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Australia's own goal

While Australia enjoys an LNG export boom, it's also looking at imports as one way of meeting domestic demand

Australia is poised to oust Qatar from the top spot as the world's largest liquefied natural gas exporter. Yet the country's populous and gas-rich eastern region is facing soaring prices, tightening supply and potential caps on LNG sales.

The cause is a mix of policy failures and market forces which have combined to create a perfect storm over eastern Australia's gas industry. This, in turn, threatens the economic viability of heavy industry, pushing up household power bills, risking blackouts and causing a political headache for the federal government.

In response, plans are afoot to import LNG into Australia for the first time, or even to pipe gas from fields in Western Australia. Aside from the questionable economics of such plans, it's a bizarre development for a country emerging from a five-year LNG investment boom, with plentiful, untapped onshore and offshore reserves of natural gas.

Part of the problem is Australia's federal and state governance structure and ideological differences between political parties. These have caused division and inaction on energy policy, particularly around supply security, which appears to have been brushed aside in Australia's haste to participate in the global LNG rush.

At a local level, questions over the environmental impact of hydraulic fracturing for unconventional gas development have led to policy tension at state and federal levels. Labour-led governments in Victoria and New South Wales have largely banned the process—known as fracking—for onshore shale gas, shutting down a potentially lucrative source of supply, much to the gas industry's chagrin.

The Australian Petroleum Production and Exploration Association argues that eastern Australia's gas supply problems would be solved if fracking was allowed. But others blame the gas industry itself, alleging its producers are colluding to profit from the LNG export boom at the expense of local consumers.

Heavy industry and power generators on the eastern seaboard have long warned of steadily rising gas prices and an inability to secure long-term supply since plans to build three LNG export terminals in Queensland were first announced in the early 2000s.

2.5m t/y - Spot LNG imports from 2020

As construction of the terminals progressed and the linkage to the international gas market neared, wholesale gas prices in eastern Australia's short-term trading market started climbing from A$3-4 ($2.3-3.1) per gigajoule (GJ) to more than A$9/GJ. During a particularly chilly July 2016, supply shortages caused them to spike well over A$20/GJ, causing knock-on spikes in electricity prices and impacting profitability at generators such as AGL Energy.

After much probing by government and regulators, it appears that Santos, operator of the new Gladstone LNG (GLNG) export facility in Queensland, is partly to blame for the tightening market. After going to final investment decision, confident it had enough coal seam gas (CSM) to supply GLNG's two-train 7.8m-tonnes-a-year facility, it now transpires this wasn't the case and it barely had enough upstream reserves to supply one train.

A halving of oil prices and pressure from LNG buyers of oil-indexed LNG offtake contracts have made it uneconomic for Santos to keep spending on costly CSM exploration, prompting it to buy gas from third parties and divert local supply to the export market.

In response to warnings of a tightening gas market, Prime Minister Malcolm Turnbull has introduced a temporary gas reservation policy—the Australian Domestic Gas Security Mechanism (ADGSM). This gives regulators the power to order LNG exporters in Queensland to divert gas to the local market when shortages arise. The ADGSM is expected to be triggered later this year when high air-conditioning usage during Australia's hot summer sharply increases gas demand for power generation, with the risk of blackouts.

As a longer-term solution, federal energy minister Josh Frydenberg has launched a feasibility study into the possibility of transporting pipeline gas from isolated fields in Western Australia over to the east. The 2,000km (1,240 miles)-pipeline—which would be the first to connect Australia's western network with the east—is widely seen as a tactical political move to pressurise the gas industry to tackle anti-competitive practices in production and transportation. These were the target of a recent Australian Consumer and Competition Council probe.

Meanwhile, AGL is taking matters into its own hands, announcing plans to install a floating storage and regasification unit at Crib Point in southeastern Australia. This would import 2.5m t/y of spot cargoes from 2020, sourced from elsewhere in Australia and internationally. The facility will give AGL competitive bargaining power with upstream suppliers and pipeline owners, and reduce the generator's exposure to soaring gas prices.

Laughed at when first announced, AGL's plan is looking increasingly to be the most logical short-term option for eastern Australia's gas supply.

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