'Coal seam methane production is now the fastest-growing sector in Australian domestic gas production, growing by 35.8 petajoules in the year to March 2008 to hit 123.1 petajoules. Global demand for energy and the price at which Australian companies can export LNG mean the opportunity for a switch is irresistible. LNG is also approaching parity with oil and is putting upward pressure on gas prices. A report by Energy Quest for the March quarter put the value of Australia's LNG exports at $7.29 a gigajoule, up 22% on March 2007. Resource-poor Japan, which imported 68 million tonnes of LNG for the year ended March 2008 and is the world's largest LNG importer, is the main destination for Australia's LNG. Japan took almost 12 million tonnes of Australian LNG at $9.80 a gigajoule. At those prices Australia is offering a considerably cheaper product than many competing African countries. Queensland's large black coal deposits mean it has about 95% of Australia's coal seam gas reserves. It is hoping the commodity will become as synonymous with the sunshine state as pineapples, sun tan and theme parks. Santos and the BG-Queensland Gas Company group have rival $8 billion LNG plants proposed for Gladstone, with initial production expected to be 3-4 million tonnes a year. The Bowen Basin and the Surat Basin in Queensland are considered the two best sources for coal seam gas, with Origin, Santos, QGC and Arrow the main players in the state's burgeoning sector. While nearly all Australia's LNG is exported, Bethune says the introduction of emissions trading in 2010 could create pressure to retain some for ourselves. "Emissions trading is the big sleeper," he says. "Only 10% of eastern Australia's power, including South Australia, is gas fired. Under emissions trading, that will grow quickly and domestic gas prices, which for eastern Australian gas is around $3.50 a gigajoule, will double." As the price of coal seam gas continues to rise, analysts are divided on where the ceiling is. Perennial's West warns that the coal seam gas market could quickly become overheated. "We are in a bubble already and I see a danger that it will distort the way we (assess) the ongoing value of these businesses," he said. "One of the big questions is whether this Gladstone region is able to contract on a 2P basis and whether it can sustain all the players scrambling to get into the market." Bethune thinks it can. "With oil and gas, there is always a risk that they might not live up to their promise. Reserve numbers are not certain so there is always that risk. But these are some of the biggest companies in the world, they are serious and highly competent companies. Show me the last bubble that Shell invested in, or Petronas and the Malaysian Government."
EPG Price at posting:
0.0¢ Sentiment: LT Buy Disclosure: Held
