Australia Coal-Gas Explorers Face Cost Risks, Deutsche Bank Says

Coal-seam gas explorers including AGL Energy Ltd. (AGK) and Santos Ltd. (STO) that are active in Australia’s Queensland and New South Wales states face the risk of higher costs and delays because of stricter rules, Deutsche Bank said.

Queensland’s Liberal National Party, expected to win the March 24 state election, proposes regulatory changes, including “full and fair” compensation to landowners, that may increase the cost of new coal-seam gas wells, Tim Jordan, a Sydney-based analyst at Deutsche Bank, wrote in a report.

The New South Wales government plans to release the results of an environmental and safety review of the coal-seam gas industry in the coming months that may lead to additional rules, according to the report yesterday. The state also may remove a royalty discount for coal-seam gas companies, bringing its policy in line with other states, Jordan wrote.

AGL, Santos, Dart Energy Ltd. (DTE) and Arrow Energy Ltd. are among companies developing coal-seam gas projects on the east coast of Australia to meet rising demand for the fuel. Some environmental groups and politicians are concerned the projects will damage aquifers, contaminate and deplete water supplies, and diminish the capacity of food-producing land, Jordan said.

“The growth of coal-seam gas exploration and production is controversial, with significant resistance from organized community opponents,” Jordan wrote. “Heightened scrutiny and tighter regulation of existing and proposed developments risk higher costs or delays for explorers and developers.”

Fracking Ban

Santos and its partners may spend more than A$16 billion ($17 billion) on coal-seam gas development in New South Wales, supplying as much as 30 percent of east coast demand, according to a December report commissioned by the Adelaide-based company. Santos, BG Group Plc (BG/) and ConocoPhillips (COP) are building more than A$50 billion of projects in Queensland that will convert coal- seam gas into liquid form for export to Asia.

In neighboring New South Wales, the state government in December extended a temporary ban on hydraulic fracturing, or fracking, for three more months. Fracking, the technology that releases trapped gas by blasting water, sand and chemicals underground, has drawn global opposition from environmental groups concerned that the process contaminates water supplies.

New South Wales also is reviewing its royalties policy, according to the report. The state doesn’t collect royalties during the first five years of a coal-seam gas project and has a lower rate than other states for the next four years, Jordan wrote.

Labor Party

In Queensland, the Labor Party is on course to lose in the March 24 vote, polls indicate. A Galaxy poll conducted Feb. 15-16 showed Labor, led by Premier Anna Bligh, trailing the opposition by 20 percentage points ahead of the election. The survey of 800 people, which gave no margin of error, showed the Liberal-National coalition with 60 percent and Labor with 40 percent in the two-party preferred voting system.

Prime Minister Julia Gillard said in November that the government would allocate A$150 million to establish an independent committee to provide scientific advice on the impact of coal-seam gas projects on water supplies.

“While the panel will not have direct responsibility for approvals, its research will be published, making it impossible for companies and state governments to ignore its findings,” according to Deutsche Bank.

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

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

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.