CNOOC Takes Stake in Australia Coal Seam Gas Venture

BEIJING (Dow Jones)

China National Offshore Oil Corp. placed a bet Wednesday on the next wave of coal seam gas developments in Australia, delivering a vote of confidence in an industry that is competing with a raft of conventional gas projects for booming North Asian markets.

CNOOC will spend A$50 million to take a 50% stake in Exoma Energy Ltd.'s (EXE.AU) five Galilee Basin blocks in Queensland state, which are believed to contain "world class" reserves of coal seam and shale gas, Exoma Chairman Brian Barker said.

State-owned CNOOC will provide the money to drill a minimum of 50 exploration wells by August 2013, he told journalists ahead of a signing ceremony for the deal.

The investment underscores China's interest in unconventional gas--one of the energy sector's hottest equities plays globally--as it looks to secure future sources of supply. China's gas use is forecast by industry consultancy Wood Mackenzie to rise to 444 billion cubic meters annually in 2030, almost five times the 93 billion cubic meters consumed in 2009.

Earlier this year, PetroChina Co. (PTR) teamed up with Royal Dutch Shell PLC (RDSA) to buy Australian coal seam gas producer Arrow Energy Ltd. for US$3.4 billion. Coal seam gas is methane trapped hundreds of meters below the earth's surface in coal beds.

CNOOC's first big move came two months ago when its Hong Kong-listed unit CNOOC Ltd. (CEO) committed to spend US$2.16 billion over the next two years in Chesapeake Energy Corp.'s (CHK) shale oil and gas acreage in southern Texas.

The Beijing-based company also has equity in some Queensland coal seam gas reserves that will feed BG Group PLC's (BRGYY) proposed US$15 billion-liquefied-natural-gas project at the nearby port of Gladstone. That project is the front-runner to convert coal seam gas for export as LNG, and CNOOC agreed in March to buy 3.5 million metric tons of coal seam LNG a year from BG for 20 years.

CNOOC is also expected to bid for some of the six domestic shale gas blocks due to be auctioned in China later this month.

Also, Wednesday, an official with China United Coal Bed Methane Co. said that CNOOC plans to buy a 50% stake in the unconventional gas producer, which used to have a monopoly in the development of domestic coal seam gas projects with foreign partners.

CUCBM owns 27 coal seam blocks in China, including 14 blocks under development with foreign cooperation, the company says on its website.

Exoma's Barker said the gas from the Galilee blocks, 500 kilometers from Australia's east coast, "could potentially feed into Gladstone, and with sufficient success (in the exploration program) could drive and support a new LNG facility at Abbot Point."

"We believe we have resources in place sufficiently large to support a new LNG facility," he said.

CNOOC is happy to acquire an interest "in such a significant exploration area in Queensland, which we believe has the potential to support one of the largest coal seam gas and shale gas projects in Australia," the state-owned Chinese company said.

"As we understand it, this is CNOOC's first relatively large-scale exploration investment in unconventional gas," Barker said.

CNOOC's investment, and an option it had taken to buy a 19.9% equity stake in Exoma for A$28 million, had taken 13 months of negotiations and it is "a very positive endorsement of the resource potential of Exoma's Galilee basin permits," he said.

CNOOC is a very large LNG buyer, and with the deal with Exoma it could become a producer of unconventional gas, and it is now "well positioned to develop a new LNG facility at Abbot Point," he said.

The challenge facing CNOOC and Exoma will be to prove the extent of reserves in the blocks, which cover an area of 27,000 square kilometers. "Without question, the gas is there. The question is: How much can be commercially extracted?" Barker said.

An LNG project "needed 8 trillion-10 trillion cubic feet of reserves. We have at least 100 trillion cubic feet, but that is not proven...even if you can prove 20% of this, it is enough for a very large LNG project," he said.

However, with some 12 major LNG projects due for start-up in Australia and Papua New Guinea by 2016, some analysts believe there could be too many, and that development of shale gas reserves in India and China could undercut the Asian LNG market.

Barker dismissed such fears. "They (CNOOC) said Exoma will not need to worry about a market for the gas. Their primary focus will be to bring it into North Asia, into China."

"CNOOC brings to us not just the expertise and not just money; critically they bring to us access to markets."

Assuming commercial quantities of gas were located, the joint venture would focus initially on coal seam gas extraction, and later on shale gas, which is technically more difficult to extract.

Expected CSG reserves in the five blocks "are enough for a stand-alone LNG project," but it would take at least eight years to develop one, he said.

The Galilee shale gas reserves are between 600 and 800 meters underground, far shallower and cheaper to extract than reserves in the U.S., which are now being exploited and which have transformed the U.S. energy market, he said.

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