Biodiesel a cautionary tale for investors  

The Australian has an interesting article from the editor of EcoInvestor Magazine, comparing the relative merits of the geothermal, coal seam gas and biodiesel sectors - Biodiesel a cautionary tale for investors.

Within the emerging clean energy sector there has been an enormous difference between the performance of the best sub-sector -- coal seam gas -- and the worst: biodiesel. The recent share market volatility may have accentuated the difference, but it has not caused it. The causes are government support, market forces and industry strategy.

The rise of coal seam gas (CSG) was apparent by early to mid 2007 but few could have known how high it would fly. Then in February this year, BG took a stake in Queensland Gas and soon after bid for Origin Energy. In June, Queensland Gas entered the S&P ASX 100 Index and last month it was joined by Arrow Energy. The latest quarterly rebalance also saw two junior CSG companies enter the S&P ASX 300 Index, bringing the number of pure CSG plays in the index to five, the highest ever.

In hindsight, it makes sense. Both the Queensland and federal governments have shown strong support for the emerging CSG industry. In Australia, it was not all that long ago that people were talking about the possibility of building a pipeline from WA's North West Shelf to eastern Australia to transport natural gas. Then the lucky country came good again and presto, gas on the eastern states' doorstep!

Demand for energy is also rising around the world and the world's leading gas companies have arrived to join the party. If that isn't enough, CSG is a low carbon fossil fuel. The result is that while global stock markets crashed, some CSG companies were among the few to rise.

It is a very different and sad story for biodiesel. Many biodiesel companies were caught up in the rush to cleaner fuel and listed, but along with their own mistakes the fundamentals of the sector failed them.

The government initially promised support, but against much advice and lobbying the Howard government withdrew it and the Rudd Government seems to have washed its hands of it. The prices of feedstock rose to uneconomic levels. They used food as feedstock. They had resistance from the dominant oil industry. Companies were overambitious and undercapitalised. And they blew the environmental angle by clear-felling tropical rainforests.

With government, suppliers, the oil industry, consumers, and environmentalists against them, they have suffered a terrible loss of capital and it remains to be seen if the sector can recover.

Like coal seam gas and biodiesel, geothermal is another emerging sector that has attracted a good number of companies to the ASX. But so far, it appears to share much more in common with coal seam gas. It does not seem to have any enemies, it is cleaner than gas and, if the technology is proven, which should happen soon, it will be able to provide significant baseload energy and thus have enormous growth potential. It has strong support from the large energy corporates and investors and, perhaps most importantly, it has strong federal and state government support.

The Minister for Resources and Energy, Martin Ferguson, recently said the geothermal industry has a significant role to play in securing Australia's energy future. "The potential of the geothermal industry in Australia is truly staggering. Geoscience Australia estimates that if just 1 per cent of Australia's geothermal energy was extracted, it would equate to 26,000 times Australia's total annual energy consumption," Mr Ferguson said.

A recent report for the Australian Geothermal Energy Association said that by 2020 the industry could provide up to 40 per cent of the Government's 2020 renewable energy target.

Not surprisingly, there is a lot happening in the sector.

The federal Government recently launched a $50 million geothermal drilling program to provide grants of up to $7 million on a matching basis to support the drilling of deep geothermal wells and proof-of-concept projects. The first round of applications closed at the end of September.

Earlier this year, the West Australian and Queensland governments opened large tracts of their states for geothermal exploration. This followed the recent start of exploration in NSW, Victoria and Tasmania, while commercialisation has been under way in South Australia for some time and is about to reach proof-of-concept stage.