Origin's Report of Chemicals in Gas Wells May Delay LNG Project Approvals

The Australian government may delay approvals for proposed coal-bed methane projects in Queensland state after Origin Energy Ltd. said it found traces of banned chemicals in exploration wells, Macquarie Group Ltd. said.

Environment Minister Tony Burke is due to decide by Oct. 22 whether to approve Santos Ltd. and BG Group Plc liquefied natural gas ventures. Origin and partner ConocoPhillips plan a A$35 billion ($34 billion) Queensland project to extract gas from coal seams for conversion to LNG and export to Asia.

“The timing clearly couldn’t be worse,” Macquarie’s Sydney-based analyst Adrian Wood said by phone today. “But if you approach it with a level head you see that the quantities of contaminants identified are so small. I don’t think this at all puts the future of coal seam gas-to-LNG in jeopardy.”

The Origin and ConocoPhillips venture found traces of benzene, toluene, ethylbenzene and xylene -- together known as BTEX -- in samples taken from eight wells in the Surat Basin, the Sydney-based company said yesterday. Origin said it informed regulators of the results and agreed to independent testing.

Origin declined 1.7 percent to A$16.01 by the 4:10 p.m. close in Sydney trading, compared with a drop of 0.7 percent for the S&P/ASX 200 Index. Santos fell 2.2 percent to A$12.46.

“There has to be a risk things do get delayed because they will want to get comfortable with where this is coming from before they approve the projects,” Macquarie’s Wood said. “Arguably this hurts Santos and BG more than Origin.”

‘Thousands of Jobs’

An Australian Environment Department spokeswoman said today that Oct. 22 remains the target for Burke’s decision, asking not to be named because of department policy.

Di Brookman, an analyst at CLSA Asia-Pacific Markets in Sydney who has a “buy” rating on Santos shares, said in an e- mail that while the government may meet that deadline, it may clear the Queensland developments “with conditions.”

Matthew Doman, a spokesman at Adelaide-based Santos, declined to comment on Burke’s review. Australia’s third-largest oil and gas producer has conducted “extensive” tests to gauge the environmental impact of its coal-seam gas operations and hasn’t identified any BTEX chemicals, he said.

Paul Larter, a spokesman at BG’s Australian unit in Brisbane, didn’t return a call seeking comment.

The Queensland government has said it is committed to enforcing its ban on the use of BTEX. The projects, including the venture planned by Origin and ConocoPhillips, may generate “thousands of jobs and billions of dollars of investment,” the government has said.

‘Strike a Balance’

“We want to make sure we strike the right balance between environmental sustainability and economic growth,” Queensland Natural Resources Minister Stephen Robertson said Aug. 4.

Australia Pacific LNG doesn’t use BTEX to extract the gas, and tests are underway to find out how the substance came to be in the wells, Origin said. Benzene is a carcinogen found in petrol and used as an industrial solvent, the Queensland government said on its website.

The amount of the substance Origin detected is equivalent to “between a thimble-full and a half-cup full of chemical in an Olympic-sized swimming pool,” Paul Zealand, the company’s executive general manager of exploration, said by phone today.

An investigation to find the source is likely to take a “number of weeks,” he said. It isn’t expected to lead to delays in the development time line, he said.

The process of extracting gas from coal seams involves pumping fluids at high pressure to fracture the rock and allow gas to flow. Queensland Conservation says on its website the process could cause contamination of adjacent aquifers.

Water Supplies

There is no evidence of any impact on surrounding landholders’ water supplies, according to Origin, which has suspended fracturing at exploration wells pending the tests.

Burke extended a review of the ventures after being appointed to the post by Prime Minister Julia Gillard on Sept. 11. A ruling had been expected by Oct. 11 after a deferral in July by former Environment Minister Peter Garrett.

The discovery of BTEX in the wells appears to be an “isolated issue,” Macquarie’s Wood said. “If we’re talking about a delay, I think we’re probably only talking about days or weeks, not months.”

To contact the reporter on this story: James Paton in Sydney jpaton4@bloomberg.net.

To contact the editor responsible for this story: Amit Prakash at aprakash1@bloomberg.net.

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