Shell keen to tap into coal seam gas in Australia

 

By Danny Fortson, Business Correspondent

Tuesday, 3 June 2008

It is odourless, invisible and buried deep within the earth, and everyone seems to want it.

For the third time in a week, a major oil company struck a deal to secure rights to Australia’s suddenly fashionable coal seam gas reserves.

Royal Dutch Shell agreed yesterday to pay up to $776m (£395m) for a 30 per cent stake in the coal seam gas assets of Arrow Energy, an Australian energy group. The deal gives the Shell access to Arrow’s 90,000sq km of acreage of coalfields and includes plans to build a liquefied natural gas (LNG) facility to cool it to liquid form so it can be exported by tanker to Asia, where such shipments are fetching eye-watering prices.

Shell, already the world’s largest LNG operator, will also take a 10 per cent stake in Arrow’s international business, which includes operations in China, India, Indonesia and Vietnam. It will have a right to buy the gas produced from the fields.

The deal comes amid a gold-rush-type scramble for Australia’s coal seam gas reserves. Last week, BG Group failed in its attempt to buy Origin Energy, one of the largest players in the sector. Origin turned down the £6.6bn bid, convinced that its ownership of land where gas is trapped deep underground in coal seams is worth “substantially more” than what BG was offering. This was in part based on the $2.5bn deal that Malaysia’s national oil company Petronas struck the day before with Origin’s domestic rival Santos to develop a build an LNG facility, also for export to Asia.

For Shell, the Arrow deal is part of its push beyond traditional oil and gas assets that has led it into other areas, such as Canada’s tar sands. Jeroen van der Veer, Shell’s chief executive, has been among the vociferous proponents of the view that the “easy oil” has largely been found and that companies must find different types of resources.

Coal seam gas is not new. Companies have been exploiting it for at least 15 years in America, where the traditionally higher price of gas made it a viable business. Its extraction involves drilling into coal seams where methane is trapped. Once punctured, the gas either escapes immediately or must be depressurised by removing trapped water from the coal.

The rush to Australia has in part been set off by the record-breaking price of oil and gas. Rhodri Thomas, an analyst at Wood Mackenzie, said: “We are in a new price domain, so companies are able to go into increasingly challenging areas or use new technologies.”

Then there is geography. Australia is on the doorstep of big Asian customers who are paying a record price for shipments of LNG. There is also the promise of great potential. Arrow, for example, has mapped out only 2 per cent of its 90,000sq km acreage.

Of the $776m Shell has agreed to pay, $210m is conditional on a decision on the building of a LNG plant and the facility producing at least 1 million tonnes of LNG annually. This would be one of the first in the world – there are currently no LNG plants converting coal seam gas to LNG.

http://www.independent.co.uk/news/business/news/shell-keen-to-tap-into-coal-seam-gas-in-australia-838981.html

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