LWP BLOG – Gas giant running out of puff

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Gas giant running out of puff

The swirling paradoxes of the Australian energy market have been making themselves felt for quite a while but have been hammered home particularly hard in recent months.

The first paradox is that ambitious state-based targets for the use of renewable energy – wind and solar – have been blamed for undermining the reliability of energy supplies.

The subsidising of intermittent wind and solar power is displacing the traditional bulwark of baseload power, coal. But if there is not readily despatchable backup baseload power available, the reliability of supply is threatened.

The community appears to have decided that it wants gas to be this backup baseload generator instead of coal – but Australia doesn’t have enough of it.

The second paradox is that the world’s largest LNG exporter could become a gas importer. After a $200 billion investment in liquefaction and shipping facilities, Australia is hitting its straps as an LNG exporter as big coal seam gas (CSG) deposits along the eastern seaboard are tapped.

But demand for CSG is running ahead of supply: the LNG exporters, battling to fill contracted orders struck years ago – when their plants were in the planning stage – have been forced to divert gas from the domestic market to meet their export contracts.

But with LNG export volumes forecast to grow by 35% a year to 2018, it’s starting to worry people that the cost of gas will rise – with domestic gas prices approaching LNG export parity. So while Australia becomes the world’s biggest exporter of gas through its LNG industry, it could also become a gas importer to bridge the supply gaps in the domestic market.

The two paradoxes both point inexorably to the need for more gas.

In August last year, the Climate Change Authority estimated that gas-fired generation would need to at least double – and possibly triple – to allow Australia to meet its 2030 targets of reducing carbon dioxide emissions to 26–28% on 2005 levels.

A third possible paradox is that as we use more renewables, we need more gas for backup. Intermittent renewable energy needs “on-call” backup electricity generation to manage falls in renewable output or spikes in demand. Gas-fired generation is the only technology that can deliver this flexible response.

So even as the nation transforms to lower-emission energy, we need access to new gas reserves to meet Australia’s energy demand.

But what do we have on the new supply front?

Very little.

This is not just the reaction to the restrictions that New South Wales, Victoria and the Northern Territory have applied to new gas developments. It is also a result of the belt-tightening that ensued among petroleum explorers in the wake of the collapse of the oil price from US$115 a barrel in June 2014 to under US$35 at the end of February 2016. Where explorers are allowed to explore, they lack the capital to do it and the market won’t give it to them.

Australia has massive gas reserves but governments lock up large proportions of these reserves. However, this policy is beginning to look more unwise by the day.

The solution is co-ordinated government policy to promote gas exploration, not least of which could be a re-examination of unconventional gas.

According to the Australian Financial Review, New South Wales imports 95% of its gas needs but has a moratorium on CSG. In particular, the New South Wales has stopped the development of Santos’ CSG project at Narrabri that could supply 60% of the state’s gas needs.

Whatever the source of gas, it’s time to look at gas drilling proposals on their merits.