The perfect storm for Australian shale

HAS the time for shale gas arrived in Australia? Wireline believes so but urges caution – investor confidence is still tipped towards more conventional energy plays and unconventionals backed by big names such as ConocoPhillips and BG. And rightly so.

Wireline would like to take a moment to consider what is going right for shale gas in Australia. Nothing succeeds like success and Beach Energy’s better-than-expected resource estimate for its two test wells of 2 trillion cubic feet of shale gas easily tops that list.

The shale resource booking from Beach’s test results from its Holdfast-1 and Encounter-1 wells equates to in excess of 330 million barrels of oil equivalent and five times what it had last year. Though the reserves are still contingent, as the company de-risks the Cooper Basin tenement it’ll get fast tracked to being commercial. It has the edge as it has access to transport infrastructure.

The company’s ambitions are clear. It has an early mover advantage and is already looking to consolidate a top spot in the Australian unconventional game by securing additional tenements in Northern Territory and Western Australia.

In a deal that may have Beach spending more than $36 million, it has signed on with unlisted Territory Oil and Gas for a 55% stake in two offshore tenements and a 90% stake in two onshore ones. And while the tenements have both conventional and unconventional potential, it is likely to focus on shale gas.

The fact that Beach’s persistence paid off will lend confidence to others. While Beach is a front runner in the shale space, the sector has garnered much interest in Australia after spectacular success in the US, where the shale revolution has had unintended consequences of stranded investments.

Only six years ago, the US was facing a severe natural gas deficit, with prices as high as $US10-$12 per MMBtu and companies were scrambling to invest in LNG import facilities.
But fine-tuning of horizontal directional drilling technology ushered in the shale gas revolution, so much so that the price of natural gas has tanked to as low as $4/MMBtu.

The US Energy Information Agency in its June 2011 report estimates that Australia has about 396 trillion cubic feet of shale gas that is technically recoverable. Analysts estimate that this number represents in excess of 20% of all the combined  shale resources in North America. And this also exceeds the coal seam gas resources in Australia that are the fulcrum of the different LNG export projects in Queensland.

The EIA report only analysed the main basins of Australia – Cooper Basin in South Australia, Maryborough Basin in Queensland and Canning and Perth basins in WA.

With Beach going ahead full steam, it appears there is gathering momentum for other projects as well, especially in Canning, where shale potential is estimated to be the most.
This year alone, in addition to Beach’s discovery, there have been three significant farm-in transactions.

In April, Falcon Oil and Hess entered into an agreement under which Hess could potentially take up to 62.5% in three of Falcon’s shale projects in the Beetaloo Basin. Of bigger significance, perhaps is the entries by Conoco and BG Group into Australian shale plays in July. The US oil major entered into a head-of-agreement and negotiation exclusivity period with shale exploration minor New Standard Energy for a 75% share of NSE’s Goldwyer shale project in the Canning Basin. Conoco will bring $109.5 million in exploration funding.

Meanwhile, British energy giant BG consented to acquire a 60% stake in Drillseach’s tenement in the Cooper Basin and took options to acquire almost 10% of the company.
BG will commit $130 million to a five-year exploration and production program, which will also include a pilot appraisal expected to cost BG $90 million.

The added advantage for BG is access to more gas for its Curtis LNG project in Queensland.
Of course, these are dwarfed by the level of interest in shale plays in the US. But baby steps, nevertheless.

Wireline also noted with some amusement, the passage of the carbon tax bill in the House of Representatives.

This scribe speculates that the celebrations on the Parliament floor on the passage of the bill, notwithstanding the rather awkward and much-commented-on Gillard/Rudd embrace, were probably surpassed by cheers in boardrooms of energy companies, particularly of shale gas companies.

The passage of the bill, which will bring into law a carbon tax effective from July next year, adds certainty to the investment regime. And with the touted lower CO2 emissions benefit, shale gas is surely set to win. But the potential growth in the sector is not without pitfalls. Chief among them are environmental concerns about hydraulic fracturing and water use. The former especially is a potent issue in the US and there has been considerable debate over the effects of hydraulic fracturing and possible contamination of aquifers due to chemicals used for fraccing.

The American protests have found counterparts in Australia, with strident opposition from Green groups. While the jury is still out on the merits of concerns, there is consensus that this area particularly needs more monitoring.

Already, the NSW government has imposed a temporary ban on fraccing which is likely to last until end of this year and the public perception doesn’t seem to have changed towards fraccing.

There is also concern about water use, with competition for water likely to lead to more conflict with farmer groups. Like CSG, shale gas requires significant numbers of wells to be drilled. And landholders are already up in arms against the CSG sector.

And while shale in US spread largely because of access to infrastructure, access is going to be a major impediment for Australian shale development. And it doesn’t help that labour and equipment costs are already skyrocketing in the broader resources sector.

But what could ultimately stymie the growth of shale is markets, with the possibility of a supply glut leading to a collapse in prices. With the burgeoning LNG industry, shale and conventional natural gas, Australia already produces more than it consumes. And while its proximity to growth markets such as China and India may give it an edge, unconventional plays are being explored in these areas as well.

The euphoria that surrounded coal seam gas seems to be transferring to shale. But, as readers are aware, the CSG sector faced a public relations nightmare and if the shale sector does not address some of the key environmental and land use concerns, it might face the same uphill battle.

It is indeed a space to watch and Wireline will be doing so.

This article was first published in the December edition of RESOURCESTOCKS