Revenue sharing will ignite gas production

One of the major surprises of the energy debate in Australia is that both the South Australian Labor Premier, Jay Weatherill, and National Party leader, Barney Joyce, managed to agree on a sensible policy.

That policy, involving handing farmers a slice of the royalties on gas extracted from underneath their land, may transform the present blame shifting of the debate into a discussion about what to do with all the cheap gas – if it is ever adopted.

As matters stand Victoria intends to permanently ban further onshore gas development. In NSW exploration is now permitted after a freeze, but green groups and some farmers stridently oppose development of any gas well, claiming that the wells will damage farmlands and the environment. This opposition borders on the irrational with green groups pointing to supposed problems with hydraulic cracking (fracking) in the US to justify their opposition, although fracking had yet to be used much at all in Australia.

Fracking involves pumping material down a well to force apart fractures in rocks to release oil and gas. Explorers in NSW want to look for coal seam gas, which are deposits of gas generated by coal deposits. This is not in the same league as fracking but still involves the extraction of ground water of doubtful quality which then has to be treated, and so is considered unconventional (as it not from the usual reservoir) and invasive.

That is enough excuse for green groups and farmers to brush aside evidence that CSG extraction is now a $70 billion industry in Queensland having started in the early 1990s, without any noticeable destruction of the environment or reduction in agricultural output, and a 2014 report by NSW state chief scientist Mary O'Kane. The report found that there were no undue risks provided there were adequate safeguards and regulation.

But while farmers and activists in Australia chain themselves to gas project equipment, gas and oil production in America which involves the extensive use of the dreaded fracking, has boomed (again, with no noticeable effect on agricultural production). Gas prices have fallen to the point where it is pushing out coal as the major feed stock for the country's electricity grid. (Coal workers disgruntled by this trend voted for Trump, but the new president can't do much about the price of gas.)

Yet farmers in America are just as belligerent as those in Australia, as well as better armed, the land is more densely settled and there are plenty of major cities filled with green activists only too happy to take a bus out to disrupt major projects. Why the difference?

Part of the answer is in the legal system. In the US, land owners also hold the mineral rights for whatever is underneath the surface. When frackers come calling the farmers get a decent share of the revenue which, to judge from the occasional story in the US media, can add up to life-changing amounts. In Australia, the state governments hold the mineral rights, and collect royalties on behalf of the community. This means farmers get nothing, except when their land is used for gas wells.

This was not a problem when the CSG industry became established in Queensland as there is more leasehold land, which allows for different uses, but also because the technological breakthroughs that permitted fracking had not occurred. That meant activists had not worked themselves into a lather about it, or alarmed farmers over the tangentially related technology of CSG extraction.

Now it is a problem and is beginning to affect community attitudes in Queensland, but if farmers were allowed, say, half of the royalties from a project (Weatherill is proposing 10 per cent), then they will quickly realise that their environmental "concerns" are marginal. Activists hoping to disrupt projects may find themselves staring down the barrels of well-used shotguns.

Such a change may well mean much more gas, but not the same cornucopia as the US. Besides coal seam gas there are still conventional gas reserves such as the Browse field off the North West coast and major formations where fracking could be used to greatly boost energy extraction. The problem is that they are all so remote that the economics don't stack up and probably won't for some time.

In America, the geological formations being exploited are underneath well settled areas with an extensive network of pipelines to deliver gas to someone who wants to buy it. In some cases, the wells are close to electricity generators.

A 2013 report by the US Energy Information Administration which looked at potential production from fracking in other countries pointed to a number of formations in Australia with just as much potential as those in the US and Canada. The most prospective to these, as judged by the EIA, included the Cooper basin well out in South West Queensland, partially in South Australia, which already has a lot of conventional oil and gas development.

Another huge area is the Canning basin which is North West Australia which has been assessed and drilled over many years without anyone starting production. It is very remote.

A more likely bet for development is the Perth basin north of Perth which has handy access to pipelines and the Maryborough basin on the coast North of Brisbane. However, the Perth basin pipes only connect to Perth and WA has enough gas for the moment. The big LNG plants that compress gas taken from CSG wells for shipment overseas are well to the North. As of last year, the Maryborough basin was rated as largely unexplored, but again there is no handy, existing infrastructure for moving the gas.

Even the conventional Browse offshore field is on the other side of the continent from most of the major population centres, and a long way even from the LNG trains of the North West shelf. The closest town of any size is Broome.

In early 2016, Woodside announced that it would shelve plans for a $40 billion floating LNG plant, due to cost pressures and poor commodity prices. An earlier plan for an onshore plant at James Price Point was scrapped due to cost problems and the ever present, activist opposition to development of any kind.

Despite continually protests and the cost issues of remote locations, the Queensland government is still releasing areas for exploration, albeit out in the west where activists are less likely to bother the explorers.

To ramp up production in Queensland, where most of the CSG action to date has occurred, and unlock gas development in NSW we need a game changer, which may mean letting farmers take a share of the revenue. Then watch production explode.