SYDNEY (BLOOMBERG) – In a corner of Outback Australia, a drilling crew will soon try tapping shale rocks that could hold more than three times the world’s annual consumption of natural gas.

Origin Energy Ltd plans to drill two wells later this year in the Northern Territory’s Beetaloo Basin, after the local government ended a three-year ban on fracking – the practice of extracting oil and gas from layers of shale rock deep underground. With an estimated 500 trillion cubic feet of gas, Beetaloo has been compared to famed US shale regions such as Marcellus and Barnett.

But its isolated location, lack of infrastructure, and the likelihood of tough environmental opposition, make Beetaloo a highly speculative investment.

“There are some big numbers being quoted and people have to realise this is exploration,” said Mark Schubert, Origin’s head of integrated gas, noting that only some of the total reserves would be extractable.

Origin’s permit area is the size of Wales, but engineers on site are more likely to encounter crocodiles than sheep in the largely barren area. The scrubby bushland, dotted with billabongs, or water holes, would be familiar to fans of the 1986 hit movie Crocodile Dundee, which was shot partly in Kakadu National Park in the north of the territory.

Beetaloo is about 2,500 kilometres away from Sydney and even further from Melbourne, so the project would require pipelines that would connect to and expand the capacity of Australia’s growing gas transmission network.

In 2016, before the exploration ban, Origin drilled a so-called dry gas well – one that contains only natural gas – that allowed it to estimate a recoverable resource of 6.6 trillion cubic feet, enough to support a gas export supply train for 20 years, according to Schubert.

The next round of drilling will focus on areas where the gas reserves could also include liquid petroleum gas and condensate – a kind of ultra-light crude oil – valuable byproducts that would improve the commercial viability of the project. Data suggest the Beetaloo formation has similar characteristics to Marcellus in the eastern US, which Schubert calls “the Ferrari of shale”.

The new wells will test whether it shares the same “deliverability” as Marcellus.

Santos Ltd, based in Adelaide, South Australia, also plans to drill for shale gas in the nearby McArthur Basin later this year and has submitted its environmental management plan to the territory’s government. Santos Managing Director Kevin Gallagher told shareholders at the company’s annual meeting on Thursday (May 2) that the McArthur Basin “is the largest and most promising shale gas opportunity in Australia”.

Origin, and its joint venture partner Falcon Oil & Gas Ltd, have a long way to go before they will bring Beetaloo gas to market, probably around the middle of next decade. That may be just in time to head off a domestic shortage of the fuel in Australia’s populous east coast, which has traditionally relied on the now-declining Bass Strait offshore field next to Victoria state.

Beetaloo could also feed the nation’s growing gas export business. Australia is vying with Qatar as the world’s top liquefied natural gas seller and the construction of three export terminals in Queensland in the past decade means domestic users now compete with fast-growing Asian demand.

As in most developed nations, fracking, or hydraulic fracturing, is a controversial issue in Australia. The practice is banned or restricted across much of southeastern Australia, and even where moratoriums have been lifted in Western Australia and Northern Territory there are strict conditions and vast swathes of land are still off limits.

The Northern Territory is developing a regulatory framework for onshore gas exploration based on 135 recommendations from the scientific inquiry undertaken during the moratorium, which it says will safeguard the environment.

“Exploration activities in the Beetaloo Sub-basin this year will create important economic opportunities for Territorians, contractors and local businesses,” said Paul Kirby, the territory’s resources minister in an emailed response to questions. The state hopes the shale deposits will lead to the region becoming a world-class hub for gas production and associated manufacturing and services by 2030.

It could also help reduce the territory’s ballooning net debt, which is projected to reach A$7.5 billion (S$7.16 billion) by 2021-22, budget projections show.

Drilling in Beetaloo, named after a cattle ranch the size of Hawaii island, has broad political support in the national parliament. Resources Minister Matt Canavan has called the area the country’s “best immediate prospect” to replace Bass Strait. The opposition Labor Party, which polls suggest could win a general election on May 18 to form the next government, has pledged to spend A$1.5 billion for pipelines that would connect Beetaloo to the port of Darwin and the east coast gas markets.

Jemena Ltd, jointly owned by China’s State Grid Corp and Singapore Power, has plans to expand its recently opened Northern Gas Pipeline to potentially link Beetaloo to pipelines that connect to the east coast.

Environment groups say the potential economic benefits of the Northern Territory gas fields have been overstated.

“We make more money from our Northern Territory watermelon industry than we are predicted to make from fracking,” said Pauline Cass from Protect NT. She pointed to a report by ACIL Allen Consulting that showed an average of only 524 extra jobs would be created per year by the resumption of gas exploration. Origin has said it expects to create around 950 ongoing operational jobs if Beetaloo goes into production, over 60 per cent of which would be based in the territory.

Cass said the Beetaloo region performs a vital function in keeping the territory’s three major rivers flowing in the dry season. “These rivers are necessary for irrigation, tourism and our fishing industries, as well as supplying water to the environment. Any ‘accidents’ in Beetaloo have the potential to destroy all these industries.”

Others say developing such a huge gas resource is incompatible with the 2015 Paris Agreement to temper climate change by limiting global warming to well below 2 degrees Celsius. Australia’s gas industry is already one of the biggest contributors to the country’s CO2 emissions.

Protesters have held up major Australian energy developments in the past. Indian billionaire Gautam Adani’s Carmichael coal project in Queensland has been bogged down by regulatory delays and was scaled back after almost a decade of concerted opposition by environmentalists.

Simon Holmes a Court, a prominent advocate in Australia for the transition to cleaner energy, tweeted in response to Labor’s pipeline investment pledge that, “the #beetaloo gas fields are the next #adani,” raising the prospect of the project becoming a major climate battleground.

Schubert is waiting on the territory to finalise its code of practice before submitting Origin’s environment plan, but he’s confident work will get underway this year. Origin’s partner Falcon in January announced a contract had been signed with Ensign Australia to use the giant Rig 963, with plans to drill wells up to 2 km deep.

Further drilling will likely be required to prove that Beetaloo is commercially viable, but Schubert predicts the deposits of liquids-rich gas will be some of the most competitive in Australia, with plenty extra for export.

“This is a very significant resource for Australia,” he said. “People do have the right to be excited.”

READ MORE STORIES ON CLIMATE CHANGE

Source: Read Full Article