International Oil & Gas Strategies Pty Ltd
27 Jan 2023
2023 Australian Gas Scene - Realities, Politics, Policy and Pitfalls.
Australia as a nation is blessed with an abundance of natural gas resources which should provide a degree of energy security and affordability ahead of most other developed nations. Yet we are increasing being bombarded with headlines highlighting problems with gas supply, increasing costs to consumers, the need for Government intervention and industry concerns over market reform. These issues are not new but have been gaining greater public attention following price hikes over the last 12 months and forecasts of supply shortfalls and ever-increasing prices in the short to medium term.
How is it that a nation with such an abundance of potential gas supply can find itself in such a situation?
Supply / Demand Fundamentals
Australia’s total remaining gas reserves (2P) of both conventional and unconventional (Coal Seam Gas – CSG) are estimated at over 100,000 Pj with additional contingent gas resources of 146,000 Pj. This compares to total cumulative production of 78,000 Pj and, at the current production rate of 6,200 Pj per annum, amounts to a total resource to production ratio of 40 years, and this does not take into account any yet to be discovered prospective gas resources.
However, this apparent overabundance of natural gas on a national scale masks significant and unbalanced supply/demand divides.
The eastern states, including South Australia, account for around 85% of the national population. Yet these same states hold only 26% of remaining gas resources, the majority of which is located in Queensland (22%). The regions with highest residential, commercial and industrial demand are located in Victoria and NSW.
The growth of Queensland’s significant gas resources rests entirely on the emergence of unconventional CSG as a viable economic opportunity based on export of LNG.
Victoria, by contrast, has relied historically on the prolific Bass Strait fields to meet both its baseload and significant winter peak gas demand. Declining production and ongoing abandonment of these mature fields, exacerbated by moratoria on onshore exploration, and insufficient gas storage capacity, results in a forecast shortfall in gas supply to meet peak demand in the short term (2023-24) and the state will increasingly rely in imported gas via a constrained pipeline network.
NSW relies entirely on imported gas from other states, having failed to commercialise its own gas resources.
With only 10 % of the Australian population Western Australia holds a disproportionate abundance of conventional gas resources. Remaining conventional gas resources in Western Australia and adjacent offshore Federal waters represents almost 95% of Australia’s total remain conventional gas and over 70% of total conventional and unconventional gas resources. This significant resource base has underpinned Australia’s leading position as an LNG export nation. WA State Governments over the years have also ensured sufficient domestic supply through the original domestic gas supply agreements and more recently the domestic gas reservation policy.
Proposals to mitigate this significant geographic imbalance date back to the early 1970’s when the first transcontinental pipeline linking the gas fields of Western Australia’s North West Shelf with the cities of the east coast was proposed by the then Labor Government. This West-East pipeline proposal has resurfaced more recently, however, feasibility studies fail to provide economic support for the concept.
A number of LNG import and regasification terminals have also been proposed to mitigate the forecast local shortfalls, particularly in Victoria. All but one has failed to materialize due largely to local activists and environmental concerns. The remaining Port Kembla Energy Terminal appears currently stalled.
Gas Market – Domestic and Export
A unique Australian gas market has developed against this backdrop of regional differences in domestic supply, export capacity and variable demand. The significant increases in international gas prices over the last 12 to 18 months have brought intense scrutiny on the Australian domestic gas market from government, media and the public.
Within an Australian context, the isolated Western Australian domestic gas market has enjoyed a degree of relative stability. The Governments domestic gas policy ensures that gas supply and prices are driven largely by local supply/demand fundamentals, removed from interstate and international price fluctuations. Until recently this has tended to dis-incentivize exploration and development of domestic gas opportunities. Although available capacity in the NWS LNG export facilities, emerging domestic market opportunities and perceived security of supply concerns are driving a resurgence of activity in terms of both exploration and M&A.
The eastern states gas market on the other hand is more complex given its size, diversity of end users and, since 2015 with the development of the Queensland LNG export capacity, an inherent link to international LNG export prices. Historically, the eastern states market has been dominantly long-term contract based with only a small share of production traded on the wholesale spot market. End users included industrial, residential and commercial, and power generation (roughly 40/30/30). The development of Queensland’s LNG export capacity led to a significant increase in gas production and these export projects now account for three quarters of total demand on the east coast. The increase in both wholesale and contracted gas prices on the east coast since 2015 has been partly attributed to the LNG export projects linking of domestic prices to international prices. Particularly the ability of local gas producers to sell into underutilised capacity at the LNG plants to produce “spot’ or uncontracted LNG cargoes.
This development has attracted attention and concern from Regulators, Governments, and market commentators, initially with respect to ensuring sufficient domestic supply and more recently, with the escalation of international gas prices, in terms of cost to consumers.
Governments Role – Intervention or Facilitation?
Various State and Federal Governments over the years have had a chequered history of dealing with Australia’s gas assets, industry participants and markets. The lack of a coherent national energy policy has been criticised for many years, but has been hampered by the constitutional separation of powers between the State and Federal Governments and inherently short term, politically motivated policy decisions,
As early as 1973, the Whitlam Governments’ Pipeline Authority Bill was passed in an attempt to “secure, control and retain reserves of petroleum adequate to meet the long term needs of the Australian people”. This was perceived by many as an attempt to nationalise the industry and the fall of the Whitlam Government in 1974 meant that none of the initiatives foreseen by the act materialized.
Over the intervening years the failure of both State and Federal Governments to ensure efficient resource development and capital investment and maximise government revenue, has seen a proliferation of infrastructure projects across Australia. This apparent laissez-faire attitude to the approval of numerous gas developments has led, for example, to the concurrent construction of three independent and adjacent LNG export facilities at Gladstone, the deployment of adjacent facilities at Ichthys and Prelude (to develop what in most other countries would be considered a single accumulation for development purposes), and the construction of LNG facilities on multiple sites in Western Australia (NWS, Pluto, Gorgon and Wheatstone) for the export of gas from the offshore Carnarvon Basin. No other country, other than the possibly the USA, has allowed such inefficient capital development of its gas assets and the foregone tax revenues, which are considered to be in the order of tens of Billions of dollars.
In 2017, following the start-up of east coast LNG export and in an effort to ensure security of domestic supply, the Federal Government established, after extensive consultations with industry, the Australian Domestic Gas Security Mechanism (ADGSM). This provided the Minister for Resources the ability to control LNG exports on the basis of a forecast domestic supply shortfall. In August last year after further consultation, the ADGSM was formally extended to 2030 and was accompanied by a Heads of Agreement between the Australian Government and East Coast LNG Exporters – “The Australian East Coast Domestic Gas Supply Commitment”.
Despite this mechanism, and in the face of forecast increases in east coast consumer gas prices, the Federal Government rushed through legislation in December last year, imposing an immediate gas price cap of $12/Gj on new wholesale contracts and a mandatory code of conduct which would include unprecedented provisions for reasonable contract pricing, contract negotiations, dispute resolutions and penalties. While almost all details of the mandatory code of conduct have yet to be defined, the resulting uncertainty and severity of potential fines has led to a breakdown of an otherwise functioning market. Contracts are not being renewed and customers are facing the threat of default pricing. It is not yet clear at what point the east coast gas market will stabilise. The wider implications of price caps on alternative supply options such as LNG import terminals have not yet even been considered.
Gas and the Energy Transition
The direct supply/demand fundamentals of the Australian gas market are also being challenged by the current energy transition away from fossil fuels.
Ongoing closure of Australia’s aging base-load coal fired power generation stations places will place an increased burden on the existing gas fired power generation capacity. Despite the increasing investment in renewable energy sources to meet the countries 2050 net zero targets, and the governments recently announced incentives to encourage additional investment in dispatchable power from renewable sources, gas fired power generation remains the only alternative to supply significant base-load and dispatchable power in the case of unplanned outages. As was seen in mid 2022, the utilisation of additional gas fired power generation will drive higher short term gas prices.
Adverse public sentiment and government moratoriums on oil and gas exploration and development have stopped gas developments in NSW and Victoria and increasing regulatory requirements and community consultation will delay new developments in other states. Access to the significant volumes of contingent gas resources will therefore be at risk should they be required to meet future national energy needs.
The emergence of ESG investment criteria is also having a wide-spread impact on an already struggling industry. Restricted access to risk capital is contributing to underinvestment. Few small and mid-cap explorers remain on the ASX and those that do are increasing turning to ESG favoured activities such as hydrogen as a means to raise funds. Without the entrepreneurial, risk taking spirit of the small-mid cap independents, new yet to find resources will remain undiscovered. ESG criteria and shareholder activism also impacts the Australian large caps as they move forward with their currently planned developments resulting in delays and increased costs.
Where to from here – Unanswered Questions
Australia will continue to rely on its abundant gas resources both to derive critical export income and provide domestic supply for its residential, commercial, and industrial customers. However, if security of supply at affordable prices is to be realised, a number of questions need to be answered.
Can a longer-term national gas policy be developed which addresses the supply/demand divide and infrastructure requirements longer term?
How can Australia balance its domestic needs for affordable supply with the investment incentives offered by export prices?
Will the importance of gas within the overall energy transition be appropriately recognised by both government and the public?
Will the existing gas industry continue to function in the face of the current challenges?
 Australia’s Energy Commodity Resources 2022
About the Author
Stuart is a proven oil and gas professional with extensive international industry experience at technical, managerial executive and Board levels including over 20 years with one of the top three globally integrated oil companies. In addition, from 2007 to 2012, Stuart held the position of Vice President Strategic Planning at Woodside responsible for the management of Woodside’s corporate strategic planning process and investment reviews. Since 2012 Stuart has provided independent technical and strategic consultancy services to the oil and gas industry, Governments, investment banks, equity analysts and hedge funds. He has over 40 years experience and is familiar with all areas of the upstream oil & gas business with demonstrated success in the areas of strategic, business, technical and human resource management. A thorough knowledge of the global oil and gas industry, its opportunities and challenges and with specific expertise in exploration, the Middle East and Africa.
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