Bid highlights value of coal seam methane

Australian
Thursday 1/5/2008 Page: 19

YESTERDAY'S $12.9 billion takeover bid for Origin Energy set the hares running in the whole energy sector and swung the investment spotlight firmly on the potential of coal seam methane in the emergence of the liquefied natural gas (LNG) industry.

BG Group's bid, which is at a 40 per cent premium to Origin Energy's latest trading price, put a re-rating rocket under the value of energy stocks with an LNG exposure, ranging from Santos and Oil search to coal seam methane companies Queensland Gas, Arrow Energy and Sunshine Gas.

BG's interest in Origin Energy is all about coal seam methane reserves, which make up the bulk of Origin Energy's assets. Coal seam methaneor CSM, is the planned feedstock for a new liquefied natural gas (LNG) industry in Queensland. The second-biggest coal seam methane operator, Santos, is expected to be the next big takeover target, after its 15 per cent share ownership cap is lifted on November 29. From that date, it will be a case of predator or prey.

Santos is expected to be a sitting duck for a takeover after that date, as two of its biggest projects, the PNG LNG project, and the $7-10 billion LNG Project at Gladstone based on Santos's Queensland CSM reserves, reach critical stages. Parties believed to be interested in Santos include US-based Apache Energy, a Santos partner in several offshore West Australian projects, and if Origin Energy doesn't work then BG.

A spokesman for Santos said carefully that we note with interest the proposal." AGL Energy is also expected to become a target, given its growing interest in CSM through equity stakes in companies including Queensland Gas. Five years ago, Australian CSM hardly existed. It accounted for less than 1 per cent of Australia's gas production, and was not expected to get much bigger.

Today, it is an exciting entrepreneurial growth story, supplying more than 10 per cent of Australia's and 70 per cent of Queensland's domestic gas production, making it a growing force in domestic gas competition, ripening the sector for consolidation and more share price increases. But with Australia's booming $15 billion a year LNG export industry, which has plans to triple output by 2017, coal seam methane is becoming a critical ingredient.

This potential is reflected in Australian Bureau of Agricultural Resource Economics (ABARE) forecasts that domestic consumption of gas will double in the next 25 years; that the supply of gas will decline as important assets such as the Cooper Basin onshore gas reserves decline; the growing likelihood that this gas will not be replaced by a proposed $7 billion Papua New Guinea-Queensland pipeline; and a move by state governments to mandate that a certain percentage of electricity generation must be powered by gas.

Put simply, with demand outstripping supply in the coming years, and CSM moving from niche to mainstream following breakthroughs in technology that have made the projects commercially viable, independent CSM entities with sizeable reserves will become much more attractive than they were.

In market capitalisation terms, growth among CSM stocks over the past couple of years has been spectacular. Wilson HTM analyst Andrew Pedler believes the prices are high, but with the growth in LNG, the attraction will continue. Once domestic Australian gas is turned into export LNG, its value approximately triples.