Newfound friend for NSW coal seam gas

With the change in federal government, New South Wales may see an expansion of its coal seam gas (CSG) industry, as was evidenced by the approval of eight exploration wells for Santos (ASX: STO) given by the NSW government. The wells are located in the state’s northwest in the Pilliga Forest.

The new Federal Industry Minister of the newly elected Liberal government, Ian MacFarlane, said the development of CSG in NSW will be a priority for the new government. Compared to Queensland, which has many CSG sites operating and being developed, NSW has hardly any.

Developing a state-based energy source will produce jobs, and the Santos Pilliga venture is estimated to supply 25% of the state’s gas market needs. Another project being developed by AGL (ASX: AGK) is projected to produce enough gas to cover 18% of the state’s needs also.

Other companies like Dart Energy (ASX: DTE) and Metgasco (ASX: MEL) also had projects in NSW previously, but because of the delays, regulatory problems and local protests against CSG drilling and potential damage to natural water sources, they moved on.

Only the bigger companies had enough money to stick it out, and it wasn’t cheap. AGL has already written down its assets in NSW Hunter Valley to about $10 million from about $200 million.

Although the Liberal government announced that Australia was “open for business” with its election victory, these CSG projects still must satisfy very strict regulations to get the go-ahead. Local environmental groups say that Santos is not clearly stating its plans to keep untreated water, which is used in the fracking process that produces CSG, from entering into natural water sources that agriculturalists and local residents use.

The Gloucester CSG project of AGL must still meet a wide array of conditions for construction and operations, and it is estimated that the company will still not have made a final decision for investing into the project until third quarter 2014. Assuming the decision is made according to schedule, the CSG supply will be available for use in 2017.

Foolish takeaway

Natural resource development always involves heavy expenditure, but investors must also learn of the time frames and understand how projects’ requirements can add years and millions of dollars of extra expense to a budget. Your share investment may languish just as long if it is held in single-play companies that have most or all of their prospects on one or two projects. Go for diversified miners that can offset delays or cancelations of projects with other profit-making segments.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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