Queensland's innovative approach to gas reservation has entered the mainstream with the surprising news that Shell has joined Santos in an exploration joint venture that must direct what they find into domestic markets.
As recently as Tuesday, Woodside Petroleum boss Peter Coleman recommended Queensland's future-dated reservation policy as a leading-edge, long-term solution to the east coast gas drought.
Just two days later, the world's super-est petroleum super-major, and the senior citizen of Australian onshore exploration and production, have aligned themselves in a project that, ultimately, aims to profitably refresh their separate and collective social licence.
This need is, of course, the product of three years of market failure in the east coast gas business. As Coleman suggested on Tuesday, there are three core reasons for an east coast crisis that has challenged the public standing of the gas sector.
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Annastacia Palaszczuk's Labor government has focused on a long-term structural response that forces domestic market priorities on future commercial gas discoveries. Dan Peled
The three exporters failed to meet production levels anticipated by their $80 billion in Queensland export facilities, customers failed to prepare effectively for the disruption to normal service that would have occurred even had the domestic market been fully served, and governments, fired by the shared ambition of east coast exports, failed to anticipate the petroleum industry's capacity to inflict self-harm.
This problem of many fathers has but one solution. The domestic market needs to be refloated with reasonably priced gas.
And that is why Santos and Shell have made sure that they are the preferred bidders for one of several new exploration tenements released by the state government on Thursday.
The 400 square kilometres of Surat Basin scrub that the pair have eyes for sits just to the south of the national gas hub of Wallumbilla and it hosts layers of deep sandstone that the new joint venture believes are prospective for material reservoirs of tight gas and condensate.
"If the play works then we believe there is multi-TCF potential across it," Santos chief executive Kevin Gallagher told The Australian Financial Review on Thursday.
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The east coast gas crisis has many fathers. James Davies
"So it is something that we are very excited about, though it is far too early to say what that is going to look like," he said.
"The next step for us is to work hard to develop activity plans for the next couple of years, to start testing it and appraising it," Gallagher added.
That work will likely be informed by the folk at Shell. The licence captured by the 50-50 joint venture includes legacy blocks released by BG Group, which won the race to open Queensland's export gas campaign and which is now owned by Shell.
Apparently Shell has done some exploration of blocks next to this new one and it is as excited as Gallagher about the potential of those deep sandstones.
That excitement is buttressed by a legacy of success in extracting tight gas from deep structures. As Gallagher jovially noted: "That is the Cooper Basin, right!"
Rebuilding trust
At the time he was talking about potential future production in the Northern Territory and the need to realign community perceptions of risk and reward. He said the industry needed to be "open to discussions with governments, gas users, unions and communities about sensible ways to reserve an agreed portion" of whatever onshore exploration in the NT might reveal.
"Some will say that this is a retreat by the industry, but it is a necessary step on the journey we need to take to rebuild trust in our industry as part of a longer-term strategy to better engage with the Australian community," he said.
"We need to recognise that politics is the art of the possible. We should want to satisfy the legitimate aspirations of Australians for long-term domestic gas security as part of our social licence for the future development of Australia's enormous resources."
This politics of the possible is now playing out in Queensland. The Palaszczuk Labor government has avoided the temptation of retrospective reset of production licences and has instead focused on a long-term structural response that forces domestic market priorities on future commercial gas discoveries.
Back in March this redrafted invitation to explore hit the headlines when a gas-short manufacturer lined up with an ambitious junior explorer to secure an exploration licence that required any future production to be dispatched to domestic markets.
The explorer was Central Petroleum and the manufacturer was Incitec Pivot. The inspiration for this deal was that Incitec wants a long-term gas supply solution for its Gibson Island urea plant near Brisbane. So it is that Incitec will fund the first $20 million of exploration spending in the name of a field-gate gas deal should that work reveal commercial gas.
Of course, whether Gibson Island can stay open long enough for that deal to pay off remains a moot point right now. But given it can and given Central's drilling goes to plan, this arrangement could be a model for others in the future.
And that might well be why Queensland's Resources Minister, Anthony Lynham, has now pushed the reservation envelope with an invitation for bids on another new licence release. It will require that the gas is sold to local manufacturers.
Gallagher's people are still assessing both that tighter prerequisite and the country on offer. But he does not resist this further facetting of the Queensland regime.
"The release only came out yesterday so it is too soon to say if we would be specifically interested in that block of not," he said. "What I will say, though, is that Minister Lynham is yet again demonstrating that the focus is on unlocking supply and being innovative in the way he is thinking about unlocking supply.
"As I have always said, your problem on the east coast is – we all talk about whether we built too many ling projects or whether the ling projects are the cause of the problem. But at the end of the day I have always said that the problem is because supply stopped.
"We turned off the valve on supply and I just think the Queensland government, and Minister Lynham in particular, deserve a lot of credit for continuing to work hard to unlock supply and help us redress the market balance on the east coast."
Exxon failure
Of course, all of this innovation and the investment it has and will foster, might yet come to nought. Exploration is a risky and expensive game. Just ask Exxon. Well, I wish I had, actually. Instead it was The Australian that reported on Thursday that the US operator of the 40-year Bass Strait bonanza had reported failure of its solo $120 million punt in the Dory gas prospect.
Failure of the two-well exploration program, along with Exxon's reiteration of its interest in importing LNG into Victoria as a way of capturing future value of its Bass Strait infrastructure legacy, reinforces my view that hope is not a strategy when it comes to energy.
At the time we warned that this seemed a tad optimistic and seemed to be largely based on the successful conversion of a whole lot of contingent resources into proved commercial stock. Here again, Dory is a lesson. Exxon does not invest $120 million on a whim. These wells were informed by data and drilled in what has been a very profitable backyard for four decades. But the gas didn't come in.
In the end, what Exxon spent on dashing its own hopes is equivalent to more than half of the cost of the most mature of the plans to import LNG from Western Australia, Singapore or the US into Australia's east coast market.
According to the detailed filings delivered to NSW Planning & Environment, the capital cost of Australian Industrial Energy's plan to park a regasification and storage plant at Port Kembla will be $223.8 million. And the great thing about that proposal is it's backed by Andrew Forrest and Japanese giants JERA and Maurubeni.
So far AIE has garnered a lot of interest from potential customers. But, so far at least, it feels like the impeccably populated plan is getting a more productive welcome from potential gas suppliers than it is from those very same customers that failed the test of anticipation in the first place. Hope can be a dangerous thing
STO Price at posting:
$6.21 Sentiment: Buy Disclosure: Held
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