[NGW Magazine] Australia's Export Dilemma
This article is featured in NGW Magazine Volume 2, Issue 19
By Shardul Sharma
Australia’s federal government is placing a burden on exporting producers, requiring them to supply gas to domestic consumers first. If they cannot supply what is needed, their exports will be at risk.
The latest pronouncements by Australia’s prime minister Malcolm Turnbull do not completely rule out the possibility of some sort of restriction on the export of gas from the country’s liquefaction projects in Queensland, on the east coast. But they do make them less likely, according to their likely treatment under the Australian Domestic Gas Security Mechanism.
Turnbull met with the heads of the three LNG producers – Origin, Santos and Shell – September 27 and October 3 to discuss the east coast supply situation. The government has managed to sign an initial agreement with the three producers who have given their assurances they will next year offer to the domestic market enough gas to equal the supply shortfall, as predicted by the Australia Energy Market Operator (AEMO).
“Today the heads of the three big east coast gas exporters signed their commitment to ensure sufficient domestic gas supply to meet the expected shortfall. This commitment is vitally important in ensuring Australian families and businesses have affordable and reliable energy,” Turnbull said October 3.
“We hope that through the heads of agreement, indeed we can find a path forward to make sure that the domestic market is serviced and that indeed there is enough available gas for the market, which we stand behind and are committed to deliver,” Shell Australia’s Zoe Yujnovich said, on behalf of Queensland Curtis LNG.
The AEMO said September 25 that the gas supply situation was still looking tight in the eastern and south-eastern Australian markets in 2018 and 2019. AEMO‘s report updated the 2017 Gas Statement of Opportunities to provide the latest domestic demand and supply market information, as requested by the then federal minister for resources and Northern Australia in late July 2017.
It projects a shortfall risk for 2018 between 54 PJ and 107 PJ, and in 2019 between 48 PJ and 102 PJs. These projections are significantly higher than its predictions from March this year. The total projected demand for domestic gas is expected to be about 642 PJs in 2018, and 598 PJs in 2019. The Australian Competition and Consumer Commission (ACCC) issued a similar warning in its Gas Inquiry 2017-20 Interim Report, also issued September 25. The ACCC reported last year, in its East Coast Gas Inquiry, that the Queensland LNG projects caused a significant disruption to the market and the supply-demand balance. In 2018, the LNG projects will together produce over 70% of the east coast’s gas and account for two-thirds of the east coast’s gas demand.
The three LNG projects – Santos’ GLNG, Origin’s APLNG and Shell’s QCLNG – are all in the state of Queensland and all rely on coalbed methane, rather than shale gas production. The LNG producers have also given a commitment to provide regular reporting to the ACCC on sales, as well as offers to sell gas and bids to buy gas that they have declined.
The availability of an alternative market on their doorstep could be a welcome alternative to exports, where buyers are spoiled for choice. Long-term offtakers could agree to sell gas to Australia although this would pose added logistical complications, a producer told NGW.
Turnbull has called the Australian gas industry “very opaque.” He said: “There has been very, very little transparency. We are going to bring that to an end by putting the ACCC on the case. They of course have the ability to investigate with compulsory powers, and they have been able to get behind what is going on in the gas sector and therefore identify the way in which the market is not working.”
At the same time Turnbull also blamed the states of Victoria and New South Wales for the problems in the east coast gas market. Presently, Queensland is where most of the gas is being produced on the east coast while both Victoria and New South Wales have placed a moratorium on onshore gas exploration.
New South Wales imports more than 95% of its gas while virtually all the gas that is produced in Victoria comes from offshore. “The failure of Victoria and New South Wales to unlock their onshore gas resources means that more gas will have to be shipped south at greater expense and it will mean that Victorians and residents of New South Wales will be paying more,” Turnbull said.
The deputy prime minister Barnaby Joyce was equally critical of the states. “What we have also seen here is, as the prime minister has clearly spelled out, that if you want to have more affordable gas in Victoria, then Victoria has a responsibility to those manufacturing workers, to those homes to get access to the resource that resides under their feet, under their feet in Victoria but somehow, they’ve got this sort of religious belief that they can’t use their gas, but they can use Queensland’s gas.”
Senex’s Queensland acreage agreement (see below) is not the only instance of industry responding to the gas supply issue. Australia’s oil and gas body Australian Petroleum Production and Exploration Association (Appea) says Australian gas producers are responding to concerns about east coast gas supply with a raft of new contracts announced.
“The industry acknowledges that the east coast gas market is tight and further supply is needed. Recent announcements have confirmed that about another 64 PJ of gas will be delivered into the market – equivalent to 10% of total demand. Since March, a dozen new gas contracts or new projects have been signed or announced to boost supply on the east coast,” Appea CEO Malcolm Roberts told NGW.
According to Appea, Queensland is now virtually self-sufficient, with local production 20% higher in the last quarter than a year ago. For the first time since November 2015, there is a net flow of gas south from Queensland. At the same time, the Gippsland basin is sustaining record output.
Although LNG export restriction will most likely not be imposed, it cannot be totally ruled out. This could be a sovereign risk issue for Australia.
The possibility of cancelling export contracts, Roberts says, threatens to undermine investment in new supply when eastern Australia needs to attract up to A$50bn to maintain supply to 2030.
“Restricting exports will only redistribute existing gas supply – it will not deliver new supply. The only sustainable solution to the challenges facing the east coast gas market is more gas supply.
“The government should be working with industry on regulatory reforms that reduce the cost of developing new supply. And it should continue to press state and territory governments to immediately remove their bans and moratoriums and consider all new projects on their merits.”
To tackle the gas supply issue, Queensland has taken some pragmatic decisions. Brisbane-based Senex Energy has been awarded acreage for gas exploration by the Queensland government as part of a pilot tender which has strict Australia-only sale conditions. The petroleum lease is for land in the Surat Basin and uses new legislation aimed at addressing the region’s gas supply concerns.
Queensland minister for natural resources and mines, Anthony Lynham, said that the pilot initiative, which was announced in January, was being used to test market interest. Senex is targeting first gas for 2019 and said the acreage is capable of sustaining production rates of more than 30 TJ/d at plateau. It’s expecting to obtain regulatory approvals over the acreage in mid-2018.
Given the success of the its pilot project with Senex Energy, the Queensland government has opened tenders for more acreage for gas exploration with Australia-only sale conditions. The tenders cover almost 400 km² of land in the state’s Surat and Bowen Basin.
Industry body, the Queensland Resources Council (QRC), praised the move by the state government and criticised other east coast states, New South Wales and Victoria, for their restrictions and bans on onshore gas development. “These domestic gas releases are fast tracked for production with Senex aiming to have gas flowing in under two years. That’s exactly when the AEMO says New South Wales might be running short of gas,” QRC CEO, Ian Macfarlane, said early September.
A government report published October 6 however held out hope that capacity would be unused, barring a steep rise in the oil price.