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Australian coal seam gas sector becomes mergers and acquisitions hot spot

March 9, 2009 - The coal seam gas (CSG) industry in Australia's northeast has undergone a startling transformation over the past decade, evolving into a hot spot for international merger and acquisition (M&A) (see table: Estimated value of recent CSG acquisitions in Eastern Australia (A$/GJ)) activity as major players jostle for massive untapped resources to underpin LNG projects.

In the eastern states of Queensland and New South Wales, CSG was nothing more than a blip on the radar even in Australia as recently as nine years ago, when total proven and probable reserves were well under 1,000 petajoules (about 1 Tcf), according to local consultancy EnergyQuest.

But the industry was given a fillip in May 2000, when the Queensland government introduced a policy requiring that 13% of electricity sold in the state from 2005 onward be generated from gas.

The policy immediately created a market for CSG, also known as coal seam methane or coalbed methane.

EnergyQuest estimates CSG production in eastern Australia has grown rapidly from just over 10 Pj in 2000 to 141.8 Pj in 2008.

In Queensland alone, about 30 Pj of sales gas was produced in 2000, of which CSG accounted for about 3%, based on estimates from the state government.

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CSG accounted for around two-thirds of Queensland's total gas consumption in 2007, with the state government projecting that figure to rise to around 70% by 2010.

But the real excitement around Australia's CSG sector has centered on its potential to supply export-oriented LNG projects aimed at the rapidly growing Asian gas markets.

That interest has been based on the vast size of the emerging reserves, which in Queensland had grown to 16,560 Pj on a proven and probable basis and 37,185 Pj on a proven, probable and possible basis by March 2009, according to EnergyQuest.

The M&A game was kicked off by Australian exploration and production company Santos, which paid $466 million for a 75% stake in the 578 Bcf Fairview CSG field in mid-2005.

EnergyQuest estimates the price Santos paid for Fairview equated to around A$0.15/gigajoule of proven, probable and possible reserves.

Corporate maneuvering explodes in 2008

The first CSG-to-LNG proposals in Queensland only emerged in 2007, but within a year the corporate maneuvering had exploded, attracting the attention of some of the biggest names in the gas business, including Shell, ConocoPhillips, Petronas and BG Group.

The action peaked in 2008 with US major ConocoPhillips agreeing to pay Australian integrated energy company Origin Energy up to nearly $8 billion for a 50% share in its proposed CSG-based LNG project in Queensland.

Along the way, Origin rejected a A$13.7 billion ($8.8 billion in March 2009 terms) takeover offer from BG, Shell tied up a billion dollar alliance with Arrow Energy, and Santos registered interest from nine potential partners in a 40% stake in its own Queensland LNG project, before eventually selling to Petronas.

BG, the UK's third-largest oil and natural gas producer, has been prominent in the M&A activity over the past year and has maintained its interest in the sector in 2009, pursuing a A$1 billion takeover of local junior Pure Energy.

BG's largest deal was its A$5.6 billion acquisition last October of Queensland Gas Company, whose planned CSG-based LNG project has become the centerpiece of the gas major's strategic goal to boost its LNG production from the current 12.6 million mt/year to 20 million mt/year by 2015.

A recent report from international accountancy company PricewaterhouseCoopers rated the ConocoPhillips-Origin deal as the largest anywhere in the world in the oil and gas sector in 2008, helping lift Australia's overall share of the $180.4 billion global M&A market to 10% for the year.

BG's takeover of QGC ranked ninth in the world last year, according to PricewaterhouseCoopers.

The accountancy company rated Australia as the third-biggest regional destination for M&A dollars in 2008, behind North America with 41% and international deals, with 22%.

"Australian gas assets are particularly attractive as they are convenient for growing Asian markets as well as being in a congenial and stable business location," PricewaterhouseCoopers said in its report.

Eastern Australian CSG is strategically located to meet burgeoning LNG demand, variously forecast to grow between 7% and 13% over the period to 2020.

Asia is the largest LNG market, importing 113 million mt in 2007 out of total world trade of 172 million mt, according to BP figures, cited by EnergyQuest. "Asia Pacific is the biggest market for LNG, but the region has relatively few uncommitted large-scale gas resources," said EnergyQuest Chief Executive Officer Graeme Bethune.

"Australia has such resources on both the west coast and east coast. For any international company that doesn't have a Western Australia position, CSG provides an opportunity to establish a large resource position and with lower exploration risk than offshore Western Australia and the Northern Territory," he added.

Richard Quin, senior analyst at global research consultancy Wood Mackenzie, said the huge potential of eastern Australia's CSG resources, cheaper entry costs, and a more favorable fiscal regime made the sector very attractive.

CSG production in Queensland incurs a royalty of only 10% compared with a 40% Petroleum Resource Rent Tax on gas production offshore Western Australia.

"Initial entry was less competitive than offshore acreage in Western Australia," Quin said. "This has changed with the entrance of BG, Petronas, Shell and ConocoPhillips."

There are currently four major and three smaller CSG-to-LNG projects at various stages of planning in Queensland, at sites on either Curtis Island or at Fisherman's Landing, both in the port city of Gladstone (see table: CSG projects currently in the pipeline).

Among the majors, Shell is in preliminary planning for a world-scale plant based on the 30% stake in Arrow Energy's 70 Tcf of Queensland CSG resources which it acquired last month; BG is planning its two-train 7.4 million mt/year project based on the gas it gained with QGC; Santos and Petronas are looking at a 3.5 million mt/year first train, with a second train on the drawing board; and ConocoPhillips and Origin are planning the first of a possible four trains, which would produce 3.5 million mt/year each.

At the forefront of the smaller proposals is a 1.5 million mt/year project being pursued by Australian junior Liquefied Natural Gas Limited, to be supplied with gas from the tenements owned by Arrow and Shell.

Canada-based LNG Impel has also proposed an open-access terminal comprising up to three trains, each producing between 700,000 mt/year and 1.7 million mt/year.

Meanwhile, Japan's Sojitz is continuing studies on a small 500,000 mt/year project it originally planned with Australian junior Sunshine Gas.

Since being proposed in late 2007, the project has been the subject of two takeovers, with QGC first acquiring Sunshine Gas, then being bought in turn by BG.

Next page: Observers divided on how many coal seam gas projects will be built

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