Small companies must think big, but I have never come across one that is thinking any bigger than oil and gas explorer Central Petroleum.
Last month, the company announced it would look for partners to convert a deep underground coal discovery into synthetic gas and then into synthetic oil. Its announcement in June said that if it was successful it would “help Australia become self-sufficient in liquid transport fuels, a national security imperative”. It also said “Australia could indeed become an exporter of liquid fuels”.
Using underground coal gasification (UCG) technology, Central Petroleum said that in five to six years it wanted to be in a joint venture that produces 60,000 barrels of oil equivalent a day, and then ramp that up to 3 million barrels a day. The proposed mine life would be (wait for it) 150 years – and all for a cost of $7.5 billion. Not much when you consider that, before costs, the ramped-up production rate would rake in more than $47 billion a year at the current oil price.
In the next five years Australia's oil import bill is expected to almost double from $16 billion to $30 billion, so it's possible Australia's many politicians and economists will be following this company's progress. Amazing stuff.
Let's look at where Central Petroleum (ASX: CTP) is today. Since it listed in 2006, this is a company that has constantly run out of money and now has almost a billion shares on issue. At 6 cents, its market cap is $61 million and it holds under $10 million in cash.
The company issues about two ASX announcements a week with more geological references than 99.9 per cent of punters' minds can handle. But it also happens to own the exploration rights over a massive amount of land in the centre of Australia - in the vicinity of 270,000 square kilometres.
While exploring, it stumbled onto an extraordinary amount of coal, which it thinks is in the region of 150 to 300 billion tonnes. The catch is it sits 150 metres or so under the ground.
This is the kind of find that represents zero value to many because of its depth. But a newly formed group called Allied Resource Partners, run by ex-mining engineer-fund manager-Fat Prophets director David Shearwood, thinks otherwise. His firm has been engaged by Central to take charge of the project, which means finding the money ($300 million for a bank feasibility study and then $7.5 billion for the stage 1 development).
There are many risks in this process, but from Central's perspective, there are not many. It is simply granting a sort of “free option” on an asset that the market currently views as worth nothing.
As its managing director John Heugh says: “We're essentially an oil and gas explorer … we are looking to someone else to monetise the coal.”
It will be interesting to see whether Central Petroleum's coal changes Australia's energy inventories.
UCG under the microscope
Proponents of underground coal gasification cite its successful use in Uzbekistan and Chinchilla, Queensland by ASX listed Linc Energy (LNC), which has a market cap of $1.4 billion.
Historically, it has been used by groups cut off from oil supply, namely the Nazis in Germany and Apartheid South Africa. In these situations, the coal was liquefied after it was dug out of the ground.
These days, some (probably investors in the technology) are describing it as the next big thing in energy because there is no physical mining of coal, which reduces personnel, costs and the physical impact on the landscape. In short, it seems to tick a lot of environmental boxes and can be used for power generation, as well as chemical feed and liquid fuel.
In reality, the conversion of what could be described as a marginal coal deposit into gas, let alone a liquid form, is a “holy grail” for gas companies, according to Johan Hedstrom, an energy analyst with Bell Potter.
“It's a nice concept, but has not been commercially proven,” he said.
Hedstrom said that there are specific conditions that need to be in place that cannot be controlled to make synthetic gas. That means the right mix of methane, nitrogen, carbon dioxide, and carbon monoxide. Clearly it is not a simple process.
This month, Queensland's Department of Environment and Resource Management (DERM) laid charges against Cougar Energy (ASX: CXY) after a gas well ruptured at a site south of Kingaroy where the company was trialling UCG technology. The company is alleged to have contaminated the ground water.
Cougar's shares now trade at less than 2 cents, having traded at 8 cents 12 months ago.
One small cap that has also been suffering a big decline in value is Carbon Energy (ASX: CNX) whose UCG operations in Australia are located in Queensland's Surat basin. At 23 cents its shares have declined almost 40 per cent in the past six months. Possibly its decline is more a reflection of being lumped in with Cougar.
But this company's prospects seem considerably brighter. Carbon Energy has survived an eight month investigation into its processes and its UCG plant has been running for three months. The company believes that its plant will be connected to the power grid by October (after several delays), which means it will be able to start generating revenues.
Bell Potter's valuation of 66 cents reflects that it is new technology, but also Carbon Energy's potential, which is what you are looking for in a small cap. It has six operations – one in Australia, one in Chile, two in the US, one in India and one in Turkey.
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