Confused about Eastern Australia’s gas crisis?

Confused about Eastern Australia’s gas crisis?

Join the club!

In 2016 Australia exported 62% of its gas production last year, according to the BP Statistical Review of World Energy. Yet in South Australia there was insufficient gas to meet demand for gas-powered generation of electricity (GPG). Politically, the situation has become a blame game, with statements such as “gas export licenses were issued without regard to the consequences for the domestic market” and, “when LNG export plants were approved, the industry said sales abroad wouldn’t impact domestic gas supply because it was developing new sources of gas”. Either governments of the day were to blame, or the industry is to blame.

But looking for blame doesn’t solve the immediate problem. What are the solutions?

Removing dependence of electricity generation on GPG solves part of the problem, but this is unlikely in the short-term even with installation of Tesla Batteries, and upgrades to the Snowy Scheme . In the longer term, gas is a transitional fuel from carbon intensive coal to full renewables such as solar and wind and will become increasingly important as coal-fired power generation declines.

The Australian Domestic Gas Security Mechanism (ADGSM) which takes effect from 1 July for a five year period will enable the Resources Minister to mandate LNG export restrictions. When export controls are invoked, an LNG exporter must seek permission to export from the Resources Minister.  Such permission will be made on a condition mandating the annual upper limit on the volume of LNG that can be exported. At the moment, the only gas project that draws more gas from the domestic market than it contributes is the GLNG plant; the APLNG plant and the Queensland Curtis LNG plant presently supply more to the domestic market than they withdraw.

But this mechanism may be a straw man. Peak gas demand for GPG is only temporary and requires some form of gas storage to be effective (either dedicated storage or linepack) or the ability to quickly switch gas transmission to a southerly flow for GPG – a situation which is not solved by the ADGSM. Industry has warned that the mechanism will do little to do bring down prices in the short term. Asking contract prices for gas have surged to $20 a gigajoule for some customers, more than double the level of expiring contracts. The difficulty is that the ADGSM is a volume-based mechanism – the gas market may be in balance but the gas price is still high.

Prices will only decline if new gas imports to the Eastern Australian Gas System can be obtained at a fair price and in sufficient volume to satisfy long-term contracts. Gas prospectivity on the East Coast is poor, with the likelihood of finding large Gippsland Basin style fields very low. New coal seam gas projects (CSG) in New South Wales seems unlikely with Santos heading for an environmental fight with its Narrabri Project and the early closure in 2023 of the AGL Camden Gas Project  and the decision by AGL not to proceed with the Gloucester Gas Project. Poor gas flows and rehabilitation costs have made both projects uneconomic.

New onshore conventional gas discoveries in the Cooper-Eromanga basins, Victoria and NSW are likely to be small and, though worthwhile for the punters, will not significantly address the Eastern Australia gas reserves issue. Tight gas and shale gas economic reserves are yet to be proven and are increasingly looking disappointing after the concerted Nappamerri Trough drilling campaign. While favourable comparisons between the US and Australia potential shale gas resources have been made in the past, notably by the US EIA, significantly different rock stress regimes in Australia compared to the major plays such as the Bakken, Barnett, Eagle Ford and Marcellus in the US, have led to little success in Australia (Chevron abandons shale exploration venture with Beach Energy). While the economics of coal gasification—which generates synthetic natural gas (SNG)—are improving, environmental issues such as the need for carbon dioxide sequestration and water use will be large barriers to entry.

Without significant new local gas production, the solution to the gas problem could come from either pipelines from PNG (though the economic case for this is at risk if PNG LNG builds a fifth train), a pipeline from Darwin to Mt Isa, and the recently touted west coast pipeline (WA to play hardball with federal proposal for gas pipeline).

All of which begs the question. The best that can realistically be achieved is price parity with the World Gas Price, which is already being factored into the business plans of many industrial gas users (Orica sees gas prices topping out by early 2020s). World gas prices are set by the LNG trade; so import of LNG to South-East Australia might end up being the cheapest option. Exporting LNG from Queensland and importing into Victoria hardly seems rational, but there is also an increasing demand for LNG as a bunkering fuel for shipping. Already the US Henry Hub gas price is 30% of the Fuel Oil (IFO 380) price in the Gulf. LNG imports into Melbourne could supply gas for industrial and GPG as well as bunkering for the increasing fleet of LNG powered container vessels, ferries and cruise ships (13 of 73 Cruise Ships on Order are LNG-Powered).

Still confused? There is no simple solution. What is needed now is rational, informed debate about the Eastern Australia gas supply chain, the need for increased exploration for offshore and onshore gas resources (supported by tax incentives), the economic and demographic benefits for gas transmission pipelines from Western Australia, the Northern Territory and Papua New Guinea, and the potential for LNG imports to the South-East. A fix with the shortest lead time is a Floating Storage Regasification Unit (FSRU) stationed at Altona in Melbourne. Such a unit may be competitive with restricting exports of LNG via the ADGSM, particularly if penalties for LNG cargo shortfalls are included in the economic analysis.

Tesla batteries, an expanded Snowy generation capacity and the ADGSM all make wonderful headlines but secure, long-term supply of natural gas to Eastern Australia needs solutions which will not only reduce energy bills now, but give commercial and industrial users surety of supply to 2030 and beyond.

About the Author

Dr Andrew Wadsley has 40+ years’ experience in the petroleum industry—starting as a well-site petroleum engineer with Shell International in 1975. He has been active in gas planning and modelling in Europe, Australia and SE Asia for over 30 years.

Did you enjoy this Article ?
Signup today and receive free updates straight to your inbox. We will never share or sell your email address.
I agree to have my personal information transfered to MailChimp ( more information )
0 0 votes
Article Rating
Notify of
1 Comment
Newest Most Voted
Inline Feedbacks
View all comments
AR Mijinyawa
AR Mijinyawa
6 years ago

Hmm. Sort of clarifies that the cost of supplying domestically sourced gas is higher than LNG imports (??) and that a glut is probably needed to normalise prices. Beyond that, I’m still confused.