Orica joins the third way in gas

Orica has produced a very effective counter to the arguments over the "reserving" of Australian gas for domestic use, securing its own private source of gas for two decades.

Orica and Strike Energy announced today that they had signed a gas off-take deal under which Orica can get access to 150 petajoules of gas over the next 20 years or so by making gas pre-payments of up to $52.5 million to help fund the commercialisation of Strike’s southern Cooper Basin coal seam gas project in the Cooper Basin.

Orica’s Ian Smith said the agreement had the potential to provide a future new source of gas supply to his group’s east coast manufacturing plants at an "affordable" price while Strike’s David Wrench said it would deliver Strike a material contribution towards the appraisal and development of the project.

Strike has said it believes it has a resource of between 6.3 and 16.4 TCF in shallow coal seams within the basin. Assuming it does have a commercial resource (Strike has said it is targeting extraction costs of about $3 per gigajoule) the extensive gas pipeline infrastructure in Cooper Basin means it would have access to both the Moomba to Adelaide and Moomba to Sydney pipelines – it could essentially supply any of the major east coast markets, including the Queensland export LNG projects.

Strike is one of a number of players both large and small looking to develop unconventional gas resources in the Cooper Basin, where the long history of oil and gas production, the existing pipeline infrastructure, governments that have been supportive of the industry and, in Strike’s case, the low level of agricultural activity in its permit areas makes it a more favourable environment for developing unconventional gas resources than, say, NSW.

There is no shortage of gas resources in Australia, although the start of exports from the three big LNG plants at Gladstone will absorb much of the existing east coast production. Those exports of coal seam gas will, however, by giving east coast gas producers access to the international price for the first time, push up domestic prices and both create an incentive to unlock more gas resources but also to make their economics more attractive.

While gas tends to be thought of in terms of its residential use it supplies nearly half the energy requirements for manufacturing and construction and more than 20 per cent of the energy within the national electricity market, a share that will rise significantly under any carbon pricing scenario.

It is their reliance on cheap gas for their energy that has caused some big industrial customers to lobby for "reserving"of gas for domestic use rather than allowing uncapped exports of LNG into the Asian market. A side-effect of reserving would be to reduce the price of that reserved gas and the incentive to develop more resources.

Because of the massive amounts of capital involved in the LNG projects and the liquefaction, transport and re-gasification costs, the domestic price might be higher than it has been once the exports start but it will always be lower than the price paid by Asian customers, giving domestic customers a material cost advantage.

Orica, however, has done something quite clever by putting its foot on its own dedicated source of gas at a price that presumably reflects the reality that it is sharing the risk of developing the Cooper Basin resource with Strike and supplying a significant lump of capital.

Orica isn’t the first company to recognise there are alternatives to passively sitting back and paying the future market price for gas that might be in short supply. Fortescue has mused aloud about taking up stakes in oil and gas companies while Alcoa has put up $25 million to help fund the development of two gas fields in Western Australia in return for a gas supply agreement. Decades ago News Corp and TNT invested in oil and gas exploration as a hedge against the fuel costs of their Ansett airline.

Industrial customers reliant on gas don’t even have to ensure physical delivery of the gas – just an exposure to its price as a hedge against their future energy costs.

Given the issues confronting would-be developers of unconventional gas resources within a gas-short but resource-long NSW, it wouldn’t be in the least bit surprising if other major gas customers emulated Orica and secured their own exposure to undeveloped gas before the real impact of those Queensland LNG plants is reflected in domestic gas prices.