In a few months time (on 3 May) the NSW parliamentary inquiry into coal seam gas is due to submit its final report. Its recommendations could help to shape the future of the industry and how it is regulated in NSW.
CSG is a finite resource and one that opponents claim has the capacity to be particularly intensive on local community infrastructure and land. As such, the amount of money the state government would earn in royalty payments from the industry was one of the issues raised during the inquiry.
The following discussion occurred during a public hearing in Sydney on 17 November 2011. In it, Greens MLC Jeremy Buckingham raises concerns about the viability of Santos’ claim that it can provide around $3 billion over 20 years (thus around $150 million a year) from ‘several hundred wells’. Buckingham queries this on the basis that the only CSG producer to file a royalty return so far in the state, AGL, paid just $432,000 for its 89 producing wells in the last financial year. Based on these figures, AGL would not come close to delivering the sort of return that Santos has promised.
I spoke to Matthew Doman (Santos communications manager) about how Santos calculated the royalty projections that they included in their submission to the inquiry, but first, here is the exchange between Buckingham and Santos representatives from the inquiry hearing:
The Hon. JEREMY BUCKINGHAM (Greens MLC): Mr Baulderstone, in your submission Santos states that its principal area of operation will be the Gunnedah basin. There has certainly been a lot of discussion in the community about the number of wells that will end up being in the Gunnedah basin that has created some uncertainty and disquiet about the number of wells and where they will be. Your submission says that the royalties that the Government can expect from this industry are somewhere around $3 billion over 25 years and up to $150 million a year. Further in your submission, on page 27, it says, “The Gunnedah basin project will involve drilling several hundred wells”. How can the Government expect to receive $150 million a year in royalties from several hundred wells? Is it not the case that there will have to be thousands of wells, if not tens of thousands of wells for the Government to attract a royalty return of that magnitude?
Mr JAMES BAULDERSTONE (Vice President, Eastern Australia, Santos): We are at a very early stage of our exploration activity. At the moment we are working out how much gas is caught in those seams, how much water is there and how we will end up producing them. Our current modelling and our current work establish that there will be in the order of a couple of hundred wells to develop the basin in its entirety to produce the volume of gas that would substantiate those royalty payments. What we will do to justify that is that as we get more data and we go through the next level of approval processes for the development phase, we will bring that to the Government and that will be scrutinised in public. The data in there is the information as we understand it to date, subsurface, and those wells are all needed to produce the gas that is required for this business.
The Hon. JEREMY BUCKINGHAM: That was unclear, Mr Baulderstone. You are suggesting that the Government will attract $150 million a year of royalties from a few hundred wells?
Mr BAULDERSTONE: That is what I am saying. I will hand to Mr Kremor, who is in charge of operations, to give you more detail, if you would like, about our development plans.
The Hon. JEREMY BUCKINGHAM: The detail I would like is about how a couple of hundred wells can produce $150 million a year worth of royalties to the State of New South Wales.
Mr ANDREW KREMOR (General Manager Energy Business, Santos): The area has a unique geology; it is characterised by multiple coal seams throughout the sequence. In some areas they are very, very thick coal seams and the net coal package is many, many times thicker than in similar areas in Queensland, and also the geology lends itself to a lack of drilling technology, which is not always the case in Queensland as well. When we drill a well we can drill into multiple coal seams. So, in effect, one well is equivalent to several wells if you can imagine they are stacked vertically on the coal seams. That is why we think we will not need as many wells on the surface footprint.
The Hon. JEREMY BUCKINGHAM: Are you committing to less than a thousand wells in the Gunnedah basin?
Mr KREMOR: Our modelling at this stage indicates that it would be well less than a thousand. Clearly, we cannot be precise at this stage because, as James said, we have got three years of study to do. But our current modelling based on the information we have to date indicates that it is several hundred wells only. But the important fact is it is the geology that determines that.
There was further discussion about royalties between Buckingham and representatives from the NSW Government later during the same hearing:
The Hon. JEREMY BUCKINGHAM: My final question relates to royalties. Obviously in New South Wales there is a five-year royalty holiday for coal seam gas mining. The submission from Santos this morning to the Inquiry was that they expected to be delivering to the Government $150 million per annum from their Gunnedah project. Has the Government done any modelling on what sort of royalties it expects to have delivered to it from coal seam gas and what sort of number of wells would they expect to be rolled out across New South Wales?
Mr BRAD MULLARD (Executive Director, Mineral Resources and Energy, Department of Trade and Investment, Regional Infrastructures and Services): We have not done the modelling. At this point in time, as Mr Paterson has said, the industry is actually still in an extremely early stage of development. The industry in New South Wales is in an exploration phase. The number of wells and how many might end up in terms of production fields we really will not know until a lot more exploration is done or the exploration that is currently under way is undertaken. At the moment there is really only one production field for coal seam methane, which is around the Camden area. There is a small amount of production occurring near Narrabri for local consumption generally at this point in time.
The Hon. JEREMY BUCKINGHAM: That Camden project delivered $400,000 in royalties in the last financial year based loosely on about 100 wells. According to Santos, if the geology is the same, for $150 million you would need something around 20,000 to 30,000 wells to deliver a comparable royalty rate, which is similar to the situation in Queensland where they are looking at 30,000 to 40,000 wells. Are those sorts of numbers of wells across the State something the Government is modelling?
Mr MULLARD: Your initial question about what royalty was paid, I do not know what royalty was paid and in fact I know that information is not available, so I am not sure where the royalty number you have for the Camden project came from.
The Hon. JEREMY BUCKINGHAM: It was in the Treasury figures, it was in the Budget— $432,000.
Mr MULLARD: I am not sure about that.
The Hon. JEREMY BUCKINGHAM: Well, I am sure.
Mr MULLARD: That’s fine but we have not done any modelling.
The Hon. JEREMY BUCKINGHAM: You have not done modelling on how many wells may roll out across the State?
Mr MULLARD: We will not know that until the exploration is undertaken and the companies start to look at what are their projects and what their projects begin to look like.
The Hon. JEREMY BUCKINGHAM: Do you accept that, if Santos is making in their submission a claim for $150 million in royalties to the Government, that that may equate to upwards of 10, 20, even 30,000 wells across the State?
Mr MULLARD: No, I do not accept that because it will depend on how each well performs, whether or not they are horizontal wells, and the technology used. I do not even know at this point in time—and I am sure the companies also do not necessarily have an understanding of it—which areas will be productive or not. It is still at an early exploration stage.
Mr MARK PATERSON (Director General, Department of Trade and Investment, Regional Infrastructures and Services): And nor would we accept, as a matter of course, an extrapolation of a proposition that Camden produces X dollars on the basis of X number of wells, so if somebody else speculated on a payment figure that you would have an automatic line of sight between the two, we do not accept that proposition.
So to the explanation. In a phone conversation last month, Santos spokesperson Matthew Doman explained how the figures Santos used in their submission to the hearing were reached:
The drilling technology that we’ll use, which is the latest, allows you to drill multiple wells from a single well pad. This minimises the surface impact, and I think communities and landholders are looking for us to do this. We can minimise the number of well pads and the surface footprint by drilling multi-stacked lateral wells. Instead of drilling one well straight down we can now drill wells that go straight down but also go off at an angle so you access the coal seam in various places from a single well pad, they offer a lot more access to the coal seam. So drilling 300 of these well pads could be equivalent to drilling 900 single wells.
I should note here that Doman used the figures of 300 and 900 by way of example, he also said that Santos currently expected to drill up to 500 wells (across the Gunnedah Basin). He continued:
The other difference is the richness of the resource in the Gunnedah Basin … From initial work, seismic and otherwise, we believe the area will be a very productive source of natural gas. [...] Another thing to look at is price. We believe the gas price will rise from around $3 to $4 per gigajoule (GJ) to between $6 and $9 per GJ … Currently producers could be selling for as low as $2. We believe that when we come to produce it will be sold at prices considerably above what its sold at now.
In summary, Santos expects higher rates of gas flow due to newer well technology and more productive coal seams as well as a rise in the price of gas. These aspects combine to allow for a greater projected royalty return than AGL is able to deliver from it’s current gas production in Sydney’s south-west. Santos told the public inquiry that they have “three years’ research to do before any significant development can commence” so it may be some time before we can see if these figures stack up.
Further information about NSW gas reserves and royalty schemes for all Australian states and territories.
Read the full transcript of the 17 November 2011 coal seam gas inquiry public hearing (pdf).