CSG Discussion

[veeone]

Come July 1, gas prices are set to spike. In New South Wales, the price increase is predicted to be as much as 8.6 per cent.

The reason behind the price hike, as stated by the New South Wales Independent Pricing and Regulatory Tribunal (IPART), is due to increased network and retail costs.
At the same time, it's believed that moderating electricity network costs will contribute to the fall in electricity prices across the state. Welcome news, given the carbon tax and other green energy schemes implemented by the federal government in recent years have added about $550 to the average annual household electricity bill.
But for gas, there is a very different story.

What are the costs driving up prices?
The construction of pipelines to ferry the gas to where it's being used is the main network cost, along with other costs associated with maintaining the pipeline network.
The energy minister, Chris Hartcher, has stated that prices for gas will now be set annually for NSW, until issues over gas development and supply are determined.
But apparently the wholesale gas market is another issue, and one that is causing uncertainty around the supply of gas. Planned large exports of liquid gas to other markets are seen to be putting pressure on local supplies.
There are fewer issues in other states that have adequate gas supply. Queensland, for example, is self-sufficient in its gas supply. Furthermore, there's an additional $60 billion in gas seam exploration and development underway in the state.
By comparison, NSW is importing more than 95 per cent of its gas. The Australian Petroleum Production and Exploration Association (APPEA) is blaming the lack of supply on the lack of gas exploration in the state. The APPEA has also raised concerns about increasing demands from environmental and farming organisations that seek to limit further coal seam gas exploration.
However, it's not as simple as just opening up more gas projects.

Can't we just extract more gas?
There are very strict regulations in place for the extraction of coal seam gas. This is to protect the environment and restrict contamination of aquifers (the underground water sources that are critical for farming and the environment).
The only way to extract more gas, more quickly, will be to relax those regulations putting the environment, farming, health and our table water are risk.
Plus, if there is more gas extracted, there is no guarantee that any of it would be kept for domestic use. Rather, it will be sold to the highest bidder, which, in this case, is likely to be countries in Asia.
There are no restrictions on the exportation of gas from Australia. In the US, restrictions are in place to ensure domestic supply. So far, neither the federal government nor the opposition is in favour of creating gas export restrictions.

If we're short of gas, why are we exporting it?
That's a very good question. In the new few years, Queensland is set to begin exporting large volumes of liquid gas to Asia. The reason for this is a simple economic one: the price paid in Asia is about $15 per gigajoule. This is around four times the amount paid in Australia. So, the gas is effectively going to the highest bidder.

Are gas companies gold-plating the infrastructure?
The electricity industry was accused of gold-plating its infrastructure and passing on those network development costs to consumers over the past few years.
But, the tricky thing is, supplying utilities to businesses and households is an expensive business. Failure to invest in the network now will only mean increased costs to upgrade network infrastructure at a later date. Poles, wires and connections cost money, as do the teams of people required to maintain and keep electricity infrastructure safe.
Price rises associated with investing in the network are never going to be popular with end customers. However, if the network fails, those same customers would be in dire state quite quickly. The concept of rolling blackouts in utilities services is not something that our modern, networked society expects.
Plus, industry regulation makes it highly unpalatable for electricity companies to have end customers off supply. Electricity providers are fined for every minute off supply when unscheduled power outages occur. The only way for companies to ensure supply to end customers is to continuously invest in its network and assets.
The same accusation is now being targeted at the gas suppliers; that they are gold-platting their networks. But, the same argument prevails. There is an increased demand for gas and to keep the supply constant, safe and accessible, the network needs to be more than just maintained – it needs to be kept as robust as possible to deal with future demands.

Should we just get used to higher gas prices?
Possibly, but it goes further than that. It is not just your heating, hot water and cooking appliances that use gas. Industry uses gas, particularly in manufacturing. Rising gas prices paid by industry will, ultimately, be passed on to consumers in other ways.
Plus, there is a real chance that the manufacturing industry as a whole will suffer, leading to job losses.
No matter which way you look at it, none of this is good news economically speaking.
http://www.bigpondmoney.com.au/why-your-gas-bill-is-rising

[triage]

This development - that Shell and PetroChina are about to can their Arrow LNG plans at Gladstone - has been on the cards for some time but now it appears to be coming a fact.

http://www.businessspectator.com.au/news/2...-gains-momentum

(h/t Elliot5 on hc)

I'm guessing that there will be big consequences for a lot of players.

If this does happen no doubt it will be a boost to the Santos and / or Origin Gladstone projects as both were considered to be short of gas for the facilities they are building. Also quite possibly a big boost for LNG that seems to be struggling with sourcing enough supplies for their smaller sized facility. Maybe not so good news for WCL (?????) seeing that PetroChina could well supply LNG with gas from its Arrow jv rather than having to go out and buy additional resources. Also may put a dampener on the more immediate prospects of the shale gas boys out in the Cooper Basin (SXY is one that explicitly indicated that potential demand for their shale gas by the various Gladstone facilities was a major motivator for them pushing on with their shale gas exploration campaigns).

The high Aussie is not only decimating our manufacturing base it is now starting to eat in to our mining heartland. Also notice that in both the Woodside and Arrow decisions to shelve or at least rethink LNG projects Shell has played a major hand even though they remain very gung-ho about LNG and gas.

http://www.nytimes.com/2013/05/02/business...ed=all&_r=0

[triage]

For some time there seems to have been developing a growing acceptance that the shale gas revolution in the US will (1) allow the US to become energy independent for ever more (2) be easily replicated in other big energy importers like China, the UK and in continental Europe, and (3) cause international gas prices and markets to crash.

I am a regular reader of the Oildrum forum and a number of contributors there bang on about how illusionary this revolution is. A main concern they have is that most of the extrapolations used in the US becoming energy independent thesis assume that gas shale wells deplete at about the same rate as conventional wells when in fact all the evidence so far suggests that depletion rates for gas shale wells are quantum levels higher (so you have to keep drilling more and more new wells to keep supplies steady over time). Another fault they find with the idea is that it ignores that drillers drill out the sweet spots first so what a new gas province can produce in its early days will be coming from the sweet spots so either there is less gas produced over time or the cost of producing that gas goes up over time.

Another assumption that the cornucopians use is that the US price for gas will stay at about it is now, around US$4 per unit, and that the price that suppliers of gas in other parts of th world will fall down to those levels (thus making many LNG projects, including the bulk of them in Australia, unviable. To begin with that assumption ignores the reality that even US drillers could not justify their existing shale gas wells with the price at $4 a unit: those wells were sunk at a time when US gas was twice the going current rate. But it also ignores that fundamental demand supply curve. With gas in the US being half to a third the price of gas in places like China and Europe users of gas will begin to demand more gas and as they do the price of US gas will be pushed up the curve.

Here is a short article which introduces the view of Jeremy Grantham, an odd mix of highly successful fund manager and a committed greenie, which is that this price differential will create extra demand for US gas and that in turn will force US gas prices to move up towards the international price equilibrium.

http://pragcap.com/gmo-natural-gas-prices-could-triple

A number of local commentators, Robert Gobblededook for one and the crew at macrobusiness being some more, believe that Qld's csg sector and the LNG developments at Gladstone are entirely irrational and unjustifiable and the whole concept of Australia exporting gas is somehow some big bubble. But the companies risking their money, like Santos, continue to insist that the demand from north Asia will continue to be there, and at commercial viable prices, even if the US shale gas revolution begins to have international ramifications.

The other day I went over some analysis of the prospects of the csg sector in Qld that I first got back in 2006. The analysis back then was very positive but none of that analysis even suggested that there would be three major LNG facilities operating in Qld within a decade. If for nothing else I enjoy following the csg theme for the sheer speed at which it develops, sometimes highly rewarding sometimes white-knuckle stuff but always interesting.

[triage]

The rumour is that another butterfly is flapping its wings.

I might be slow to this party but I just saw this on the ABC news page (and if it's made it onto the ABC news page then it means that other media outlets have probably been carrying the story for some time...):

There are media reports that Woodside has told both the WA and Federal governments it has decided not to proceed with the [Browse LNG] project at James Price Point, north of Broome, because it cannot develop it profitably.

http://www.abc.net.au/news/2013-04-11/wa-p...n-proje/4624098

There is a side issue of the ABC journo entirely missing what Premier Barnett actually said. From the quotes it appears he said that the decision to not proceed would formally be made by the jv partners and that that formal decision will not be taken until mid-year. But again going on the quotes Mr Barnett walked around any specific mention of what Woodside may have said to him: it could just as well be the case that Woodside has already advised government that when it comes time for a formal decision it will be voting to not proceed (and Woodside is the key promoter of this project).

But anyway my main point of conjecture is that it could mean that there are a couple of supermajors that could have a few tens of billions of funds all of a sudden unallocated. If that money isn't needed anymore in WA then maybe it means more for Qld csg (Shell and PetroChina have also yet to make a decision on what to do with all those Arrow csg assets they acquired) or perhaps an early move into the unconventional gas in the Cooper Basin (?). And wasn't there rumours that Mitsui were playing hardball in relation to the takeover of Westside so maybe they have ambitions themselves in that regard (?).

As of December 2012, the owners of the joint venture are

• Woodside Energy Ltd
• Shell Developments Australia Pty Ltd
• BP Developments Australia
• Japan Australia LNG (MIMI Browse) Pty Ltd (a joint venture of Mitsubishi and Mitsui)
• BHP Billiton Petroleum (North West Shelf) Pty Ltd

In December 2012, PetroChina agreed to buy BHP Billiton's 8.3% stake in the East Browse and 20% holding in the West Browse joint venture for US$1.63 billion. The transaction is subject to regulatory approval and an option for the other members of the JV to match the offer.

http://en.wikipedia.org/wiki/Browse_LNG

Mind you there has been chatter for some time that Shell is actually angling for a floating LNG plant to be used on the Browse project rather than an on-solid-ground operation. The reason always given for this push has been that the FLNG will use South Korean workers and South Korean costs (which is where the vessel will likely to be built) as against the high costs of Australian workers and conditions. But I read somewhere today where a local manufacturer - to do with the car industry I think - said that most companies can deal with the local cost structures okay but it is the irrationally high AUD that is killing off investment and profitability. Either way if a FLNG plant was used it would mean that Australia would lose out on substantial economic activity and benefit.

[balance]

In Reply To: triage's post @ Mar 28 2013, 09:35 PM

Just heard that on the news a little while ago. Some rare good news in NSW for csg.

[triage]

A victory of sorts for Dart Energy: the Land and Environment Court today upheld the approval for Dart to press on with their Fullerton Cove, near Newcastle NSW, development process and "lifted an injunction preventing Dart Energy sinking exploratory wells" there.

http://www.abc.net.au/news/2013-03-28/full...o-ahead/4600522

This will now be a test case for the NSW government in that if they choose to they can let the project proceed given that it already has obtained approvals but if they want to play the populist hand - and personally I don't think the BoF and Tony Abbott have any delusions of attracting the Green vote: for me they are more intent on shoring up the support of ultra conservatives in the National Party and the rural liberals like Bill Heffernan - then they could still intervene.

It will also be a test of whether Tony Burke at a federal level wants to really buy into the csg battle or was he just posturing.

Just to remind you the gas from the Fullerton Cove project is intended to make viable a major industrial glasshouse development that will grow tomatoes and capsicums and employ several hundred locals. Also the water by-product from the gas production is intended to be used to irrigate the crops. Regional jobs, major new agricultural development, locally produced gas, locally produced vegies, its own water provisions, I mean what more do the pollies want?

Let's see where this goes from here...

[mcart117]

The lobby group Manufacturing Australia says a shortage of cheap gas is causing regional businesses to shut down production.

http://www.abc.net.au/rural/news/content/201303/s3719775.htm

This lot needs to be doing their lobbying in NSW!

[triage]

I reckon the BoF needs to stop whimpering in the corner, cowering in fear from all those nasty ferals and NIMBY's, and start listening to his conservative cousins in the old dart.

"This was an entirely predictable crisis," [Mr Yeo, the senior MP chairing the energy and climate change select committee in the UK] told the World at One on BBC Radio 4, warning that uncertainty in energy policy would put off investors.

“Energy policy has been neglected for over a decade," he said...“We’ve got the Energy Bill going through Parliament now, but it does need to pass quickly, so we get the sort of policy framework and a sort of secure policy context in which these huge sums of investment can be attracted."

http://www.telegraph.co.uk/finance/newsbys...r-a-decade.html

[triage]

I may have this all wrong but I reckon the overnight news that the BoF appears to have folded under pressure from various quarters - including from some farmers, some ferals, the feds and a shock jock - and will now impose even stricter regulations on the coal seam gas industry in NSW is a very positive development.

http://www.smh.com.au/environment/dead-in-...0218-2eniw.html

http://www.theherald.com.au/story/1310221/...as-bans/?cs=316

http://www.dailytelegraph.com.au/news/prem...9-1226580653815

When looking to build a solid structure you usually need to put the foundations onto bedrock and it is likely that the regulatory regime is now there. With the apparent capitulation by Mr O'Farrell Alan Jones can claim victory, Tony Bourke, the federal environment minister, will have to go through the motions of agreeeing that the arrangements are a workable compromise, the la de da's with their wineries and horse studs in the Hunter will be taken out of the equation, as will the suburbanites from south western Sydney. The loonies behind the Lock the Gate will not of course not in any way be willing to concede that the NSW government has gone a long way to addressing community concerns but I am fairly sure they are more about revolution than development.

But where will the capitulation put csg regulations in NSW? My understanding is that the regulatory regime in NSW will pretty much be at the same or similar level to that already in place in Qld. If these new arrangements allow the industry in NSW to develop along similar lines to the industry in Qld then I'd be happy with that. There will be some big losers of course - AGL looks to have lost any chance of further developing its Cambden field in SW Sydney and also looks likely to lose out in the Hunter - but those csg companies with holdings away from residential areas should now be able to get on with the job they need to do, and what the NSW economy needs to have happen (imo).

[triage]

Here's a short piece on how the north americans are taking a bite out of "our" pie ie the near insatiable demand for gas supplies from north east Asia. Not to worry apparently as they are likely to take only a relatively small bit and it will may not put too much downward pressure on the prices that the Aussies suppliers can expect to get.

http://thediplomat.com/pacific-money/2013/...tion-hits-asia/

I have to admit I'm still not on board that the US shale gas bonanza is as unstoppable as most now are assuming. Three things that I cannot reconcile with all the hoopla is (1) on oildrum and elsewhere it is often commented that the depletion rates of many of these shale plays are huge, with the rates of flow dropping by orders of magnitude within the first year or so (2) that many of the projections assume that future drilling will be as successful as already completed drilling but that misses the point that the drillers target the most prospective areas first, and (3) that the current price that US gas sells for is simply not enough to justify new developments, the existing wells are only kept on stream due to the bygones rule (which is that if you've already paid upfront the capital costs for the well to go into production you may as well keep pumping it as long as it earns enough to pay operating costs even if you are getting a lousy return on the capital invested).