By John Phillips, Managing Director, Blue Energy; John Ellice-Flint, Chairman and Executive Director, Blue Energy; and Rod Gould, Exploration Consultant, Hedges Gas
Australia’s East Coast is facing significant demand for new gas supply over the next several decades, and the obvious solution to meeting this demand is unconventional gas.
Natural gas is reservoired in many different types of rocks. Sandstone, limestone, shale, and coal are all capable of reservoiring natural gas.
Some are both source rock and reservoir rocks, whilst others are only reservoir rocks that require natural gas to migrate from its source into the reservoir. However the gas is basically the same – it is natural gas.
For this reason we do not use the terms shale gas and coal seam gas; these are terms that were introduced by Wall Street operatives for promotional purposes. The majority of the world’s natural gas is produced from sandstone or limestone reservoirs, yet who uses the term sandstone gas or limestone gas?
The industry is the natural gas industry. The real difference between the reservoir types is largely a function of the rock’s permeability.
High permeability rock equals higher flow rates and lower cost development by virtue of requiring a lesser number of wells (e.g. for sandstone and limestone reservoired gas) and by contrast lower permeability rock (e.g. shale, coal, and tight sandstone reservoired gas) equals lower flow rates and higher cost development as more wells are required to achieve the same flow rate.
As the high permeability, high flow rate and low cost reservoirs were generally found and developed first (e.g. Gippsland Basin, Cooper Basin and North West Shelf), these resources have been in production for many decades and are now, substantially, in decline.
However, the development in the United States of specific drilling and completion technologies [such as horizontal drilling and multistage low cost fracture stimulation in horizontal wells] has recently allowed the economic development of lower permeability reservoir rocks.
These technologies, coupled with higher gas prices, have brought vast quantities of previously marginal subeconomic gas resources to market.
While De Silva and others have discussed the challenges to the development of the Australian tight gas industry, the prospects for low permeability gas resources in eastern Australia should now become more attractive as domestic gas prices rise.
Whilst technological advances are the principal reason for allowing economic development of low permeability gas, gas price is clearly a compelling factor.
It could be said that most of the relatively cheap gas for East Coast Australia (from high permeability rocks) has been produced, leaving the more expensive gas from lower permeability rocks now to be developed.
This development depends on the market price for gas allowing a reasonable return for those risking the capital expenditure required for exploration success and development.
Gas end users in eastern Australia have been the beneficiaries of available low cost gas for decades, but basic input costs have risen, in part because regulatory requirements have increased to ensure that explorers and producers:
- Protect the environment
- Do not adversely impact social aspects of communities
- Negotiate and agree on compensation for Traditional Owners and operators
- Identify, acknowledge and preserve cultural heritage
- Pay royalties to the relevant government
- Protect farmers’ rights
- Identify and protect endangered flora and fauna
- Keep groundwater pristine
- Protect the Great Barrier Reef.
All of these contribute to the ultimate cost of getting gas to the market and end users.
In addition, there is now an export LNG market available to gas producers which has a pricing mechanism linked to the oil price.
This is different to the basis for the historical Australian domestic gas contracts. The LNG export market has a very large demand, which will run for many decades.
It is this export market and its historically higher price for gas that has led to the development of East Coast gas resources that would not have been developed otherwise.
The higher cost, lower permeability gas today would not have been considered a development target without the benefit of the huge amount of capex already spent on the pipelines and processing plants needed to develop the early high permeability sandstone reservoirs.
The recent dramatic fall in the oil price has however affected the international trading price of LNG, due to the link to oil price, and therefore the cost of production becomes critical to the economics of each producing asset.
Given that low permeability gas is by definition high cost, the economics of Australian low permeability gas are not currently as favourable for the international LNG market. In addition, Australian low permeability gas is still largely a work in progress and therefore has uncertainties on both cost and reservoir/field performance.
The projects which use tight gas from Queensland’s Surat Basin as the feedstock for the three Gladstone LNG operations on Curtis Island are a world-first in reliance on this type of gas source.
Those responsible for the successful start-up of these projects deserve acknowledgement; but it needs to be recognised that there are three big experiments on Curtis Island – not so much from a liquefaction technology perspective but from the point of feed gas supply. Additional gas now has to be sourced from other areas.
The evolving supply/demand situation for gas in the East Coast market is resulting in rising wholesale prices.
This would ordinarily invigorate a wider search for low permeability gas. However, the east Australian domestic gas market itself is volumetrically too small to underpin development of the large low permeability gas resource.
It needs the international export gas market volumes to work, but unfortunately at the moment the international LNG market is oversupplied and priced accordingly.
The ACCC inquiry into the East Coast Gas Market highlighted the uncertainty of the future gas supply for the East Coast market and the requirement for new gas sources to meet demand, particularly to satisfy the need for feedstock at the three LNG export plants in Gladstone, Central Queensland.
There are as yet undeveloped gas resources in organic-rich horizons of Proterozoic and Palaeozoic basins that could be tapped by the existing east Australian gas pipeline network, including the proposed Tennant Creek to Mt Isa line.
In 2013, the US Department of Energy assessed the Beetaloo, Cooper and Georgina Basins as among the four Australian basins with the largest potential for low permeability gas resources. The McArthur Basin can be added to this list.
In addition to technological, higher costs, and pricing issues, there is a lack of practical political support in Australia for the establishment of a viable low permeability gas industry as illustrated by the situation in Victoria and New South Wales where regulatory barriers prevent the development of onshore gas resources.
Five of the six LNG export trains in Gladstone are now on stream, contributing to the country’s balance of payments and to the benefit of Queensland’s economy.
With all six of the Gladstone export plants to be operating by 2017, Australia will become one of the leading LNG exporters in the world.
The increased demand for natural gas supplies has, as predicted by Steve Davies of the Australian Pipeline Industry Association in 2013 [Fig. 1], resulted in the reversal of the Moomba to Adelaide and the Moomba to Sydney gas lines so that gas sourced from the Otway Basin and Bass Strait respectively, is being transported to Gladstone via Moomba and then through Wallumbilla.
Wholesale gas prices on the East Coast, historically around $3-$4 per GJ, have recently risen generally to around $6-$9, although in late June and early July 2016 headed skywards to $20-$30 per GJ (see Figure 2) following supply disruption and a sudden cold snap in the southern states.
Australia’s historically low gas prices of $3-$4 have been a relic of the initial long-term contracts when natural gas was competing with coal on a non-carbon-based calorific comparison.
In actual fact, gas production in the Cooper Basin and the Gippsland Basin was subsidised by the value of the associated oil production. Without this associated liquid production, many of Australia’s onshore fields would have been uneconomic at these gas prices.
Although drilling activity in the shale revolution in North America has slowed considerably with the dramatic fall in oil prices, the financing of many companies in the sector requires maintenance of cash flow to service the high levels of debt that fund these companies.
The petroleum industry has again turned to technological developments to reduce costs and improve efficiency, allowing sustained production levels and cash flow.
Advances in drilling have included advanced analysis of real-time downhole subsurface information for increased production, and the use of nitrogen for drilling and fracture stimulation which minimises environmental concerns.
All these technological breakthroughs will be required to be implemented at the lowest possible cost for Australia to realise the full potential of its vast natural gas resources.
The demands for natural gas in the East Coast markets are already evident. To meet those demands there will be more and more reliance on low permeability or tight gas reservoirs which have higher costs of production.
With the lead time for exploration, discovery and development in Australian jurisdictions, it is pressing that investment in the search for and proving of gas resources for eastern Australia not be impeded.
A decade ago the biggest risks to success in the gas business were geological in the subsurface. Fast forward to today and it appears that the biggest risk to the nation’s energy self-sufficiency and security are above ground.
For these high capital intensive, large volume, low permeability accumulations to be developed, Australia’s large gas users can play a significant role in ensuring an efficient industry is developed in a timely manner and secure long-term energy security for their own businesses and the nation.
One can argue that if these current gas users had the vision — as AGL did with the 1970s Cooper Basin gas contracts which covered supply for 30 years or so and allowed Santos to finance and build the Cooper Basin gas production infrastructure in arid central Australia — they should now pool their collective gas demand volumes over the next ten to 20 years, and the natural gas extraction industry would be able to make efficient long-term investment decisions to develop this strategic and essential resource for the nation.
It is easy for Australians who live in the coastal cities to forget the huge distances and arid environment this gas has to travel through to get to market.
The high capex locations of the majority of Australia’s gas resources in both the onshore and offshore settings add considerably to the cost base.
The combination of the tyranny of distance and the harsh remote environmental conditions, both for central Australian locations and for offshore areas like Bass Strait, which has an environment somewhat equivalent to that of the North Sea, predicates that the initial development and ongoing maintenance costs are not cheap.
What the East Coast of Australia is currently missing is a coordinated approach by the explorers, producers, distributors and gas users, and a consistent regulatory framework to ensure Australia has a reliable, relatively low cost, highly efficient natural gas industry.
- Australian Competition and Consumer Commission. 2016. Inquiry into the East Coast gas market. 22 April 2016. 174 pages.
- Davies, S. 2013. Making sense of the evolving East Coast pipeline grid. Australian Pipeline Industry Association Ltd.
- De Silva, N., Simons, S. & Stevens, P. 2016. Shale resource development potential: the Australian context. Unconventional Oil & Gas, Autumn issue, 4:32-36.
- Macdonald-Smith, A. 2016. Winter freeze pushes gas price to panic level. Australian Financial Review, w1 July 2016: 17, 20.
- Sims, R. 2016. Keynote address: observations on the east Australian gas market. Australian Domestic Gas Outlook Conference, Sydney, 9 March 2016.
- Stratas Advisors. 2016. Global LNG outlook. Hart Energy. 32 pages.
- Watts, R. 2016. Energized fracturing solutions. Safe, reservoir-friendly and water-saving well stimulation is made possible with N2 and CO2. E & P Magazine, July 2016, 89(7): 56-58.