October 10, 2017
Eastern Australia must expand its gas supply.
We need to relieve tight domestic gas market conditions and put downward pressure on prices.
We need to guarantee energy security.
We need to maximise the return to the community from the nation’s gas resources.
The consequences of not supporting gas development are deeply undesirable:
- Higher energy costs – electricity and gas – for industries and households;
- Higher emissions from the generation sector, assuming that gas would otherwise have replaced coal-fired plants;
- A loss of competitiveness for industries that need gas as a feedstock and for energy;
- Lost opportunities for regional development;
- Diminished revenue for governments;
- Lost export dollars; and
- A shrinking local supply chain with fewer jobs.
These are powerful reasons for every government in eastern Australia to make gas development an urgent priority.
We must make investment decisions now if we want to avoid, in the near future, supply risks and escalating prices.
The $50 billion challenge
McKinsey & Company estimates we must spend up to $50 billion between now and 2030 to ensure that new supply is brought into the market to offset falling production from our traditional reserves.
Gas projects have long lead times – so key decisions must be made before 2020.
If we act promptly, we will replace declining output from traditional fields and deliver stable prices. IN this scenario, McKinsey estimates production costs of around $8 per gigajoule.
But if we delay investment, we risk seeing supply shortfalls. This would create unnecessary volatility and higher prices. In this scenario, McKinsey estimates future prices of up to $12 per gigajoule.
Finding and developing the next wave of gas resources on the east coast is a massive challenge. But the industry has already demonstrated – in Queensland and South Australia – that it can deliver.
Despite all the political restrictions imposed on the industry and savage hits to balance sheets, producers have more than doubled gas production in just five years.
In less than a decade, the industry has successfully converted coal seam gas from an intriguing idea into 45% of the gas used in the east coast market.
Producers can deliver a large, secure supply to the east coast market.
But do our policymakers understand what is at stake and are they willing to do their part in supporting that development?
States of disarray
Oddly, the problem is at its worst in the states most exposed to supply risks and higher prices.
Victoria has no onshore gas production. It relies on production from offshore basins in Commonwealth waters – basins that are now in decline.
NSW has virtually no local gas supply – more than 95% of its gas comes from interstate – and its last producing asset will close in 2023.
New supply will enter the east coast market over the next two years – but it will not be in these states, with the possible exception of the Narrabri project.
States facing such risks should be anxious to promote investment in local supply.
Yet Victoria has banned all onshore gas development – conventional activities are barred until 2020 and there is a permanent ban on unconventional operations. The government has felt no need to present any evidence of environmental or economic risks to justify its decision.
The NSW government has a Yes-No approach. It claims to be open to business, but boasts of closing nearly all the State to exploration. And it seems to be in no hurry to release new acreage or to approve the only live project in the State.
In contrast, Queensland produces enough gas to meet the State’s local demand, as well as exports.
And in recent months, Queensland gas has flowed into Victoria.
Now the three east coast LNG producers have committed to give domestic customers the first opportunity to buy all their uncontracted gas.
This eliminates the risk of shortfalls in southern markets in 2018 and 2019.
But it is an expensive solution.
The ACCC says transport costs mean there is a 25% price premium to be paid by southern customers for Queensland gas.
Interstate gas is more expensive than local supply.
It is well past time for a co-ordinated effort by the Commonwealth, States and the Northern Territory to support a strategy to develop east coast gas supply.
The consequences of politics as usual are becoming too obvious to be ignored.
Exploration is essential
The starting point must be reviving exploration.
Exploration is at a 30-year low – hit by difficult market conditions, escalating regulatory costs and political bans.
The South Australian and Commonwealth governments have launched programs to pull forward semi-mature gas projects.
Sensible reforms to improve acreage release would also help.
But – above all – prospective resources in Victoria and NSW should be made accessible.
Few people would dispute that we are at a tipping point in the east coast gas market.
The commitments of the three LNG projects give us security for the next two years.
This buys time to make the necessary changes to ensure our future supply, foster more competitive markets, and contain the rise in gas prices.
During that reprieve, our political leaders can choose to continue to pretend that there are not hard economic consequences from restricting gas development.
Or they can accept reality.
Gas is indispensable to our economy.
Governments must re-enter the public debate about unconventional gas and must also build confidence in the community.
We need a web of trusted, independent agencies that can provide impartial information and facilitate sound community-industry relations, as is the case in Queensland.
We need honest leadership that encourages honest debate and evidence-based policy for the long-term health of our economy.
This blog post is a condensed version of a speech given to the AFR Energy Summit on 9 October.