THE coal seam gas industry in NSW is set for a fivefold expansion after the federal government approved the first stage of AGL Energy's Gloucester Gas project, subject to conditions including a new hydrogeological study.
AGL, which last week suspended the northern expansion of its Camden Gas project in Sydney's south-west, will now take a year to do front-end engineering and design on the Gloucester project, before its board gives a final go-ahead. The project will drill up to 110 coal seam gas wells and includes approval for fracking and construction of a pipeline from Gloucester to Hexham, near Newcastle.
AGL shares rose 1.3 per cent or 20¢ to $15.45 on Tuesday, although the Federal Environment Minister, Tony Burke, told journalists his decision on Monday was a "Clayton's approval", given it was so conditional.
AGL's head of upstream gas, Mike Moraza, said the Gloucester decision was "not a Clayton's approval - this is a formal approval from the Commonwealth, subject to 36 conditions".
Mr Moraza said two conditions required AGL to develop a new peer-reviewed, numerical hydrogeological model of the project, which would require a lot more data than the desktop model already completed. But he was confident the numerical model would show the project posed "negligible if not nil risk to the environment and the water resources of the Gloucester area".
Gloucester has proven and probable reserves of 669 petajoules of gas, compared with just 142PJ at Camden and another 142PJ at its Hunter Gas project. Gloucester is expected to produce about 30PJ a year, compared with the 6PJ/year delivered by the existing wells at Camden, which produces about 5 per cent of the gas used in NSW.
Macquarie Bank analysts said given the potential shortage of gas in NSW from 2016, the timing of the Gloucester project was "arguably ideal for AGL to capture the short term bubble in gas prices in 2016-17 and thereafter to simply apply higher gas prices". Macquarie estimated the Gloucester project would cost $280 million to $345 million - including 110 wells, the 110 kilometres pipeline, and a gas compression plant - up somewhat from the $300-odd million AGL estimated in 2011.
But a UBS utilities analyst, David Leitch, said the costs to AGL could be as high as $900 million, based on the experience in Queensland. "Having got their approvals, [AGL] have to update their cost estimates," he said. But he expected AGL would go ahead with the project, perhaps as soon as this year, as "the commercial logic for it is complete".
Mr Moraza differentiated the Gloucester project from the massive LNG projects under construction in Queensland and said a tripling of the previous cost estimate "would really surprise me".