A huge bet on coal seam gas  

BG's drawn out takeover attempt for Origin Energy has finally bitten the dust, with Origin instead selling a large stake in its coal seam methane (coal seam gas) assets to Conoco Phillips, with the gas destined for a large LNG plant to be built in Gladstone.

The Business Spectator reports - A huge bet on coal seam gas.

The Origin deal is the high-water mark in what has been a scramble by the international oil and gas majors to grab a piece of the coal seam gas action in Queensland.

There's BG itself, with its deal with Queensland Gas and bid for Origin, Malaysia’s Petronas, through its joint venture with Santos, Shell through its deal with Arrow Energy (and its reported interest in Origin’s gas) and ConocoPhillips – all have paid previously unimaginable prices to secure CSG resources as feed for planned export LNG plants. BP was also said to be one of the participants in Origin’s CSG "monetisation" process.

The highest prices paid – $1.65 per gigajoule for 3P reserves if two-train LNG plants are built – were achieved by Santos and Origin. That’s rational, given that they have the largest resources.

The intensity of interest from the global oil and gas majors, and the prices they have been willing to pay, validate the view that the Queensland CSG fields are a new resource of global significance. The abruptness with which CSG has gone from being a curiosity to a strategic resource has, however, confounded the local market. Even Santos and Origin appear a little stunned by the values attributed to their resources. ...

After a competitive process, one of the world’s biggest energy groups has committed itself to putting simple cash on the table for a half share of the resource and its development potential. That looks as real and as arms-length a mechanism for establishing value as any.

Whether that value holds up over time will, as will be the case with the other CSG partnerships, depend on the eventual economics of building and operating export LNG facilities based on CSG.

Some of the world’s largest companies are, of course, completely disregarding the signals the market has been providing on the value of the CSG-exposed companies and making very, very large bets that it will.

Origin beat all expectations on Monday when it signed a deal worth up to $9.6 billion to sell half its coal seam gas (CSG) reserves to Conoco and begin a Queensland liquefied natural gas (LNG) export project with ambitions to rival the massive North West Shelf, which is Australia's biggest resources project. ...

BG declined to comment further on its plans, saying only that it remained firmly committed to Australia and planned to develop an LNG plant at Gladstone with Queensland Gas Co (QGC). The company has committed to supply 4 million tonnes a year of LNG to Singapore and Hong Kong, but this could still be fulfilled through the first stage of its $8 billion planned project with QGC. ...

The Conoco deal leaves three major LNG projects and two smaller ones planned for the port town of Gladstone. If they all come to fruition, Gladstone could alone be producing more LNG than the whole of Australia has currently committed to. Origin and Conoco have ambitions for a 14 million tonne a year project, BG and QGC want to build a 12 million tonnes a year capacity, while Santos and Petronas have plans for a 7 to 8 million tonnes a year plant.

Despite a host of LNG plans around the country, Australia still has only two LNG operations: the Woodside-operated North West Shelf, which produces at a rate of 16.3 million tonnes a year after commissioning of a fifth train this month; and Conoco's Darwin LNG, which produces 3.5 million.

There is also only one more plant with project approval, Woodside's Pluto, which will produce at a rate of 4.3 million tonnes a year. Mr Greenwood warned investors that 100 million tonnes a year of capacity is now scheduled for Australia, whereas demand forecasts only call on 65 million tonnes a year from the Pacific Basin. "We foresee a softening of this market and also see the potential for major project deferrals," he said.

The Santos and QGC projects, which were further advanced than Origin's, were relatively low-risk projects compared with Western Australian plans, which were "fraught with joint venture conflicts", he said.

Mr Greenwood also said Shell, which now has a small stake in Arrow Energy's acreage would probably move to increase its position in the region.