268 JPM Csg1

Asia Pacific Equity Research
30 November 2010
ESG and the Energy Sector

Water Concerns: QLD Coal Seam Gas Developments
Report Summary
Water, Water Everywhere…Few Drops to Drink? Australia

AC
Garry Sherriff
(61-2) 9220-1502
garry.sherriff@jpmorgan.com
Benjamin Wilson
(61-2) 9220-1384
benjamin.x.wilson@jpmorgan.com
Jason Steed
(61-2) 9220-1551
jason.h.steed@jpmorgan.com
J.P. Morgan Securities Australia Limited
See page 28 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision.
Garry Sherriff Asia Pacific Equity Research
(61-2) 9220-1502 30 November 2010
Table of Contents
Executive Summary .................................................................3
Coal Seam Gas and Water Use ...............................................5
The Great Artesian Basin.........................................................8
Surat and Bowen Basins .........................................................9
Six Key Water Concerns ........................................................10
Potential Implications for CSG Companies..........................24
Penalties for Breaching Water Conditions...........................26
Tables
Table 1: Water Types and Total Dissolved Solids.......................................................7
Table 2: Estimated Population - Surat and Bowen Basins...........................................9
Table 3: Summary of Key Water Risks and Risk Management Options ...................11
Table 4: Surat Basin – Type of Water Bores .............................................................13
Table 5: Bowen Basin – Type Water of Bores ..........................................................13
Table 6: Chemicals typically used in Australian CSG fraccing fluids.......................17
Table 7: Preferred Water Management Options – Queensland Government.............20
Table 8: Non-Preferred Water Management Options – Queensland Government.....21
Table 9: Salt and Brine Waste Management Preferences ..........................................21
Table 10: Analysis of Water Management Options ...................................................22
Table 11: Examples of Maximum Monetary Penalties from Water Breaches ...........26
Figures
Figure 1: Typical CSG Extraction Process ..................................................................5
Figure 2: Estimated Number of QLD CSG Wells........................................................6
Figure 3: Estimated % Water Volumes Extracted .......................................................6
Figure 4: Water Extraction vs Gas Production ............................................................6
Figure 5: Aerial Photo of CSG Fields ..........................................................................7
Figure 6: The Great Artesian Basin .............................................................................8
Figure 7: Cross-Section of the Great Artesian Basin ...................................................8
Figure 8: Location of the Surat and Bowen Basins......................................................9
Figure 9: Key Water Concerns...................................................................................10
Figure 10: Potential Water Movement in Aquifers from Changes in Water Pressure12
Figure 11: Location of Existing Water Bores in the Surat Basin ...............................13
Figure 12: Water Bores in QCLNG Gas Fields .........................................................14
Figure 13: Condamine Alluvium May Drain into Underlying Coal Seam ................15
Figure 14: Example of Hydraulic Fracturing Process................................................16
Figure 15: Surat Basin ...............................................................................................18
Figure 16: Bowen Basin.............................................................................................18
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Executive Summary
The proposed coal seam gas (CSG) developments in Queensland’s Surat and Bowen
Basins have sparked public debate regarding the potential water impacts from CSG
drilling activities.
We identify the key water concerns raised by various groups and discuss the
strategies the major CSG players (Santos, Origin, BG and Shell) have employed to
address these concerns.
We spent two days visiting gas fields, irrigators, landowners and community groups
in Queensland’s Surat Basin to gain on the ground insights into the area’s water
concerns. As part of our research process we also spoke with the key CSG players,
relevant State and Federal Government Departments, law firms and water experts.
Six Key Water Risks

Our analysis identified the following key water risks associated with the proposed
CSG development activities:
1. Risk of reduced water supply to landowners and regional townships.

2. Risk of reduced water quality from cross contamination of water tables.
3. Risk of reduced water quality from drilling chemicals contaminating water.
4. Risk of gas migrating from gas fields to existing water bore wells.
5. Risks on how to treat, store and dispose of saline water, brine and salt brought to
the surface during CSG drilling activities.
6. Unknown cumulative water impacts from multiple CSG developments.
Potential Company Implications

We highlight possible implications for CSG players should any of the key water risks
we have identified above materialise and seriously impact public health, safety or the
environment:
• Potential project cost increases
• Potential future Government intervention
• Potential changes to regulation over time
• Potential disruption to long term gas supply contracts
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Key Proposed CSG Developments in Queensland

Currently there are four major proposed CSG to LNG developments in Queensland
which have been approved or are in the process of being approved:
• Origin Energy and ConocoPhillips’ Australia Pacific LNG Project (APLNG)

• Santos, Petronas and Total’s Gladstone LNG Project (GLNG)
• BG Group’s Queensland Curtis Island Project (QCLNG)
• Shell and PetroChina’s LNG Project (Arrow)
Each of the proposed CSG developments have been declared a ‘significant project’
by the Queensland Coordinator General for which an Environmental Impact
Statement is required in accordance with the State Development and Public Works
Organisation Act 1971 (Qld). The Commonwealth Government also requires an
Environmental Impact Statement under the Environment Protection and Biodiversity
Conservation Act 1999 (Cth).
The Environmental Impact Statement process occurs under a bilateral agreement and
addresses matters on behalf of both the Queensland and Australian Commonwealth
Governments. The process is coordinated by the Queensland Coordinator-General.
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Coal Seam Gas and Water Use

What is Coal Seam Gas?
Coal Seam Gas (CSG) is a natural gas consisting of around 98% methane and is
Coal seam gas is primarily
formed from the degradation of plant matter over millions of years. CSG is trapped
methane
by water and ground pressure against the surface of coal in underground coal seams
and is also located within pores inside the coal. The spaces between the coal are
known as fractures or cleats. Some of the fractures are interconnected and permeable
which allows water and gas to move between the fractures.
How is CSG extracted?

Economic extraction of coal CSG is extracted via CSG wells that are drilled into the coal seams to release the gas
seam gas typically occurs trapped within the coal. For economic extraction of CSG, coals seams in Australia
at depths of 200m to 1,000m
are generally between 200 metres – 1,000 metres deep. The CSG wells are cased
with steel and cement to prevent loss of water from aquifers above the coal seam. An
aquifer is a seam of permeable rock such as sandstone that holds water.
In situations where coal seams are very deep and of low permeability, the use of
hydraulic fracturing or ‘fraccing’ may be employed to increase permeability. This
process involves pumping fluid comprising water, sand and other additives at high
pressure down the cased CSG well and into the coal seam. This action fractures the
coal seam and provides a pathway to facilitate gas flow through the coal.
Water flows to the surface Why does underground water rise to the surface?
unaided or is pumped out To extract CSG requires the coal seams to be depressurised by releasing the gas and
if the pressure within the
coal seam is low
associated underground water in the fractures of the coal seams to the surface. The
underground water is released as a byproduct of the CSG extraction process. The
depressurisation process affects the water levels in coal seams and can potentially
affect interconnected aquifers above (overlying) or below (underlying) the coal seam.
This is a key reason for why CSG extraction can affect water supply to water bores in
areas surrounding CSG extraction wells.
Gas and water in the coal seam Figure 1: Typical CSG Extraction Process
is usually separated at the
CSG well head
Source: Queensland Department of Environment and Resource Management
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CSG Water Volumes and Gas Extraction

Approximately 450 gigalitres of underground water is extracted from the entire Great
Between 125 and 350 gigalitres Artesian Basin per year for domestic, agricultural and industrial purposes 1.The CSG
of water per year are expected activities in Queensland’s Surat and Bowen Basins alone are estimated to extract
to be extracted from the Surat between 125 - 350 gigalitres of water per year over the coming 20 to 30 years2. This
and Bowen Basin’s from CSG
equates to an additional ~30% - 80% of current water volumes being extracted from
activities over the next
20 to 30 years the GAB per annum solely from CSG activities.
The water extraction volumes are based on an estimated 25,000 to 30,000 CSG wells
in Queensland over the next 20 years to 30 years. Currently there are approximately
3,000 wells in Queensland. The estimated percentage of CSG water volumes over
the next 20 to 30 years are approximately 60% for the Bowen Basin and 40% for the
Surat Basin.
60% of estimated future CSG Figure 2: Estimated Number of QLD CSG Wells Figure 3: Estimated % Water Volumes Extracted
water extraction volumes will be
from the Bowen Basin with the 40,000
remaining 40% from the Surat 30,000
Basin 30,000 Surat
Basin
20,000 40%
10,000
3,000 Bow en
Basin
-
60%
Currently Estimated
nex t 20 y ears
Source: Queensland Department of Environment and Resource Source: Queensland Department of Environment and Resource
Management Management
Higher volumes of water are

An inverse relationship exists between water extracted and gas produced. As coal
released in the early stages seams are dewatered, the volumes of water pumped to the surface generally
of CSG extraction before decreases over time and gas flow production increases per Figure 4.
tapering off over time
Figure 4: Water Extraction vs Gas Production
Source: Santos GLNG Water Management Strategies
1
Department of Environment and Resource Management
2
Department of Environment and Resource Management; Basin Sustainability Alliance
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CSG Water Quality

CSG water typically contains CSG water typically contains high concentrations of salts and naturally occurring
high levels of salt which is minerals. CSG water generally has a high sodium adsorption ratio and could contain
unsuitable for drinking or other contaminants. Due to the high saline content of CSG water it could cause
irrigation purposes without environmental harm if released to soil or surface waters untreated. Table 1 shows the
treatment
typical concentration levels of dissolved solids in various water sources.
Table 1: Water Types and Total Dissolved Solids

Water Source Total Dissolved Solids Parts per Million
Rainwater 15–22
Desalinated water 180
Brisbane tap water 240
Amended associated water 2,650
Saltwater swimming pool 6,000
Average CSG water 300–8,000
Seawater 35,000
Brine More 40,000
Source: Santos GLNG Water Management Strategies Queensland Department of Environment and Resource Management
Operation of CSG Fields

CSG production wells are usually spaced approximately 500 metres to 1,000 metres
apart in a matrix or grid pattern. Production wells are connected by underground
water and gas pipelines known as ‘gathering systems’. The gas and water is piped to
a processing facility where the gas is compressed at a central compressor station
before being distributed to customers via a high-pressure pipeline. The water is
usually stored in water storage reservoirs or containment ponds which are lined to
prevent seepage. Water treatment plants utilising reverse osmosis technology are also
used to treat some of the water and distribute for beneficial use.
Figure 5: Aerial Photo of CSG Fields
Source: Basin Sustainability Alliance
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The Great Artesian Basin

The Great Artesian Basin Much of the CSG development activities lay above the Great Artesian Basin (GAB).
covers over 20% of The GAB is one of the largest underground water reservoirs in the world and covers
Australia’s land mass
most of inland Queensland, parts of New South Wales, South Australia and the
Northern Territory per Figure 6.
The GAB covers an area of over 1.7 million square kilometres or ~22% of
Contains water volumes Australia’s land mass and is estimated to contain around 65 million gigalitres of
equivalent to around water equivalent to around 130,000 Sydney Harbours or 26 billion Olympic sized
130,000 Sydney Harbours swimming pools3.
The GAB consists of a series of alternating permeable sandstone layers and

impermeable siltstone and mudstone layers. Water is trapped under great pressure
Recharge areas are mainly within the permeable sandstone layers. The GAB is recharged with rainfall where
located around the western side permeable sandstone is exposed above ground and is mainly located along the
of the Great Dividing Range western edge of the Great Dividing Range. The general flow of water in the GAB
flows from east to south-west.
Water bores tap the aquifers in the GAB with average bore depth of around 500
metres, however some water bores are drilled to depths of 2,000 metres. Some water
GAB aquifers are used as a bores are free flowing while others require pumps to bring water to the surface. The
source of water supply for aquifers of the GAB are an important underground water supply providing vital
agricultural, domestic and
industrial purposes
water to overlying regions for stock, domestic, urban and industrial use, often in
areas where there is no alternate water supply source.
Figure 6: The Great Artesian Basin Figure 7: Cross-Section of the Great Artesian Basin
3
Water Matters – Issue 4, May 2009. Commonwealth Department of Sustainability,
Environment, Water, Population and Communities.
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Surat and Bowen Basins

The CSG tenures and development activities in Queensland occur in the Surat and
Bowen Basins. These areas currently have a population of ~140,000 people4.
Around 140,000 people live Table 2: Estimated Population - Surat and Bowen Basins
in the Surat and Bowen Basins
Geographical Area Estimated Population
Surat Basin 46,000
Bowen Basin 94,000
Total 140,000
Source: Queensland Department of Infrastructure and Planning; Office of Economic and Statistical Research
Surat Basin
Some aquifers in the Surat Basin The Surat Basin in southern Queensland stretches from the Western Downs near
connect with the GAB Dalby and extends as far as Roma. Generally the coal seams in the Surat Basin are
striated and not continuous. The aquifers of the Surat Basin are connected to the
GAB. BG (QGC), Origin (APLNG), Santos (GLNG) and Shell (Arrow) have
tenures for CSG developments in the Surat Basin area.
Bowen Basin
Most of the aquifers in the The Bowen Basin stretches north of the Surat Basin beyond Roma into central
Bowen Basin do not connect Queensland up as far as Rockhampton. The Bundana coal seam is the main coal
with the GAB
seam in the Bowen Basin and is a more continuous, solid seam of coal. The Bowen
Basin lies below the GAB and is not connected to the major GAB aquifers (however
the Bowen Basin does touch the precipe sandstone in some areas). Santos (GLNG),
Origin (APLNG) and Shell (Arrow) have tenures for CSG developments in the
Bowen Basin area.
Figure 8: Location of the Surat and Bowen Basins

BG only operates in the Surat
Basin while Santos, Origin and
Arrow have tenures in both the
Bowen and Surat basins
Source: Origin APLNG
4
Queensland Department of Infrastructure and Planning; Queensland Office of Statistical
Research.
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Six Key Water Concerns

Water concerns from
Various groups including Government, agricultural landowners and community
multiple stakeholders groups have raised concerns regarding potential water risks from CSG activities in
Queensland. In this section we identify and discuss the six key water concerns
regarding the proposed CSG developments in Queensland’s Surat and Bowen basins
(Figure 9).
Figure 9: Key Water Concerns

1.
Reduced water supply to
landowners and townships
6. 2.
Cumulative water Reduced water quality
impacts from multiple from water table
CSG developments cross contamination
Key Water
Concerns
5. 3.
Treatment, storage and Reduced water quality
disposal of saline water, from drilling chemicals
brine and salt contaminating water
4.
Gas migration to
water bores
Source: J.P. Morgan Research and Analysis
Site visit
We visited Queensland gas We spent two days visiting gas fields, irrigators, landowners and community groups
fields for two days to meet with to gain on the ground insights into the area’s water concerns. We met with various
agricultural landowners and
community groups
groups including the CEO of the Queensland Murray Darling Committee, the
Chairman of the Central Downs Irrigators, the CEO of the Basin Sustainability
Alliance, members of the Western Downs Alliance and agricultural property owners.
Multiple Data Sources

Directly obtained information We spoke with several Queensland Government Departments and reviewed
from CSG companies, numerous documents including the Environmental Impact Statements (EIS)
Government Departments, water submitted by the Santos, BG and Origin joint ventures; the Co-Coordinator General's
experts and agricultural groups
EIS Evaluation Reports and the Federal Government’s environmental approvals and
associated conditions. We also reviewed documents published by hydrologists,
agricultural groups and the major CSG producers.
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The predicted large volumes and variable quality of CSG water mean water
management is critical. The amount of water extracted varies from basin to basin and
also over the life of individual CSG production wells. Strategies for management
and beneficial use are dictated by water quality and quantity at each CSG
development site. Table 3 summarises the key water risks and management options
based on our analysis.
Table 3: Summary of Key Water Risks and Risk Management Options
Key Water Risk Details Risk Management

1. Loss of water supply to As coal seams are dewatered, the change in water pressure may result • Steel cased CSG wells with concrete seals.
• Regular groundwater testing and monitoring.
landowners and townships. in overlying aquifers draining over time into coal seams below. Water
• Groundwater modelling.
bores accessing water from these overlying aquifers may experience • Reinjection of water back underground.
drops in water levels. Poorly constructed CSG wells which are not • Make good arrangements.
appropriately cased and sealed can also contribute to water loss.
2. Reduced water quality from CSG drilling activities may result in a) one aquifer mixing with water from • Steel cased CSG wells with concrete seals.
• Groundwater modelling.
water table cross another aquifer or b) lower quality water in coal seams entering higher
contamination. quality water aquifers. These events can occur from changes in water • Make good arrangements.
pressure from the dewatering process resulting in movement of water
between aquifers/coal seams or from poorly constructed CSG wells
which are not appropriately cased or sealed.
3. Reduced water quality from Risk of CSG drilling lubricants or fluids used during hydraulic fracturing • Steel cased CSG wells with concrete seals.
drilling chemicals of coals seams entering water sources. This can occur from either poorly
• Treatment and disposal of water used during
contaminating water. constructed CSG wells or from poor disposal of produced water (eg not drilling and hydraulic fracturing.
removing all the produced water from fracced wells or from spilling • Make good arrangements.
produced water onto land or surface waters).
4. Gas migration to water bores. Gas can migrate from coal seams to overlying aquifers where a pathway • Regular water bore testing and monitoring.
• Appropriately constructed water bores.
exits. The process of gas migration usually occurs in areas at a distance
• Make good arrangements.
from the CSG well where depressurisation is lower. As such the gas
does not flow at high pressure to the surface and instead migrates away
from gas fields through natural geological pathways or via artificial
conduits such as man-made water bore wells.
5. Treatment, disposal and CSG water brought to the surface is typically highly saline and not • Regular groundwater testing and monitoring.
• Reverse osmosis treatment for beneficial use.
storage of CSG water, brine suitable for agricultural or domestic purposes. The CSG water can be
• Reinjection of water back underground.
and salt. treated to produce high quality water however the residual waste, known • Containment ponds.
as brine, is a highly concentrated saline mixture. • Licensed disposal facility.
• Pipe to marine waters.
6. Cumulative impacts from Cumulative water impacts from multiple CSG developments occurring • Development of a regional-scale groundwater
flow model from both private and public sector
multiple CSG developments. are currently difficult to accurately model.
sources.
Source: J.P. Morgan Research and Analysis
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1. Reduced water supply to landowners and townships

Landowners and townships within the development areas are concerned about the
possible reduction of water supply and the impact on underground water resources as
a result of CSG activities. Particular concern surrounds potential impacts on:
• Shallower, high quality groundwater reserves such as the Condamine Alluvium

in the Western Downs located west of Toowoomba.
• Deep water aquifers forming part of the Greater Artesian Basin which sit
below large areas of the proposed CSG development areas.
How could water supply be reduced?

Changes in water pressure and The water levels tapped by existing water bores could be reduced as a consequence
the permeability of aquifers of the depressurisation process as water is extracted during CSG activities. As coal
and confining layers can impact
underground water sources
seams are dewatered, the flows and the storage of water in aquifers could be affected
by a reduction in hydrostatic pressure.
The risk is water pressure changes as coal seams are dewatered may result in
overlying aquifers draining down into the coal seam. Thus water bores which tap
water from overlying aquifers may experience a drop in water levels. Similarly water
in underlying aquifers may move to coal seams above them over time. Figure 10
demonstrates how water could potentially move between aquifers and confining
layers from changes in water pressure as groundwater is removed during CSG
activities.
Figure 10: Potential Water Movement in Aquifers from Changes in Water Pressure
CSG wells
Arrows
represent
water
movement
Source: Department of Environment and Resource Management
Poorly constructed CSG wells Poorly constructed CSG wells which are not steel cased or do not have appropriate
can also contribute to water concrete seals to prevent water from escaping into other aquifers or the coal seam can
supply losses
also contribute to water losses. The steel casing is cemented into place isolating the
surrounding rock from the producing coal seams.
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How many water bores are there in the Surat and Bowen Basins?
There are approximately 7,000 water bores in the Surat and Bowen Basins. The Surat
There are currently a total of Basin contains approximately 5,000 water bores and the Bowen basin contains
~7,000 water bores in the approximately 2,000 water bores5.
Surat and Bowen Basins
Water bore use

The water bores in the Surat and Bowen Basins are mainly used for stock purposes
such as for cattle, sheep, horses etc and for domestic household purposes. Stock
intensive use refers to the use of feedlots such as cattle and dairy farming.
Table 4: Surat Basin – Type of Water Bores Table 5: Bowen Basin – Type Water of Bores
Water bores used for Type of Bore Percentage Type of Bore Percentage
agricultural, domestic Stock and domestic 94% Stock and domestic 97%
and industrial use Stock intensive 3% Other 3%
Irrigation 1% Source: Department of Environment and Resource Management
Town water supply 1%
Other (including mining) 1%
Figure 11 shows existing water bore locations in the Surat Basin.
Figure 11: Location of Existing Water Bores in the Surat Basin
Source: Origin APLNG
5
Department of Environment and Resource Management
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How many water bores are within the proposed CSG development areas?
We contacted each of the major CSG players to obtain estimates of how many water
bores were within or near their Queensland CSG development areas. Only one of the
four major CSG players responded to our information request at the time of
publishing this report. Origin stated it has approximately 600 water bores within its
Walloons development area. Although BG did not provide us with information, the
location of water bores near its QCLNG gas fields are shown in Figure 12.
Figure 12: Water Bores in QCLNG Gas Fields
Source: BG QCLNG Environmental Impact Statement
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2. Reduced water quality from aquifer cross contamination

CSG drilling activities may result in aquifer cross contamination due to changes in
water pressure from the coal seam dewatering process or from poorly constructed
CSG wells. Examples of reduced water quality are where:
a) Water from one aquifer mixes with water from another aquifer or;
b) Lower quality water in coal seams enters higher quality water aquifers.
Lower quality water from coal seams entering aquifers

There is a risk that lower quality water from coal seams may enter aquifers
containing higher quality water. The primary cause of this event is from poorly
constructed CSG wells. As lower quality coal seam water rises to the surface during
CSG extraction the concern is that lower quality water could enter higher quality
overlying aquifers. All the major CSG players have stated they use steel-cased CSG
wells and the wells are appropriately sealed with concrete to prevent lower quality
water from coal seams entering higher quality water aquifers. Therefore we believe
the likelihood of this occurring is low.
Water from aquifers entering coal seams

Water from higher quality aquifers may drain into coal seams due to changes in
water pressure. The Condamine Alluvium in the Western Downs of Queensland is a
shallow, high quality water resource used by irrigators for agricultural farming.
From a water quality perspective this is less of a concern since the coal seams are
receiving higher quality water (ie the water quality in the coal seams is improved).
The risk for CSG players from an operational viewpoint is that water draining down
into the coal seams may affect gas flow production and reduce well productivity.
This may add to the costs of CSG extraction depending on the frequency and severity
of this event occurring.
Figure 13: Condamine Alluvium May Drain into Underlying Coal Seam
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3. Reduced water quality from chemical contamination

Risk drilling chemicals or fluids A particularly contentious issue in the community at present is the risk of chemical
used in hydraulic fracturing may agents and fluids entering water sources. Drilling chemicals used in CSG activities
enter water sources
and fluids used during hydraulic fracturing are the main causes of concern.
Drilling chemicals used during drilling CSG wells consist of lubricants and oils
containing hydrocarbons. Traces of these chemicals can enter underground water
sources during the drilling process. However, much of the recent concern regarding
potential chemical contamination of water is about hydraulic fracturing.
Hydraulic Fracturing
Hydraulic fracturing is typically Hydraulic fracturing or “fraccing” is often used in coal seams which are very deep
used in coal seams with low and of low permeability. Fraccing facilitates the flow of gas from the seam to the
permeability
surface and involves pumping large volumes of fraccing fluid comprised of water,
sand and chemical additives, under high pressure into the coal seam. This action
fractures the coal seam creating pathways to facilitate increased gas flow. The sand
holds the facture open to allow gas and water to flow to the gas well for extraction.
Most of the fraccing fluid is Fraccing occurs hundreds of metres underground and typically takes one to three
brought back to the surface days to complete. The majority of the fluids used in the fraccing process are brought
back to the surface and either recycled for future fraccing treatments, disposed of in
containment ponds or transported to water treatment facilities.
Fraccing fluid is either recycled Figure 14: Example of Hydraulic Fracturing Process
for future fracturing purposes,
stored in containment ponds or
taken to treatment plants
Source: Wall Street Journal, Al Granberg, Chesapeake Energy
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What chemicals are used in hydraulic fracturing fluid?

In the United States BTEX chemicals have been used in fraccing fluids in the past.
BTEX is an acronym for benzene, toluene, ethylbenzene and xylene compounds.
BTEX are highly soluble organic compounds and are a common indicator of
BTEX in fraccing fluids are
petroleum or gas contamination in groundwater. BTEX poses a risk to human health
banned in Queensland
as some of the compounds are known carcinogens and have a tendency to migrate
with groundwater to water supply wells6.
The Queensland Government has banned the use of BTEX and a major Australian
petroleum and gas industry body7 stated that BTEX is not used in Australian CSG
fraccing fluids. Table 6 lists chemicals typically used in fraccing fluids in Australia.
Table 6: Chemicals typically used in Australian CSG fraccing fluids

Chemical Fraccing use Example of common use / found in household products
1-Propanol Complexor Solvent in the pharmaceutical industry
2-Butoxyethanol Reduces surface tension to aid gas flow Whiteboard cleaners, liquid soaps, cosmetics and lacquers
Acetic Acid pH buffer Gives vinegar its taste
Acrylic copolymer Lubricant Soil-repellent coating products in the building industry
Ammonium persulfate Turns gel into water Hair bleach, blot gels and glass cleaning products
Boric Acid Crosslinker to increase viscosity Antiseptic
Boric Oxide Crosslinker to increase viscosity Used to produce high strength alloys, glasses and ceramics
Carbonic acid Crosslinker to increase viscosity Soft drinks, champagne
Carboxy-Methyl Hydroxy-Propyl Guar Thickens fluid to help suspend sand Food products
Crystalline silica (cristobalite) Proppant – holds open fractures Sand and gravel
Crystalline silica (quartz) Proppant – holds open fractures Sand and gravel
Citric Acid Cleaning well bores before fraccing Orange juice
Diammonium Peroxidisulphate Turns gel into water Hair bleach, blot gels and glass cleaning products
Disodium Octaborate Tetrahydrate Gelling agent Fertiliser
Gas oils (petroleum), hydrotreated light vacuum Guar liquefier Baby oil, coolant, thermal fluid, wood conditioner
Fumaric acid pH buffer Food flavouring and to make bread
Gelatine Corrosion inhibitor or gelling agent Jelly
Guar Gum Thickens fluid to suspend sand Food thickening agent
Hemicellulase Enzyme with Sodium Chloride Thickens fluid to suspend sand Commercial food processing of coffee
Hydrochloric Acid Cleaning of the wellbore prior to fraccing Used to clean swimming pool filters
Hydroxy-Ethyl Cellulose Thickens fluid to suspend sand Placebo in medical trials
Hydroxy-Propyl Guar Thickens fluid to suspend sand Food products such as cheese and ice cream
Magnesium silicate hydrate Gelling agent Talcum powder
Methanol Reduces surface tension to aid gas flow Type of alcohol
Mono ethanol amine Gelling agent Cosmetics, pharmaceuticals and emulsifiers
Ethylene Glycol Monobutyl Ether Mutual solvent Household cleaners, fire fighting foam
Muriatic Acid Used for cleaning the well bore Leather tanning and for cleaning
Non-crystalline silica Proppant – holds open fractures Used to make glass
Poly (oxy-1,2-ethanediyl) Proppant – holds open fractures Hair treatments and shampoo
Polydimethyldiallylammonium chloride Clay control Waste water treatment
Potassium Carbonate pH buffer Soap, wine, glass, dyes and as a fire suppressant
Potassium Chloride Clay inhibitor Table salt substitute
Quaternary Polyamines Clay control Waste water treatment
Sodium Acetate pH buffer Primary flavouring in salt and vinegar potato chips
Sodium Borate pH buffer Glass, pottery, and detergents
Sodieum Bicarbonate pH buffer Cooking
Sodium Carbonate (Soda Ash) pH buffer Used to neutralise acid
Sodium Chloride Turns gel into water Table salt
Sodium Hypochlorite with Sodium Hydroxide Antiseptic to eliminate bacteria in water Bleach for household cleaning and swimming pools
Sodium Persulfate Turns gel into water Hair treatments and detergents
Terpenes/terpenoids/sweet orange oil Reduces surface tension to aid gas flow Pharmaceuticals
Tetrakis (hydroxymethyl) Phosphonium Sulfate Antiseptic to eliminate bacteria in water Antiseptic to eliminate bacteria in water and petroleum
Tetramethyl ammonium chloride Clay control A type of salt
Zirconium complex Crosslinker to increase viscosity Alloying agent in surgical appliances
Source: Australian Petroleum Production & Exploration Association
6
U.S. Geological Survey
7
The Australian Petroleum Production and Exploration Association
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How many CSG wells are actually fracced in Queensland?

Around 5% of CSG wells in Since 2000 approximately 5% of CSG wells drilled in Queensland have undergone
Queensland have undergone hydraulic fracturing with an estimated 10%-40% of future Queensland CSG wells to
hydraulic fracturing to date
undergo some form of hydraulic fracturing over the coming 20 to 30 years8.
Fraccing in the Bowen Basin is expected to occur more frequently due to the nature
of the coal seams. Coal in the Bowen Basin is typically deeper underground and the
Around 40% of the Bowen
geological formations of the coal seams are solid and densely packed in part due to
Basin’s CSG wells are expected the increased pressure from being deeper underground than the Surat Basin. This
to be fracced over the coming typically makes it more difficult for the gas to escape from coal seams in the Bowen
20+ years due to the lower Basin and is the primary reason why the Queensland Department of Environment and
permeability of coal in this area Resource Management is forecasting approximately 40% of CSG wells to be fracced
in the Bowen Basin over the coming 20 years or so.
On the other hand the coal seams in the Surat Basin are forecast to only have
Only 5% of the Surat Basin’s approximately 5% of CSG wells fracced over the next 20+ years due to the varied
CSG wells are forecast to be
fracced over the same period
geological formations of the coal seams. The Surat Basin coal seams are more
striated meaning it is easier for the gas to move through the coal and thus fewer CSG
wells are expected to require hydraulic fracturing.
Estimated Percentage of Fracced CSG Wells in Queensland over next 20+ years
Figure 15: Surat Basin Figure 16: Bowen Basin

Fracced
5%
Fracced
40%
Not
Not Fracced
Fracced 60%
95%
Source: Department of Environment and Resource Management Source: Department of Environment and Resource Management
8
Queensland Department of Environment and Resource Management
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Recent Water Contamination Precedents in Queensland

There have been three recent precedents in Queensland relating to concerns about
chemical contaminants entering water sources. The precedents involve companies
undertaking coal seam gas extraction activities.
Origin Energy
Australia Pacific LNG (APLNG) announced in October 2010 the discovery of BTEX
traces in fluid samples in eight CSG exploration wells in the Surat Basin west of
Miles. The samples were taken from exploration wells that had been stimulated by
hydraulic fracturing.
APLNG stated that BTEX is not used in its fracture fluids and its supplier confirmed
the fluids supplied do not contain BTEX. Although the concentration of BTEX
identified was very low and restricted to eight wells, the traces found highlight the
risk of chemicals and fluids entering underground water sources. Sampling
conducted on surrounding landholder water bores did not identify unsafe levels of
BTEX. A detailed investigation including comprehensive testing is ongoing at the
time of publishing this report.
Arrow Energy
Arrow Energy announced in November 2010 that traces of benzene were detected in
three wells in its developments in the northern Bowen Basin. Traces of benzene
were identified in two wells in Moranbah tenure and one in an adjoining exploration
tenement. The traces are the equivalent of between one and three parts per billion.
Arrow stated it has not used benzene or BTEX in its hydraulic fracturing fluids.
According to Arrow there are no registered water bores within five kilometres of the
affected wells and the coal seam water is not used for feedstock. Independent testing
is being undertaken to determine if the traces of benzene are naturally occurring or
entered the water via other means. The company is also testing water bores closest to
the affected wells.
Cougar Energy
ASX listed Cougar Energy received an Environmental Protection Order from the
Queensland Government in July 2010 to cease operations of its pilot underground
coal gasification plant near Kingaroy (north of Toowoomba). The operation remains
closed at the time of publication as the Queensland Government is still not satisfied
that groundwater resources in the area are adequately protected. Although
underground coal gasification is a different technology to the CSG developments
being undertaken by the major CSG players in Queensland, this example highlights
the risk of potential future Government intervention regarding water concerns.
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4. Treatment, storage, disposal of saline water, brine, salt

Once the water is brought to the surface, the next key concern is how to treat, store or
dispose of CSG water and associated waste streams. The water brought to the
surface is often high in salt and other minerals.
Concentrated saline waste Treatment of CSG water through desalination or reverse osmosis technologies
is known as brine produces higher quality water however a byproduct is the concentrated saline waste
water known as brine. Brine is typically defined as saline water with a total dissolved
concentration of more than 40,000 milligrams per litre (seawater is around 35,000
milligrams per litre).
The Queensland Government released its CSG Water Management Policy in June
2010’s with the aim to:
Aim is to maximise beneficial
use and minimise the risk of
• Maximise the beneficial use of CSG water
environmental harm • Minimise the risk of environmental harm
Treatment and Disposal of CSG Water

As part of the CSG Water Management Policy, the Queensland Government
stipulates a list of preferred management options (Table 7) and non-preferred
management options (Table 8).
Table 7: Preferred Water Management Options – Queensland Government
Preferred Management Options Details

Injection of water back underground • Inject into deep, underlying aquifers
(where no detrimental impact likely) • Water quality must be the same or better than the receiving aquifer
• Pilot studies under way by some CSG players
Untreated water for beneficial use • Supplying untreated water for beneficial use
(agricultural, mining, industrial, municipal purposes)
Treated water for beneficial use • Supplying treated water to approved quality standard for beneficial use
(agricultural, mining, industrial, municipal purposes)
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Table 8: Non-Preferred Water Management Options – Queensland Government
Non-Preferred Management Details

Options
Disposal via evaporation dams • Requires large surface areas for evaporation and risk that evaporation
dams may seep, leak or overflow from heavy rain or flooding
• Last resort unless no other feasible alternative available
Injection of water back underground • Injection of lower quality CSG water than the receiving target formation
(where detrimental impact is likely) or surrounding environment
• Clearly not a preferred management option as likely to result in

degradation of environment rather than protection or enhancement
Disposal to surface waters • Risk that CSG water quality and quantity may disrupt surface water
flows and ecology
Disposal to land • Risk that CSG water quality and quantity may affect soil, vegetation and
ecology
Treatment and Disposal of Brine and Solid Salt

The Queensland Department of Environment and Resource Management suggest the
following waste management hierarchy for treatment and disposal of brine and solid
salt in Table 9.
Table 9: Salt and Brine Waste Management Preferences
Waste Management Strategy Details Hierarchy

1. Waste reuse or recycling • Recycling by chemically treating brine or salt Most Preferable
residues to create useable/saleable products
(eg soda ash, commercial salt)
2. Inject brine underground • Inject brine into underground geologically isolated

structure that does not contain water able to be
used for drinking, agricultural or industrial purposes
3. Pipe brine to marine waters • Only if independent scientific analysis shows the
marine waters will not be adversely affected
4. Solid salt to existing disposal • Suitable existing licensed and regulated waste
facility disposal facility
5. Solid salt to new disposal facility • Purpose built licensed and regulated waste Least Preferable
disposal facility on land owned by CSG operator
Source: Department of Resource and Environmental Management
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We provide a summary analysis of various CSG water management options in Table

10. Cost estimates are not provided as the selected water management options are
highly dependent on site specific conditions.
Table 10: Analysis of Water Management Options

Option Advantages Disadvantages Suitability
Underground Injection
Into coal seam • Repressurise coal seam × May impact gas flow if reinjected into • More suited to coal seams that are no longer
producing coal seams producing
× Risk of reinjected CSG water moving to • Dependent on ability to accept water as coal seams
surrounding aquifers can undergo a one time compaction event once
dewatered and may be unable to hold the same water
volumes
Into aquifer • Recharges depleted aquifers × Poor quality water could contaminate • Appropriate only if water quality is of equal or better
aquifer quality than the receiving aquifer
× Costs of treating water may make option • If treatment required may limit economical suitability
unviable
Storage
Containment ponds • Short term option × Relatively large land area required • Suitable for short term requirements
× Risk of overtopping onto land or waters • Lining of ponds required to prevent seepage
× Risk of seeping into land or waters • Sufficient freeboard needed to prevent overtopping
× No beneficial use
Evaporation ponds • Short term option × Substantial land area required • Limited due to large surface areas required
× Risk of overtopping onto land or waters • Regulators prefer containment ponds (deep dams
× Risk of seeping into land or waters with a small footprint) rather than evaporation ponds
× No beneficial use (shallow dams with a large surface area).
• Disposal of brine and other waste material required
Disposal facility • Risk transfers to licensed × Transportation costs may be large • Suitable depending on proximity to production areas
operator of disposal facility × No beneficial use and economics
Agricultural Use
Livestock watering • Beneficial use for regional × May affect animal health and production if • Suitable for certain livestock depending on water
industry water quality not suitable quality and proximity to production areas
Irrigation • Beneficial use for regional × May affect soil structure and crop yield • Dependent on water quality
industry • Treatment costs may outweigh agricultural benefits
Industrial Use
Coal mine use • Beneficial use via dust × Water transportation costs to coal • Suitable depending on proximity to production areas
suppression, truck washing, operations and economics
haul and pit road water • Opportunity to share costs with coal operator
• Transport costs may be shared
Water cooling tower • Beneficial use for regional × May require water treatment or capex for • Suitable depending on proximity to production areas
industry infrastructure conversion to accommodate and economics
• Transport costs may be shared lower water quality
Fire protection • Beneficial use for regional × Requires storage facilities close to regional • Suitable depending on proximity to CSG production
communities townships areas and economics
Municipal Use • Beneficial use for local × Treatment required • Suitable depending on proximity to CSG production
communities × Limited longevity of supply (20 years) may areas and economics
offset economic viability of investment
Surface Waters • Provides increased base flows × Potential erosion of banks • Limited due to sensitive nature of surface water
for water systems suffering × Difficult to match to natural flow rates systems
depleting water flows × May contaminate soil, water course and
ecology if not treated to appropriate level
Source: JP Morgan Research Analysis; Parsons Brinckerhoff Coal Seam Gas Water Management Study August 2004
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5. Potential gas migration to water bores

Gas migrating to water bores Another key concern is the issue of gas migrating from gas fields to water bores and
could pose health and safety other surface vents as a consequence of CSG drilling and dewatering of coal seams.
risks
Gas can seep into overlying aquifers where there is a pathway between the coal seam
and the overlying aquifer.
The process of gas migration usually occurs in areas at a distance from the CSG well
where depressurisation is lower. As such the gas does not flow at high pressure to
the surface and instead migrates away from the gas fields to outlets such as natural
geographic surface vents or artificial conduits such as man-made water bore wells.
Standard water bores are not designed to safely bring CSG to the surface. The build
up of gas in water bores can result in large uncontrolled releases of gas which may
pose a risk to public health and safety. The build up of gas can also damage water
bore pumps.
Appropriately constructed CSG wells designed to maintain separation between

aquifers and coals seams reduce the risk of gas migration.
6. Cumulative water impacts of multiple CSG developments

Cumulative regional water The cumulative impacts of multiple CSG developments in the region are currently
impacts are currently unknown according to an independent expert advising the Federal Government.
unknown Geoscience Australia assisted the Federal Government evaluate the EIS documents
submitted by Santos, BG and Origin. In their advice to the Commonwealth
Government, Geoscience Australia state:
“We have noted that the current groundwater modelling is inadequate in terms of
scale and detail to identify the impacts of multiple CSG developments on
groundwater interactions in the Great Artesian Basin (GAB) and hence on EPBC Act
listed discharge springs communities in the GAB.”
Geoscience Australia. "Summary of Advice in Relation to the Potential Impacts of Coal Seam Gas
Extraction in the Surat and Bowen Basins, Queensland”. 29 September 2010
The Geoscience Australia report recognises that Santos, BG and Origin have
considered the short term local impacts of groundwater extraction on local users and
proposed appropriate mitigation strategies which address most of the water issues.
However, in terms of long term cumulative impacts, Geoscience Australia states that
more data and sophisticated modelling are required.
Regional-scale groundwater flow Geoscience Australia advocates a comprehensive regional-scale groundwater flow
model from private and public model from private and public sector sources to better inform understanding of long
sector sources needed
term cumulative water impacts. Currently individual CSG players are unable to
adequately model cumulative impacts due to the limited sharing of commercial-in-
confidence data. The outcomes from the cumulative regional model are highly
uncertain until more CSG production data becomes available.
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Potential Implications for CSG Companies

We highlight four possible implications for CSG players should any of the key water
risks we have identified materialise and seriously impact public health, safety or the
environment:
1. Potential project cost increases
2. Potential future Government intervention
3. Potential changes to regulation over time
4. Potential disruption to long term gas supply contracts
1. Potential Project Cost Increases

The long term nature of these projects (20+ years) suggests that the issues regarding
water will not dissipate. Although difficult to quantify, the ongoing costs for CSG
players to comply with the Government's approval conditions and future uncertainty
about cumulative water impacts mean costs are likely to be higher than the market
currently anticipates.
We believe that despite the CSG companies employing water risk mitigation
strategies, the inherent uncertainty regarding these risks and the unknown cumulative
water impacts may result in higher ongoing capex and opex costs for the CSG
players than currently planned. Capex costs may include additional or improved
infrastructure to store and treat water such as water treatment plants and brine storage
facilities. Opex costs may include water transportation costs, clean up costs to
remediate affected areas or potential future legal liabilities from aggrieved
landowners, irrigators or graziers.
The Queensland Department Environment and of Resource Management also

requires financial assurance (security deposit, cash or a bank guarantee) from CSG
players to cover potential costs of rehabilitating areas significantly disturbed by gas
activities. The financial assurance remains until the regulator is satisfied that no
claim on the assurance is likely. Any amendment to a project means the financial
assurance must be regularly recalculated and updated throughout the project’s life.
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2. Potential Future Government Intervention

CSG project operations may be affected depending on the severity of a future water
incident(s). In the event that public health, safety or the environment is seriously
impacted, Government will be compelled to act swiftly and has powers to intervene
and suspend company operations via Environmental Protection Orders.
A recent example of Government intervention regarding water issues in Queensland

involved ASX listed Cougar Energy receiving an Environmental Protection order in
July 2010 to cease operations of the company’s pilot underground coal gasification
plant near Kingaroy. The plant remains closed at the time of publication as the
Queensland Government is not satisfied that groundwater resources in the area are
protected.
Although underground coal gasification used by Cougar Energy is a different

technology to the coal seam gas developments being undertaken by the major CSG
players in Queensland, this example highlights potential future Government
intervention from water issues.
3. Potential Changes in Government Regulation Over Time

Government has a history of encouraging large investment projects to stimulate
economic activity through large capital expenditure programs, employment and the
associated tax revenues generated by the projects. However precedents exist where
Government has ‘changed the rules’ over time in order to address emerging social or
environmental impacts.
The gaming industry is an example where upfront investments in poker machines by

clubs and pubs was encouraged by State Government’s eager to generate tax
revenues from poker machine licenses. Over time however the social costs to the
community became more prevalent and in response more onerous gambling
regulation was enacted.
Due to the large upfront capex required for these long life CSG developments, once
the infrastructure is built (pipelines, LNG facilities etc) the CSG players are in effect
'locked in' for a 20+ year period. We believe this situation and the potential of more
stringent government regulation presents a risk to CSG players over the medium
term.
4. Potential Disruption to Long Term Gas Supply Contracts

The major CSG players operating in Queensland have secured or are in the process
of securing long term gas supply contracts with domestic and international
customers. Due to the confidential nature of customer gas supply contracts we do
not know whether gas supply contracts with the major CSG players contain clauses
regarding Government intervention or changes to Government regulation.
In the event that a CSG player is obliged under contract conditions to fulfill its gas
commitments to customers under a Government intervention or regulatory change
scenario, the CSG player may be legally obliged to find alternative gas supply
sources or obtain gas on the spot market for its customers.
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Penalties for Breaching Water Conditions

Monetary Penalties
Both State and Federal legislation imposes monetary penalties on CSG producers for
breaching water conditions associated with CSG activities. An example of monetary
penalties available to regulators is the Queensland parliamentary Bill recently passed
in late November 2010. The Water and Other Legislation Amendment Bill 2010
(Qld) contains numerous monetary penalties for water breaches by CSG players.
Examples of water breaches and maximum penalties under the Bill are listed in Table
11.
Table 11: Examples of Maximum Monetary Penalties from Water Breaches
Breach Max Penalty Units Max Monetary Penalties1

Failure to provide underground water impact report 1,665 A$832,500
Failure to comply with an underground water impact report 1,665 A$832,500
Failure to prepare baseline assessment plan 500 A$250,000
Failure to undertake a baseline assessment of a water bore 500 A$250,000
Source: Water and Other Legislation Amendment Bill 2010, Queensland Government.
(1) Maximum Monetary Penalties applies to bodies corporate (companies).
Financial Assurance
The Queensland Department of Environment and Resource Management also
requires financial assurance (security deposit, cash or bank guarantee) from CSG
players to cover potential costs of rehabilitating areas significantly disturbed by CSG
activities. The financial assurance remains until the regulator is satisfied that no
claim on the assurance is likely. Any amendment to a project means the financial
assurance must be recalculated and regularly updated throughout the life of the
project.
We contacted each of the major CSG players to determine the financial assurance
provided to the Queensland Government and also enquired about any environmental
insurances that the companies may have regarding their CSG activities in
Queensland. We did not receive a response to either of these questions from the
companies at the time of publishing this report.
Environmental Protection Orders

Under the Environmental Protection Act 1994 (Qld) the Queensland Government has
the authority to issue Environmental Protection Orders which can include the
suspension of company operations. ASX-listed Cougar Energy received an
Environmental Protection Order from the Queensland Government in July 2010 to
cease operations of its pilot underground coal gasification plant near Kingaroy. The
operation remains closed at the time of publication as the Queensland Government is
still not satisfied that groundwater resources in the area are adequately protected.
Under the Act the Queensland Government can also issue Clean-Up Notices and
Cost Recovery Notices in the event of a water contamination incident. The cost of
complying with these notices can be substantial depending on the severity of the
water contamination.
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Asia Pacific Equity Research

ESG and the Energy Sector

Water, Water Everywhere…Few Drops to Drink? Australia

J.P. Morgan Securities Australia Limited

Six Key Water Risks

1. Risk of reduced water supply to landowners and regional townships.

Potential Company Implications

• Potential project cost increases

• Potential future Government intervention

• Potential changes to regulation over time

• Potential disruption to long term gas supply contracts

Key Proposed CSG Developments in Queensland

• Origin Energy and ConocoPhillips’ Australia Pacific LNG Project (APLNG)

Coal Seam Gas and Water Use

How is CSG extracted?

Source: Queensland Department of Environment and Resource Management

CSG Water Volumes and Gas Extraction

Higher volumes of water are

Source: Santos GLNG Water Management Strategies

CSG Water Quality

Table 1: Water Types and Total Dissolved Solids

Operation of CSG Fields

Figure 5: Aerial Photo of CSG Fields

Source: Basin Sustainability Alliance

The Great Artesian Basin

The GAB consists of a series of alternating permeable sandstone layers and

Source: Queensland Department of Environment and Resource Management

Surat and Bowen Basins

Figure 8: Location of the Surat and Bowen Basins

Source: Origin APLNG

Six Key Water Concerns

Figure 9: Key Water Concerns

Multiple Data Sources

Table 3: Summary of Key Water Risks and Risk Management Options

Key Water Risk Details Risk Management

Source: J.P. Morgan Research and Analysis

1. Reduced water supply to landowners and townships

• Shallower, high quality groundwater reserves such as the Condamine Alluvium

How could water supply be reduced?

Source: Department of Environment and Resource Management

Water bore use

Figure 11 shows existing water bore locations in the Surat Basin.

Figure 11: Location of Existing Water Bores in the Surat Basin

Source: Origin APLNG

Figure 12: Water Bores in QCLNG Gas Fields

Source: BG QCLNG Environmental Impact Statement

2. Reduced water quality from aquifer cross contamination

Lower quality water from coal seams entering aquifers

Water from aquifers entering coal seams

Source: Department of Environment and Resource Management

3. Reduced water quality from chemical contamination

Source: Wall Street Journal, Al Granberg, Chesapeake Energy

What chemicals are used in hydraulic fracturing fluid?

Table 6: Chemicals typically used in Australian CSG fraccing fluids

How many CSG wells are actually fracced in Queensland?

Figure 15: Surat Basin Figure 16: Bowen Basin

Recent Water Contamination Precedents in Queensland

4. Treatment, storage, disposal of saline water, brine, salt

Treatment and Disposal of CSG Water

Table 7: Preferred Water Management Options – Queensland Government

Preferred Management Options Details

Source: Queensland Department of Environment and Resource Management