Oz gas supply a political hot potato [NGW Magazine]

Australia’s emergence as a leading LNG exporter over the last few years appears to be pushing the federal government into adopting a position on a natural gas reserve policy.

In early July, it emerged that the minor Centre Alliance Party had traded its support for the government’s planned tax cuts in return for access to a preliminary review of the Australian Domestic Gas Security Mechanism (ADGSM) and a draft energy policy. Centre Alliance Senator Rex Patrick said on July 4 that he was “relatively confident” that a federal gas reserve policy would be approved.

Talk of a political answer to the question of rising gas prices has been denounced by industry body Australian Petroleum Production and Exploration Association (Appea), which argues that central and local authorities need to trust in a free market to boost gas supplies. The organisation points to a slew of new supply agreements for the domestic sector, the latest of which was announced on July 11. 

New deal

Cooper Energy has signed a three-year supply deal with packaging provider Visy for a total 7.6 petajoules (197.97mn m³) of gas starting from January 2020. The gas will come from the company’s Sole field, which lies in 120-130 metres of water in the Gippsland Basin offshore Victoria State. The gas will be supplied at an ex-plant price in line with the market and will be indexed annually. Cooper Energy added that the agreement has a three-year extension option.

Sole, which is expected to begin production in the third quarter once infrastructure operator APA Group completes the Orbost Gas Plant upgrade, is projected to deliver 68 terajoules (1.75mn m³)/day of gas.

Cooper Energy’s agreement with Visy follows its supply deal with power utility AGL in June. The developer is still negotiating with other potential buyers for Sole’s remaining uncontracted production for this year.

While Visy was upbeat about the deal, the company’s executive general manager of global procurement, David Abela, described the current conditions on the East Coast gas market as “tough”.

In welcoming the deal on July 11, Appea took the opportunity to say “all governments” should focus on “having more gas supply and more gas suppliers” in order to place downward pressure on gas prices.

Appea CEO Andrew McConville said: “This deal highlights the importance of developing new gas resources and the response industry is taking to accelerate delivery of more supply,” and added: “This new agreement brings the total to 79 new publicly announced gas agreements signed since 2012 in Australia, showing the strong commitment the sector has for the domestic market. Together, these contracts total more than 4,500 petajoules [117.22bn m³] of gas.”

The industry body is lobbying against mounting federal and state regulation of the gas industry, particularly where bans on hydraulic fracturing are concerned, as critics weigh in on rising gas and power prices. 

Political manoeuvring

The Institute for Energy Economics and Financial Analysis (IEEFA) has claimed in a new report that rising gas prices are behind higher electricity prices and has warned that Australia could end up relying on gas imports to meet 90% of its demand within just three years.

“Contract prices are A$8-12 [US$5.62-8.43]/GJ, which is three times what we used to pay – A$3-4/GJ – for many decades prior to 2015,” report author Bruce Robertson told the ABC on July 11. “The domestic gas reservation policy has to be at a price and the price that I have proposed is A$5/GJ.”

Appea, however, has refuted the report’s findings, saying that power prices have been driven up by overly concentrated wholesale and retail markets as well as poorly designed regulation and policy.

“The average [gas] price across the Australia economy in 2014 was around US$4/mn Btu and is now just over US$4.50/mn Btu. Prices for new supply have risen as a result of rising production costs and supply restriction caused by the impact of bans and moratoriums in southern states,” McConville said July 9.

He added: “A domestic gas reservation policy would act as an implicit tax on Australian gas production that diminishes incentives to invest in future gas production and exploration. This can lead to lower investment and lower gas production which in turn may cause higher prices.”

The IIEFA’s warnings came a week after the Centre Alliance Party’s revelation that it had been locked in talks with the federal government for around a month over a national gas reserve policy. 

Shifting political sands

Senator Rex Patrick said on July 4 that the party had been having “a running dialogue” with the federal government and revealed that Canberra had a “draft outline of how they want to approach things”.

Patrick then told the ABC: “[Australian Resources Minister] Matt Canavan has indicated he is open to a gas reservation policy.”

Finance minister Mathias Cormann, however, has said no firm deal addressing the minor party's concerns had been struck. He said that while the government worked with non-government senators on public policy issues, which included lowering gas and power prices, “these decisions have to stand on their own merit.”

At present, Western Australia is the only state to have a formal gas reservation scheme in place, requiring 15% of production from fields that feed LNG projects to be directed towards the local market.

While Queensland does not have a formal gas reserve policy, the local government has set aside certain exploration blocks with future output earmarked solely for the domestic market. Of the more than 39,000 km² of land Queensland has released for gas exploration since 2015, almost a quarter of that has been for domestic-focused developments.

While it remains unclear what the Canberra government’s plans are with regard to its review of the ADGSM or a possible gas reserve policy, it seems likely that such a move would win broad support beyond the energy sector. Not only are WA and Queensland already ringfencing production for the local market, but Australia Industry Group head Innes Willox said on July 4 that “a major response” was needed to ensure the local market received sufficient gas supply at the lowest sustainable prices.

Introducing a nationwide policy may encourage other states such as Victoria to drop their various drilling and exploration moratoria while likely winning political support from industrial and residential consumers alike.