In the first article in New Matilda’s series on the future of Australian energy, Ben Eltham examines Australia’s gas industry. Despite a huge boom in production in eastern Australia, gas prices are set to skyrocket. And that could flow on to electricity prices. It’s a good lesson in the complexity of local energy markets.
North-east of Roma, hundreds of gas wells dot the dry landscape of Queensland’s interior. Roma, the heartland of Nationals country country west of Toowoomba, is in one respect the birthplace of the Australian gas industry. According to local gas giant Santos, the township is the site of the first natural gas discovery in Australia. This gas was later used to light the street lamps of Roma for 10 days in the early 1900s.
If you pull up the ABC’s wonderful website devoted to coal seam gas exploration in Australia, you can see the locations of gas wells drilled throughout inland Australia. They cluster thickly around Roma and in the upper Hunter Valley, but exploration is continuing all over inland Queensland and New South Wales.
Coal seam gas is big. Really big. Australia’s LNG exports already account for 8 per cent of the world’s total liquefied natural gas (LNG) exports, and we’re on track to becoming the world’s second largest exporter by 2015. Bond University’s Tina Hunter estimates that there are plans to drill over 40,000 wells in Queensland alone over the next five years.
According to the Bureau of Resource and Energy Economics, there is an estimated $166 billion worth of gas export projects under construction in Australia right now – and that’s not counting the projects on the drawing boards or winding their way through planning approval. The development around Gladstone is particularly rapid, with three huge LNG plants being built at the central Queensland port, all of which will turn coal seam gas into valuable LNG for export to Asia.
The chart below is from Australian gas company Santos. It shows Australian gas reserves, and gas production. As you can see, reserves have doubled in less than 15 years, driven by new exploration off the north-west coast of Western Australia, and by a huge increase in exploration of coal seam gas in inland Queensland and New South Wales. Between 2000 and 2010, Australia’s estimated reserves of coal seam gas were doubling every two years.
The wildcat boom in gas has caught most Australians by surprise. Many farmers and rural landowners had no idea that mining companies could legally come onto their land without their permission and drill in search of gas. The hydraulic fracturing process employed — known as "fracking" — has been deeply controversial, with many environmentalists and water scientists raising concerns about the effects of the process on underground water tables.
That gas boom has also sparked a blowback, in the form of a fierce community protest movement opposed to coal seam gas drilling. New Matilda’s Kate Ausburn has been covering fracking and the Lock The Gate movement for some time now; the movement has mobilised community support in unusual quarters, from conservative talk-radio hosts like Alan Jones, Liberal Senators like Bill Heffernan, veteran Greens politician Drew Hutton, as well as hundreds of farmers and environmentalists.
But despite the high-profile battles by Lock the Gate and other protesters, the gas boom continues. Despite recent halts on fracking by several of the state governments, the big gas producers have plenty of wells approved and expect to be able to produce enough gas for the three big Gladstone plants by the time they come on line later this decade (it’s worth remembering that not all coal seam gas is harvested by fracking). For their part, state governments are simply too greedy for the extra royalty revenue to slow down coal seam gas for long. Just today, New South Wales Deputy Premier Andrew Stoner announced the end of the fracking moratorium in New South Wales, allowing coal seam gas drilling to resume.
What’s driving the boom? In a word, Asia. Despite a huge boom in unconventional gas in the US in recent years, demand for gas worldwide is still strong enough to keep forecast world prices well above Australian domestic prices. A 2012 report by accounting firm Deloitte points out (pdf) that "by 2020, Southeast Asia will have nearly 25 million tons of LNG import capacity, according to some analyst estimates — with countries including Thailand, Malaysia, Indonesia, Singapore, Philippines, and Vietnam expected to have import terminals." And those rapidly industrialising economies want our gas.
What that means is that by the second half of this decade, the three big LNG plants being built at Gladstone will be exporting huge quantities of Australia’s domestic gas supply — as much as they can get their hands on. Back in April, Michael Fraser, the boss of big electricity company AGL, warned that "Gladstone is going to be like a giant vacuum cleaner for the east coast gas market hoovering up all the gas it can get its hands on." This, in turn, is expected to drive the domestic price of gas up.
When Deloitte released its gas report early this year, it warned that "eastern Australia’s gas market is currently facing an unprecedented convergence of issues that have the potential to both transform it into one of the world’s largest LNG exporters, while also threatening the future security of its domestic gas supply." The Deloitte report points out that "with the emergence of a booming LNG export market … there will be significant pressure on supply in eastern Australia over coming decades."
Gas price forecasts vary, but some have future prices on east coast rising to $9 a gigajoule. This means the price of your gas bill could soon be rising — and sharply. The Melbourne Energy Institute’s Dylan McConnell agrees. "The historic price for domestic gas in Australia has about $3 a gigajoule," he told me in a phone interview in August. "I don’t think we’re going to see that ever again."
Respected energy analyst Jenny Riesz also sounded the warning bells in a widely read report for AECOM in July. Riesz argued that with Australia’s gas prices becoming increasingly linked to the export price for gas, "this creates a growing degree of domestic gas market exposure to the uncertainty and volatility inherent in international markets." Secondly, she argued, "there is expected to be a strong trend towards investment in gas-fired generation in Australia," which means that "electricity prices are likely to become increasingly linked to domestic gas prices."
Riesz thinks that gas prices are almost unpredictable, but if overseas demand deos hold up, domestic prices are definitely heading north too. And that means that electricity prices will go up too, because so much of the national grid is moving to gas-fired generation.
Veteran fossil fuel lobbyist and industry analyst Keith Orchison points out that many domestic gas contracts will expire in the near future, just as Gladstone comes on line.
"Here in New South Wales, the really significant issue is that the current gas contracts run out between 2015 and 2017, and this is 95 per cent of the state’s gas supply," he said in a phone interview last week. "Now, it’s not that we’re running out of gas, it’s that we’re running out of contracts, and there’s going to need to be a whole new approach to that in New South Wales." Orchison observes that if supplies for domestic gas aren’t guaranteed, a situation could emerge similar to what has happened in Western Australia, where domestic gas prices have soared. Gas is now so expensive in the west that coal-fired power generators are ramping up their electricity output, because even with the carbon tax, burning coal is cheaper than gas.
ROAM Consulting’s Joel Gilmore thinks this could happen on the east coast too. "We have been hearing every possible gas price you could think of," he says. "That ranges from prices staying around about where they are now with just moderate growth, up to some really significant price rises. There’s potential for very high gas prices in the future."
"Probably as big a driver of anything in the future is not just the carbon price, but that gas price. If you have a really high gas price, that means gas is very unattractive [for generating electricity, and either you build coal, which probably is not going to be the right move, or you’re going to start building renewables and solar PV maybe looks competitive."
But if high gas prices mean a new lease of life for dirty coal, they also eventually mean good news for the renewable energy sector. As Kane Thornton from the Clean Energy Council observes, "we’ve already seen Origin Energy come out and say they don’t want to do any more gas generation for the next decade at least, so that I think is a recognition that there’s a trend at play there."
"I think it’s an acknowledgement that gas prices are going to continue to strengthen and really I guess it’s just a matter of time, therefore, before renewable energy is cost competitive with gas," Thornton says.
Who would have thought that a boom in coal seam gas production could lead to higher gas prices, more coal and more renewable electricity? But that’s the Australian energy industry for you, where negative feedback loops like this are surprisingly common. On Thursday, we’ll explore the industry in more detail, in a special statistical report.
The boom in gas and the potential impact of that boom on the future shape of Australia’s national electricity market is just one of the ways in which the domestic energy industry is distorted by a complex mess of competing economic and policy incentives. Later in this series we’ll see some other examples, like the notorious "phantom certificates" created by the Rudd government in one of Labor’s worst decisions in office.
Ultimately, no-one knows what the future price of gas will be, whether Australia’s gas boom will intensify, or peter out quickly. If there’s one constant to energy in this country, it’s uncertainty.
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