PERTH Confidence in Australia's coal seam gas industry, one of the nation's brightest economic prospects, has begun to flicker.
For the first time since energy firms kicked off $50 billion of projects to drill for gas in the region's rich coal deposits less than two years ago, there is a consensus emerging among industry executives and experts that plans are well off track.
Patchy drilling results, rising costs and a world-wide glut of gas threaten to jeopardize what could amount to more than $60 billion of additional investment in liquefied natural gas (LNG) plants, based on current project costs, and leave an industry that would be just half the size its architects once envisaged.
Instead of exporting 56 million tonnes of LNG a year, as originally planned, the industry may have to stop at 25 million tonnes - the capacity already being built on Australia's northeast coast by firms such as Britain's BG Group BG.L and Australia's Santos (STO.AX) and Origin Energy (ORG.AX).
Given the patchy drilling results, developers are scouring Australia for supplies from inland conventional fields, such as those around Moomba in the central desert, to meet contracts to customers taking gas from these initial projects.
The project expansions would have delivered enough gas to feed over 70 percent of LNG demand from top importer Japan, whose voracious appetite for fuel to generate power has increased since the Fukushima nuclear crisis.
Developers are under pressure to deliver, having sold most of the gas from the first phase of the three coal seam projects to Asian customers through long-term deals starting around 2015.
To get to the fuel, operators aim to drill tens of thousands of wells targeting methane held in coal beds, hoping to mirror the rapid rise of U.S. shale gas which has revolutionized the American energy sector.
But abundant U.S. shale gas could soon provide competition for costly Australian exports, as producers there look to ease a supply glut by shipping gas to Asia.
"If you join up all these dots: rising costs, technical challenges, regulatory hurdles and pushback from competing communities ... then you have a very poor scenario there," said Gundi Royle, a Paris-based oil and gas analyst at Moelis & Co.
The gas export projects - BG Group's Queensland Curtis Island LNG (QCLNG), Santos' Gladstone LNG (GLNG) and Origin Energy's Australia Pacific LNG (APLNG) - plan to rely primarily on coal seam gas and have consistently held they are on schedule to export gas between 2014 and 2015.
Australia is on course to overtake Qatar as the world's top LNG exporter by 2017, whether or not future expansion of the coal seam projects goes ahead. The east coast projects are part of a wider $170 billion LNG boom, with more plants being built in the west and north and supplied with conventional gas.
Even within the industry, some think that the challenges of firming up coal seam gas reserves, extracting the gas and pumping it for export look tough.
"I personally think that people have underestimated the challenge of deliverability into these plants," Santos chief executive David Knox told reporters.
Reservoirs of coal seam gas, or coal bed methane as it is also known, are variable, so two wells just a few hundred meters apart can produce very different amounts of the fuel.
"We're learning from well to well. I'm sure I speak for all the companies involved - the first wells you learn an awful lot from, but you can't get it right the first time," said Paul Zealand, Origin's chief executive of upstream operations.
Measuring coal seam gas resources can be tricky, said John Pope, chief executive of contractor WellDog. Although Australian coal seam gas projects test more than elsewhere globally, said Pope, results can still be unpredictable.
"It's geology - you can confidently predict some trends, the sweet spots. But they have picked them off so now they are out in the dark stabbing around," said Moelis' Royle, who has broken ranks with some analysts and rated the stocks of companies with coal seam gas projects negatively.
But even analysts who have more favorable views of coal seam gas developments have flagged concerns.
Santos' recent application to drill 4,000 more wells, up from 2,600 in its initial environmental impact statement, was interpreted by several analysts as a sign the company's coal seam gas exploration is not going as well as hoped.
Santos says exploration is on track and that it always planned to buy extra gas.
The firm says that its wells on average have been producing 1.4 terajoules (TJ) of gas per day (equal to 0.09 million tonnes of LNG per year), higher than the 1.2 TJ daily rate it had targeted. But Santos has also said it is uncertain what fields at early stages of development would eventually produce. That only becomes apparent when companies pump water out of the seams to free up the gas flow.
"We won't really find out the true production rates until we start putting on compression and really start to (pump out the water)," Knox said of its Roma gas field in southeast Queensland.
Even without these challenges, projects were struggling with schedules. All three began construction in 2010 and 2011, two of the wettest years in decades in Queensland state, where the coal seam gas fields are located.
As a result, Santos' GLNG and BG's QCLNG were likely unable to firm up enough coal seam reserves to deliver gas for export on time, say analysts and industry insiders.
"Because it has been so wet, they haven't been able to access their top prospects - they are drilling outside the core areas and that's why they are not getting the results for their reserves that they were hoping for," said Noelle Leonard, an analyst with FACTS Global Energy.
The QCLNG and GLNG projects are, respectively, as much as 16 percent and 9 percent behind schedule, according to Macquarie Research. APLNG seems to have weathered the wet conditions better and may be slightly ahead of schedule.
The delays are adding to the project costs - BG recently announced a 36 percent cost rise and analysts expect the other projects to come in 10 to 15 percent above initial budgets.
Developers have faced political opposition as well as geological difficulties. Environmentalists and farmers fear drilling for coal seam gas could damage water supplies on farmland or near populated east coast areas. Opponents have in some cases set up barricades around potential drilling sites.
The scale of the projects means massive mobilization of workers and equipment, a tough ask in a country where a $500 billion resources boom has created a shortage of skilled labor.
"I'd say the projects are probably all about a year and a half behind where we originally thought they would be in terms of the number of wells drilled and the amount of work being done out in the field," said Peter Goode, the chief executive of contractor Transfield Services, which works in the sector.
Transfield's Goode anticipates that the coal seam gas operators underestimated the number of wells they would need.
The three projects currently have approvals for 18,650 wells, according to environmental impact statements submitted to the government. Goode says the number of wells needed was likely to more than double to 40,000.
Brad Lingo, managing director of explorer Drillsearch DLS.AX, said while it would be technically possible for coal seam gas developers to ramp up drilling to deliver gas to export plants on time, it would provoke a lot of community pushback.
"That presents an opportunity for gas from the Cooper Basin in particular to become a complimentary source of supply to help those projects meet their desired timelines," Lingo said. The Cooper Basin is Australia's main onshore oil and gas province and the location of the Moomba plant.
Concerns that coal seam gas will be unable to provide enough gas to meet LNG contracts has pipeline owners, drillers and gas producers eyeing a potential bonanza.
Last month, Origin Energy signed a contract to supply some of its gas to Santos' GLNG project beginning in 2015, in a deal that some interpreted as a sign that Santos' coal seam gas exploration efforts are stumbling. Origin has a similar deal with BG's QCLNG.
Santos has also committed to pumping some of its own conventional gas to the GLNG plant and is in talks to supply more. Santos is the majority owner of the Moomba plant that has supplied population centers on the east coast for four decades.
Parts of the Moomba plant were mothballed in 2005 and 2007. The higher price achievable for export gas and the need to supplement coal seam gas production could bring it back to life. Macquarie Research has estimated it could cost $3 billion to $4 billion to refurbish Moomba.
For pipeline owner Hastings Fund Management, the need for more gas to flow east is proving lucrative.
"It is the most obvious expansion opportunity in the history of our pipeline," said Simon Ondaatje, head of investor relations at Hastings, which owns a pipeline from Moomba part of the way to the Gladstone export ports.
Hastings has already signed two major contracts, one with Santos and another with a gas producer that it declined to name, worth around $1 billion over 15 years to pipe gas from Moomba.
Given the likely problems facing the first phase of coal seam gas, the prospects for further expansions look slim.
Santos, BG, Origin, and Arrow LNG, a Royal Dutch Shell (RDSa.L) and PetroChina (0857.HK) joint venture, together have approvals to build a total of 56 million tonnes per year of LNG export capacity from east coast plants.
Expanding the projects under construction would cost around $27 billion, assuming LNG production costs remain constant, according to Reuters calculations. If the Arrow LNG project also goes ahead, it would cost a further $36 billion, based on the average LNG production costs at plants under construction.
Santos' Knox said it was uncertain how much expansion there would be beyond the three plants, comprising six LNG production trains or 25.3 million tonnes of capacity per year, that are either under construction or seen likely to go ahead.
"Effectively, we are seeing there are six trains pretty much for sure... we're not sure what will go beyond that," he said. Trains are the facilities that chill the gas into liquid form for transport on ships.
The potential for U.S. shale gas exports to undercut Australia's coal seam gas exporters also threatens further expansion.
BG, after deciding to purchase U.S. LNG, said in a quarterly earnings call in February that it may delay plans for a third train at its QCLNG plant.
"They are not ruling this stuff out, but it seems like a more longer dated and more out of the money option," said Adrian Wood, an analyst with Macquarie. "I think Australia's window of opportunity in the LNG market for high-cost projects, if it hasn't closed already, is closing quickly."
(Additional reporting by Simon Webb in Singapore, Rosemary Arackaparambil in Mumbai; Editing by Ed Davies and Simon Webb)