Queensland’s emergence as a major new force in the global liquefied natural gas (LNG) industry has received a major boost, following a long-awaited federal government decision to approve two new gas projects worth $35 billion slated for the port city of Gladstone.

Unlike conventional LNG projects, the new Queensland LNG industry is to be supplied largely by coal seam gas (CSG), which will be converted to LNG for shipping to energyhungry Asian markets.

The collective sigh of relief from the state’s emerging CSG and LNG industries over the positive decision was likely audible even in Canberra. After previous deferrals, on October 22, Federal Environment Minister Tony Burke finally gave the green light to BG’s Queensland Curtis Island LNG project (QCLNG) and the Santos/Petronas Gladstone LNG project (GLNG).

While the projects are still subject to final investment decisions (FIDs) by the end of the year, the decision has boosted the prospects of not only the proponents of new LNG projects around Gladstone – eight are on the drawing board, although only two to four are considered likely to proceed – but also CSG suppliers such as Bow Energy, Dart Energy and other independents.

Bow Energy CEO, John De Stefani, said his company was “very excited” by the news given the forecast gas reserve shortfall for the LNG projects, and the Queensland Government was equally pleased.

With billions of investment dollars, jobs, exports and royalties at stake, Queensland Premier Anna Bligh was quick to praise the move by her federal party colleague, saying it would generate 10,000 jobs.

“Five years ago this was unthinkable but today, a whole new export industry is set to become a reality,” she said in an official media release.

“This is great news for jobs, great news for the Gladstone region and great news for the Queensland economy.”

Assuming the projects proceed as planned, Australia could soon be exporting energy in the form of coal, uranium, oil, conventional LNG and CSG-LNG – a portfolio reportedly unmatched by any other country.

However, ministerial approval did not come lightly, with more than 300 conditions imposed on each project by the federal minister, adding to the 1,200 conditions prescribed by the Queensland Coordinator General.

Burke’s decision came at the end of an eventful week for the state’s fledgling CSG industry, which suffered a blow to its reputation with Origin Energy’s announcement three days earlier of the discovery by its Australia Pacific Liquefied Natural Gas project (a joint venture with US energy major ConocoPhillips), of cancercausing chemicals known as BTEX (benzene, toluene, ethylbenzene and xylene) at eight CSG exploration wells.

But despite the negative publicity concerning Origin’s disclosure, the federal environment minister gave his backing for an industry that could see Australia become the second-largest LNG exporter by 2020 and the largest supplier to the Asian market.

“After rigorous assessments that included public consultation and the advice of experts, I consider that these projects can go ahead without unacceptable impacts on matters protected under national environment law,” Burke said in an official media release.

“While there are significant economic benefits to these projects, which must be a consideration in my decision, my focus has been on protecting environmental matters such as protected species and ecological communities.

“I also considered potential impacts on agricultural land and the Great Artesian Basin, among other economic and social matters.”

The minister said the “strict conditions” would help protect groundwater-dependent species and minimise other environmental impacts. The companies are required to carry out detailed planning and monitoring to protect groundwater resources, and submit management plans for aquifers, groundwater and surface water.

“Water pressure must be maintained above conservative thresholds. If those thresholds are exceeded, the companies must have plans ready to re-establish pressure. This may involve reinjection or other suitable methods of replacing groundwater to restore water pressure,” the announcement said.

“Pilots for aquifer reinjection must be carried out and suitable water treatment programs must be in place to ensure that any water to be reinjected is of suitable quality. The companies will have to rehabilitate a significant area of land and conserve other areas in perpetuity.”

The emphasis on water management follows forecasts by the Queensland Government that up to 281 gigalitres (GL) per year of water could be extracted during the process of producing 40 million tonnes per annum of CSG. Water extracted during the CSG production process is saline and unsuitable for drinking, with each megalitre of such water estimated also to generate around two to six tonnes of salt.

Queensland Government policy requires the water to be reinjected, used in an environmentally acceptable way, or treated to the government standard before disposal or supply to others for beneficial use, such as irrigation, coal washing or for cattle feedlots (as currently done by companies such as Arrow Energy). Wastes are also required to be managed, treated and disposed of in accordance with a waste management hierarchy.

The minister said the companies would also have to cooperate with other CSG proponents and the Queensland Water Commission in developing “a regional model for the ongoing assessment of the impacts of this new industry on groundwater-related matters.”

The announcement also prescribed more than 50 conditions for Gladstone Ports Corporation in its associated dredging project, with $7 million to be contributed by the corporation towards ecosystem research and $5 million in protecting threatened species.

The Queensland Premier also said the state government would work with industry to ensure the LNG projects met the “highest environmental standards.”

“The state government has already imposed stringent environmental conditions on the two projects,” her announcement said.

“The process has taken approximately two years and involved around 27,000 pages being assessed by the Queensland Coordinator General who has imposed 1,200 conditions covering everything from social housing to environment impacts.

“Along with the 300 new conditions imposed as part of the federal government’s approval, these are some of the most stringent environmental conditions ever imposed on an industry and its projects and that reflects our government’s commitment to strike the right balance between new developments and our precious environment.”

Environmental lawyer Tim Hanmore, Special Counsel at McCullough Robertson Lawyers, said the approvals were justified and that extensive environmental regulations and monitoring systems were in place.

“I’ve operated in a number of different Australian jurisdictions, and in my view the federal and Queensland environmental regulations are extremely comprehensive,” he said.

“It’s a question of ensuring sustainable development and we need to be careful that operational conditions don’t go too far such that they restrict progress without necessarily delivering significant environmental benefit.”

‘Transparency working’

Hanmore said Origin Energy’s October 19 announcement that traces of BTEX had been found in fluid samples taken from eight exploration wells in the Surat Basin, west of Miles, showed that the regulatory system was working appropriately.

The discovery was made in routine testing from fluid samples from hydraulic fractured exploration wells. The company stressed that water produced from the wells was contained in lined and fenced ponds and tanks for treatment and was isolated from water courses and livestock, and that it did not use BTEX in its fracture fluids.

“This is an excellent example of swift action following a discovery during routine monitoring, and it shows that the CSG operators take their environmental controls extremely seriously,” the environmental lawyer said.

“From what I’ve seen, this is an example of the regulations working and there’s no reason for any further controls given the extensive regime in place.”

In its October 27 quarterly production report, Origin said it would resume fraccing (fracture stimulation to increase gas production) at its exploration wells after it had resolved the environmental concerns.

“Australia Pacific LNG is undertaking further comprehensive testing aimed at determining the source of the BTEX,” Origin said in its report. “All waters are contained within lined ponds and there is no indication that licence conditions have been breached.”

The announcement had sparked further calls for a moratorium on the CSG industry from environmental and landholder groups, however Hanmore said such a move would cause “a bottleneck effect which no one is going to benefit from.”

The industry’s peak body, the Australian Petroleum Production & Exploration Association (APPEA) said a moratorium would be a “massive over-reaction” given the level of regulations and transparency in place.

“The Queensland gas industry is subject to the most rigorous environmental approval and monitoring processes in Queensland’s history,” APPEA chief executive Belinda Robinson said.

“Environmental assessments conducted by the Queensland government have resulted in more than 1,200 conditions per project being applied. This is in addition to federal environmental approvals processes, currently underway, making the CSG industry one of the most heavily regulated, and scrutinised, in the country.

“The industry acknowledges that its longterm future is dependent on its ability to minimise environmental impact. This is why it is spending millions of dollars on research and studies to ensure it operates safely and sustainably.

“In some ways, the greatest assurance the community has, is the magnitude and longevity of these investments. Companies looking to spend tens of billions of dollars to build projects and have them operating for decades to come will need to ensure that these investments are protected by ensuring that all environmental and social risks are clearly, identified, managed and minimised.

“This is why the industry supports strong regulatory processes, transparent reporting and ongoing environmental monitoring.”

Bow Energy’s De Stefani said BTEX was a banned substance in the fraccing process, and strict guidelines were in place concerning his company’s environmental and operational management to ensure the safety of its operations.

“We’re very mindful of the environmental conditions that are applied to our tenements. We have strict guidelines on what fraccing fluids we use and we use well-established companies in that fraccing process which have been in the industry for many years,” he said.

He said the company had an advantage in that its key CSG projects were in the Bowen Basin, and did not overlap with the Great Artesian Basin or other significant water aquifers.

“Bow has determined that the water resources in its Norwich Park and Comet blocks in the Bowen Basin do not intersect with the Great Artesian Basin or catchment area. Groundwater resources in the area are primarily limited to creeks, with only a limited volume used in mining operations,” he said.

He said the company had an advantage in that its key CSG projects were in the Bowen Basin, and did not overlap with the Great Artesian Basin or other significant water aquifers.

“Bow has determined that the water resources in its Norwich Park and Comet blocks in the Bowen Basin do not intersect with the Great Artesian Basin or catchment area. Groundwater resources in the area are primarily limited to creeks, with only a limited volume used in mining operations,” he said.

“This is a major strategic advantage for Bow, as along with having a minimal impact on the environment we will also benefit from lower production costs.”

Gas bonanza

Gladstone’s gas bonanza is expected to commence as early as January following the federal government approvals, although the companies involved have yet to announce their FIDs.

Australia Pacific LNG is targeting FID by yearend on a 14-15 million tonne per annum (mtpa) project involving two LNG processing trains, and remains on schedule despite the recent contamination scare.

Conoco vice-president for investor relations, Clayton Reasor, was quoted saying in an October 28 report by PetroleumNews that buyer interest remained strong in Australia Pacific LNG’s gas.

“APLNG is engaged with several potential LNG buyers in support of moving to FID, but we’re not in a position to discuss information regarding specific market discussion at this time,” he was quoted saying.

“However, we plan to have an announcement regarding the sale of two trains of LNG before year-end.”

BG’s QCLNG could be the first to make a FID on its 8.3 mtpa project, however. According to The Australian, BG had been ready to give approval since the first half of 2010 and a decision was anticipated within weeks.

The Santos-led GLNG is also expected to decide on its first LNG processing train at the $16 billion project by the end of December 2010, with a decision on a second train for a 7.2 mtpa project due in 2011. Santos has announced plans to utilise up to US$4 billion worth of unconventional natural gas from its Cooper Basin reserves for the Gladstone CSG-LNG project, easing reported concerns over a potential gas shortfall for the second train.

A joint venture between Santos, Malaysia’s Petronas and France’s Total, GLNG is forecast to commence production from 2014 with Santos supplying 750 petajoules of gas per year. South Korea’s Korea Gas is also reported to be in negotiations with Santos over an equity stake and a long-term sales agreement.

The economic benefits of the projects are considerable, with BG’s QCLNG expected to generate $2.6 billion a year in GDP growth and create 4,000 jobs during construction. The GLNG is set to add $4.1 billion a year to the national economy and generate 4,300 jobs in its development.

The Queensland Government has forecast that an LNG industry exporting 28 mtpa of gas could add more than $3 billion a year to the state’s economy and contribute $850 million a year to the state’s depleted coffers.

Other LNG projects touted for Gladstone include one involving Shell and Arrow Energy, with Shell and PetroChina having acquired the former Brisbane-based independent earlier in 2010 in a $3.4 billion takeover. Japan’s Sojitz Corporation and Impel also have projects on the drawing board, while Perth-based Liquefied Natural Gas Limited has also continued to pursue its own, smaller 1.5 mtpa Fisherman’s Landing LNG project.

Dart Energy has also said it could supply gas to an LNG project at a later date, utilising its assets in eastern Australia.

Consolidation is expected in the Gladstone projects, given their competing demand for resources, materials and other logistical considerations.

Bow Energy’s De Stefani said it was sensible for some collaboration on the projects, given the existing constraints.

“It makes sense for the projects to share common infrastructure, but it will depend on commercial offtake agreements and the LNG market,” he said.

“Two projects will likely go ahead, and anything beyond that is a plus for the industry and for suppliers such as Bow Energy.”

According to the company, the Gladstone LNG projects face a potential gas shortfall of up to 21,050PJ of 2P reserves, based on production projections for five projects (QCLNG, GLNG, Australia Pacific LNG, Shell- Arrow and LNG Limited).

Including forecast demand growth in the domestic market, De Stefani said Bow’s holding of the largest uncontracted gas reserves near Gladstone gave it a major opportunity to monetise its gas resource in multiple markets.

“There’s strong interest in our gas reserves and we are pursuing multiple development options, including power generation and the supply of gas for the domestic and export markets,” he said.

“Queensland is positioned to become a major part of the global LNG industry due to its tremendous gas resource. These are exciting times for the industry, and all Queenslanders will benefit from its sustainable development.”