Qld Cashing In On Coal Seam Gas
Sydney Morning Herald
Friday October 6, 2006
WHEN AGL announced in mid- August that it was freezing work on the Australian onshore component of the much-touted $7 billion Papua New Guinea gas pipeline project, Queensland Gas's Richard Cottee must have started worrying about the implications for the independence of his company.
Only a couple of weeks earlier Queensland Gas, the country's largest coal seam gas group, had announced plans to raise $60 million to accelerate the proving-up of its gas reserves.QGC was moving to capitalise on what it foresaw - the latest deferral of the PNG pipeline project as a result of exploding construction costs and difficulties in locking in major customers. Continued delays and rising costs of the PNG project had created a widening of the window of opportunity for the nascent Queensland coal seam gas industry to reassure customers that there was a competitive alternate source of supply - and lock in contracts at the PNG project's expense.The backdrop to the scramble to develop a coal seam gas sector is the steady decline, and rising costs, of Santos's Cooper Basin onshore gas fields, which have traditionally supplied South Australia, Queensland and NSW. Despite a $1 billion drilling program to add to the basin's reserves, Santos's near 40-year dominance of gas supplies into those markets is starting to wane. With demand for gas soaring - it is expected to more than double over the next 25 years - and onshore reserves falling, the PNG pipeline had been seen as the solution, until the coal seam industry developed. Now the coal seam producers say there is sufficient gas in Queensland's Surat and Bowen basins to supply the eastern states for decades. Santos has flirted with the PNG project since it was first conceived, at times showing enthusiasm to become a participant and core customer and at others expressing scepticism. Other participants in the project are cynical about Santos's attitude, suspecting that it would prefer not to help develop a competing source of gas.Whether that is true or not, Santos has been active in trying to shore up its onshore reserves position. It was recently outbid by Beach Petroleum for Delhi Petroleum, which would have increased its share of the Cooper Basin reserves. More particularly, a year ago it spent $612 million to acquire Tipperary Corp, which controlled the producing Fairview coal seam methane field north of Roma in Queensland. Santos already had a producing field, Scotia, north-east of Roma and north of QGC's fields. Santos isn't the only major energy group that sees coal seam gas as a solution to the emerging supply/demand tensions for gas in Queensland and NSW. AGL and Origin Energy also have interests in coal seam gas and could be expected to consider whether to allow Santos to take out the major producer without a contest. AGL has secured its gas supply until about the middle of the next decade, after which contracted supply falls off sharply. QGC could be a strategic response to its longer-term needs, both locking in supply and diversifying it away from the current reliance on Santos. Santos appears to be cognisant of the risk that it might ignite a bidding war for QGC. It has already acquired 3.9 per cent of its target and is bidding $1.26 a share, a 24 per cent premium to QGC's price before Santos started buying and a 47 per cent premium to its volume-weighted price over the preceding three months. Santos also has a minimum acceptance condition of only 50.1 per cent, suggesting either that it does expect competition or is concerned that interests associated with the QGC board, which control just over 20 per cent of the company, might hold out. The reason QGC raised equity this year was to free itself from bank covenants that forced it to undertake intensive drilling programs and slowed its ability to prove up new reserves. The accelerated program (which QGC labels its "growth acceleration strategy") could, if QGC's confidence isn't misplaced, more than double its proved and probable reserve base relatively quickly, making the company far more valuable. QGC says its production is within the lowest cost quartile for competing gas producers. Its interests are well located in south-east Queensland, close to the electricity grid and the Roma-to-Brisbane gas transmission pipeline. It has contracts to supply an ANZ-funded power station near its gas fields and has been negotiating with petrochemical and fertiliser producers. The $521 million price the Australian Pipeline Trust paid for Queensland's gas distribution business, Allgas this week - nearly 1.7 times its regulated asset base - is an indication of the strategic value of energy-related assets in south-east Queensland.How valuable and strategic QGC and the coal seam gas producers more generally turn out to be may be dependent on whether the Santos bid flushes out competition from the other big players.
© 2006 Sydney Morning Herald
