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LNG From Coal-Seam Gas Problems Are `Overstated,’ JPMorgan Says

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LNG From Coal-Seam Gas Problems Are `Overstated,’ JPMorgan Says 

By Angela Macdonald-Smith

Aug. 6 (Bloomberg) — The technical challenges of producing liquefied natural gas from coal-seam methane have been “overstated” and LNG projects based on that process have benefits over some conventional ones, JPMorgan Chase & Co. said.

None of the issues that are typically raised as potential obstacles for producing LNG from coal-seam methane, as proposed by five rival ventures in Australia, are “showstoppers,” JPMorgan said in an Aug. 4 report. Santos Ltd. andQueensland Gas Co., two stocks involved in such projects, are being undervalued, it said.

No LNG projects have been built based on coal-seam methane, or CSM, rather than conventional natural gas. Such ventures will involve drilling many times more wells than typical LNG projects, while the wells will produce large volumes of dirty water requiring disposal. Coal-seam methane also contains no gas liquids to help boost profitability, while the LNG will have a lower energy value.

“While we recognize that any LNG project will be challenging, we see some of these CSM-specific issues raised as spurious,” JPMorgan analysts led by Sydney-based Mark Greenwood said in the report. “We are comfortable that QGC and Santos have solutions for the genuine challenges associated with these projects.”

Adelaide-based Santos and Malaysia’s Petroliam Nasional Bhd. are planning a A$7.7 billion ($7.1 billion) LNG project near Gladstone in Queensland state, while Queensland Gas is partnering BG Group Plc in a larger project that may cost as much as A$14 billion. Royal Dutch Shell Plc, Arrow Energy Ltd. andSunshine Gas Ltd. are among other companies planning LNG projects in Queensland using coal-seam gas.

`Thousands of Wells’

Don Voelte, chief executive officer of Woodside Petroleum Ltd., told the Australian Broadcasting Corp. last month there were “a lot of issues” connected with building LNG projects based on coal-seam gas. Woodside is operator of the North West Shelf venture, Australia’s biggest LNG producer, and doesn’t have any investments in coal-seam gas.

“It takes literally thousands of wells,” Voelte said on the Lateline Business program. “It’s a low-quality gas. We’ve looked at it. We have an opinion about it and we’re pretty happy with our gas.”

While it’s true that coal-seam gas-based LNG projects will require many wells, those ventures will still have a lower capital cost per ton of LNG capacity and per trillion cubic feet of reserves produced, JPMorgan said. It estimated the “life- cycle capex” for Woodside’s proposed Pluto LNG project at A$2.80 per million cubic feet of gas, compared with A$2 for the BG-Queensland Gas project and A$2.16 for the Santos-Petronas project.

Higher Returns

Estimated rates of return from the coal-seam gas-based projects exceed those from Woodside’s initial Pluto production unit even in the absence of condensates in the gas, JPMorgan said. That’s partly because, as onshore projects, they will benefit from a “relatively benign” royalty system compared with the conventional LNG projects off the northwest coast, it said.

JPMorgan calculates that Queensland Gas shares are trading at a 47 percent discount to its discounted cash flow valuation of A$8.75 a share. Santos istrading at a 45 percent discount, it said. Perth-based Woodside and Port Moresby-based Oil Search Ltd., a partner in a proposed conventional LNG project in Papua New Guinea, are trading at smaller discounts to valuations, it said.

To contact the reporter on this story: Angela Macdonald-Smith in Sydney at[email protected]

Last Updated: August 6, 2008 02:48 EDT

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