AGL Says Rules May Stop A$2 Billion in Coal-Seam Gas Plans

AGL Energy Ltd., Australia’s second-biggest electricity retailer, may drop plans to invest about A$2 billion ($2.1 billion) on coal-seam gas in New South Wales after the state moved to restrict access to some areas.

“This is an arbitrary announcement,” Chief Executive Officer Michael Fraser said today in a phone interview after the Sydney-based company reported that it may need to write down the value of two proposed coal-seam gas projects in the state. “You’ve got to work out ways to develop those resources in a way that addresses community concerns and avoids what is going to be a huge cost to the New South Wales economy.”

AGL’s proposal to expand its Camden project southwest of Sydney and another in the Hunter Valley wine region north of the state capital may not go ahead after the government declared country towns and suburbs “no-go zones” for coal-seam gas, Fraser said. The state will prohibit exploration and production in 2-kilometer (1.2-mile) areas around residential communities, Premier Barry O’Farrell said Feb. 19.

AGL, which today reported a 20 percent gain in first-half underlying profit, advanced 4.5 percent to close at A$15.87 in Sydney trading, the biggest gain in 18 months. Australia’s benchmark S&P/ASX 200 Index climbed 0.7 percent.

Possible Damage

AGL is seeking to extract natural gas from coal deposits to help decrease reliance on supplies from outside Australia’s most populous state and address a looming gas shortage. The company’s coal-seam gas projects are among proposals that have faced opposition from some environmental groups and farmers concerned about possible damage to water supplies.

The company’s Gloucester gas project in New South Wales, which received federal government approval earlier this month, and its existing Camden gas operation aren’t expected to be “materially affected,” AGL said today. AGL said it expects an investment decision on Gloucester in mid-2014.

Further development of the Gloucester project may be affected by the new measures, which will undergo a consultation period before taking effect, according to the company.

AGL expects to carry out further analysis of the consequences of the regulations this half year, the company said today. Camden, including the expansion, was valued at A$134.5 million at the end of 2012, while the Hunter project had a book value of A$191 million, according to the company

“If you cut off supply, you are going to force up the price of gas,” said Fraser, who estimated that as much as A$2 billion may be required to develop the Hunter gas resources.

AGL has 2.1 million electricity customers and 1.4 million gas customers, according to a presentation filed today. Origin Energy Ltd., with about 4.4 million customers, is Australia’s largest energy retailer, according to its website.

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