BY Andrew Heathcote
The recent announcement of a $25 billion deal to sell liquefied natural gas from the North-West Shelf to China created excitement among politicians and resource industry executives. But elsewhere in the gas industry, the story is less happy. A battle for customers between producers of natural gas and producers of coal-seam methane has put some large gas projects on the brink of collapse.
One hard-luck story is the $7 billion Papua New Guinea (PNG) gas pipeline proposal, which is fighting for survival after missing out on a crucial contract with the Queensland Government. In June, the contract to supply gas to the Townsville power station was awarded to the state-owned energy trader Enertrade. Enertrade will supply the Townsville station with coal-seam methane from CH4, a company that is 90%-owned by Macquarie Bank.
The pipeline was first proposed in 1996 to exploit the gas resources in PNG. In July, the plan was changed to allow more gas from PNG to be delivered to the southern states. Esso Highlands, a subsidiary of the United States petroleum company ExxonMobil, is managing the project and holds a 26% interest. The biggest shareholder, with 37%, is Oil Search, an Australian listed oil and gas exploration company based in PNG.
The exploration director at ExxonMobil Australia, Doug Schwebel, says that although not winning the Townsville contract was disappointing, it did not "reduce the project's viability. There is still sufficient demand out there for us to deliver the project." Schwebel says that the pipeline should be completed by 2006, although work has not yet started. Beginning construction is contingent on securing more customers.
Schwebel says he is negotiating with several energy retailers. In March, the project's first contract, with AGL, was announced. Esso Highlands has contracted to supply AGL with gas from PNG from 2006, but the deal is believed to be conditional on other customers supporting the project. TXU, Comalco and CS Energy are believed to have held talks with Esso Highlands about PNG gas.
The chairman of the coal-seam methane producer Queensland Gas Company, Bob Bryan, doubts that the PNG pipeline will be built. "I think the PNG pipeline has probably been fatally wounded (by the loss of the Townsville contract)," he says. Merrill Lynch analyst Stuart Smith says the companies behind the pipeline "basically have to get just about every other potential customer they are talking to across the line now".
The pipeline project's critics believe political instability in PNG adds to the risk that it will fall over. Bryan says support from the
PNG Government is essential to ensure completion of the pipeline. "Nothing has happened in recent times to indicate that risk has lessened," he says.
The market for natural gas in Australia is about $5 billion a year. Smith says the location of gas reserves splits the market in two, between the eastern seaboard and reserves in Western Australia, including the North-West Shelf. Smith says the PNG pipeline project should not be overshadowed by the big export deal to China. He says the PNG pipeline will produce annual revenue for its owners of about $600 million and be capable of providing about 25% of the eastern seaboard's gas requirements.
Apart from Queensland's geographic proximity to the PNG fields and other gas reserves, it is considered a good potential market for natural gas because of the Beattie Government's energy policy. This requires 13% of all energy consumption in Queensland to be produced from natural gas by 2005 (compared with approximately 5% now).
Bryan says unrest in Timor has restricted the short-term viability of natural gas production projects in the Timor Sea, leaving coal-seam producers and the PNG project to vie for the Queensland market. He says the decision by the Beattie Government to award the Townsville contract to a coal-seam methane producer was a vote of confidence in emerging coal-seam methane processes.
There are three big coal-seam methane producers in the Queensland market: Queensland Gas Company, CH4 and the Oil Company of Australia, which is 85%-owned by Origin Energy. Coal-seam methane has been criticised by industry groups because it is harder to measure than conventional natural gas. Bryan says the criticism is baseless. He says coal-seam methane production is established in the US, where the coal basins are "very similar to those in Queensland and New South Wales. There is no doubt we can emulate what is happening over there."
Fact file
The local market for natural gas is worth about $5 billion a year.
A proposed $7 billion natural gas pipeline from Papua New Guinea to south-east Queensland is scheduled to begin supplying natural gas to the Australian market by 2006.
The viability of the proposal has been threatened by the Queensland Government's decision to award a key gas contract to Enertrade.
Enertrade's natural gas is extracted from coal rather than the conventional source of underground basins.
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