US experience shows shale gas potential

IF you’re looking for a local financial flutter with a touch of geological mystery then go no further than Dongara, where Australia’s first commercial shale gas project is taking shape.

AWE Ltd is the principal player in the emerging Perth Basin shale gas business, which is following in the footsteps of an industry that has taken the US energy sector by storm, and which last week won the approval of BHP Billiton.

It was the $4.75 billion BHP Billiton paid for a slice of the shale-gas tenements owned by Chesapeake Energy in the north-east corner of the US that has elevated shale from the status of a curiosity suffering a bad press to a mainstream investment idea.

The gas at Dongara is the same as the US gas (methane) and the rocks in which it is trapped look to have similar qualities.

All that’s missing is a full-scale commercial test to see whether it can be extracted in sufficient volumes, piped to Perth, and sold to a market keen to have alternative sources of energy for industry and domestic consumption.

Those final questions should be answered later this year as AWE starts drilling a deep test well in the Arrowsmith area, which will be subjected to the same rock fracturing techniques that have earned shale gas its share of critics.

Given the accumulation of knowledge in the US, where it has come from nowhere to account for 20 per cent of US gas supplies, it is reasonable to expect that AWE will succeed, and potentially transform the energy sector in Western Australia.

A glimpse into Perth’s future as a shale-gas market can be obtained by looking at gas prices in the US, which have fallen from close to $US9 per million British thermal units (BTUs) to less than $US4/mbtu – and fell even further last week even as Libya burned.

The prime reasons for AWE feeling confident, and for nearby explorers sharing in the glow of a new gas source, lies in the scientific analysis conducted last year, culminating in a November 9 report that put a huge number on the potential shale gas resource in just one of the shale-rock structures under its tenements.

According to AWE, the Carynginia shale contained between 13 and 20 trillion cubic feet of gas, with 4tcf of that regarded as ‘recoverable’. To put 4tcf of gas into perspective, it is widely regarded as the minimum amount required to support a liquefied natural gas (LNG) export project.

Carynginia, a shale bed about 300 metres thick, has ‘sister’ rock units also rich in what is called unconventional gas – the Kockatea shale and the Irwin River Coal Measures. In theory, these structures could contain as much gas as the Carynginia.

In fact, last year AWE ran a fracture test on its Irwin River rocks from the vertically drilled Corybass well to see what might happen when ‘fraccing’ technology was applied; the result was a commercial gas flow which started at 4 million cubic feet a day, and which was still producing at a rate of 1.2 million cubic feet at the end of 2010.

Now for the serious testing, involving the use of all the tools needed to tackle shale, including directional drilling (turning the drill bit sideways) to track the shale beds and gain maximum exposure to the gas-soaked hard rock.

If AWE can demonstrate that the shales of the North Perth Basin are rich in recoverable gas, then the entire energy sector of south-western WA will be transformed by the availability of abundant supplies of gas, and the resulting fall in the gas price, as has happened in the US.

Investor interest in Perth’s shale gas adventure has faded since AWE’s November report, despite the rising oil price and strong gas demand in the state.

AWE’s share price, heavily influenced by problems at other projects, fell sharply last year from around $2.90 to $1.46, before recovering to $1.67.

However, as a measure of the interest in Perth’s shale gas potential AWE did deliver a sharp upward price move when the November 9 report was released, adding 25 cents in a day (15 per cent) with a rise from $1.64 to $1.89.

The price retreat since then indicates that shale gas has faded from investor interest – a situation that will be rectified over the course of 2011.

Long-term deposit

THE Dongara oil and gasfields, which have served WA for more than 40 years, are not the only resource that might benefit from a fresh look; the Panton platinum and palladium deposit is also overdue for a spot of spring-cleaning.

It was discovered decades ago and once known as the Panton Sill, but nobody has been able to make money from the minerals in the ground because of three factors – fluctuating metal prices, fluctuating currency values, and the remote location.

There’s nothing that can be done about the location, near Halls Creek in WA’s Kimberley region, and there’s not a lot that can be done about currency movements, with the sky-high Australian dollar hurting all export projects.

There is, however, good news on the palladium price, and at Panton that is the dominant metal with its close relation, platinum, playing second fiddle.

Back in August 2003, when Panton’s owner, Platinum Australia, pulled the plug on the WA deposit and shifted its focus to South Africa, palladium was selling for $US172 an ounce, and platinum for $US694/oz.

Today, platinum is selling for $US767/oz, a rise of 345 per cent, and platinum is up by 155 per cent from $US694/oz to $US1772/oz.

If the current prices can hold, or be locked in, perhaps Panton will finally fly.

On the march

THE Costco juggernaut gets closer to Perth, with the US warehouse-style retailer so happy with its Melbourne experiment it is sending more cash to Australia to open in Sydney and Canberra.

In time, Costco will discover that Queensland and WA are not only Australia’s growth states, they are also the states more heavily populated by people with big freezers and plenty of storage space, which are two of the success essentials for a business that sells by the tonne rather than the kilo.

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“Show me a thoroughly satisfied man, and I will show you a failure.”

Thomas Edison