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LNG is booming in Asia

August 5th, 2008 · 1 Comment

We’ve reported on it quite a few times before. But it’s hard to be denied. There are a couple of simple reasons for it. 

Natural gas has a couple of crucial advantages:

  • It’s the cleanest energy of the traditional energy sources
  • On an energy unit basis, it’s cheaper than oil.

In Australia, there is a boom in coal seam gas, this article warrants some comments

  • Coal seam gas was barely talked about 10 years ago but a combination of rising gas prices globally and demand from Asia means it is going to be a hot spot for the resources sector in coming years.

Yes, booming demand from Asia and higher prices have produced a situation in which previously uneconomical gas resources have suddenly excellent prospects (now where have we seen that one before..). You have to understand that coal seam gas is not the easiest gas to get, a few facts on coal seam gas:

  • Coal seam gas occurs naturally when coal is formed deep underground by a process of heating and compressing plant matter. The gas is trapped in deep coal seams (typically 300-600 metres underground) by water, which must be removed to stimulate the gas flow.
  • The CSG is extracted via wells which are drilled down through the coal seams. The water is pumped out, and the CSG is desorbed and released from the coal. If the pressure within the seam is high the gas may flow to the surface unaided, and if the pressure is lower the gas may have to be pumped to the surface.
  • Various techniques have been developed to enhance the rate of desorbtion, including the pumping of CO2 underground to increase field pressure. (This “sequestration” of CO2 underground may also have environmental benefits if the CO2 would otherwise be released into the atmosphere.)
  • The two most important in-situ factors are the extent of gas saturation in the coal seam, and how permeable the coal seam is. The expertise of the operator is also very important, since different production techniques can have very different impacts on flow rates. For example, QGC has a number of producing wells that were previously drilled and which, prior to being reworked using our contemporary completion techniques, had produced uneconomic gas flow rates, and in some cases had previously shown no traces of gas.

Even wikipedia has a surprisingly decent take on the subject:

  • Permeability is key factor for CBM. Coal itself is a low permeability reservoir. Almost all the permeability of a coal bed is usually considered to be due to fractures, which in coal are in the form of cleats. The permeability of the coal matrix is negligible by comparison. The fracture permeability acts as the major channel for the gas to flow. The higher the permeability, higher is the gas production.
  • Coalbed methane [another name for coal seam gas, ShUnite] wells often produce at lower gas rates than conventional reservoirs, typically peaking at near 300,000 cubic feet (8,500 m³) per day (about 0.100 m³/s), and can have large initial costs. The production profiles of CBM wells are typically characterized by a “negative decline” in which the gas production rate initially increases as the water is pumped off and gas begins to desorb and flow. A dry CBM well does not look different from a standard gas well.

Peaking near 300Mcf/d flow rate. InterOil just had a DST which produced a flow rate over 30 times that and it was considered a disappointment by some (but wait for the last well flow test results in a couple of weeks, when they have cleaned up the skin with acid, which will allow much higher flow rates).

Back to the initial article:

  • Asian consumers are paying around $14 a gigajoule for LNG, compared with $2.50 – $2.70 for sales in Australia.

That’s a price premium of a good 500%. Another question is, how much is $14 per gigajoule? It’s roughly 1Mcf, so it’s also trading almost at a 70% premium to the Henry Hub price ($8.62)

  • Energy-hungry Asian markets are the prize that has drawn Shell, BP, Britain’s BG and Petronas of Malaysia into Australia’s growing coal seam gas business and seen stock prices jump as the industry is re-rated.
  • EL & C Baillieu estimates the export market out of Gladstone could be worth $100 billion by 2013 if all the five LNG plants planned and being built there are in production. Head of research, Ivor Ries, says the global market for gas is growing and rising prices will flow through to the domestic market, giving all producers a lift.

$20B per LNG, those are interesting figures. Some might argue that there will be too much competition for InterOil’s (or rather, Liquid Niugini’s) LNG facility, read on:

  • Ries says the global gas market is rising by 3 – 3.5% a year “which does not sound like much but the volume of that is extraordinary, trillions of cubic feet. “At the same time, a lot of the old fields around the world are in decline, particularly in North America.”

And gas is poised to substitute for oil wherever it can because it’s both cheaper and cleaner. The limit of demand is only produced by limits in the infrastructure to deal with LNG. Boom times are here to stay for LNG, that much is sure, especially in Asia:

  • He says the industry is in for an exciting time. “We are really just at the start of it. We have seen the interest of a number of international energy companies who have invested significant amounts of capital here. We will see this industry continue to grow very strongly.”
  • The domestic market will get a boost from the Federal Government’s carbon tax scheme, which will provide a real incentive to generate electricity from gas, and from higher prices globally flowing onto Australia.

Plenty of financing around for projects:

  • Company debt levels and access to funds are going to be important given the funding requirements of some of the planned projects, however the smaller players are showing they can attract partners with deep pockets if they can prove up reserves.

We believe InterOil, our main featured company which has gas resources that flow much better than coal seam gas, is at the verge of doing both the reserve proving and attracting partners with deep pockets.

Tags: IOC

1 response so far ↓

  • 1 Jim Tate // Aug 5, 2008 at 4:35 am

    IOC appears to be in the middle of a perfect storm