Authors: Bernadette Cullinane, Nye Hill
Despite Australia being on the verge of becoming the world’s largest producer and exporter of liquefied natural gas (LNG), its domestic gas supply position is looking much less secure.
Gas-powered generation (GPG) now plays a crucial bridging role in our energy generation mix as the National Energy Market transitions to lower carbon energy sources to meet emissions targets. The AEMO’s 2017 Gas Statement of Opportunities (GSOO) published in March analysed the ability of eastern and south-eastern Australian gas markets to meet energy demand and identified a number of vulnerabilities in the domestic gas supply chain. GPG demand is increasing at precisely the same time as shortages of gas have become very apparent. Domestic gas production is declining at an alarming rate and is expected to decline by an additional 20% by 2021. This has been compounded by the lack of investment in infrastructure and reduced exploration spend. Australian petroleum exploration expenditure fell by 53% from 2015 to 2016 to $1.8 billion. Both onshore and offshore exploration recorded sharp declines.
The AEMO’s recently released Energy Supply Outlook, published in June, factors in updated production forecasts from gas producers and an increase in GPG demand. This report does not fundamentally change the outlook and confirms the Australian gas market remains ‘finely balanced, with continued risks of shortfalls’.
LNG exports have changed the market
The GSOO notes LNG export demand has effectively ‘changed the dynamics’ of the east coast gas market. Through the LNG linkage that connects Australia to the global market, Australia’s domestic gas sector has become more volatile. The sheer scale of LNG exports means small gas supply chain disruptions can now have a large impact on domestic gas supply and demand in eastern and south-eastern Australia.
Over the next five years, energy shortfalls are expected in each of the southern states with the gas supply crunch particularly severe in New South Wales and South Australia. Looking further ahead, Queensland is expected to experience a material gas supply shortage by 2030. In all these states, additional gas production will be required to meet gas powered generation demand and the needs of residential, commercial and industrial gas consumers.
But the problem isn’t due to a lack of supply – the gas is there – it’s an investment problem with a number of barriers preventing supply development. Additionally, uncertainty in Australia’s carbon policy has also been a factor constraining investment. Environmental issues aside, state moratoria and bans of onshore drilling is significantly hurting the overall supply situation.
Western Australia is not immune to gas supply issues either. While the state’s gas market appears balanced, unlike its supply starved eastern counterparts, supply risks may emerge in Western Australia’s gas market after 2021 in absence of new gas field developments. Due to reserve depletion, several major gas producing regions are nearing the end of their natural life. A chronic lack of exploration activity is adding to the future supply tightness scenario.
The solution will require a number of options
The solution to Australia’s gas supply crisis will likely involve a number of options – new gas field developments, construction of new gas infrastructure (pipelines, interconnectors, processing centres), increased exploration and productivity initiatives at existing facilities are all mandatory elements of the solution.
Government policy (both at the federal and state level) towards resources exploration and development appears to be somewhat more supportive than it has in the past. While there have been recent allocations by the Federal Government of acreage for exploration and development in various under-explored regions of Australia, more is needed. At the state level, the Queensland Government has released some blocks for coal seam gas (CSG) exploration in the Surat Basin and the South Australian Government has launched a grant based program (PACE) to accelerate gas development in the state.
Furthermore, there are at least five major pipelines under consideration. Each of the pipeline proposals have their pros and cons and come with high price tags. Developers will need to negotiate complex land access and environmental barriers. For some, like the hugely ambitious West-East pipeline linking Western Australia’s offshore gas fields to the customer markets in the east, the costs may be prohibitive. Building an LNG receiving terminal on the east coast and shipping LNG from one of the offshore gas fields in Western Australia may be a less capital intensive option. As we’ve seen with the shelved Bunbury to Albany gas pipeline proposal, getting a major gas pipeline project approved and built is by no means guaranteed
A role for government and energy policy
The energy security issue is too big for the private sector to solve by itself. There’s a role for government here whether it’s setting the right regulatory and policy signals to encourage investment, allocating land for domestic gas production and lifting the moratorium that currently exists in some jurisdictions to create a positive climate that incentivises supply development. A stable long-term carbon policy is also essential.
A holistic view is needed
Given the interdependencies and energy market convergence, there needs be a holistic view of the market. Gas and electricity can no longer be treated as separate, autonomous markets. They are intrinsically connected, part of the same ecosystem and should not be looked at in isolation. This convergence will strengthen as Australia’s energy market transitions from a primarily fossil-fuelled system to one powered by renewable energy sources. There’s a need for clear planning across the entire supply chain.
The only way to meet gas demand for exports, domestic manufacturing, and energy generation in a sustainable manner is to increase supply. There’s an urgent need to accelerate the pace of gas field development given the expected supply constraints and to build the infrastructure to bring new supply to the market.
Doing nothing is not an option, and the time to act is now.
Bernadette Cullinane is Deloitte’s Australian Oil & Gas Leader and Nye Hill is Senior Research lead in Deloitte Australia’s Market Intelligence team
 The Australian Government’s ‘Resources & Energy Major Projects’ (Dec-16): https://industry.gov.au/Office-of-the-Chief-Economist/Publications/Documents/req/Resources-and-Energy-Major-Projects-December-2016.pdf