incredible 3 mmcuft per day, while gas production rates have continued to increase for up to three years, which is well beyond early expectations of peak gas production within six to 12 months.

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The focus in the Bowen Basin remains on low-cost vertical wells. Other fields in northern NSW, where coal cleat and fracture characteristics are different, appear to lend themselves to the sort of low-cost directional drilling, perfected by companies such as AJ Lucas, for installing underground cabling. The higher capital costs associated with multiple horizontal completion is thought to have a payoff in higher production rates and larger recovery per well.

Efficient gas well interconnection, along with gas collection and processing systems has evolved. CSM field expertise has also been developed to deal with water removed from the coal seams, where they sit below the watertable.

In many cases, water pumped out to lower formation pressure and stimulate gas flow, is suitable for animal use and in some cases, companies are using reverse-osmosis technology to purify water for domestic use in nearby towns.

Excess water is then stored in evaporation ponds, where forced evaporation sprinkler systems are employed. Longer term, the industry faces an issue with salt being brought to the surface and deposited in evaporation ponds.

The industry is now dominated by larger companies, which control the premium CSM addresses in Queensland within the Bowen, Surat and Clarence Moreton basins, which combined are estimated to hold potential for 70 trillion cubic feet (Tcf) of gas reserves.

Origin and AGL are major utilities and Origin has upstream activities in oil and gas.

The companies are in a strong position to convert gas reserves into power, improving margins on both operations and Origin has a JV with oil major, ConocoPhillips to develop an LNG outlet. BG is a recent arrival.

The company is a major producer of LNG and distributor of gas, but has more re-gasification and distribution capacity than LNG production capacity, so it is seeking to match LNG production with its handling capacity globally.

Santos is in the mix as it works to defend its domestic gas business and has recently moved downstream to develop merchant power production capacity. The company is partnering with Petronas on a proposed CSM/LNG project in Gladstone.

Arrow is a leader in the CSM field and it is now taking its expertise to India, Vietnam, China and Indonesia, with the support of Shell. Arrow is in a domestic JV with Shell and LNG Ltd and its partner, Norwegian LNG shipping company Golar, to develop a 1.5mt/year LNG facility.

Metgasco operates in the technically more challenging Clarence Morton and Gunnedah Basin of northern NSW, as does Eastern Star, which managed to discover gas in a conventional trap, even though the gas may have migrated from nearby coal measures.

Coal seams in northern NSW appear to respond well to horizontal well completions, since the coal has low permeability and directional fracturing.

Beach has indicated that the price is right for it to withdraw from CSM and may sell its interests to a better-positioned participant in order to focus on conventional oil and gas activities.

Beach concludes that, without long-term access to an LNG processing facility, its CSM will remain low value. European Gas is working with CSM from old coal mining areas of France and Italy, while Molopo has sold out of most of its Australian permits and now has interests in Canada, China and South Africa.

Recent arrivals, Vicpet and Bow are in joint venture on an area with interest to BG, which has become the largest shareholder in Vicpet. BG is likely to focus its attention on areas it controls 100 per cent and will most likely be content to hold a blocking stake in Vicpet, so that the reserves it proves up can not be used elsewhere, without its approval.

Growth is likely in the major CSM participants and value will expand once plans for LNG facilities are finalised and funded.

Smaller companies and those without access to export capabilities may find that they are overvalued in the market. Beach may have recognised that, without a connection to any of the new LNG processing facilities, it may be unlikely to achieve higher margin gas sales to the LNG market.

Likewise, smaller players may have difficulty achieving higher margins for their CSM.

Operators in NSW have already begun discussing the potential for an LNG facility in Newcastle, which would be of interest to eastern Star and to AGL, with its expanded interests in the Hunter Valley, post its takeover of Sydney Gas.

Without that access to global markets, purchased at the cost of building an LNG facility, domestic CSM suppliers will be hostage to local gas price dynamics.

n Peter Strachan is the author of subscription-based analyst brief StockAnalysis, further information can be found at Stockanalysis.com.au

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