The arrival this year of global oil and gas heavyweights BG plc, Petronas and Royal Dutch Shell in Queensland is an extremely significant event for Australia's bourgeoning coal seam methane (CSM) business.
The arrival this year of global oil and gas heavyweights BG plc, Petronas and Royal Dutch Shell in Queensland is an extremely significant event for Australia's bourgeoning coal seam methane (CSM) business. The upstream technical skills that can be brought to the deal and downstream marketing synergies between these groups and their local partners is self evident.
Prices being paid for undeveloped, in situ CSM reflect global forces which will set the price of gas in Queensland and the rest of south-east Australia post-2015.
The current gas price in Queensland, of $3-$4.50 per thousand cubic foot (Mcf) will have no bearing on decisions made in London or The Hague, since these little molecules are destined for a liquid natural gas (LNG) business in the long term.
Looking at project economics, if the new players are paying, say, $2/Mcf for proven and probable (2P) gas in the ground, they are clearly expecting that ongoing field exploration will reduce that initial purchase price to less than $0.40/Mcf. They can expect to pay an additional $1.50/Mcf to develop the field and it will cost $0.40/Mcf to produce the gas and $0.60/Mcf to get it to the point of sale. All those costs come to $2.90/Mcf, so you would not be paying those prices for CSM if you intended to sell the gas for $3/Mcf.
Arrow Energy and Queensland Gas (QGC) currently suffer the indignity of accepting Queensland's low gas prices, but they have not paid $2/Mcf for the privilege of owning the gas. Their costs are limited to around $1.50/Mcf to find, develop and produce the stuff, plus some transport costs.
While their operating margins are at least positive, the overall economics, after allowing for development costs, are not great. This is why the CSM players have been looking at ways to add value by pumping gas into gas-fired turbines, selling direct to industrial customers or planning gas-to-liquids or an LNG facility, which would refrigerate the methane to minus 161 degrees celcius, at which point it becomes a liquid and can be shipped to global customers.
The LNG process is costly. A 4 million tonne per annum plant is likely to cost $3.5 billion and a small proportion of the gas is consumed to make electricity, which runs the process. Add to this the cost of a port and loading facilities and you start to get up to some serious money.
In general, conversion to LNG will cost about $1.20/Mcf and the product will need to be transported to market in Asia or the US, costing an additional $1/Mcf. Added to this, the capital cost of the LNG will need to be repaid, adding a notional $2.40/Mcf to the cost of delivered LNG. So all up, the new player will be looking at a total cost for LNG of $7.50/Mcf, delivered to China or the US.
Briefcase initially found this number frightening, but after considering that the domestic gas price in the US today is already around $12.50/Mcf and spot cargoes have been going into India and Japan for $20/Mcf, I don't think that Shell and BG are going to do their dough.
The price of gas is only going one way and that is up. Today's US domestic gas price is still half the value of oil on an energy equivalent basis. Briefcase expects the price of gas will rise to energy parity with oil as it finds more uses to replace oil and so we might expect it to be at a real price, equivalent to about $22/Mcf when these planned LNG plants are commissioned.
No doubt the industry will take some exception to my numbers, and I am sure that they expect capital costs to be contained, but recent experience tells us not to hope for this. Today, CSM producers supply a product which costs it about $2.20 to find, develop, produce and transport to market, on which it makes a margin of 80 cents/Mcf. In the future, the industry will be making a product which costs roughly $7.50/Mcf to deliver to market, on which it will make a margin of at least $4.50/Mcf if not much more.
Disruption of oil and gas production from the Apache Energy run Varanus Island facilities is not good news for Tap Oil, which has a 12.2 per cent interest in the project, however it does not reduce the company's long-term value. Market jitters represents a fantastic trading opportunity and a great buying opportunity for those with an eye for value.
Tap is underpinned by a value for its cash plus oil and gas in the ground of about $1.60 per share, and Briefcase estimates an additional risk adjusted exploration value of over $1 per share. Exploration drilling, currently under way at the Marley prospect and scheduled for offshore Philippines in July, has potential to massively enhance value, so the current pull back is a buying opportunity.
In the game of life it is an ill wind indeed that blows no-one some good. The rising price of diesel has caused much havoc among the fishing fleets of Europe, with strikes by fishermen and port blockades in France, Spain and Portugal. This, of course, is good news for fish, but bad news for fishermen.
Briefcase finds a delightful irony in this commotion, since it is the long deceased ancestors of the fish whose rotting bodies, over millions of years, have provided much of the oil which goes to make diesel in the first place.
With 70 per cent of the world's fish stocks now depleted and vast areas of the world's oceans categorised as dead zones, perhaps some respite from the ever-hungry homosapien, caused by rising fuel costs, can in some way restore a balance. I doubt it.
Readers should be vigilant against some very lax stock exchange reporting, which has been filtering out recently. A lot of smaller companies know that the ASX and ASIC are blowing smoke, so they duck under their guard to make outlandish statements to the market in an attempt to ramp up their shares.
We have seen companies describing exploration targets as resources. This is akin to a managing director asking the exploration manager how much ore he thinks could fit in between the company's permit boundaries and then taking that number and reporting it to the market as a resource and then going to the pub.
In the oil and gas game, we are seeing companies reporting discoveries on the basis of some hydrocarbons in drill chips or in sidewall core and a wire-line log. This is a dangerous business. There are many good shows which prove to be uncommercial or never flow to the surface. Some companies have reported multiple 'discoveries' but have never tested them and never give vital information on the quality or thickness of reservoir intersected or even the nature of the hydrocarbons intersected. There are numerous examples of this. Nothing wrong with reporting a show, but to call it a discovery implies commerciality.
Please be careful out there. There is an increasing number of sharks in the water and basically, you are on your own (with Briefcase by your side of course) because the regulator has gone missing and is nowhere to be seen.
- The author has an interest in Tap Oil