Coal Seam Gas doesn’t seem so hot anymore

Coal Seam Gas (CSG) has always been something of a nuisance, as it made the winning of coal more risky (because of dangers of explosions). However, when energy prices were soaring, possibilities were seen to convert it into a proper energy source, especially in Asia, were gas is both in high demand (because it’s a much cleaner source of energy than coal or oil) and scarce (because the region’s main exporter is cutting back). This thesis is hitting come uncomfortable realities..

The problem with CSG is that it is very expensive to get out. A truely staggering amount of wells have to be drilled, treated (the gas doesn’t flow naturally), and manned, in some cases in excess of 20,000 wells (as in the Conoco/Origin venture). Now that energy prices are coming down, this proposition doesn’t seem quite so good anymore.

But the demand for gas is still there, and this should make gas properties which are less expensive to exploit a lot more attractive. We know one in the neighbourhood of Australia’s CSG… It’s two, already completed, wells can already produce enough gas to supply 40% of a proposed LNG facility, and labour cost are a fraction in PNG of those in Australia..

CSG’s bumpy ride down from oil-price peak
Monday, 6 October 2008

  • FROM the highest point of a mountain range, or from the peak of a commodity-price graph, you can see forever – which is why Slugcatcher reckons a few people in the “oil alternatives” business wish they could climb out of the valley and reclaim the high ground.
  • Coal seam gas investors are in The Slug’s “alternatives” category, along with shale oil and tar sand spruikers.
  • When the oil price was spiking above $US140 a barrel it was a terrific time for anyone playing on those alternative fields. They could see endless opportunity. With oil now in the $US90/bbl range there are a far fewer smiley faces.
  • Should the downward price trend continue, as seems likely courtesy of the world sliding into a painful and prolonged recession, then everyone playing alternative games might have to pack up their bat and ball and go home.
  • For a peek at what’s happening let’s start with a six-month trip back in time, when oil was around $US110/bbl, the share price of Origin Energy was around $10 and some people were moderately excited about the export potential of CSG, but most outside observers simply saw it as a neat way of boosting supplies of domestic pipeline gas.
  • Enter BG Group, with its April 30 takeover bid for Origin pitched at $14.70 a share, close to a 50% price premium.
  • Suddenly, CSG was not simply a domestic gas boost. It was being promoted by overly-excited 20-something, pimply-faced, share floggers as the “gas to save the world”.
  • Not only would CSG be sold locally, it would be liquefied and exported around the world – a cry that grew louder as the oil price soared and the profit margins from potential CSG LNG projects grew fatter by the minute.
  • But look now. The oil price has crumbled under the pressure of reduced global demand, and the obliteration of hedge funds and fat cat investors who had been speculating merrily on money borrowed from their friendly neighbourhood bank.
  • Gone with the demand decline are the fat cat gamblers – and the banks themselves, melted in the heat of the sub-prime credit crisis and the flight of capital to safe havens.
  • It’s the collapse of the banks, as much as the collapse of the oil price which has The Slug peering with great curiosity at the future of the assorted CSG LNG projects, because not only have the hypothetical profit margins evaporated, but so have the banks and many of the world’s richer investors.
  • Suddenly, from looking like a low-ball bid, made to look even lower, when ConocoPhillips weighed in with its astonishing $9.6 billion bid for 50% of Origin’s CSG LNG projects, the BG price is looking rather more realistic.
  • Consider a few numbers to understand what’s happened during the longest month in the history of the world’s financial markets:
  • Origin’s share price has fallen by 17.5% from $19.99 on September 8 when ConocoPhillips joined the party to $16.49, and is now alarmingly close to half the peak value of $30.71 suggested by Grant Samuel in its assessment of Origin’s worth.
  • ConocoPhillips’s market capitalisation has fallen by 20% from $US125 billion when it moved on Origin to $US100 billion.
  • The oil price has fallen by close to 17% from around $US110/bbl to $US92/bbl
  • The trend has turned nasty because everything, from recession in the US to European bank failures, to the promise of a Chinese slowdown points to even lower oil prices and lower asset values.
  • It’s stating the obvious to say we live in interesting times, but there is no doubt that falling values represent the most exquisite challenge for everyone in business.
  • Quite simply, something bought yesterday is expensive today.
  • No one is yet saying that ConocoPhillips over-stretched itself, or that once attractive profit margins on CSG LNG have vanished, or that bank debt will not be available for risky new energy adventures.
  • But even if no one is saying it The Slug is thinking it.

We think this article is a little overdone though.

  1. Energy prices are still very high by historical standards
  2. Even India and China might slow down, but nobody argues they will enter a recession, demand for energy from emerging economies will still make up for the decrease in demand from the rich countries (most notably the US, as taxes on energy are so high in Europe that demand is quite price insensitive)
  3. LNG is set to grow much more rapidly than other energy sources (bar alternatives) because it’s clean and to build a gas driven power station is relatively capital extensive.