Chevron's shove-along for Aussie shale

Chevron's commitment of up to $US349 million to farm into two unconventional gas permits controlled by Beach Energy in South Australia and Queensland could eventually be seen as a landmark deal in the fledgling history of shale gas in Australia.

With the focus – and the controversy – on coal seam gas, shale gas and tight gas have had a relatively low profile here despite the energy revolution they are creating within the US.

That's probably because, despite what appear to be relatively large shale gas resources, the cost of exploiting them relative to the vast resources of offshore gas and coal seam gas has seen them regarded as something of long-term rather than immediate interest.

Warnings of domestic gas shortages, the community opposition (most evident in NSW) to coal seam gas extraction and a surging domestic gas price are, however, coinciding to put shale gas more firmly on the agenda.

The Beach deal with Chevron would see Beach receive about $US207 million of cash and have about $US142 million of exploration and pilot production funding met by Chevron if the US major exercises all of its option to proceed and emerges with 60 per cent of the permits within the Nappamerri Trough in the Cooper Basin.

The deal comes at a time of increased interest in unconventional gas in Australia from both offshore and local energy companies, sparked by the dramatic development of the US industry as new technologies for extracting the gas emerged.

Beach was among the first of the locals to recognise the potential for unconventional gas, although Santos also has large holdings of prospective acreage in the Cooper Basin and has the first commercially producing well.

Apart from the elevated global interest in shale gas domestic circumstances have conspired to bring it more firmly into the debate about gas resources in this market.

The development of the four coal seam gas-fed export LNG projects at Gladstone in Queensland has created an enormous demand for gas, with the projects probably still short of their requirements.

At the same time a community backlash, centred in NSW, has seen the NSW government promulgate exclusion zones for coal seam gas developments close to residential areas, which has led to warnings from the producers that the inability to develop new domestic resources will put further upward pressure on gas and electricity prices and could create a gas crisis as existing supply contracts expire over the next few years and that gas is diverted towards the LNG plants.

Domestic gas prices have been rising and would continue to rise anyway as the Gladstone plants will be exporting gas at international, oil price-linked prices. That will inevitably import international gas prices (less the transport and liquefaction costs and risk premia) into the domestic market.

Domestic prices are, however, already pushing into the $6-plus per gigajoule level that is considered necessary to make shale and tight gas viable. Santos said last week that it had signed some contracts for delivery in the 2014-2016 period priced towards the upper end of a range of $6 to $9 per gigajoule. Santos plans to spend $500 million a year for the next three years on its in-fill drilling and unconventional gas programs in the Cooper Basin.

Shale and tight gases are different to coal seam gas and ought to be less controversial, particularly Cooper Basin gas where Santos and others have been producing in central Australia, and doing so without controversy, for decades.

The most significance difference, in terms of both cost and the level of community anxiety, is that shale gas occurs at far, far greater depth than coal seam gas – well below water tables.

The cost of extracting it makes it more expensive but shale gas also tends to have condensate whereas coal seam gas has no higher-value liquids, and any gas produced in the Cooper Basin is close to an extensive network of east coast gas pipelines.

The surging interest in unconventional gases in this market does tend to validate the arguments put by Santos chief executive David Knox, and others in the sector, that domestic gas should neither be "reserved" for domestic use or its price capped.

It will be rising domestic gas prices that will initially attract investment (it already is) and lead to development and then rapidly increasing production that will create a better balance of supply and demand and, as we've seen in the US, discipline prices or even force them down.