First OilSearch, now those Australian coal seam projects…
Those competitors, already much more expensive compared to InterOil’s project, are hitting serious problems. Coal seam gas is a byproduct of coal. Wells don’t flow by themselves, they have to be treated with large amounts of water which bears significant environmental risks (this practice is suspended in parts of Canada as a result).
Thousands of wells have to be drilled and treated (in the Conoco/Origin case up to 20,500), making these kind of projects very expensive. Australia’s cost base is also several fold that of Papua New Guinea (PNG), where InterOil is located. And now, the Australian taxman provides another obstacle…
bad news for Australian coal seam gas LNG
The problem is not the long list of pipeline management, gas pressure, or environmental issues raised by seasoned oil men such as Woodside’s Don Voelte, it’s the oldest business problem of all – tax.
Well, in Queensland it’s not actually called tax, it’s given the same name that has caused problems in the conventional gas industry in places such as Western Australia: “Gas Reservation Policy”.
News of a Queensland government-enforced gas reservation policy has been around for some time, and most oil and gas producers probably expected something similar to the 15% requirement in WA.
But, what has changed is that bankers and other non-oil financial types, have finally got around to reading the beautiful brochure put together by the Queensland government and billed as a “Blueprint for Queensland’s LNG Industry” – available at this link http://184.108.40.206/dsdweb/v4/apps/web/secure/docs/3895.pdf.
Long on presentation and colour photography the document was quietly slipped out about a month ago, to be added to the collection of glossy brochures most business people put on their coffee tables and do not take too seriously.
That changed last week when one of Australia’s top financial analysts, Ivor Ries, discovered what was being proposed for the Queensland LNG industry. Boiled down, Ries summarised the reaction as: “You cannot be serious”.
Unlike The Slug and his somewhat dodgy reputation, Ries is the real thing. A former columnist with the Australian Financial Review newspaper, he is now head of research at the stockbroking firm EL&C Baillieu – and for anyone outside Australia, the Baillieu family has the bluest of blue establishment blood.
What stirred Ries, writing in the subscriber-only investment website EurekaReport, was what he described as the “bombshell” of a 20% gas reservation policy for an industry that had not even started to produce.
Acknowledging that Western Australia operates a loosely-enforced gas retention policy to ensure sufficient supply for local customers, Ries said the difference with Queensland was that its industry had not yet started with funding discussions taking place in the most difficult banking climate in 50 years.
The Slug admits that he has not, until now, bothered with the detail in the Queensland government’s LNG brochure. Like everyone else, he dismissed it as standard government propaganda.
The first few pages, loaded with politicians exhibiting their unnaturally white teeth, are reason enough to go no further.
Ries, apparently egged on by friends in the banking sector, did dig a little deeper and was horrified with the two possible approaches to “maintaining Queensland’s domestic gas supply”.
The second option is a complex, four-stage approach of withholding certain gas production areas and applying tough new restrictions on gas production, while the first option is the contentious policy of forcing gas producers to “sell, or make available to the domestic market, the equivalent of between 10-20 per cent of gas production”.
The argument from bankers is that such a policy might work in an established gas field which lacks the technical challenges of producing sufficient coal seam methane for liquefaction – in a normal financial environment.
As we all know, these are not normal times. Capital development funds are in short supply, and expensive.
Investors and bankers are slowly regaining their appetite for risk, but not for novel gas liquefaction technologies in places with greedy governments.
From a banker’s perspective the possible 20% retention “tax” is a killer, or as Ries puts it: “Currently one of the biggest fears among foreign bankers about coal seam gas to LNG is that some companies may have trouble converting their gas reserves into actual production due to technical problems, and therefore most banking syndicates will be demanding that the coal seam gas developers have up to two or three times the gas reserves they actually need to meet their LNG contracts.
“If 20 per cent of their current reserves are locked up to provide cheap gas for domestic industries, some projects will clearly fall short of the gas they need to win financing.”
He goes on: “The big gas players can’t really believe what they’re hearing. They are just kind of stunned.
“They knew the government would jack up the gas royalty rate … but to do it when most of them are trying to get a final investment decision from a group of gun-shy bankers beggars belief.
“Ask the money men, well, if you’ve just dropped $5 billion on subprime you’re not going to be especially keen to drop another few billion on a project because a government on the other side of the world has a change of heart.”