Feature Stories | Apr 24 2013
This story was first published for subscribers on April 9 and is now open to all readers.
– Dangers of fracking are back on the political agenda in Australia
– Pegasus pipeline spill raises environmental concerns in US
– US government is having second thoughts about exporting cheap gas
– Canada might emerge as an important international exporter of oil and gas
By Greg Peel
It was no doubt a coincidence, but interesting nevertheless that coal seam gas (CSG) aspirant Dart Energy ((DTE)) announced last Tuesday it was taking its bat and ball and abandoning New South Wales as a site for CSG development. The announcement came a day after the ABC’s Four Corners aired an expose of sorts on CSG and the potential dangers of the process of fractionating, or “fracking”.
Dart’s move was a response to retrospective and knee-jerk legislative reactions from both the NSW state and federal governments with regard to CSG development in the vicinity of cities, towns and valuable farmland. Energy rival AGL Energy ((AGK)) has also suspended NSW operations since the state government applied two kilometre exclusion zones around sensitive areas. On Tuesday, Dart Energy shares halved in value on the market.
The Four Corners report brought into question the safety of the fracking process and the insistence of the CSG industry that leakages could not occur into vital groundwater tables. Images of methane bubbling to the surface in rivers and airborne methane spikes measured by roving detectors in Queensland suggested otherwise. But the crux of the Four Corners report was that of governments state and federal fast-tracking of CSG projects without environmental assessment of any note. Vague industry assurances, unsupported by specific data, were sufficient for governments consumed by thoughts of jobs and profits to override normal processes and give the green light to unrestricted drilling, even below suburban backyards.
Political pressure has now swung legislation back the other way. Hence the suspension from AGL and the departure of Dart, the latter noting in particular that the UK, for one, is pushing ahead with CSG development with full government support. For Australia it’s just another case of electorate-driven political flip-flopping.
Yet the question remains as to whether fracking is truly safe. Were Australia’s groundwater tables and aquifers, and notably the Great Artesian Basin, to be compromised it would be a catastrophe for this country. There is indeed a strong argument for stringent testing to be carried out before project approvals are rushed through. For Australia’s burgeoning liquid natural gas (LNG) industry, of which east coast CSG is a major component, the implications of a full fracking ban are significant. The Four Corners program had specifically in its sights the enormous Gladstone LNG and Queensland Curtis LNG projects in Queensland, which respectively involve Santos ((STO)) and Britain’s BG Group. Both are moving closer to LNG production.
BA-Merrill-Lynch nevertheless suggests debate over the safety of fracking should have "moved on" post the release of the Queensland government's Underground Water Impact Report in July last year, which indicated only 528 out of 21,000 private water bores would be impacted in the long term. On the strength of Four Corners' whistle blower's revelations, can we rely on this assessment?
Those of us, and that’s all of us, who have been stunned by the rampant increases in both gas and electricity prices these past couple of years might be forgiven for wondering whether a suspension of CSG projects will head off any chance of cheaper gas for all (and electricity, through gas-fired generation). But this was never to be the case, with CSG earmarked to feed LNG exports, not simply to provide Sydney with cheap hot water. Australia is just about the only country with no policy of quarantining a proportion of domestically-produced energy for subsidised domestic consumption. Our own gas prices are to be determined by LNG demand from China, Japan, Korea et al.
In stark contrast, US energy policy is all about putting America first. In what seems like the blink of an eye, the US has swung from being beholden to crude oil imports from enemy states to overflowing with domestic sources extracted from local shale and from Canadiancrude and tar sands. It all comes down to step-jumps in technology, of which fracking is one element. Yet despite this richness of potential oversupply, the American energy scene is throwing up all sorts of dilemmas.
Over the Easter break, the Pegasus pipeline owned by Exxon ruptured at Mayflower, Arkansas, spewing thick black goo into suburban streets and backyards. Locals rushed to prevent the goo oozing into nearby Lake Conway, abundant with various breeds of fish. Exxon has promised compensation.
Three immediate reasons have been cited by critics for the rupture. Firstly, the Pegasus pipeline was over 60 years old. Secondly, while initially built to take light crude from Texas to Illinois the pipeline now carries thick, chemically diluted bitumen sourced from Canadian tar sands, which introduces the third reason, being that in 2006 Exxon reversed the flow of the pipeline in order to pick up Canadian oil from a pipeline to Illinois and take it to the Texas Gulf coast refineries. The rupture has only served to highlight America’s energy dilemma.
The US oil industry was born in and around Texas and Oklahoma, thus giving rise to the benchmark West Texas Intermediate crude price benchmark. The pricing point for this dominant futures contract remains as Cushing, Oklahoma. Decades ago, after readily accessible oil was exhausted in these early fields using the technology of the day, the oil industry upped and moved to the Gulf coast. Today the Gulf is America’s predominant oil producing region, and the heavier Louisiana Sweet crude would be a more relevant price benchmark were WTI not so entrenched.
The importance of the anachronistic Cushing storage facility is highlighted by the fact a pipeline runs from the Gulf to Cushing, despite the fact the bulk of refineries are on the Gulf. There are also now two major pipeline routes leaving Illinois and flow to the highly populated US east coast and to Cushing, carrying Canadian oil.
As noted above, the Pegasus pipeline originally flowed the other way, taking oil from the Oklahoma storage facility to the densely populated Chicago region. Exxon has since reversed this pipeline, and there is a plan underway to reverse the pipeline flowing from the Gulf to Cushing to take excess stored crude the other way, towards the major refineries. There is also a plan to build a brand new pipeline to take Canadian oil all the way from Alberta to Texas.
The increased flow of oil into the benchmark Cushing facility has meant storage capacity is now limited and storage costs are at a premium. That premium is what makes WTI crude that much cheaper than Brent, or even Louisiana Sweet which trades very closely in price to Brent. The irony is Americans do not enjoy the benefit of this discount given that by the time oil is transported from the very central point of Cushing to the population centres in all corners, the price is the same as Brent-based fuel anyway.
And just to add insult to injury, America’s shale “explosion” is occurring right back where it all started, in the original oil fields of Texas, Oklahoma and Arkansas. Modern technology has allowed for shale gas liquids to be extracted in these regions which is even lighter than famed WTI. Light is good, but not so much for the Gulf refineries which are tooled up to process heavier Lousiana crude.
The bottom line is that America has all this oil, whether domestic or coming in from Canada, but its transport and refining infrastructure is all upside down. The reversal of the Gulf-Cushing pipeline is expected to provide some relief, and thus go some way to closing the WTI-Brent price gap. Also set to square things up is the aforementioned pipeline planned from Alberta to Texas, known as the Keystone XL pipeline. Clearly this pipeline passes through numerous jurisdictions, and already its construction has been greatly delayed, most recently by President Obama’s insistence on greater environmental assessment.
Keystone is all but set to begin construction, but now the Pegasus rupture has thrown everything back into doubt once more. Despite Keystone having a much greater diameter than Pegasus, being thoroughly modern, and built to flow only in the intended direction, industry pundits suggest the project could now be held up for another two years as a result of the Arkansas spill. Americans are rather sensitive about oil spills.
Whether or not America can ever sort out its upside down oil infrastructure, the real US energy boom is in shale gas. There is so much gas now being produced that approval has been granted to convert terminals once built for LNG imports to LNG production facilities for export. America has, in a heartbeat, swung from worrying about where its next energy source might come from to looking to sell its riches to others. Many more LNG export facilities are now seeking approval, and as a whole the burgeoning US gas industry is offering a potential longer term game killer for Australian LNG aspirations.
In contrast to the mess that is the US crude oil pipeline system, the US natural gas pipeline system is vast and efficient, boasting a spider’s web of pipelines across the mainland which converge at Erath, Louisiana, at what is known as the Henry Hub. The US crude benchmark is priced at Cushing, and the US gas benchmark is priced at the Henry Hub. Given America has never exported its natural gas, the Henry Hub price is representative of a closed market and gas prices in the US have remained well under those of Europe or Asia ever since the GFC. The cheapness of Henry Hub gas has been exacerbated by the growth of the shale gas industry.
Which is one reason the US government decided to sanction LNG exports from a country that is supposedly far from energy self-sufficient and geopolitically vulnerable as such. Another reason, presumably, is that while natural gas heats American homes and businesses it is still good old oil which powers cars, trucks and industry. To convert the country to gas would be sensible, but a very long term prospect. And America also has plenty of its own coal to power electricity generation.
The US government has now, however, begun to change its mind about LNG exports. The reason is that while the Henry Hub gas price wallowed at US$2.00mmbtu only a couple of years ago, it is now at US$4.00mmbtu. Domestic demand for US gas is rising, and leading the charge is the US electricity companies who can switch easily to gas-fired generation from dirty coal-fired generation. Were the trend to consume more gas and less oil and coal to continue, the business of exporting LNG would force Americans into paying more for their gas. And the bulk of those exports would be bound for the new enemy – China.
Goldman Sachs suggests the US gas market has now stabilised to the point demand and supply are well balanced and the pricing outlook is more certain. For the US, a lack of potential energy price volatility is somewhat of a Holy Grail. Why, then, upset the apple cart by earmarking valuable natural gas for LNG export? The US Department of Energy, Goldmans notes, is yet to approve any further LNG projects for export to non-Free Trade Agreement countries.
This could be great news for the aspiring Australian LNG export industry, except that this would be to overlook Canada. Canada is already losing patience with the whole US pipeline mess, and were Keystone to be further delayed the northerners might just yet throw their hands in the air. Canada also boasts plenty of its own shale reserves, thank you very much, and while starting late could yet become a major LNG exporter over time, Goldman Sachs suggests, as well as exporting tar sand crude to whoever else might want it if needs be. Already two major LNG projects are underway, backed by Chevron/Apache and Shell respectively.
Thus North American LNG, as opposed to just US LNG, will continue to pose a threat to Australian aspirants. Goldmans nevertheless believes Australia/PNG’s existing LNG projects are unlikely to be undermined by North American LNG, and that further brownfield expansion projects can also remain competitive. Furthermore, shale gas extraction technology is improving a-pace, driven by North American development, and Australia, too, boasts as yet untapped shale reserves in the Cooper Basin, for example.
Will shale gas developers be able to frack away to their hearts’ content in the Cooper, given there is no farmland a few living souls in the region? It will be interesting to see. The Cooper might be in the middle of nowhere but it is still within the Great Artesian Basin. In Australia it appears the jury is now out on fracking, in this case with regard to CSG. There have been similar environmental bans placed on the practice in parts of Europe, but elsewhere, such as in the US and UK, fracking is on for young and old.
The enormous CSG LNG projects underway in Queensland are already treading a knife edge between a valuable market place and cost blow-outs, weak LNG prices and a potential lack of viable gas. Never mind the hopefuls. Were the Four Corners findings to prompt a more serious examination of the fracking process, or worse still further knee-jerk political reaction, Queensland CSG LNG just might find itself precariously in the balance. Aside from PNG LNG, more tenuous WA natural gas LNG projects, such as Woodside’s ((WPL)) Browse for example, might start to look more viable. Or at least more secure.
We may yet have another environmental battle on our hands, nevertheless. Last week a decision was made by joint venture partners Exxon and BHP Billiton ((BHP)) to build a floating LNG (FLNG) processing/loading platform for the significant Scarborough project in the Carnarvon Basin off WA. The decision comes in the wake of Shell's plans to build FLNG platforms at Prelude and Sunrise and Scarborough's platform will be bigger than either. The joint venture partners must now submit a proposal to Federal Environment Department.
As an aside, Citi analysts suggest the FLNG decision puts to bed any last hopes Woodside may have had of using Scarborough as a gas source for its land-based Pluto LNG facility. Distance was always the biggest issue, and FLNG means no pipeline to the coast.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
