Commercial viability of coal seam gas

Australian coal seam gas is expensive to extract: about $4 to $5 a gigajoule. 

Rising cost of extracting coal seam gas

 The U.S. wholesale gas price is only $3 a gigajoule.

U.S. natural gas price

One option for increasing the natural gas supply in Australia, though it isn't the preferred option, is to import LNG from the U.S. 
The point to take away from this is that coal seam gas in Australia, facing competition from the U.S. that is rapidly expanding its LNG export capacity, is unlikely to be commercially viable within a few years. 

Expanding the unconventional gas industry that  has little prospect of long-term commercial viability isn't a good investment.

Another option for increasing the supply of natural gas is to make it from coal. Black coal in Australia is being sold into an over-supplied export market where the price is falling to around $2 a gigajoule.

Brown coal costs only about 50 cents a gigajoule.

 
New processes are available that can make methane from coal relatively cleanly. 

Supercritical Water (SCW) gasification of coal and wet biomass

 Coal mixed with water and heated to 400 centigrade with solar thermal energy reacts to form approximately equal quantities of carbon dioxide and natural gas. 
Another way to heat the mixture is to add hydrogen produced by wind turbines or solar PV systems. With sufficient hydrogen, all of the carbon in the mixture reacts with the hydrogen to form natural gas and no carbon dioxide is created.

Why the energy industry resists innovation

When workers oppose technology change it is put down to efforts to protect jobs by opposing innovation that boosts productivity.

When industries resist technology change very little comment is heard.

In the energy resources industry new technology boosts efficiency of converting resources into energy. This reduces demand for resources and lowers the cost of energy. It also reduces revenue of the energy resource industry.

The price of natural gas relies both on limiting supply and maintaining demand.

The economic benefits and prosperity created by access to cheap energy are being sacrificed to the short-term commercial interest of energy producers.

The energy industry is not only slow to innovate, it actively resists innovation.

The Luddite Movement in the 21st Century

A natural gas producer in Australia is accused of manipulating the export market for liquified natural gas (LNG) so that it can increase the book value of coal seam gas reserves on its balance sheet.

Santos accused of using cynical strategy to lift gas price in Australia http://t.co/mky0BTm0E2
— Guardian Australia (@GuardianAus) May 13, 2014

The report, which was presented to the NSW Independent Pricing and Regulatory Tribunal (Ipart) on Tuesday, analyses Santos’s $19bn liquefied natural gas (LNG) export facility at Gladstone, known as GLNG.

Credit Suisse’s report says “quite clearly at face value this has been a materially unappetising project”.

The report adds: “Santos now argues that its aim in GLNG was always as much about raising the domestic gas price, and therefore re-rating large parts of the portfolio outside of GLNG, as it was about the project.’

Santos confident Australian gas prices to almost triple... http://t.co/3pZAJ7FGXr
— James Nicholson (@jamnic77) February 10, 2014

New technology and processes increase the efficiency of converting resources into energy. This reduces demand for resources and lowers the cost of energy.

Santos and another natural gas producer, AGL, are ignoring U.S. technology that can produce natural gas without the costs of drilling for coal seam gas.

GreatPoint Energy produces clean, low cost natural gas from coal, petroleum coke, and biomass utilizing its bluegas™ catalytic hydromethanation process.

GreatPoint Energy's coal gasification technology appeals to China because it allows them to keep using cheap domestic coal, but in a much cleaner manner.

In 2012, GreatPoint announced a $1.25 billion deal to build the first of 34 coal gasification plants in a remote, coal-rich part of China.

The total project will cost an estimated $20 - 25 billion and will supply a trillion cubic feet of natural gas.

This represents a massive leap in the scale of domestic production for China, which last year produced only 107 billion cubic feet of natural gas.

The deal includes an equity investment of $420 million, the largest ever by a Chinese corporation into a venture-capital-funded U.S. company.

Cheaper energy will benefit the Australian economy and the economies of countries that import energy from Australia.

However for Santos new technology that it could use to produce cheap natural gas means the book value of coal seam gas reserves on its balance sheet falls dramatically.

.@abcnews @pjordan_cfmeu China makes natural gas from coal. Avoids the cost of drilling for #csg, saves mining jobs. http://t.co/3XgEvgrygX
— Askgerbil Now (@Askgerbil) May 16, 2014

This situation raises questions of energy policy.

It is an example of market failure - the economic benefits and prosperity created by access to cheap energy are being sacrificed to the short-term commercial interest of energy producers reluctant to write-off reserves rendered worthless by innovation.

---

Further reading -

Technology change resisted by energy industry

Innovations to solve political disputes

The coal lobby scores an own goal

The coal industry's "War on Coal" campaign is all spin

---