What is the role of gas in a green economy?
The Tomago aluminium smelter outside Newcastle received a special visitor in September. Prime Minister Scott Morrison wanted to outline how he would use affordable and reliable energy to supercharge Australia’s post-COVID economic recovery. As the single biggest user of energy in the country, the Tomago smelter was an ideal backdrop.
Morrison explained that his government’s JobKeeper and JobSeeker payments had helped support millions of Australians. Now, the government’s JobMaker plan would help create new jobs – and, to do so, it would be necessary to “get more gas, more often and more reliably”.
Getting more gas would be achieved “by resetting our east-coast gas market, unlocking additional gas to drive recovery; paving the way, ultimately, for a world-leading Australian gas hub to support high-wage jobs, including and especially in manufacturing.”
In his speech, Morrison mentioned gas 55 times.
The government believes that increasing gas supply and use in Australia is key to rebuilding an economy that has been battered badly by the COVID-19 pandemic but as it champions the fuel and its industry, critics of gas are growing louder, questioning long-held claims about gas’s credentials as a cheap and cleaner source of energy.
Why does the government want more gas? How clean is natural gas, really? And what’s next for its future in Australia?
Gas been used in Australia for decades in power generation, heating and manufacturing. The gas that flows into your stove is a fossil fuel, primarily methane, formed over millions of years by the breakdown of micro-organisms. In Australia, large stores of it are found onshore and offshore, bound up in sedimentary basins capped by impermeable rock as well as in shale and coal seams. For domestic use, it is typically extracted by drilling then treated, piped to distribution hubs near cities and industrial centres, and plumbed into homes.
The Coalition backs the expansion of the gas industry for two main reasons.
The first is economic: more gas, the government says, means more affordable and reliable energy to domestic manufacturers that rely on it – thereby boosting employment. A three-fold increase in east-coast gas prices in recent years has been pushing manufacturing firms to breaking point. Energy often counts as one of their big operating costs, and big businesses have been feeling the heat. In 2019, chemical giant Dow announced the shutdown of its plant in Melbourne’s west, citing rising gas prices as a major driver. Sydney-based RemaPak collapsed into administration the same year, saying its gas costs had rocketed from $4 to $16 a gigajoule. Increasing supply and competition by opening up more sources of gas is intended to put downward pressure on prices.
The second is to smooth the electrical grid’s transition from coal. The Coalition and many large companies in the energy industry promote gas as the “transitional” energy source, one that emits far fewer greenhouse gasses than coal but is still capable of dispatching the around-the-clock energy needed to support the growing use of weather-reliant wind and solar generators. The government says it is focused on ensuring that electricity remains reliable and affordable as the market transitions from coal and, for this reason, it is touting gas as the key plank of its plan.
The problem, however, is natural gas also faces some big challenges.
Gas is a heavy source of emissions. While it is a cleaner-burning fossil fuel than coal, it is a fossil fuel nonetheless, and Australia needs to reduce its reliance on all fossil fuels over time in order to achieve its climate targets.
And gas is expensive. Despite the pleas from the manufacturing sector and the government’s best efforts, there is a growing realisation in the industry that the price is unlikely to return to the “good old days” of $4 a gigajoule that eastern Australia has traditionally enjoyed.
That depends on who you ask.
Gas prices began sharply rising on the east coast in 2017, when commercial and industrial buyers started receiving new contracts offered at above $10 a gigajoule, much higher than the historic levels of between $4-$6 a gigajoule.
This price rise coincided with Australia deciding to sell natural gas in its super-chilled form, known as liquefied natural gas (LNG), overseas. The construction of six new LNG export facilities at Gladstone in Queensland increased overseas demand for Australian gas – our top LNG export destinations are Japan, South Korea and China – and required producers to tap more expensive gas fields to meet their obligations. This linked the east-coast gas market to international LNG prices, pushing up domestic prices.
Australia has become the world’s number one exporter of LNG. In 2019, cargoes of LNG accounted for about $50 billion in export earnings, sealing its position as the country’s second-biggest commodity export after iron ore ($100 billion a year).
Paradoxically, Victoria, NSW and South Australia are facing the danger of winter gas shortages as early as 2023, warns the Australian Energy Market Operator. This is because most gas now being produced in Australia is in Western Australia and Queensland – far from the domestic demand centres that need gas the most in the south-east – while gas output from fields in the south-east such as ExxonMobil’s and BHP’s Bass Strait gas fields, which have traditionally supplied up to 40 per cent of east coast demand – have been in rapid decline.
As Australian Competition and Consumer Commission (ACCC) chair Rod Sims explains, when you boost the supply of a product, it should drive down the cost, and this applies to domestic gas. “If we really want permanently lower prices in the south, we need more gas in the south,” he said.
Much of the federal government’s efforts to rein in runaway prices has been focused on increasing availability of supply, including incentives to encourage the opening of new gas fields, support gas production and invest in pipeline infrastructure.
But there are doubts about whether the government’s interventions in the gas market will succeed in lowering prices or if they are “swimming against the tide”. As energy experts at the Grattan Institute think tank explain, the cost of producing gas in Australia has been steadily increasing over time, and the cost of supply has increased as low-cost sources have become depleted. Gas could once be provided for $4 per gigajoule or less, but today eastern Australian gas fields will struggle to supply gas for less than double that amount.
“Eastern Australia still has plenty of gas, but it does not have a lot of cheap gas – especially in the southern states,” the Grattan Institute says. “Large new resources exist, but are either relatively expensive – such as Santos’ Narrabri coal seam gas field in NSW – or far from major markets – such as the NT’s Beetaloo Basin shale gas fields.”
At energy giant Santos’ massive coal-seam gas development planned at Narrabri, for instance, analysts are projecting that the cost of delivered gas will not be lower than $8 a gigajoule.
Australia’s biggest gas producers say new east-coast projects have production costs of up to $8.25 per gigajoule, and that’s before transport, distribution and other commercial costs are factored in, according to the Australian Petroleum Production and Exploration Association.
“At $4 a gigajoule most Australian natural gas would stay in the ground and less production would place upwards, not downwards, pressure on prices,” the industry group says.
Other investors are betting on a different means of lifting supply: proposing floating terminals to import and re-gasify LNG from elsewhere in the world to reduce the risk of shortfalls and boost competition.
The Morrison government and many of the nation’s biggest energy companies believe it will. “There is no credible energy transition plan, for an economy like Australia in particular, that does not involve the greater use of gas as an important transition fuel,” Morrison said in January 2020, arguing that switching from coal to gas had helped other nations reduce their greenhouse gas emissions.
When it comes to electricity, this is true: burning gas releases fewer emissions than coal, and using gas to displace coal in power stations around the world has contributed to lower emissions.
Gas is also touted for its role in supporting the power grid’s transition away from coal to a greater uptake of renewable energy by helping to ensure reliability of supply and keeping a lid on price spikes. Because gas-fired power plants can ramp up and down and dispatch “baseload” energy into the grid whenever needed, many believe gas must play a key role in supporting the shift to renewable energy for those cloudy and windless days when conditions for generating solar or wind energy are unfavourable.