Exports fuel boom in gas production

The red, sun-scorched earth at Moomba bears the telltale signs of the prohibitive heat this pocket of desert receives - temperatures soar through to the high-40s in summer.

Nestled in the desolate and remote north-eastern reaches of South Australia, this company town of 1200 has existed since the 1960s for the sole purpose of tapping into the oil and gas riches locked deep underground in the Cooper Basin.

Pipelines transport gas from this nerve centre to the major markets of Brisbane, Adelaide and Sydney. More than 2000 wells have been drilled. And yet the easy-to-reach gas has been all but exhausted and, for the past decade, production capacity has been largely in decline - that is, until now.

Three huge liquefied natural gas projects worth $60 billion are being built on the east coast of Queensland to feed the surging energy needs of Asia. It means Santos, the largest producer in the Cooper Basin and the operator of the $18.5 billion Gladstone LNG plant, needs all the gas it can get.

"But for those new investments [in Gladstone], Moomba would have shut down within five years," James Baulderstone, the head of Santos' eastern Australia operations, says.

Instead, Santos' Moomba operation is aggressively stepping up its drilling and exploration, targeting production increases of up to 15 per cent a year for each of the next three years.

Drilling methods previously deemed too expensive or speculative, including shale gas exploration, are now being undertaken in earnest.

The turnaround at Moomba is a window to the stark contrast in the fortunes of the oil and gas industry and the rest of the resources sector. Falling commodity prices and rising costs have meant BHP Billiton's much-vaunted $20 billion expansion of Olympic Dam, the world's largest uranium deposit and fourth-largest copper deposit, has been rendered uneconomic.

"I'm astounded by how much impact the decision has had. It's been a body-blow to have that happen," says Paul Heithersay, who heads the state government's Olympic Dam Task Force.

At Moomba, Santos has taken 500 dongas off the hands of BHP that for now will not be used at Olympic Dam. Santos' James Baulderstone says it is spending $300 million on shale gas exploration, compared with the $700 million being spent on the conventional gas drilling program on the east coast.

The ability to extract previously inaccessible gas trapped in shale at commercial rates is revolutionising US energy prices and rejuvenating its manufacturing sector, though there is growing consensus that geological differences will mean shale is unlikely to have a similar impact locally.

Yet for all the fanfare last October, when Santos unveiled the first shale gas well to achieve a commercial flow rate, the Moomba-191 well, operated in a joint venture with Beach Energy and Origin Energy, remains the only one so far.

But it can still be exploited and piped up for export at a tidy profit.

The general manager for Santos Eastern Australia, Nick Lagonik, told BusinessDay that seven new shale wells would be drilled this year, and from 10 to 12 next year.

He explained that each conventional gas well would require on average three to seven "fracks" and would cost between $6 million and $7 million. A shale gas well required more extensive and pricier horizontal drilling, as well as between 15 and 20 fracks, costing about twice as much.

But the rush from the big gas companies to tap enough gas to meet their long-term export contracts has drawn heavy criticism from others.

Prominent representatives of the manufacturing lobby, including Andrew Liveris of Dow Chemicals and Paul Howes of the Australian Workers' Union, say the country's gas reserves should be mainly used for domestic use to ensure gas prices remain low. Environmentalists and farmers, particularly in NSW, vehemently oppose the use of their land for coal seam and shale gas exploration, worried about its environmental impact on water and farmland.

"People's minds on this are not going to change," David Quince, a farmer and Gunnedah shire councillor, says. "Santos espouses to be an Australian company; I think it's horrendous."