Perspective: Australia's Natural Gas Industry Should Worry About Demand, Not Supply

By Clyde Russell, Reuters columnist

SYDNEY (Reuters) — Australia, the world's largest exporter of liquefied natural gas, is facing a dilemma when it comes to domestic demand for the fuel, as the government's plans for a gas-fired economic recovery run into some confronting realities.

Boosting exploration, which would require new pipeline infrastructure to carry fuel from remote parts of the country, is often discussed as a solution for the shortfall in supply domestic gas consumers will face with two or three years.

The exploration and production industry is increasingly warning it will be difficult, if not nearly impossible to boost output in the time available.

It may seem incongruous that a country that has in the last 10 years overtaken Qatar to claim the crown as the world's biggest shipper of LNG is facing a shortfall in supply that threatens an already under pressure manufacturing base.

But a combination of over-investment in LNG export terminals on the populous east coast, restrictive government policies in some states and at a federal level and Australia's challenging geology and vast distances now threaten to radically re-shape the country's natural gas sector.

The message from speaker after speaker at last week's Australian Domestic Gas Outlook (ADGO) conference in Sydney was consistent.

There isn't enough natural gas to meet demand, what gas there is to be found and developed is likely to be considerably more expensive that the discoveries of the past, and what new gas can be brought to market can't be delivered fast enough.

The solutions proposed by industry and the federal government all seem possible, but probably insufficient.

Boost exploration, perhaps with government subsidies, in order to bring new production online, is the most commonly touted solution.

But the complication here is that the most prospective basins are in remote parts of the country, will be expensive to develop and will require extensive pipeline infrastructure to be built in order to transport the fuel vast distances.

In other words, this will be expensive gas, unless the government is prepared to back its gas-led recovery plans with massive subsidies, something that may be difficult to sell to an electorate that would rather see money spent on more tangible benefits like health care and education.

Australia's domestic gas market on the east coast, which is home to the major cities of Sydney, Melbourne, Brisbane and Adelaide, benefited from years of cheap natural gas, as the fuel was produced as a by-product of crude oil at fields off the southern coast, effectively allowing the higher-priced crude to subsidize the gas.

As those fields were depleted of liquids, this cross-subsidy ended, and along with it much of the cheap gas. At the same time, three LNG export terminals were built in the northeast state of Queensland, based on a world-first process of using coal seam gas as a feedstock for LNG.

Another potential solution seen by some in the industry is to develop LNG import terminals near Sydney and Melbourne, and import the fuel from other exporters, such as the United States.

While this would add to supply, it wouldn't solve the problem of high prices, as LNG imports would be at the prevailing international price, which in all likelihood would be higher than the current domestic price, which is largely based on an LNG netback price, in other words the price received by the LNG exporters before shipping and other costs.

TIME TO QUESTION DEMAND?

The elephant in the conference room at ADGO was that the speakers assumed that the demand forecast from the Australian Energy Market Operator for the next 20 years was somehow set in stone.

The market operator produced a report last year that estimated natural gas consumption at around 2,000 petajoules and forecast it would be flat to gently increasing in the next 20 years.

It's fair to assume that LNG's share of that will remain steady, and it accounts for some 73% of annual gas consumption.

However, if Australia does face higher domestic gas prices, that 27% of remaining demand is under serious threat.

Gas-fired power is already declining in the face of rising renewables such as wind and solar, and the rapid increase in grad-scale battery storage is a further threat to the role of gas as a supplier of peaking electricity.

Household gas demand is also under threat from higher prices as consumers will switch to alternatives for heating and cooking, especially given retail electricity prices in Australia have been trending lower in recent years as cheaper renewables claim an ever-increasing market share.

And industrial users of gas, such as the chemicals, fertilizer and glass-making sectors, face competition from cheaper imports of their products from Asia and may decide to switch to buying from overseas if the price of natural gas erodes their margins too far.

The main risk for Australia's domestic gas industry isn't that it can't meet demand, it's that demand will shrink enough that the industry doesn't need to develop new resources.

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