British gas launches £9bn project to liquify gas from coal

The company's biggest investment to date, is the first of a series of 'coal seam methane' initiatives in eastern Australia

BG Group will spend £9.3bn on the world's first project to liquify and ship business gas produced from coal deposits, the natural gas company's biggest ever investment, it was announced today .

The 20-year Queensland Curtis scheme is the first of a clutch of "coal seam methane" projects in eastern Australia to get the go-ahead, and will underline Australia's growing importance as a supplier of natural resources to South East Asia. It will involve building a 540km underground pipeline in Queensland which will link the gas producing coal deposits to a new terminal near Gladstone, on the east coast, which will liquify the gas for export by tanker.

BG will give more details when it reports third quarter results tomorrow. An 11% year on year increase in net income to $866m is forecast. BP is also reporting its delayed third quarter results tomorrow. Analysts expect that the ongoing costs of the Deepwater Horizon disaster will result in a slight fall in profits, compared to an 88% rise reported by Shell last week.

The BG project is scheduled to begin operation in 2014, producing 8.5m tonnes of liquified natural gas (LNG) each year initially, equivalent to one 10th of the gas consumed in the UK.

State-owned China National Offshore Oil Corporation (CNOOC) has signed the biggest supply contract with BG, and will buy 3.6m tonnes of LNG each year for 20 years. CNOOC will also take a 10% stake in the first phase of the project and invest with BG to build two new LNG cargo ships in China to be used in the project.

The Australian government finally sanctioned the Queensland Curtis project last month, along with a rival project near Gladstone put forward by a joint venture between Santos, Petronas, and Total.

BG chief executive Frank Chapman said: "The decision represents the realisation of a pivotal strategic objective for BG Group – to further the globalisation of our LNG business by establishing a new and material source of equity LNG in the Asia-Pacific arena. Today's sanction is also a significant milestone on the road to delivery of the group's growth agenda over the decade ahead."

The process of producing gas from underground coal seams has attracted opposition from some environmentalists and farmers in Australia over concerns that it will pollute the water table in a country already facing severe water shortages. Vast amounts of trapped salty water are released along with the gas when the coal seams are drilled into. At the peak of production in 2014, BG estimates that 190m litres of water will be released each day.

BG will build two large desalination plants to treat the water. It has also promised to monitor groundwater and compensate owners of bore pipes if the volume or quality deteriorates. Some 300 conditions have been set by the federal government for both projects, mostly concerning the protection of groundwater.

Technology improvements allowing coal seam gas to be converted into LNG, and a burgeoning market for LNG gas, particularly in Asia, has made such projects more attractive. In July, Australia's coal seam gas company Arrow Energy agreed to a £2bn takeover by Shell and PetroChina. Analysts at Merrill Lynch said they expected the market for LNG will become tighter after 2012 as demand rises, which could justify BG's latest move.

2nd November, 2010

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