Sinopec to open doors for coal seam gas from Origin Energy  

The Business Spectator has a look at the recent coal seam gas export deal between origin Energy and Sinopec - Sinopec to open doors for Origin.

Despite, relative to his peers, taking an apparently leisurely route towards a green-lighting of Origin Energy and ConocoPhillips’ proposed massive Queensland export LNG facility, Grant King has always appeared confident he put together the customer base to support a go ahead for the project. Today the Australian Pacific LNG partnership was expanded as it locked in its first big customer.

That was not much of a surprise, given that APLNG had signed a non-binding heads of agreement with China’s Sinopec back in February but converting that agreement into a firm commitment was a necessary pre-requisite before Origin and ConocoPhillips could even consider a final investment decision.

Sinopec has committed to taking 4.3 million tonnes a year of LNG from the Curtis Island plant for the next 20 years – the largest single gas contract, by volume, yet entered into by the industry. It will also acquire a 15 per cent stake in the project for $US1.5 billion, diluting the existing partners to matching 42.5 per cent holdings but also reducing the amount of funding they will need to put in place to develop the project.

The contract will underwrite one train in what APLNG plans to be, initially, at least a two-train project that would be developed at a cost of around $US20 billion. Eventually it would like to have a four-train facility at Curtis Island, with an overall investment closer to $US25 billion.

Securing Sinopec ought to help convince other customers to sign up. APLNG has been negotiating with other prospective customers about off-take agreements and with a committed foundation customer and therefore a near-certainty that the project will proceed one would normally expect the prospects of signing up additional customers to strengthen.

Assuming a final investment decision to proceed is made this year, Origin hopes to deliver first gas to Sinopec in 2015.

King has been quite sanguine about demand for APLNG output even thought his project has been lagging the progress of the rival BG Group and Santos/Petronas projects in lining up customers.

The long term outlook for demand for LNG in the wider region is regarded as very strong but, until recently, there were some concerns that the sheer number and scale of new LNG projects planned for Queensland and north-west Australia might overwhelm demand in the near term.

The natural disasters in Japan, and the impact that has had on planned expansions of nuclear plants, however, has fundamentally altered the dynamics of energy supply and demand throughout Asia and, indeed, elsewhere. LNG is the most obvious beneficiary.

The SMH has an article on concerns being raised about the environmental impact of the development on the great artesian basin - Major LNG deal sparks enviornmental fears.

A major liquified natural gas (LNG) deal between Australia and China has environmentalists fearing for the future of the Great Artesian Basin. Australia will supply China with a further 4.3 million tonnes of LNG each year for 20 years. ...

The coal seam gas-to-LNG project involves the extraction of CSG from coal seams in the Surat and Bowen basins in southern and central Queensland.

Friends of the Earth spokesman Drew Hutton says this is bad news for the environment, the Great Artesian Basin and for landowners. "The federal government water group and Geoscience Australia believe there are going to be dramatic draw-downs [of the water table] in sections of the Great Artesian Basin and the damage could last for hundreds of years," Mr Hutton said. The basin is a major source of water for farmers and communities in inland Queensland.

Origin Energy managing director Grant King said he was confident the project would not harm the basin. "Our project has done an enormous amount of work in understanding the impact the project will have on water, acquifers and the Great Artesian Basin," Mr King said. "The technical work, the engineering and scientific work done by our teams gives us the confidence there won't be any adverse impacts."

Mr King said trials were under way to understand issues surrounding water management. He also said they were treating the unwanted water that comes up during the gas extraction. "That water is treated and applied for a number of beneficial uses and one of the uses could be reinjection [into acquifers]," Mr King said.

Mr Hutton said CSG companies did not know what to do with the unwanted water. "They don't know how to treat it to an acceptable level at an acceptable cost," he said. "They don't know what to do with the one million tonnes of salt a year that comes to the surface except to wack it into landfill. "Is it worth disrupting and sometimes destroying the farms that provide our food and fibre? "The cost of this industry is far too great."

The Climate Spectator had an interview by Giles Parkinson with Grant King last month, covering a range of topics related to the local energy industry - Q&A: Grant King.

GP: Ok. Let’s move onto the renewable energy target, because you’re obviously sort of closely involved with that now, being the largest energy retailer in the country. How do you see the renewable energy target being acquitted and, I guess we’re talking here, which technology by 2020?

GK: Well, clearly in the short term the market price of the two instruments under scheme now, the LRECs and the SRECs, is quite low and that tells us therefore that there is plenty of supply – and I think that the reason for that is pretty well understood, particularly generation of RECs from solar PV installations last year. And in our case, we’ve said quite publicly we have secured RECs that will probably cover our position inclusive of the recent acquisition in NSW for three or four years.

We do not expect this low price to remain, and the price has already started to move up from the lows of late last year, and in our view must inevitably get to a level that will cause more renewable energy assets to be built, because there is clearly insufficient renewable generation to generate a level of RECs required in the future years, and particularly the 2015 to 2020 period as the REC curve or the liability increase is substantially under the scheme. Now, it’s always difficult to call a forward market – and we couldn’t call all that movement towards replacement cost will happen in a year’s time or two years’ time or whatever – but inevitably it must rise because there is insufficient renewable generation yet in store to meet the future REC requirements of the market.

GP: Can you make any sort of call as to when that build does occur, whether it will be still mostly wind, or do you think other technologies will be capable of pushing some of the wind capacity aside?

GK: Well, I think one of the features of the current long REC position is that it probably will bring a bit of a pause to the development of wind assets. Origin has, for example, invested substantially in other technologies, primarily geothermal, and I think that probably means there’s another couple of years for us and others to do some more development activity around geothermal and see whether that can be a major source of RECs. But at the moment, you’d have to say that there is a substantial amount of wind development sites consented and in the consenting pipeline which I would have thought would have met the greater part, if not all, of that REC requirement.

So, it can, and it certainly could be met from wind, but we’ve probably got another couple of years to find out whether there are other technologies which will compete on a cost basis with wind. But certainly, from about at least I would think two years on, we’re going to start to need to see a substantial building or development of new renewable energy assets to meet the overall REC targets.

GP: Yes. And Origin has 3000MW of wind capacity in development, either with planning approval or not. Are you likely to develop your own wind farms to meet your own obligations or will you be seeking third parties where appropriate?

GK: We’ve done both. And in fact, historically, we’ve tended to buy more from third parties, either to buy RECs in the market or buy renewable energy from third parties; for example, Waubra is a case in point. Ultimately, that question is answered more in terms of the overall funding demand on Origin and we’ve got some quite, big projects underway, obviously the energy acquisition in NSW, but looking ahead, construction of APING.

GP: Ok. Can we just go back to geothermal because you mentioned that just a few moments ago? Origin made a a big write down on its investment in the so called Innamincka deeps, the hot dry rock technology. Symbolically, that was a bit of a blow to that particular technology. Is it simply a question of time? Or do you think it’s just going to be too hard?

GK: By the time we entered into that project, we were hopeful that that the Deeps could be developed in a time frame that was much more immediate and relevant. In other words, there was enough time left under the REC target through to 2020 to do a substantial amount of production in that period because that, of course, was a major economic driver for renewable energy and that investment in particular. Now it’s taken longer than we would have hoped a few years ago to move through that development path and therefore the economics of it are influenced by that, and therefore we feel it’s less likely to be developed, driven by the REC target through to 2020, because it’s just becoming less and less part of the asset’s overall economic life.

There is no question that the work done in the Deeps by Geodynamics has in our view confirmed that the heat resource is there. But it probably will take a bit longer to develop technologies to access that resource through the deeps in particular. At the same time we are investing in what we call the shallows which is the geological formations immediately above the deeps which are more in reach of conventional technology and therefore more capable of coming into production sooner, but for which the key question is: is there enough heat in that sedimentary basin? And clearly it’s cooler than the deeps because it’s shallower, but if there’s enough heat there, then I think the prospects for developing that are much more immediate and much more real because it’s within the reach of current technology.

GP: It is a much smaller resource, though, in general, isn’t it?

GK: Well, to the best of our knowledge, the Cooper Basin in broad terms is a far bigger resource than any other potential geothermal resource that we have in Australia. Now, that’s a reasonably studied comment, but we may prove to be wrong, but at the moment we would rate the Cooper Basin resource or the potential of that resource as much, much bigger. There’s more than enough resource there if we can access it through the shallows to make geothermal a major contributor to Australia’s renewable energy requirements.

GP: Ok. So, you think it could be developed in the time frame needed to be able to benefit from the renewable energy target?

GK: If we start to see a carbon price, then that gives a second bit of legs and second bit of momentum to the deeps. Our original involvement in the deeps was on the premise that the REC target would be increased which it was and it did offer a potential resource and technology that might be able to contribute to that target. But it’s important to say that that target’s finite, but ultimately a carbon price isn’t; it will go on forever. So, those sorts of technologies and resources will have their day.

GP: Skipping over to other technologies, Hydro – you talked of a fascinating new scheme in Papua New Guinea, a 1800MW run-of-river hydro scheme and its potential to provide energy for Australia. Can you tell us a little bit more about that, what you’ve learned since then and are you still as optimistic about that project as you were when you announced it? Have there been any developments at all since then?

GK: Well, we’ve continued to work on that project. At the time we announced it, we had done some preliminary studies on hydrology and transmission, etcetera, and construction. What we’re now doing is seeing various advices, engineering advices and environmental consultants to do the much deeper studies. That process is underway and it will probably take another year. At the end of that, we expect to have a much better defined understanding of a project and its costs. To the best of our knowledge, the project still remains very attractive conceptually and economically viable and, of course, any movement towards a carbon price will clearly increase the attractiveness of that resource.

Having said that, it’s a massive project. It takes a lot of effort and planning and development and capital make big projects happen, but we happen to think it’s a project that could significantly contribute to a change in the way we source our energy and certainly substantially lower the carbon intensity of generation, in Australia and New Guinea obviously because they’d be connected electrically. ...

GP: Can we talk about solar now? Fans of the solar technology are well aware of Sliver and its potential. That technology has now gone into a joint venture with Micron. Are we about to see the emergence of that technology?

GK: The aim of that joint venture was to migrate the IP, the technology we developed into Micron’s production facilities, and that process has progressed pretty much consistent with our expectations of a year ago. What we’re wanting to do is scale that production up and get product out in the market and establish the market acceptance for the Sliver technology. There should be increasing amounts of that product available through calendar 2011. We then need to get confident that we can scale the production of that technology up to the hundreds and hundreds of megawatts level and move that amount of product into the market.

And so, 2011 is a pretty important year because we will or have migrated the technology and we will get more product into the market and I would imagine by year end, we will have or we will be very close to making a decision as to whether we ramp that production up through the large capital investment. ...

GP: Can we just go quickly to electric vehicles? Origin opened its first charging point station recently. What’s your view of the electric vehicle market? How quickly do you think it would expand? And what role do you hope Origin plays in it?

GK: Well, we are very interested in that technology as we are in many other forms of technology for power use or for people’s engine needs. Now, we’ve historically not brought that much into the transport fuel sector of the market. We probably operate in the non transport space. But electric cars is one of those technologies that bridges those two spaces, and so we’re very interested in understanding the technology, the viability and the cost competitiveness of the technology. I don’t have a research reason for saying this, but my experience over many years is that it does take a while to get these technologies taken up in a way that they achieve a sort of critical mass to support the different sorts of fuelling infrastructure that you need, etc. At the end of the day, electric vehicles will have their place, but I’m not sure I would see them displacing the conventional, certainly in in the very long term, but not in the medium to long term.

GP: On Smart meters, what are your plans for the roll-out of Smart meters and the potential of smart metering technology?

GK: Well, clearly this is an issue that’s been grappled with in Australia where we’ve seen generally the roll-out of smart meters, in Victoria is the obvious example, where it’s been mandated by government and done through the network owners and, at the moment, that’s pretty much the state of play. And when I say ‘state of play’, no pun intended. I mean some states have mandated it, some states are running trials and the federal government is sponsoring trials to sort of test the viability and contribution this technology can make.

Again, we are very closely involved in some of those trials. We’re very closely involved in installing and selling, not so much residential but the SME commercial end of the market, to try and help customers understand how it might benefit them and help us understand how it might be best deployed. Large scale roll-outs of that technology is something that’s tended to be mandated by governments and promoted through the networks.

GP: The concept of the 'negawatt' and this idea that energy companies might one day make more money by selling less energy, rather than by selling more energy, is that another Utopian view of where it might all end up or do you think that that’s actually a possibility?

GK: I can understand the seductiveness of that view, but for us to get us many consumers to get our energy, a lot of capital is invested. So, I think the real question ultimately on what it will cost us to get the energy is a question of what will we have to pay and the timing. The second point is – and we have the data for this – is that energy efficiency is improving, but there’s also not a lot of evidence that energy consumption is reducing and that equation balances simply because we tend to use more electricity in more applications than we’ve historically done. Now, I can’t say that will happen forever, but certainly at the moment that very positive trend of improving efficiency is at least in part offset by all of the lifestyle elements of the way we use energy.

The ABC's Lateline program also had an interview with King recently - Origin chief talks up Qld coal seam gas benefits.

TICKY FULLERTON: The deal is nearly $100 billion over 20 years. Was the high Australian dollar at all a barrier during negotiations?

GRANT KING: Not a barrier directly, Ticky, because these deals essentially are done in US dollars, so the sales are in US dollars and therefore the A dollar-US dollar exchange rate doesn't matter that much to the sales agreements. Where the exchange rate is relevant of course is to companies like Origin who are A dollar companies. And at the moment with high exchange rates and the capital costs ahead of us, that's actually quite favourable to the project.

TICKY FULLERTON: When would the money start flowing through because it's come at a very good time for Queensland? I'm thinking about when they might see some royalties.

GRANT KING: Well Queensland will benefit initially from the construction activity. The Finance Minister of Queensland, Rachel Nolan, who joined with us today was talking about $900 million a year of investment in regional economies in Queensland from now. So the regional communities in Queensland around Gladstone, Curtis Island and Gladstone community and then the Darling Downs region will benefit immediately. The project will take four to four and a half years to generate revenues and those revenues will of course then attract royalties so the Queensland Government at a Treasury level of course will begin to receive royalties from that time. But the community will benefit from direct investment immediately.

TICKY FULLERTON: What about the environmental side? I'm thinking of the media around the Surat Basin in particular. Does your board see a real business risk here?

GRANT KING: Well I think the important thing to acknowledge is that we very much understand the community's interests in this area, particularly environmental impacts and particularly on water, water table, ground water and water use for agricultural production. That sits very high on our risks, if you'd like to think about it that way, our risk register and we're working very hard to make sure that we understand those risks, those risks are manageable and we have a minimal impact on the community and on the environment. Now we're quite confident because we've done extensive work in this area that these risks are all manageable, but we are very mindful of the concern and interest the community has, but we do believe the risks are very manageable.

TICKY FULLERTON: Now, I'm thinking back to that Four Corners program in February and I know you guys came out a little bit better than your competitors. But the issues were particularly of farmers saying they were losing control of their properties and indeed that the water table, they think, might be sinking. But this issue of connected aquifers is an issue, isn't it?

GRANT KING: Well we think we have a very good scientific understanding of what's happening in the aquifers when we produce coal seam gas and we believe that the concerns around interconnection between aquifers and depletion of the water table should not be of great concern and is quite manageable. But I think the very important point is that we're not just asking the community to rely on that assurance. Both state and federal government permits require very, very extensive monitoring of ground water through water bores on properties or on adjacent to properties we're on and in the region. And I think it's that very extensive monitoring that will see us pick up very early, whether there are any adverse impacts. And whilst we don't expect there will be, if there are we will see them very early and we can then ensure that they're mitigated. ...

TICKY FULLERTON: In broad terms, are you seeing interest from the Japanese post the nuclear crisis over there?

GRANT KING: We are, but I think it's very important to say that the Japanese are dealing very much with short-term issues at the moment. They've had to do an enormous amount of work to reconfigure their supply chain, their energy supply chain, and those that are in the LNG business today with spare cargoes are all working very hard to meet that increased demand from Japan and help Japan get through this sort of immediate crisis. Firstly - secondly, there's a very strong consensus in industry that demand for LNG in Japan will increase medium term, but it would be important to say that that Japanese interest on buying is very much short-term focused on buying cargoes at this point in time.