New technology puts shale gas in play

AUSTRALIA’S slow and expensive march towards a wind and solar powered future received a modest, but largely unreported, setback in South Australia earlier this month, and is likely to take another hit in Western Australia next month.

Gas, a fuel freshly demonised by the environmental movement, has emerged as a major blockage on the way to a world driven only by politically acceptable sources of renewable energy.

More specifically, newly discovered gas flowing from shale rocks once regarded as too ‘tight’ has suddenly emerged as an energy source that will drive down the price of power, potentially putting high-cost renewable schemes, and other forms of fossil fuel, out of business.

The ‘new’ shale gas flowing in the Cooper Basin is not really new at all. It has been given a new tag only because advances in technology have found a way to extract gas previously regarded as impossible to recover.

Beach Energy is the driving force behind the first flush of shale gas in Australia. It will not be the last, with the next big test in unlocking a sequence of tightly packed shales scheduled for a well near Dongara, about 300 kilometres north of Perth, in early September.

First, however, it is important to look at what happened in the Cooper Basin where, on August 10, Beach booked, or added to its balance sheet as a contingent asset, two trillion cubic feet (tcf) of gas not previously been regarded as commercial.

Measured in more easily understandable terms, 2tcf of gas is the equivalent of 330 million barrels of oil, worth around $33 billion in the ground.

Much more of this new gas will be proved in the Cooper over the next few years because Beach’s 2tcf is the result of drilling just two test wells; and it is just one of many explorers rushing to unlock gas in thick beds of shale under their tenements.

Two things will happen over the next few years as more shale gas is outlined in the Cooper, essentially repeating what’s been happening in the US during the past decade.

Firstly, environmentalists will object to the use of rock fracturing (fraccing) fluids, claiming they harm the environment. This might have some validity in the lush farming and thickly populated regions of the north-east US, or under farms in Queensland and NSW, but it will be a hard claim to sustain in the central Australian desert.

Secondly, the price of gas in Sydney, Melbourne, and other east coast markets will crash, also following a US trend where a glut of shale gas has demolished the gas market, causing a 65 per cent fall in the domestic gas price from around $US11.50 per million British Thermal Units (BTUs) to around $US4/mbtu.

Perth should be the second cab off the shale gas express. Next month, a syndicate led by AWE Ltd and Norwest Energy is scheduled to start flow testing the Arrowsmith No.2 well for gas in five thick beds of shale, which total more than 1,000 metres of potentially gas-rich target.

After the Arrowsmith test, AWE plans to try similar rock fracturing and flow metering at its 100 per cent-owned Woodada Deeps No.1 well.

Apart from the game-changing nature of the shale gas revolution reaching Australia, a country earmarked by the US Energy Information Administration as a major future source of shale gas, there is something else of extreme importance – the oil companies doing the testing already know that the gas is there in the shales.

The reason they know is that when the first oil and gas exploration wells were drilled more than 40 years ago, monitoring equipment noted gas ‘kicks’ in the shales through which the drill bit was passing. No testing of those kicks was carried out because conventional wisdom in the 1960s said the gas would not be recoverable.

It is today, thanks to advances in drilling technology that enables directional (sideways) drilling, and the new rock fracturing techniques.

If AWE and Norwest can produce a similar result to that achieved by Beach then the WA energy equation changes significantly. Gas prices will fall and proponents of renewable energy will face a fresh struggle to convince consumers that it’s worth paying a price-premium in the name of an unspecified environmental benefit.

Bankers beware

WHILE a gas glut will be beneficial for the south-west of WA, there is a human commodity in short supply in this state which will also prove to be a bonus over the next few years – we have very few bankers.

Most WA-based bankers, especially those working in the risk-taking world of investment banking, cleared off years ago, preferring the excitement of deal-doing in Sydney and Melbourne.

It is in those two eastern financial centres where the chill winds of a global deal slowdown will be felt and where Australia’s share of a worldwide banker cull will take place.

In London, where the sackings have started, an estimated 60,000 redundancies in the banking world have already been handed out. Worldwide, the total of banker sackings is tipped to hit 300,000.

Some of the handful of financial service jobs in Perth might disappear, but nothing like what is happening elsewhere as the world slides into the next phase of the GFC.

Guessing on gold

HOW high can the gold price go before it becomes a balloon and pops? Well, the latest thinking is that $US2,000/ounce is the target for Christmas, but after that there is chatter among the most feverish of the gold bulls that $US5,000/oz is possible.

The problem with such as extreme view is that, to achieve it, the world as we know it will have to come to a halt.

However, it is worth considering how those sky-high numbers are generated, with the starting point being the 1980 price peak of $US850/oz, and then applying the effects of 31 years of inflation, with the tricky question being, what measure of inflation?

If you use the US consumer price index, the peak gold price today is a theoretical $US2,400/oz. Producer-price inflation generates a gold price of $US1,814/oz, while US gross domestic product per head generates a number of $US3,377/oz.

Or, you can read tea leaves, which is probably about as accurate as the best guesses from the gold bulls.

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“A committee is a cul-de-sac down which ideas are lured and then quietly strangled.”

Sir Bernard Cocks