Comet Ridge is pushing to move ahead with development of its Mahalo gas projects
Key work progressing on the Mahalo JV project
Development decision on Mahalo North is expected after EPBC approval from Canberra
Special Report: With Australia’s east coast facing a severe structural gas shortage expected to worsen in years ahead, ASX-listed Comet Ridge’s Mahalo gas projects in Queensland will help ease the looming crisis.
In its 2024 Gas Statement of Opportunities, the Australian Energy Market Operator forecast that eastern Australia could experience shortfalls on extreme peak demand days from 2025 and small seasonal supply gaps from 2026. We saw a large spike in Victorian spot gas prices only a few weeks ago, with the onset of what appears to be a cold winter.
Shortfalls in gas supply could lead to load shedding – the controlled reduction of electricity supplied to homes and business – during periods of peak demand from 2028. However, commentators and consultants are warning that the trouble could start much earlier.
Speaking to Stockhead, Comet Ridge (ASX:COI) Managing Director Tor McCaul blamed the spectre of intra-day gas shortages in the southern states on the delay of new project approvals.
“There isn’t really much unconnected 2P (proved and probable) gas available on the east coast. Santos has got Narrabri, that they would like to develop, but they have been fighting that battle for over a decade. Then you have the Victorian government with a formal ban on natural gas while NSW has an informal moratorium,” he noted.
McCaul added that the Federal Labor Government’s decision in late 2022 to introduce a $12 per gigajoule (GJ) price cap only served to put a freeze on investment due to the uncertainty created for both buyers and sellers.
“By late February 2023, the government had realised that it had made a terrible mistake and then by July came out with the new policy and by September smaller companies were exempted as long as they produced gas for the domestic market, and there’s a massive domestic market,” he noted. “For renewables to work, they need a very large volume of more reliable gas backup. Otherwise, the lights go out.”
“In fact, the $12/GJ cap has become the $12/GJ floor. By government putting a line in the sand, it said to the market that $12 is a fair price so we are seeing a lot of gas priced above that level now as demand tightens further. I have never understood how someone thought regulating price was going to increase supply.”
This is coupled with rising demand for gas with the Government’s Safeguard Mechanism, which requires the biggest 215 CO2 emitters to reduce CO2 emissions by 4.9% per year. That has pushed some manufacturers using both gas and coal to look for more gas. It’s become the sole practical solution for operating businesses to cost-effectively reduce their emissions.
McCaul says there is an over-focus on gas in the energy mix for electricity generation, however about 70% of the domestic consumption of natural gas around the east coast is for manufacturing.
“You need gas for fertilisers, glass, bricks, plasterboard. People talk about a housing crisis, but you need enormous amounts of gas to build the inputs for housing.”
The uncertainty has also meant a change in how long gas sales contracts are for.
Rather than contracts that last for 5-15 years, few deals last more than one to two years.
“What we are seeing is a lot of one or two year, stop gap sort of contracts, but there is so much uncertainty around where prices are going, people don’t want to lock in for too long,” McCaul added.
“There is a lot of chatter about LNG import terminals, but prices appear to be very high and customers seem to be standing back unwilling to sign up. The cheapest gas into the market will always be our own natural gas.”
“It is likely to be the new normal for a while. While the uncertainty reigns, people feel better to contract for smaller lots and for shorter terms.”
Positioned for success
While Victoria and NSW have fundamental issues that prohibit them from developing new gas projects, McCaul believes the opposite is true for Queensland where its Mahalo projects are located.
“Queensland is one of the few jurisdictions that’s good to be active in because it has good governance, support and people generally understand the use of gas,” he said.
“There’s a drive in Queensland to generate at least another 1000MW (1GW) of gas-fired power generation to support renewables.”
This expected increase in gas-fired generation has also led to a corresponding interest in securing more gas supplies.Despite these advantages, the company’s projects in Central Queensland were bogged down for several years due to a complicated joint venture structure.
“When we farmed into the Mahalo gas project initially, we were a 40% equity holder with Santos 30% and Oil Company of Australia at 30%. OCA subsequently became part of Origin Energy and then APLNG,” McCaul said.
“We had a complicated joint venture, so during COVID in 2020 we started the process of buying APLNG’s equity and got that done in the middle of 2022.
“That simplified the joint venture to Santos – the new operator at 42.86% equity – and Comet Ridge (57.14%).
“Concurrently with this, we won three new blocks from the Queensland Government – Mahalo North, Mahalo East and Mahalo Far East – across the northern part of Mahalo and more recently were awarded a fourth block (the Mahalo Far East Extension block), all of which we hold at 100%.
“We have got a really big position. We have 989km2 in the Mahalo JV with Santos, and about another 960km2 held 100% by Comet Ridge.”
The Mahalo tenements. Pic: Comet Ridge
This large acreage position is accompanied by valuable reserves and resources with the company’s share of proved and probable reserves – the figure often used for investment decisions – totalling 195 petajoules. Best estimate contingent resources – considered to be potentially recoverable – total an additional 211PJ. This gives a 2P + 2C of 406 PJ.
“We have a big area, we are in the right spot, we have got an experienced JV partner in Santos, but we have also got a big volume of gas in our own right,” McCaul pointed out.
Gas development
COI’s Mahalo projects have also proven they are capable of commercial gas flows with three successful pilots carried out on the high-quality fairway with the latest, Mahalo North-1, flowing 1.75 million cubic feet of gas per day.
McCaul said the pilots proved the Mahalo project’s ability to produce gas, which was a key indicator of its quality.
Along with the size of the resource, it is certainly enough for the company to push ahead with the development of its own Mahalo North block.
“We are doing our engineering work on that right now. Fortunately, when you have a gas stream that is almost purely methane and with only really trace amounts of CO2 and nitrogen, the engineering is very simple. It is just dehydration and compression,” McCaul explained.
“We will rent a small reverse osmosis unit, which will take the little bit of salt out of the produced water, then we can supply the water to the local landholders for stock (cattle) use.
“Then we run the gas through the dehydration column to get the moisture out prior to compressing to pipeline requirements as required.”
The Jemena pipeline front-end engineering and design study and Santos FEED will begin soon on the main Mahalo development, which should run for a number of months.
“Then we have FID to make on the Mahalo North project and the Santos operated project to lead us into gas production. We will then look at gas from the northern block going to the western pipeline option or via the main Mahalo project” McCaul added. “This is subject to timing around our environmental approval for Mahalo North, which can sometimes be difficult to schedule.”
Combined, these Mahalo projects could provide between 85MMcf and 90MMcf (85-90TJ) of gas per day into the broader market, about 60-65% of which will be net to COI.
“We have a data room open at the moment to facilitate development funding and see if we can do that through a sell down of some of these assets where we can get a carry through into production,” McCaul said. “Or potentially a more corporate level deal. The key is to get best value for our shareholders.”
Initial development at Mahalo North will see the company drill 4-6 new wells and connect these (and Mahalo North-1) into one of the two pipeline options.
This focus on the Mahalo projects has also meant that the company’s Galilee Basin gas assets will remain on the shelf for now, with McCaul confident they will have their day in the sun.
The Mahalo North block. Pic: Comet Ridge
Recent activity and upcoming work
COI recently won a $5m grant from the Queensland government, which it will apply to a pilot test on Mahalo East where drilling will commence in October.
Pilot testing will then follow and will take a number of months given the coal reservoir is brought online initially producing only water, then transitioning over to gas flow as the pressure in the coal reservoir is reduced steadily.
The Company also expects to have the first environmental approval for Mahalo North from the Queensland Government imminently, with the separate federal environmental approval (EPBC) to follow later.
“In terms of development applications, in October 2023 we split the Mahalo North block into two and applied for development of the bottom half first. Then we applied to develop the northern half at the end of April 2024,” McCaul said. These processes are both ongoing.
“The bottom half of Mahalo North, PLA1128, is where we are expecting state environmental approval soon whilst we continue to work on the federal EPBC approval. In Australia at the moment, there are certainly a lot of steps to work through to get any project online, which is adding to the forecast east coast gas crisis.
“Things are coming together for us. The ingredients are there for a very strong year or two for us going forward.”
This article was developed in collaboration with Comet Ridge, a Stockhead advertiser at the time of publishing.
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.
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