THE frenzy over Queensland’s vast coal-seam gas resources continued to gather pace yesterday when the oil major Royal Dutch Shell signed a deal with Arrow Energy worth up to $776 million.

Shell’s entry into the sector, which follows deals by liquefied natural gas exporters such as BG Group of Britain and Petronas of Malaysia, has given a boost to the likely viability of coal-seam gas to LNG projects, a world first, planned at Gladstone.

“The export of LNG and turning this coal-seam gas to LNG really is a commercial reality or the big guys wouldn’t be getting involved,” said an analyst with Fat Prophets, Gavin Wendt. “They seem to be scrambling … and I think it’s because they don’t want to lose any ground to their competitors.”

The chief executive of Arrow, Nick Davies, said the joint venture with Shell followed interest from “five to 10” other companies and would increase investor confidence. Arrow shares rose 46c to close at a record $3.79, after trading as high as $4.11.

Shell, which has coal-seam gas interests in Canada and China, will buy a 30 per cent stake in Arrow’s Queensland reserves for up to $644 million and a 10 per cent stake in its international assets for up to $132 million.

Shell is also likely to seek the rights to market the gas from LNG Ltd’s $US400 million ($420 million) Gladstone LNG project, which is based on Arrow’s coal-seam gas resources.

The chief executive of LNG Ltd, Maurice Brand, said his company planned to start discussions with Shell and would welcome the oil giant taking a 20 per cent interest in the first production train if they could reach a commercial agreement. “It is certainly our preference to have a single off-taker,” Mr Brand said.

The Arrow-LNG Ltd project is expected to produce 1.3 million tonnes to 1.5 million tonnes of LNG a year starting in 2011, with the potential to later produce up to 6 million tonnes a year from four trains.

The rival projects proposed by Santos-Petronas and BG-Queensland Gas [QGC] are expected to cost closer to $8 billion for initial production of 3 million to 4 million tonne a year.

Analysts said the Santos-Petronas venture, based on a $US2.5 billion deal signed last week, looked to be ahead of the BG-QGC project – it had secured a site and a larger gas supply.

Origin Energy last week knocked back a $13.6 billion bid from BG that was based largely on the British gas group’s interest in the company’s Queensland coal-seam gas resources. Origin is now likely to sell its gas to either the Santos-Petronas or BG-QGC project.

The managing director of Origin, Grant King, last week cited the $4.66 a gigajoule of probable reserves offered by Petronas to Santos as one reason behind his company’s rejection of the BG bid.

The Arrow-Shell deal signed yesterday valued Arrow’s probable reserves in Queensland at 81c a gigajoule, below even the $1.35 price BG paid for an interest in February.

Mr Davies said Arrow was just as focused on “strategic drivers” in the Shell deal as it was on price. “What we are really after with this agreement with Shell is creating a global coal-bed methane company.”

http://business.smh.com.au/shell-joins-queensland-gas-rush-20080602-2kye.html