Based in Brisbane, Geofrey Cann is Deloitte’s National Director, Oil and Gas. Image courtesy Deloitte.

Based in Brisbane, Geofrey Cann is Deloitte’s National Director, Oil and Gas. Image courtesy Deloitte.

By Geoffrey Cann

WHEN the New South Wales and Northern Territory Governments recently raised the prospect of a new gas pipeline connecting their respective gas grids, they brought back into focus a piece of energy infrastructure that has been on and off the agenda since the 1970s.

Given the Territory has gas, and NSW is going to need it, a pipeline makes sense, right? Well, not so fast.

What’s the course?

As a gas importer, NSW needs to have diversified gas supply. And it does, with gas supplies from Queensland and South Australia.

But with the launch of the LNG industry in Queensland, east coast gas contracts expiring on the dawn of the start of Gladstone production, and gas prices in NSW rising to match those to Asian export markets, the adequacy of supply at the historic low prices is certainly looking perilous.

Demand destruction is a real risk, as manufacturing, mining, food processing and other large gas consumers scale back or cease operations.

The best answer would be for NSW to produce its own gas. This would be cheaper and faster, and supply could more precisely match demand.

NSW actually has enough of its own gas to meet 50% of its demand, but local rules and restrictions placed on exploration and production are making this all but impossible to achieve.

So, with high prices, possible shortages and job losses looming, shouldn’t a good alternative surely additional supply from the NT via pipeline be a good investment?

There are several proposed routes – one connecting the existing Darwin-Alice Springs pipeline to Mt Isa, another connecting the same to Moomba in South Australia, and a third from Tennant Creek to the Carpentaria Pipeline.

While longer and more expensive, the Moomba route makes most sense to this writer, with processing infrastructure in place in Moomba and the pipeline grid already connected to NSW.

What’s the horse?

It goes without saying that gas pipelines are costly. They’re well suited to connecting large stranded low cost gas supplies with large distant high paying consuming markets (as in at least 20 years of demand and a matching big supply of gas).

As base load assets, they are the darlings of pension funds that seek out investment in long life, stable income producing assets.

But they are also not particularly good at solving peak demand problems, which are the main issues faced by NSW.

This horse for this course?

There are reasonable doubts. On the demand side, NSW does consume a lot of gas, but it’s been well supplied for years and it isn’t obvious that there’s large and continuous unmet demand.

The price is rising, but actual volumes of gas required aren’t (in fact, as prices rise, demand is falling as power generators switch over to coal, companies relocate or switch to electricity or switch products to something less energy intense, and as residential customers switch to solar).

As a result, a big new gas supply via pipeline from the NT would confront a big existing gas supply from Queensland and South Australia, with industry needing to be persuaded to deliver more gas to a largely satisfied market.

The supply side presents another question mark. There are no known large fully proven gas reserves on shore in the NT that are waiting for a market (it’s likely five years or more before the reserves are set up).

There’s lots of exploration activity underway, but banks won’t finance pipelines based on exploration. There are off-shore fields, but they’re also years away from production.

And NT royalty rules favour on-shore gas resources over any available off shore supplies.

There’s also a timing issue. Big gas pipelines take years to deliver, and this pipeline will be no different. It won’t be in the market until 2020 at the earliest, so it certainly isn’t a solution to NSW’s short-term shortfall issues which are expected to surface as early as 2016.

In the meantime so many other variables could also change, including governments, their policies, further permanent demand destruction, increasing use of solar and global gas pricing falls.

Would supply increase, or go down?

There’s a real chance that if the NT connected its gas pipeline to the NSW grid, the gas would actually find itself headed to Gladstone.

The Moomba pipeline grid (and the Mt Isa pipeline) connects to Gladstone, so gas traders will have the option to sell gas to either NSW or Gladstone.

Margins may well be better going offshore (they have been so far, which has given rise to the pipeline idea). Indeed, one proposed project in Gladstone will be a tolling plant looking for supply. So supply to NSW might not increase at all.

It’s hard to see how gas prices would return to historic norms for NSW. Gas from the NT will have to bear the cost of the pipeline charge to shift it, making it more expensive than gas produced in-state, and certainly more expensive than gas from SA or Queensland that doesn’t carry the pipeline charge.

And if the NT gas has the option to go to Gladstone, gas buyers in NSW will have to at least match that price.

Other Options

This looks more like a base load asset being aimed at a peaking market demand opportunity.

If the pipeline were to aim at a base load demand, then it would be a better match.

Base load could come from an LNG project in Gladstone, or possibly from a combined NSW and Victoria gas market. But would it require an outright ban on any further in-state gas development, and some way to give market preference to NT gas.

A faster option to dealing with gas shortfalls is to promote in-state production, while next best would be to accelerate gas exploration and production by mid-market producers in South Australia and Queensland.

And then there’s gas storage – injecting surplus gas into empty underground gas fields or large salt caverns, which is then delivered to market at times of peak demand.

Storage is cheap and quick to implement – certainly well within the time challenges faced by NSW – and most empty reservoirs are already connected by pipelines. All that’s really needed is some compression assets at surface or some pipeline expansion.

Ultimately, in this particular race, the course looks better suited to modest production expansion and gas storage than to expensive pipelines from distant fields.