Resource-rich Australia’s rush to cash in on promising global energy export opportunities has left a gas- and electricity-depleted eastern Australia wrestling with the bizarre prospect of gas imports.
And we could probably end up buying the same stuff we’ve already sent to Japan.
It’s a whacky scenario which was fairly clearly predicted as the liquefied natural gas (LNG) export industry’s construction boom began eight-plus years ago, then was allowed develop to a point where industry analysts now say our wholesale domestic gas prices are comparatively much higher than overseas.
In fact, overseas markets are also increasingly oversupplied, which has slashed our LNG’s export worth by half in the past few years.
Meanwhile, the east coast’s shrinking domestic gas supplies are 150 per cent to 400pc more expensive than three years ago, says Australian Competition and Consumer Commission chairman, Rod Sims.
“These price rises have seen a significant reduction in gas used for electricity generation and are expected to flow through to significantly higher power prices for residential customers,” he warned.
Industrial companies, including agricultural processors, faced huge energy cost hikes which “could permanently damage their business”.
Mr Sims noted gas made up 15pc to 40pc of a “surprising number” of industrial companies’ costs.
In the last quarter of 2016 the amount of gas diverted to Queensland from other states grew almost 12-fold as the $80 billion Gladstone-based LNG export sector sucked supplies from South Australia’s Cooper Basin and Victoria to help it meet long-term contracts to Asian customers.
Gas previously sent to domestic markets in Victoria, NSW and SA is now pumped to Gladstone from as far away as Bass Strait via a circuitous connection of pipelines which traditionally delivered to Sydney, Melbourne and Adelaide and regional users en route.
Since 2015 exports have risen rapidly to absorb two thirds of eastern Australia’s extracted gas through the three new LNG plants, which cost their owners, Santos, Shell and Orign Energy (and their various joint venture partner-customers) a hefty $24b each to build.
Although new coal seam gas (CSG) projects in Queensland were initially promised to service the export deals, developing and maintaining many of those wells has been harder than expected.
Santos is the exporter most reliant on third party Bass Strait gas to help meet its orders to Malaysia and South Korea.
“We always knew domestic supply issues had to be dealt with, but somehow it slipped through the cracks when these big export plants were planned almost decade ago,” observed chief investment officer with stockbroker JBWere, James Wright.
Governments, energy companies, investors and others were apparently dazzled by high global prices and huge job creation opportunities associated with building LNG terminals around Australia.
Meanwhile, the rush of construction activity also pushed up start-up costs, then oil prices halved and new gas reserves began emerging overseas.
Profitability projections withered and the export ventures are now struggling to appease shareholders.
Ironically, Queensland government’s upbeat 2009 blueprint for the LNG industry had predicted the state’s 250,000 petajoules of recoverable gas reserves were likely to meet export and domestic supply needs “for many decades”, but there was “a real problem availability of gas in the ground may not translate into gas supplied to the domestic market”.
“It is clear the Queensland government must be sure there will be enough gas to meet future electricity generation needs,” the blueprint said.
Mr Wright said it “may all end in tears” for some investors, particularly if governments now moved to impose gas supply allocations.
“From an economic policy perspective it might make sense, but it’s not not a good result for shareholders – insisting on a strategic domestic reserve will effectively cap the gas price.”
To make the energy conundrum more acute, Gladstone’s big LNG trains – giant refrigerators which chill gas into liquid for shipping overseas – are now drawing massive amounts of electricity from the national grid.
“They draw so much power they’ll definitely be an strain on the electricity grid,” said energy sector financial analyst and NSW Mid North Coast beef producer, Bruce Robertson.
“Queensland’s total electricity demand was declining until this financial year, but it will be drawing more from the national grid now.”
Mr Robertson, an investment fund manager before joining the New York-based Institute for Energy Economics and Financial Analysis, said while most gas production worldwide went into powering electricity generators, in Australia gas was getting too expensive to justify the cost.
Gas-fueled generators were increasingly selling gas back to the inflated domestic market rather than generating electricity.
Queensland’s Stanwell Corporation mothballed its Ipswich gas generator two years ago while half of SA’s Pelican Point gas-fired generator is shut because of high costs and a lack of available gas.
About 21pc of Australia’s total electricity supply came from gas-fired generators in 2014-15, with SA using gas for about 60pc of its electricity.
“One reason AGL can even consider building a $300 million LNG import terminal in south-eastern Australia is that we pay way more for gas than our offshore customers,” Mr Robertson said.
“Importing is an absurd proposition – akin to Saudi Arabia re-importing oil.”
However, AGL’s plans implied it was now cheaper to buy our liquefied gas at international prices in Japan, ship it back to Australia, re-gasify it and pipe it to domestic customers.
AGL has confirmed it began examining LNG import terminal options last year because it will have no spare gas to contract out this winter.
However, Mr Robertson argued Bass Strait still had capacity to supply competitive volumes for decades, but domestic gas producers were making the most of their cartel-like position and restricting total supplies, so prices kept rising at an outrageous rate.
“There’s also no transparency about reserves and resources because they are calculated on a wholly inconsistent basis,” he said.
“They’re trying to create a fake shortage to promote more CSG exploration which would effectively entrench high gas costs in the local market while the cheapest stuff is sent offshore.”