The Case for Coal Seam Gas – Glenda McLoughlin

The issue of mining coal seam gas became a much debated  topic in 2011, resulting in the NSW government announcing a tough new regime for the coal seam gas mining, including a ban on BTEX chemicals (benzene, toluene, ethylbenzene and xylenes) in drilling. In the ensuing media flux, Glenda McLoughlin, Chief Financial Officer at Metgasco Limited, addressed The Sydney Institute on Wednesday 14 September 2011 to explain many of the misconceptions surrounding the industry.

THE CASE FOR COAL SEAM GAS

GLENDA MCLOUGHLIN

Coal seam gas has emerged as an important energy source in eastern Australia.

I would like to set the scene on my own perspectives on the coal seam gas industry. I came to the coal seam gas, or CSG, industry in 2004 after a career in banking when, along with a geologist colleague, we listed a company called Metgasco on the stock exchange. In 2004, I had spent the previous 18 months speaking to many brokers and funds trying to interest them in funding some CSG exploration drilling in northern NSW.

Despite CSG being a major industry in the US, broker after broker told us that there was no investor appetite for CSG. It was an experimental technology that would never work and didn’t we know that there was going to be a gas pipeline built from Papua New Guinea that was going to supply all of eastern Australia’s gas requirements. Coal seam gas, we were told, could never compete with conventional gas.

Well, here we are six years later in 2011. CSG now supplies 90 per cent of Queensland’s and 6 per cent of New South Wales’s gas supply. There is more CSG in eastern Australia than the Cooper basin and Bass Strait added together and there are three CSG to LNG export plants in development in Queensland. Metgasco has also discovered a major CSG resource in northern New South Wales. The CSG has turned out to be a remarkable Australian success story.

This year, the industry has been the subject of considerable negative media coverage with questions being asked about the environmental impact of the industry, the adequacy of regulatory frameworks and the potential impact on farmland. These are all legitimate questions to ask about the emergence of a significant new industry.

As someone who has been involved from quite early days I have had a box seat on the development of this industry. I believe in the CSG industry because it delivers a clean source of energy to households and industry. I believe the CSG industry can be developed in an environmentally sustainable manner. I believe the CSG industry can revitalise regional communities and deliver additional funding to governments by way of royalties and taxes to provide infrastructure and services to our communities. Most importantly, I believe the CSG industry can work co-operatively with farmers and co-exist with food production.

Many of the questions about the CSG industry stem from an array of misinformation on the internet which is repeated in the media. I would like to try to correct this imbalance somewhat tonight.

To start with – what is coal seam gas?

CSG is natural gas which is largely methane. Methane is not toxic and does not smell. It is formed from decomposing organic matter. It is produced in rubbish dumps, compost bins and from animals and people.

Natural gas is one of the cleanest, safest and most useful forms of energy.  CSG is the same natural gas that many of us use in our homes for heating or to boil the kettle.  If you live in Sydney or Brisbane and have natural gas connected to your home you are already using CSG.

So where does coal seam gas come from?

Natural gas is generated in sedimentary basins throughout Australia. When gas companies go exploring we used to look for what we call conventional gas. That is, gas trapped in a pocket, often in conventional traps.

Gas can also be held underground in conditions of low permeability. This means that the gas cannot move to the surface because the pathways for the gas to flow upwards are blocked. This is called unconventional gas and includes coal seam gas, tight gas and shale gas.

Over the past 20 years, new drilling and completion techniques have emerged which have made gas trapped in unconventional reservoirs commercially accessible.

It was discovered that if a well was drilled into a coal seam and the downhole pressure reduced then gas and water would flow to the wellhead. Over time, the water production rate would decline leaving only gas being produced from the well.

The extraction of natural gas from coals should not be confused with coal mining.

The extraction of natural gas from coals should also not be confused with a process called underground coal gasification. In this process coals are burned underground in a controlled process to produce synthetic gas. This “syngas” is a different chemical composition from natural gas and is not able to be transported on the national gas pipeline network.

There are many other misconceptions about coal seam gas.

Unfortunately, for many people the only source of information about the gas industry is from a movie called Gasland. This movie is about the US Shale gas industry not the Australian coal seam gas industry. The drilling and completion techniques for shale gas are quite different than from coal seam gas. In addition, the regulatory environment for the gas industry is very different in Australia than in the US.

The Gasland movie itself is full of misinformation. One of the claims in the movie, that is widely repeated on the internet, is that natural gas wells caused methane to leak into aquifers resulting in residents being able to set their tap water alight.

This claim is not true and has been thoroughly investigated by the Colorado Oil and Gas Conservation Commission. The regulator concluded that the source of gas in the groundwater was naturally occurring methane. Gas drilling was specifically excluded as a cause of methane contamination in groundwater in the example used in the movie.

The presence of methane in groundwater in some areas has been known ever since holes were first drilled deep into the ground.  It is not caused by the coal seam gas industry.  In Australia, the ignition of gas in groundwater has been a great source of amusement for country kids for over a century.

Another frequently repeated claim from the Gaslands movie is that hydraulic fracturing or “fraccing” uses a mix of toxic chemicals which are forced into wells and poison aquifers.  Some groups that oppose the development of the CSG industry claim that no-one understands fraccing and that the chemicals used are unknown and unregulated.

Firstly, fraccing is a process that is critical to the extraction of gas from shales.  It is not that widely used in coal seam gas wells. Only five per cent of CSG wells in Queensland have been fracced. Metgasco has not fracced any of our CSG wells. Fraccing and the CSG industry do not necessarily go hand in hand.

Secondly, fraccing is a process which has been used in Australia and overseas for over 60 years. Industry and government have a detailed knowledge of the fraccing process and the chemicals used.

Fraccing involves forcing water at high pressure into a gas reservoir to create fractures – a bit like if a stone hits your windscreen. These fractures would normally close up quite quickly because of the overburden pressure. So some form of proppant – typically sand – is washed into the reservoir after the fracture stimulation to ensure that fractures stay open enabling pathways for gas to migrate to the wellhead.

Water and sand comprise more than 99 per cent of the fraccing operation. Small amounts of chemicals are used to reduce the friction of the sand and enable the sand to move into the fractures to prop them open.  Companies must identify the chemicals being used and this information is available on government websites as well as on the gas industry association – APPEA’s – website.[i]

Hydraulic fracturing has been used in more than one million wells in the United States and the process has been extensively studied around the world. Here are just a few examples:

• In 2004, the US Environment Protection Authority (EPA) conducted an extensive investigation into the impacts of fraccing in coal seams on groundwater and concluded that “the injection of hydraulic fracturing fluids into coalbed methane wells poses little or no threat to underground sources of drinking water”.

• In the US, environmental regulation of the oil and gas industry is conducted by the US Ground Water Protection Council. The Ground Water Protection Council has issued a statement saying “[We] have become aware of press reports and websites alleging that six states have documented over one thousand incidents of ground water contamination resulting from the practice of hydraulic fracturing. Such reports are not accurate.”

• In fact, a number of US states have conducted investigations into the impact of hydraulic fracturing on groundwater resources and the environmental regulators of the major gas producing states in Ohio, Pennsylvania, New Mexico, Alabama, Texas, Louisiana, and Oklahoma have all advised that despite considerable investigation into thousands of wells they have not documented a single incident involving contamination of groundwater attributed to hydraulic fracturing.

• Then earlier this year the UK Energy and Climate Change Parliamentary Committee conducted an investigation into the development of shale gas in the UK and found: “There is no evidence that the hydraulic fracturing process itself poses a direct risk to underground water aquifers. We conclude that, on balance, a moratorium in the UK [on hydraulic fracturing] is not justified or necessary at present”.

Despite the fact that hydraulic fracturing is not used that widely in the coal seam gas industry, I have spent a bit of time on this today because this appears to be an area where there is a great deal of misunderstanding on the part of the general public.

In Australia, we seem to have picked up much of the anti-shale gas rhetoric from the Gaslands movie and conflated it to the Australian coal seam gas industry.  But opponents of the CSG industry have also come up with an array of misinformation of their own.

The CSG industry is well understood

One point of view which has been put frequently is that the CSG industry is a great big experiment and we don’t know how it will work. Some people say the CSG industry should be stopped until the science is known. This is not true – the CSG industry is full of scientists, geologists, geophysicists, hydrologists and other technical specialists.

The CSG industry has been around for 30 years in the US and has been a significant source of gas production for Queensland for more than 10 years.  The science of CSG extraction is well understood.  It is also constantly being studied, monitored and analysed by technical experts in the CSG companies and in regulatory agencies in Government.

The CSG industry is well regulated

Another point of view is that the regulatory framework for the CSG industry is inadequate.  This is not true – the CSG industry is possibly the most regulated industry in Australia.

In obtaining approvals for CSG to LNG developments the CSG companies completed extensive environmental studies which were approved by both state and federal governments.  All of the major CSG to LNG projects went through the highest level of environmental scrutiny in Australia under the Environment Protection and Biodiversity Conservation Act.

In NSW CSG companies must comply with an extensive regulatory framework including the:

• Petroleum (Onshore) Act;
• Environmental Planning and Assessment Act;
• State Environmental Planning Policies;
• Water Management Act and Water Act.
• NSW Aquifer Interference Policy and others.

Every exploration well drilled in New South Wales is required to complete a Review of Environmental Factors before commencing. Individual well approvals must be required from the Department of Primary Industries and each application is individually scrutinised and conditions applied to ensure compliance with the regulatory framework. When a project goes into development in NSW a fully environmental assessment must be conducted which provides for extensive input on the part of interested parties.

In addition, CSG companies adhere to American Petroleum Institute standards for well construction and operation and the Australian Petroleum Producer and Explorers Association and Australian Pipeline Industry Codes of Conduct.

Coal Seam Gas wells are designed to protect aquifers

These regulatory frameworks have been developed in the context of years of experience.

It is very important that any well drilled through an aquifer takes precautions to protect that aquifer – be it a gas well, a water bore or a mineral exploration core hole.  CSG wells typically adhere to industry standards and have three layers of steel casing cemented into place to protect the well from water ingress.

The drilling of wells through aquifers is nothing new and certainly not unique to the CSG industry. Millions of water bores and minerals and gas wells have been drilled around the world. There are decades of experience and standard practices in place to protect aquifers while drilling.

The CSG industry has found beneficial uses for most of its by products

Another concern about CSG is that it produces large volumes of waste water and salt and some parties say there is no way to handle this.

Water produced with coal seam gas is not toxic, but it is sometimes saline. The quality of the water varies from as good as normal drinking water to about 50 per cent the salt content of sea water. The level of salinity varies from high to being suitable for some forms of irrigation or stock. Because some plants are sensitive to saline water, this water must be handled separately and treated. While in the exploration stage of activity most CSG companies keep this water in holding dams where it evaporates. Once CSG companies move into production this water is usually either treated with reverse osmosis or re-injected into the reservoir.

Now, while sea water primarily consists of common salt, or sodium chloride, water from CSG wells is mainly sodium bicarbonate or baking soda. Sodium bicarbonate is an important industrial chemical and the sole Australian producer, Penrice Soda, has recently entered into a consortium with the aim of commercially exploiting the sodium bicarbonate produced in association with CSG.[ii]

The volume of water produced by CSG wells varies according to the location. CSG wells in New South Wales typically produce lower water volumes that in Queensland and some of Metgasco’s coal seam gas wells have not produced any water at all.

Much of the misinformation about the coal seam gas industry overlooks the obvious environmental, economic and social benefits that the industry can deliver.

It is widely accepted that gas fired electricity can produce up to 70 per cent lower greenhouse gas emissions than conventional sources in Australia. The federal government’s Clean Energy Plan acknowledges this when it says that a key purpose of the carbon tax is to facilitate a shift to gas fired power generation.

Renewable energy will play an increasingly important role in our domestic energy supply.  But renewable energy is inherently intermittent. Back up power supplies must be in place to supply electricity when the sun is not shining and the wind is not blowing.

Gas fired power has fast start capabilities to back up intermittent renewable energy to ensure a continuous reliable electricity supply. If we as a community want more renewable energy in our generation mix we have to increase investment in gas fired power generation at the same time. Modern economies cannot function without a reliable and secure energy supply.

CSG not only supplies 65 per cent of eastern Australia’s energy needs, but is emerging as a major export industry as liquefied natural gas or LNG. LNG is simply natural gas cooled to 161 degrees below zero and transported by ship to export markets. The LNG industry has emerged as one of the most critical energy markets in the Asian region.

Asian economies, especially China and India, are facing pressures to reduce greenhouse gas emissions and the introduction of more gas fired power, through LNG imports, will help them to achieve this objective.

This year global engineering group WorleyParsons completed a study which concluded that for every tonne of CO2 emissions associated with CSG to LNG production and use, up to 4.3 tonnes of emissions are avoided when the gas is used instead of imported coal by Chinese power generators.[iii]

If the CSG to LNG projects are able to reach an export level of 28 million tonnes per annum, as estimated, by the Queensland Government, and this LNG is substituted for coal in power generation in China then approximately 90 million tonnes of global CO2 emissions would be avoided per annum. This is equivalent to around 19 per cent of Australia’s annual CO2 emissions, coincidently very close to Australia’s annual target reduction in greenhouse gas emissions of 20 per cent.

I would like to highlight this. The Australian community has been engaged in a tumultuous debate about the introduction of a price on greenhouse gas emissions which aims to reduce Australia’s greenhouse gas emissions by 20 per cent.

At the same time the development of the CSG to LNG industry in Australia offers an opportunity to reduce global greenhouse gas emissions that is unmatched by any other single effort.

The economic opportunity

Australia is currently poised to become the world’s largest producer and exporter of LNG by 2020 with earnings of $36 billion annually. [iv]

The industry is expected to create over 18,000 jobs with many of these jobs located in country towns providing a significant boost through direct employment and purchasing of local goods and services.  Already, over 8,000 people work in the CSG industry in Australia.

The economic impact on Queensland will be substantial – with gross state product expected to increase by one percent and around $850 million per year paid to the Queensland Treasury in state royalties. This pays for a lot of new infrastructure, schools and hospitals.

Additional taxes will also be received by the Commonwealth through the onshore application of the Petroleum Resource Rent Tax, additional income tax and additional GST receipts.

The economic opportunity for New South Wales

New South Wales has similar geological systems to Queensland and hosts large CSG resources.  We also have a significant demand for gas in the State.

Currently, New South Wales imports over 94 per cent of its gas from interstate gas fields. With gas consumption in New South Wales forecast to rise by 79 per cent by 2030 and a decline in supply capability from traditional sources, New South Wales would be well served by the development of its own gas resources.

New South Wales has the second lowest growth rate in Australia, only just in front of Tasmania. If the resources boom is creating a “two speed” economy then, other than growth in the coal industry, New South Wales is in the slow lane. If the state wants to move forward and maintain its standard of living relative to the rest of the country, then NSW needs to grasp development opportunities where they arise.

The development of a CSG industry in NSW could deliver many of the same benefits that we are seeing in Queensland – employment growth and business opportunities in regional communities leading to a revitalisation of country towns.  Increased investment in regional infrastructure, support for local community groups and of course additional non-seasonal income for farmers from land access payments.

The CSG industry is revitalising regional communities

At the community level, CSG companies have been working to build links and ensure that benefits are delivered to communities. Increasing economic activity is revitalising regional towns. The CSG industry is focussed on supporting local communities through financial support for infrastructure, hospitals, schools, airport and transport infrastructure. The industry also supports numerous community events.

Metgasco operates in the Northern Rivers region of New South Wales – an area that has one of the State’s highest unemployment levels and an average income level 25 per cent below the rest of the State. We operate out of the town of Casino where we employ 15 full time staff.

Our direct employment impact understates the overall impact of our business on the community. In the past year alone over 95 local businesses supplied us with goods and services and over 600 people were engaged in activities on our sites. We are a relatively small player in the CSG industry, at this time, so I’m sure you can imagine that if a CSG company with 15 permanent employees has this significant level of impact on its regional community what an industry with 8,000 employees must be having.

There are very few job opportunities and even fewer career opportunities for young people in the area. The biggest export out of the northern rivers region in the past 50 years has not been beef or sugar. It has been people.

The CSG industry is creating local jobs in rural communities which can keep kids in the area close to their families. In our business we have made a point of employing local staff. We link promotions to training achievements at the local TAFE and on the job experience. We support the innovative Greenteam alliance which employs local aboriginal workers in paid jobs in land management.

Farmers and resource companies can work together

Farmers and resources companies have a track record of working together. These two industries are the backbone of rural Australia and always have been.

Rightly or wrongly, since the 1850s freehold land title in Australia has been structured such that landowners own surface rights to the land while the Crown owns nearly all the minerals and petroleum rights.[v] CSG companies are granted rights by State Governments to explore for and develop gas resources and when developed must pay a royalty to the relevant State Government based upon the value of the gas.

Landowners are compensated for the impact on their business, not the value of the resource. Some parties have sought to link compensation payments to the value of the resource being extracted. This is a claim to the value of the resource which is owned by the public, not the landowner. The public’s share of the State’s resource wealth is received by royalties and taxes.

Governments have been granting multiple rights over land for over a century with rights now existing for: water extraction, gas extraction, CO2 storage, gas storage, native title, coal mining and other mineral exploration. Where once land might have been used for a single purpose, definitions of property rights which are often overlapping, and negotiations for land access have now become standard practice in the rural and resource sector. This process enables efficient development of Australia’s resource endowment for the benefit of the whole community.

It is incredibly important though that this negotiation process is carried out in an environment of trust and respect. CSG companies cannot enter any property without the land holders knowledge or consent. By law, CSG companies must give notice before entering land for any form of activity. For any activities involving some form of disturbance of the land, companies must have a negotiated land access and compensation agreement with the landowner.

Every access agreement entered into with a farmer creates a one on one relationship between the CSG company and that farmer with commitments that must be honoured.  These commitments include being open and transparent, minimising the impact on the farmers property and remediating properly when the exploration or production activity is completed.

This dialogue is also working. In Queensland, the CSG industry has voluntary access agreements in place with around 1,800 farms. I know from my own experience that mutually beneficial outcomes for farmers and CSG companies can be achieved. Metgasco has around 300 land access agreements in place with land owners in our area and is not in dispute with any of the landowners.

Landowners and rural communities have much to gain from the development of the CSG industry. These days many rural families operating a working farm have one member of the family with a second job. This provides a stable income stream to offset the instability of farm earnings which can be high in good years but virtually non-existent in bad years.  Compensation payments from gas wells provide a stable source of income to many farmers and are effectively another cash crop on the farm which the farmer does not need to attend to.

Stockbroker Wilson HTM has calculated that the average Queensland farmer will receive approximately $45,000 per year for the disturbance on their farmland. Average farm income in the areas of likely CSG development is estimated at between $60,000 and $150,000 per year per farm. The potential cash contribution for the average farm is significant. To put this in context the annual cash compensation payment is 5 -10 times the value of the agricultural output foregone from land disturbed (estimated at 2 per cent of the land involved). Land access payments alone are estimated to be around $50 million a year to farmers in Queensland.

Coal Seam Gas, the farm and what’s in it for us?

Decades of prosperity for Australia is what’s in it for us. Global forces are shaping our economy. The rapid industrialisation of emerging markets such as China and India is lifting millions of people out of poverty. This is creating unprecedented demand for food and energy.

The coal seam gas industry is at the centre of these forces and we must rise to the challenge of developing our energy resources while ensuring the continued success of our agricultural sector.

At the same time the world is seeking to limit growth in greenhouse gas emissions. The CSG industry presents the single biggest opportunity that Australia has to reduce global greenhouse gas emissions. Environmentalists concerned about global warming should be 100 per cent behind the CSG industry.

The coal seam gas industry is a remarkable Australian success story.  It is the classic story of the little industry that dreamt big and succeeded against the odds. The coal seam gas industry is being developed in an environmentally acceptable manner. The coal seam gas industry must work with farmers to achieve mutually beneficial outcomes. We are a new industry to many and we need to put ever greater efforts into communicating and explaining our business.

Farmers and resource companies have worked together for a century to deliver prosperity to Australia and we can continue to work together for another century.

Endnotes

[i] APPEA Website

[ii] www.penrice.com.au/pdf/110607%20Penrice%20GE%20Consortium%20Announcement.pdf

[iii] WorleyParsons, Greenhouse Gas Emissions Study of Australian CSG to LNG

[iv] The Australian 7 June 2011

[v] Prior to the enactment of the first Australian mining laws in 1851 ownership of minerals and petroleum passed to those who were granted title to land by the colonial governors according to common law concepts, except the right to gold and silver which remained vested in the Crown. From 1855, colonial parliaments legislated for ownership of minerals to be retained by the Crown in future grants of freehold title. Thus throughout Australia the Crown owns nearly all the minerals. Wilson HTM 19 Aug 2011