Australia’s domestic gas markets have been a critical focus area for the industry over the past 12 months, as we look to new supply sources for the market. Ahead of the Australian Domestic Gas Outlook Conference, being held in Sydney from 4-7 March 2019, Graeme Bethune, CEO, EnergyQuest; Jim Snow, Executive Director, Oakley Greenwood / Adjunct Professor, University of Queensland Energy Initiative; and Saul Kavonic, Head of Equities Research, Oil and Gas, Credit Suisse, share their perspectives on some of the critical issues affecting the sector.
What do you see as the biggest challenges right now for the domestic gas sector?
Graeme Bethune: Finding the next source of gas for the domestic market is the biggest challenge. Exploration needs to increase, and be supported. We need to move past popularist government policies, to support the adding of new supply.
Jim Snow: The biggest challenges relate to supply of gas to the east coast market – especially given that in two years BHP ESSO are forecasting a halving of their production output which could see 200PJ less for the east coast – effectively shorting NSW and even forecasting a small deficit for Victoria in 2022. This will occur within a pricing constraint of LNG netback, which will effectively cap prices on the east coast (via the ACCC and relative mechanisms) – it is unclear how the sudden but very large drop in supply (mainly for NSW) will be managed other than more gas from Queensland or via LNG imports. Other new supplies such as NSW CSG will add to market, and the 2018 AEMO Gas SOO was optimistic new reserves would be booked and these supplies could be brought to market – and that is the challenge. Given this challenge, gas prices will remain at LNG netback (and would have gone higher without the regulatory constraints) and we will see more demand reductions. East coast demand could well fall significantly in the next five to ten years in the industrial, commercial and residential sectors.
The other issue will be the role of gas for power generation. As renewables continue to take energy out of the National Energy Market, they will expose the market to a greater need for synchronous generation or similar alternatives (read: a NEG). The forecasts for gas supply for this sector to increase from 2025 are logical and this could vary a lot relative to how coal generation withdraw from the market, and how fast equivalent system support, such as hydro, can be made available. The Gas SOO numbers vary from 30PJ/a for the weak case as a minimum to anywhere up to 300PJ/a for the strong case – again the domestic gas demand variances are really controlled by this sector and its outcomes.
I also think the other major challenge for the sector will be adapting to a potential change in Federal Government to a Labor-led Government with quite different, and aggressive, targets and policies for the reduction of greenhouse emissions in the economy.
Saul Kavonic: One of the biggest challenges for the east coast gas sector is presented by populist government interventions, and rent seeking behaviour, being prioritised over considered measures to accelerate supply side responses. Only the latter will prove sustainable.
As a result, what priority policy and regulatory steps do you support for addressing the east coast gas “crisis”?
Graeme Bethune: Long term consistent policies should be set to support industry risk takers. Australia has extremely remote areas which struggle to find market demand support. Governments can facilitate access to markets, for example buying gas to generate electricity in a way which supports the early stages of gas appraisal and development. Recognise that the time frame for gas projects and LNG do not always match the manufacturers or gas users preferred time frames. There will be disconnects from time to time, and policies should be set which smooth these bumps.
Jim Snow: Get more gas into the market – this will solve the availability and contracting issues – but pricing will not be relieved until we have excess supply across a number of sellers – real competition to off load gas. WA has proven this to be the case. Policies directed at accelerating supply will also only be useful if the costs of that supply is less than the cost of LNG netback or importation. I suspect this will not be the case without major intervention – for example new supply from NT may be economical or Queensland through its domestic-only gas acreage extensions coupled with new (maybe subsidised) infrastructure. The other critical government role would be to create a far more open market in terms of price discovery and more consistent contractual terms for trades – this will create a derivative market and materially assist with the efficiency of the market for all involved, particularly for investment – there are ways to make this happen but it would likely involve government intervention.
Saul Kavonic: The biggest priority for east coast gas policy should be for the government to halt rushed populist policy measures like the ADGSM and return to proper consultative policy development processes. To that extent, the government needs to address the political imperative of saving at risk manufacturing jobs, then targeting at risk manufacturing for direct government support alongside a transition plan to sustainability via gas efficiency/substitution is likely to be a preferable outcome to distorting the entire gas market via export controls in a blunt attempt to try achieve the same goal.
What infrastructure developments do you feel would be the most likely to bring long-term gas security?
Graeme Bethune: LNG import terminals will take some of the pressure off long term gas supply concerns and the political pressures on gas prices being high compared to overseas. There needs to be optimal sharing of infrastructure, particularly in remote areas. However, infrastructure alone does not bring long term (domestic) gas supply, only exploration does that.
Jim Snow: Gas security is about supply, not price so LNG importation will work here as would domestically focused new reserves – and this will require new transmission pipelines I suspect – from Queensland and NT.
Saul Kavonic: Gas pipeline expansions, more effective use of gas pipeline and processing infrastructure, and new gas pipeline and processing infrastructure will likely be needed to enable gas supply security over time.
What do you expect to happen to the market between now and 2025?
Graeme Bethune: The market will be reasonably balanced for the next few years (until 2022), and then scramble to fill the gap as Gippsland begins to decline. Peak electricity and gas days will be early warnings of supply and demand issues to come.
Jim Snow: The gas industry is like any other commodity market (just way less efficient in price discovery) so economics tells us what will happen – supply will remain very tight, prices will remain high (LNG netback) and economics tells us this will mean a reduction in demand as the demand side uses price to ration the supply. We will end up with some new equilibrium as gas intensive industries decline in use (which they are rapidly but gas price has to be recognised as just one issue here in such decisions), others use alternatives (easy now in the residential, and commercial sectors – reverse cycle air conditioning and solar), etc. – these changes may also have some inefficiencies due to poor market price discovery – so demand may even over react or supply investment under react.
Saul Kavonic: East coast domestic gas prices are now linked to global LNG prices, so we could see a dampening of domestic gas prices from recent highs over the next couple years as more global LNG supply comes online. But there is a real risk of LNG prices spiking early next decade, which could put upward pressure on domestic gas prices, and which may be exacerbated if pipeline infrastructure becomes increasingly congested.
Do you support LNG imports to east coast?
Graeme Bethune: LNG import terminals will provide gas supply at a price i.e. it is not dependent on exploration and development programs. They will decrease pressure to force development of domestic gas, and the adverse investor implications. Supply would be closer to markets, and compete against pipelines. LNG import terminals would give peak day and seasonal swing support, decreasing the supply risk, and political embarrassment of outages. We won’t need the five terminals being studied, but one or two may be feasible.
Jim Snow: It is has logic in such a market environment and will bring more gas security to the east coast market but not lower prices due to its inherent links to LNG pricing – although there may be some discounts in LNG glut times which is not to be ignored. These could end up risky investments later on if more volume does enter the market or demand declines but suspect they will have by that stage marginal requirements for returns. Probably also good for Australia as it does add optionality to a tight market.
Saul Kavonic: With five LNG import proposals to date, Australia now appears to be planning to overbuild LNG import capacity in response to an overbuild of LNG export capacity (only in Australia’s LNG industry!). Import terminals that are reliant on industrial buyers to sign term deals will struggle to proceed in our view. LNG imports remain an overall inefficient outcome for Australia. The recent ACCC gas inquiry reports show that industrial buyers can, and do, achieve better pricing through the domestic pipeline network than they can through imports, so we can’t see industrial buyers having appetite to lock in to LNG import pricing. We also expect a possible future ALP government could be even less amenable to LNG imports, likely ruling out any near-term government support. LNG import terminal FIDs may be delayed into 2020, by which time pipeline regulatory reforms will likely be kicking in, potentially further reducing the business
Each year, the Australian Domestic Gas Outlook (ADGO) conference brings together the who’s who of the industry, for high-level discussions that will set out the future direction of the industry, to debate policy imperatives and discuss how commercial opportunities can be seized.To find out more visit https://www.adgoconference.com.au/