Geoscience Australia
GGP: Australia's Conflicting Natural Gas Policies
The statements, opinions and data contained in the content published in Global Gas Perspectives are solely those of the individual authors and contributors and not of the publisher and the editor(s) of Natural Gas World.
This is an excerpt of an article by the Baker Institute, also published by Forbes on July 5, 2017.
On April 27, 2017, Australian Prime Minister (PM) Malcolm Turnbull announced a regulatory measure, Australian Domestic Gas Security Mechanism, that would give the Minister of Resources the authority to curb Australia’s liquid natural gas (LNG) exports. According to the Australian Prime Minister, “The shortage of domestic gas supplies has resulted in dramatically higher prices in Australia - higher than prices paid in the markets to which Australian gas is being exported.” The move is intended to protect domestic manufacturing industry that uses natural gas as a feedstock or fuel in an effort to help domestic job creation in manufacturing. Limits on LNG exports could come as early as January 2018 if the Minister of Resources, following consultation with industry, determines that there is a domestic market natural gas shortage.
Industrial gas users, including the Australian Industry Group, have praised the plan while the natural gas industry has stated its strong opposition to the measure. The gas industry considers the policy damaging to Australia’s reputation as dependable LNG supplier; a policy that would harm the competitiveness of Australian LNG as foreign consumers seek secure and reliable LNG sources.
Is the new policy truly an answer to the high natural gas prices in Australia? Will it really help Australia’s industry in generating new jobs? Or will the policy have as negative impact on the LNG trade (and ultimately the country’s economy) as the Australian gas industry argues?
The answers lie in the details of the Australian gas market and the reasons behind the shortages and high domestic prices of natural gas.
Australia’s Natural Gas Market & LNG Export Restrictions
Over the past decade Australia has experienced a rapid rise in natural gas production and is expected to continue on an upward trajectory. The production is supposed to more than double by 2030. Currently, natural gas is one of the country’s largest natural resources (after coal and uranium). Half of Australia’s natural gas produced today is exported and this proportion is predicted to grow by 2030s to circa 2/3 .
Approximately 66 % of Australia’s gas is produced offshore, in the Northern and Western parts of the country (Figure 1). This is also where most of the Australia’s LNG exports come from (Figure 2). The remaining 1/3 of Australia’s production relies on coal seam gas from the East and the South, including Queensland, Victoria and North South Wales. These three areas are also where most of Australia’s natural gas is consumed (72% of energy consumption in Australia in 2014-2015) and where natural gas shortages have recently emerged causing prices to skyrocket and prompting government to impose restrictions on LNG exports.
Figure 1.
Geoscience AustraliaAustralia’s identified natural gas and coal seam gas resources, and annual production (PJ)
Source: Geoscience Australia
Figure 2.
GISAustralia’s LNG Terminals
Source: Geopolitical Intelligence Services via Crystol Energy.
As visible in Figures 1 & 3, one of the most important features of the Australian market is lack of an integrated national pipeline system that can move natural gas across the country. This includes particularly poor connections (Figure 3) between the producing regions in the North and the West and the consuming regions in the East/South. As a result, approximately two-thirds of the country’s natural gas produced offshore of the North West Shelf has no way to reach heavily populated and industrialized regions in Eastern and Southern Australia.
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Figure 3.
Institute for Energy Economics and Financial Analysis.Map of Australia’s Pipeline Infrastructure, Existing and Proposed
Source: Institute for Energy Economics and Financial Analysis.
The situation has several important implications for the effectiveness of the proposed restrictions.
First, even though the export restricting regulations do not specify this directly, their reach will be limited, at least in the short to medium turn. Since offshore natural gas that feeds LNG terminals in Western and Northern Australia does not have pipeline connections to the consuming areas of the East, their exports have no impact on that part of the Australian market. Thus, according to the new measure, terminals in the North and West should be able to get Unlimited Volume Export Permission since these terminals “will be unable to deliver gas at reasonable price to a market experiencing a shortfall.” Export restrictions should not affect these terminals at least not until, if at all, a new pipeline connection is built. This suggests that only LNG terminals in Queensland fed by Eastern Australia’s coal seam gas will truly feel the impact of the regulation
Second, as promised by Prime Minister Turnbull, prices of natural gas in the region may indeed fall as a result of LNG export restrictions and prop up Australian manufacturing. But at the same time they may also contribute to lower investment in coal seam gas development going forward. Meanwhile, natural gas development has already experienced setbacks due to restrictive regulatory measures adopted within the consuming regions. For example, the gas hungry- Victoria and New South Wales have effectively banned all natural gas development on their territory by imposing moratoriums on shale and coal seam gas development. Lower production will cause gas prices to rise again and the problem is bound to reemerge. Thus, if we see any of price effects from the LNG export restrictions, they may be very short-lived.
Third, we may see LNG investment and throughput at existing terminals moving from the less-reliable - due to potential limits on exports- East to the less-affected West. For now the West LNG projects will provide the security of supply that many LNG importers require. But, since the measure relates to the entire country there is also the concern that protectionist policies may deter investment in LNG export infrastructure everywhere in Australia. Given government’s willingness to interfere with the markets investment in that country, new investment in LNG terminals may be considered as more risky.
Last, a government limitation on exports of LNG is particularly problematic considering that major growth areas for Australian natural gas are in Asia and not in domestic markets. Given the proposed restrictions, Asian customers may treat long-term contracts for Australian LNG as less reliable, which will reduce the LNG price they are willing to pay.
The Real Policy Solutions to Natural Gas Shortages in the East
Given the specificities of the Australian’s natural gas market, the real solution to the problem should be a two-pronged strategy that involves: (a) changes in regulations that currently slow development of coal seam gas in the East and (b) new cross-regional pipeline infrastructure that could move additional volumes of natural gas to the East. Such strategy will integrate the market allowing liquidity and flexibility for both the producing and the consuming regions.
But even though some in the Australian government realize its necessity, economic feasibility of the latter is for now in question. The major issue relates to high cost (in excess of $5bn Australian) when much of the gas that is developed today in the West is already allocated to international customers. In addition, the new export restrictions will make gas producers in northwestern Australia reluctant to support a pipeline interconnect since such pipeline would effectively subject their gas to potential government restrictions on LNG exports intended to protect manufacturers in the East.
Changes in regulations that block natural gas development in the East and South are also difficult but may have better chances to be realized in the short term. It seems the national government starts to understand this need as it began to push against the fracking bans in the East and South. But it will be a difficult task given the general anti-fracking sentiment among the Australian population and strong opposition from farmers, environmental lobby and the Green Party. To gain broader support, the government needs to respond to concerns about possible environmental issues. Particularly, it needs to have a plan how to prevent negative externalities associated with natural gas development, including issues of water and soil quality and air pollution. The government should also educate the public as to the environmental benefits that natural gas provides when compared to coal and how these benefits fit into the country’s renewable energy mandates.
Will the New Policy Work?
A closer look at the Australian natural gas market suggests that effectiveness of the new policy in achieving government objectives when it comes to manufacturing jobs may be rather limited. Also, as Australia may quickly learn, policies that ban energy exports may have many unintended consequences. East Australia’s natural gas users may experience some short-term relief in terms of lower natural gas prices. However, the region itself, and possibly the country, may find that the move negatively affected their economies as a whole, as upstream investors and international LNG customers react to Australian policies.
Meanwhile, not LNG exports but other factors are responsible for natural gas shortages and high prices. If the Australian government really wants to address those issue, it needs to strive for a nationally integrated natural gas market. This means natural gas development that connects points of supply and demand within and across provinces. This may be difficult given the costs as well as local regulations that currently ban natural gas development in many of the gas-consuming areas. Here the government should listen to concerns that are at the heart of the local regulations restricting natural gas development and take a more active role in addressing them in an economically and environmentally responsible way.
Michael Maher is a senior program advisor for the Center for Energy Studies at Rice University’s Baker Institute for Public Policy.
Anna Mikulska is a nonresident fellow for the Center for Energy Studies at Rice University’s Baker Institute for Public Policy.
The statements, opinions and data contained in the content published in Global Gas Perspectives are solely those of the individual authors and contributors and not of the publisher and the editor(s) of Natural Gas World.