Santos bid lights up coal seam gas sector  

The SMH reports that the new carbon tax is accelerating interest in coal seam gas, with Santos moving to acquire the rest of Eastern Star Gas - Carbon tax not the end of fossil fuels, just ask Santos.

HYDROCARBONS have been copping some bad press lately.

What with all the flak over emissions and how best to reduce them, you could be forgiven for thinking the end of the industry is nigh. But the past few days has seen a flurry of takeover activity, starting last Monday with Peabody's $4.7 billion bid for Macarthur Coal and ending the week with BHP Billiton's $14 billion tilt for American gas producer Petrohawk.

Then, before the market even opened yesterday, Santos jumped in with an agreed mop-up of pubescent coal seam gas outfit Eastern Star Gas, valuing the group at just shy of $1 billion. At a nominal 90¢ a share, the deal delivers Eastern Star shareholders a whopping 51 per cent premium to last Friday's closing price.

Rather than spelling the death knell for fossil fuels, it would appear the carbon price arrangements announced last week have partially eliminated the uncertainty that has caused energy and power companies to continually delay long-term investment decisions.

BHP's expansion of its American energy portfolio obviously falls outside the Australian carbon tax proposal but gives a clear indication the mining giant sees a future in lower emissions energy sources as carbon pricing becomes a global inevitability.

It was BHP's chief executive Marius Kloppers who last year reignited calls for carbon pricing while power suppliers like Origin Energy's Grant King have roundly criticised the inordinate length of time it has taken successive Australian governments to implement a carbon pricing policy.
It takes up to eight years to get a power station from the drawing board to the paddock and in the policy vacuum that has existed here for most of the past decade, operators like Origin have been unable to decide whether to build old-style, low-tech operations belching out coal fumes or something a little more modern.

That has left a worrying dearth of investment in power generation, particularly in the eastern states.

It therefore is no coincidence that the junior partner in Santos's latest coal seam gas expansion is the Hong Kong-based TRUenergy which, along with Origin, snapped up the NSW state government-owned electricity distribution companies last year. TRUenergy also owns the Yallourn brown-coal-fired power station in the Latrobe Valley, one of the world's dirtiest.

Under the terms of the friendly deal announced yesterday, Eastern Star Gas shareholders will swap their shares for Santos scrip, giving the Adelaide-based oil and gas group full control. But a second leg of the deal will see Santos emerge with 80 per cent of Eastern Star's gas permits with TRUenergy accounting for the remaining 20 per cent.

Eastern Star has extensive reserves in the Gunnedah Basin but, as a corporate minnow, was always constrained by a lack of capital in developing the resource. Crunch time was approaching, either to joint venture with a much bigger partner for a smaller slice of the future, or merge. ....

Santos will now have a major presence in every eastern Australian onshore gas basin from Moomba in South Australia near the Queensland border to the giant fields of the Bowen and Surat basins inland from Gladstone and in the Otway basin in Victoria.

Just how and where it will ship the gas from the Gunnedah Basin has yet to be decided. It may decide to pipe it up to its new $18 billion Gladstone liquefied natural gas plant, currently under construction. Or it could opt for another port facility at Newcastle.

The $730 million bid by Santos for NSW coal seam gas (CSG) group Eastern Star Gas was a welcome relief from the investor gloom that has characterised the CSG sector in the last 12 months.

Share prices of the CSG companies not yet swept up by the big boys of the industry, with their gas export plans, are popping again, regardless of the on-going environmental campaign against the industry.

Investors are again playing a who-is-next game, driving up CSG share prices across the board. Bow Energy and Metgasco have led the pack, with Dart Energy and Comet Ridge also receiving some new attention.

Julia Gillard has also helped fuel the renewed interest in the CSG sector, with the proposed carbon tax set to drive a shift away from coal-fired power generation to gas-fired power with its 60 per cent lower emissions

But the reality is that with or without the Santos bid and the carbon tax, the CSG sector was due for a return of investor interest on the simple premise that Australia’s eastern seaboard faces a gas shortage, one in which domestic gas prices will have to about double to pull back gas that would otherwise head offshore to higher priced markets.

It is a theme that Morgan Stanley zeroed in on in the wake of the Gillard minority government unveiling its carbon tax plan on July 10. “The era of cheap and plentiful gas in eastern Australia is over,’’ the broker declared. ‘’Steady demand growth and depletion of historical conventional production is leading to a shortage evident after 2014, with CSG and other unconventional gas required to meet the gap.’’

The broker said that it was generally accepted that the carbon tax would increase the use of gas as a ``transition’’ fuel for power generation.

Assume that will increase demand for gas, and a case can be built that annual eastern state gas demand is set to grow from around 720 petajoules in 2011 to more than 1350 petajoules by 2020.

But there isn’t enough gas to meet that sort of growth. Morgan Stanley reckons that existing conventional gas supply (mainly Bass Strait and the Cooper Basin) will be largely depleted within 10 years.

The build-up in CSG resources was meant to flood the market. But there isn’t enough of that either as the multiple gas export projects being built at Gladstone in Queensland will soak it all up to chase the much higher export prices.

Morgan Stanley says the end result of all that is obvious – domestic gas prices are ``likely to escalate sharply to divert high-cost unconventional gas earmarked for export markets back to the domestic market’’.

``We believe this will take effect after 2014 as existing long term contracts wind down and need to be replaced. A gap-up to export parity (about $7.50 a gigajoule) is the likely first step,’’ Morgan Stanley said.

That means those that own gas resources on the eastern seaboard are heading towards a golden era. It also means that we have not seen anything yet in home energy bill shocks.