A DOMESTIC gas reservation policy has been ruled out as a solution to an impending shortage of gas in New South Wales and Victoria in the Federal Government’s Green Paper on energy.
The Green Paper, released in September by Federal Industry Minister Ian Macfarlane, comes ahead of the Energy White Paper which will outline the government’s blueprint for long-term energy policy.
“Whether it’s through world firsts in floating LNG technology, ensuring flexible, transparent domestic energy markets or connecting the Australian energy market in the most sophisticated way that adds value to our economy, the government’s focus is on maximising our competitive edge and natural strengths,” he said.
“This includes addressing questions about how to ensure Australia’s vast gas reserves are accessed to the benefit of local industry, consumers and export markets.”
Australia’s energy landscape
Long an exporter of coal, the paper noted Australia was entering a new phase whereby gas and uranium exports would also supply global markets hungry for energy security.
“While Australia consolidates its position as an energy superpower, it is essential that we have a long-term framework in which the energy sector can grow,” the paper said.
Australia is currently the world’s second largest exporter of coal, number three exporter of uranium, and number four exporter of gas.
While Western Australia is Australia’s largest gas-producing state, with the state’s resource development driven by LNG export opportunities, and gas exports dating back to 1989, the eastern gas market has traditionally been purely domestic.
However, this is rapidly changing, with the eastern gas market soon to be linked to an export market, exposing it to international competition and pricing.
The Green Paper called for better transparency, including of supply availability and pricing within gas markets.
“The development of this industry is of national importance, because the growth in gas exports…supports Australia’s position as a regional energy superpower.”
Electricity market reform
According to the Green Paper, electricity market reform should feature removal of unnecessary regulation, privatisation of government-owned assets, and more consumer choice.
More flexible pricing could reduce electricity use during peak hours, but this relied on customers having adequate information about their electricity use, the Paper said.
“This requires more advanced residential electricity meters than those currently in most houses.”
The paper noted continuous reform in the electricity sector since the early 1990s had resulted in better outcomes for consumers, however, there was increasing concern that reform had slowed.
“The pace of reform needs to accelerate to provide downward pressure on further price rises.”
Building gas supply
The Abbott Government communicated in the paper that it would take on board opportunities to improve gas supply.
“As the sources of gas are changing, it is becoming more expensive to extract, and the growing export of LNG is affecting gas markets as increased competition from higher priced international markets pushes up local prices,” the paper said.
“All parts of the gas markets, from production to use, need to be examined under these new market conditions.”
In building strong and sustainable gas supply, the paper argued for unnecessary regulatory barriers to be removed.
“Increasing gas supply relies on addressing community concerns and removing unnecessary regulatory barriers, although gas resource development must still be subject to necessary environmental and community safeguards,” it said.
Addressing near-term east coast gas supply and price rise
The eastern Australian gas market is on the cusp of a massive increase in gas demand, largely through exports from the first LNG train that will start later this year.
This will be followed by the progressive start-up of the remaining four LNG trains at the three projects over 2015–2019.
The potential for a near-term supply shortage in the eastern market is being attributed to Queensland’s emerging LNG export sector as well as recent decisions to restrict the development of CSG supply in New South Wales and Victoria.
According to the paper, eastern gas production was 854 PJ in 2012–2013.
“This will need to triple to around 2,300 PJ by the end of the decade to meet forecast domestic and export demand,” it noted.
“There are no ‘quick fixes’ for the potential near-term supply shortage and price pressures facing gas users.
“Most stakeholders agree that increasing gas supply will help reduce upward pressure on gas prices, but higher domestic prices are nonetheless inevitable.”
Without timely investment in natural gas infrastructure and the development of reserves, the paper warned there would be potential gas shortfalls in New South Wales across four winter days, and throughout the year in Queensland, in 2020.
“Some incremental upgrades to infrastructure and contracts will develop extra gas supply, but more needs to be done.”
While the government noted calls for domestic gas reservation policy and national interest tests, the paper indicated that such actions would not address current challenges in the market, and may result in negative long-term outcomes by deferring future investment.
“Instead, more competitive markets need better market information, informed community participation, operational transparency, and accelerated project development,” it said.
The government’s response to solving the gas shortage challenge was to bring on new east coast supply as quickly as possible and improve market transparency and competition.
“The Australian Government does not propose to pursue any form of intervention, such as reservation policies,” the paper said.
“Coal seam gas and other unconventional gas resources, such as shale gas and tight gas, can potentially increase supply and grow regional economies.
In the paper, the government said it would work with states and territories to facilitate the approval of priority gas projects by improving licence management policies and removing unnecessary barriers to supply.
“The Australian Government will prepare a strategy to support the responsible development of the CSG industry and other unconventional gas resources, in consultation with state and territory governments,” it said.
While the paper noted there was “upward pressure” on east coast gas prices as Queensland LNG exports began, it said a more transparent and flexible gas market would help relieve consumer uncertainty about availability and pricing, and also improve price competition.
“The COAG Energy Council gas market reform program will deliver improvements that will build on progress already made in transparency and price discovery, such as the new Wallumbilla Gas Supply Hub market in Queensland.”
The government also plans to continue to work with state and territory governments and industry provide mechanisms for understanding likely future prices, and any associated risk management.
The Australian Petroleum Production and Exploration Association commended the paper’s focus on addressing the issues that detract from Australia’s appeal to investors.
“The Green Paper’s message that Australia must be seen to be open for business – with a stable and predictable policy environment and appropriate taxes and regulation – is a positive one,” APPEA chief executive David Byers said.
“A high-cost local environment and the emergence of new LNG competitors in East Africa and North America are major challenges to LNG industry growth.
“Industry welcomes the Australian Government’s dismissal of domestic gas reservation policy as a solution to a tightening eastern Australian gas market.”
Mr Byers said it was critical the government’s final White Paper ensured Australia’s oil and gas companies were not disadvantaged against international competitors or against producers of other energy sources in Australia.
“Australia has more than enough natural gas to service both domestic and export markets for decades and this puts Australia in an enviable position to maintain long-term energy security,” he said.
The Australian Industry Group said the paper addressed its concerns around rising gas prices and potential gas shortages.
“We welcome initiatives outlined in the Paper to increase gas production and reform gas markets so that they are more productive, competitive and transparent,” AI Group chief executive Innes Willox said.
However, Mr Willox said vital reforms to the gas market would only happen if State Governments were on board.
“Blanket bans and moratoriums that are stifling unconventional gas production in NSW and Victoria should be replaced by credible science-based regulation,” he said.