Santos and Queensland Gas Company are concerned that supply will outstrip demand, thus pulling down the domestic gas price, at a time when production is being ramped-up ahead of exports.

If all Gladstone LNG projects are established - including Sunshine Gas' much smaller proposal - they will consume 500-600 petajoules of gas per year at full capacity - the equivalent of eastern Australia's current gas demand.

QGC alone needs 140PJ, which is not far off the current gas market in Queensland.

"The initial response from the domestic market is there is going to be gross oversupply because of the ramp-up," QGC managing director Richard Cottee told the Australian Financial Review recently.

"Every customer wants to buy gas at the lowest possible price."

QGC hopes to tackle the problem by scaling back its plans for signing long-term contracts, as it focuses on proving-up enough CSM reserves for the $8 billion LNG project.

In contrast to Cottee's concerns, rival company Arrow Energy does not believe eastern Australia is facing an over-supply of gas.

"I don't see it causing a ‘supply glut' or forcing prices down," chief executive of Arrow's Australian unit Shaun Scott said.

"The real question is what these coal seam gas projects are going to do with the ramp-up gas."

The nature of gas supply contracts and limited pipeline capacity in Queensland make this a problem, according to Scott.

"There is no real spot market in Queensland and all major gas users are supplied under long term contracts, which have take or pay clauses at around 85 percent to 95 percent, meaning that buyers have limited flexibility to take additional gas," he said.

"[Also] gas pipelines in Queensland have limited supply capacity beyond the supply to the existing long term contracts - so even if there was a buyer, it is not obvious how this extra gas could be physically delivered."

Arrow will take advantage of the spare capacity in its existing Townsville power plant to use ramp-up gas, and could also store some gas in its 600km Moranbah-to-Townsville pipeline, according to Scott.

Yes, we can shut down CSM

CSM projects are difficult to shut-off and then restart due to the need for water to be pumped from the seams to extract the gas.

"While there may be limited scope to slow the flow of coal seam gas, there is a fundamental requirement to dewater the field to get the CSG to flow, given the rates that will be required this will take many months," Scott said.

"Even when a field is dewatered, shutting it in for several months will allow the aquifer to come back in and the field will need to be dewatered."

But QGC argues that contrary to conventional wisdom, some relatively mature CSM fields can be shut down without damaging the productivity of the coal seams.

QGC says in some fields once wells are free-flowing (usually over a year old) they can be shut down with minimal fuss.

Likewise, Santos has mentioned plans for shutting down wells at its Fairview CSM field, which is being expanded to meet the 2009 target production rate of 115 terajoules per day.

During a February conference call, then Santos managing director John Ellice-Flint confirmed that controlling production rates was now a reality.

"We have now technically got the option to shut-in some wells… so that gives us another option that we didn't talk about a year ago," he said.

"Before it was a concern generally in the industry that you couldn't shut [CSM] wells in because the water would come back."

Turning the tap down on CSM fields means an operator can substitute some of the gas being sold into sales contracts with ramp-up gas, Santos chairman Stephen Gerlach said.

Santos also has the capacity to shutdown some of its conventional fields and to store some surplus gas in depleted reservoirs near its Moomba gas plant.

And regardless of how much extra gas is produced in the ramp-up phase, Ellice-Flint said it was worth remembering that domestic gas demand was also likely to boom.

"By then [2011-2014] we imagine that there will be a price on carbon, there will be a price on water, and there will be huge demand for gas-fired generation as well," he said.

"So I see a step-change also for the domestic demand."

While Arrow Energy will avoid restricting or shutting in CSM production, the company and its partner Liquefied Natural Gas Limited have a plan in mind for the downstream component of the project.

The companies believe that as well as adding smaller trains to the project incrementally, their technology would allow the LNG plant to initially run as low as 50% of total capacity.

This would give the partners the advantage of exporting the LNG while the CSM projects are being ramped-up to full field production, giving them access much higher prices than if they were selling the ramp-up gas on the domestic scene.

Presumably if other producers overshoot the mark, Arrow and LNG Limited would also be able to liquefy and onsell some of the surplus gas for a fee.

First published in the April issue of Petroleum magazine