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Australian emission plans will fuel expansion of gas-to-power

New South Wales will rely on coal seam gas and/or imported LNG to form the core of its plan to reduce emissions and electricity prices

The Australian government agreed the first of a series of emission-reduction plans with its constituent states on 31 January, when it agreed A$2bn plan with its most populous state New South Wales (NSW). The deal’s cornerstone is substantial support for an increase in gas for electricity generation.

While the memorandum of understanding (MoU) is not legally binding, the east coast state has “set a target to inject an additional 70 pj/yr of gas” into its market. In exchange NSW will receive A$0.9bn in federal contributions—in a combination of grants, loans and guarantees—towards its A$2bn grid upgrade and renewable energy investment plan.

Gas consumption in NSW is projected to rise from 120 pj/yr in 2019 to 150 pj/yr by 2038, according the Australian Energy Market Operator (AEMO) in its annual report last May. Back then, AEMO warned that the entire east coast faces tighter supply from 2021 if rapidly declining output from the Victoria Bass Strait is not replaced, with shortfalls possible from late 2024.

The deal, made with Prime Minister Scott Morrison’s centre-right coalition government, leaves the source, or sources, of supply open for the state to determine. NSW has undertaken to “fast tracking/streamlining opportunities for regulatory assessment” so competition between the already-progressing projects is likely to intensify.

Coal seam gas

The leading domestic project to bridge the looming gap is Australian gas producer Santos’ A$3bn Narrabri coal seam gas (CSG) project, which has been under development since 2014. It claims that it can achieve a lower cost per gigajoule than prevailing rates and, handily, predicts output would be at the MoU’s target of 70 pj/yr.

“The only way to put downward pressure on gas prices for NSW customers is to develop new gas supplies closer to market,” Santos CEO Kevin Gallagher said in a statement on 30 January. “Narrabri Gas Project would be developed solely for the east coast domestic market.”

The developers of two proposed LNG import facilities in the state, both anticipating FID this year, say their projects offer a less capital intensive option

Local activist groups have fought against the Narrabri project since 2015, claiming that it threatens agriculture. They argue the 850-well project would involve drilling through a groundwater recharge zone of the Great Artesian Basin—but the claim is strongly contested by the project’s developer.

“Santos would never develop the project if we were not certain that we could protect water and the environment—just as we have been doing in Queensland for more than a decade where the coal seam gas industry is welcomed by farmers and regional communities. That trust has been built because we have a proven track record of looking after the land, water resources and the environment,” says a Santos spokesperson. 

The state’s Independent Planning Commission, which considers projects facing significant local opposition, will announce its determination an unspecified date later this year. 

Home or away?

The developers of two proposed LNG import facilities in the state, both anticipating FID this year, say their projects offer a less capital intensive, more flexible option.

Australian Industrial Energy (AIE) is developing Port Kembla Gas Terminal with the backing of iron ore billionaire Andrew Forrest. AIE states that it could contribute 100pj/yr to local markets through up to 46 LNG shipments a year, all from capex of just A$250mn. Utility EnergyAustralia has agreed to buy 15 pj/yr from the venture, starting from 2021, in a deal expected to be worth at least A$750mn.

Energy Projects and Infrastructure Korea (Epik) is developing the A$589mn Newcastle GasDock terminal. It differs from Port Kembla in that it could be used by third parties to source LNG to sell into the domestic market. It would incorporate a 170,000m³ FSRU and increase local supply by 110 pj/yr.

“We believe our low-cost, low-risk, rapidly deployable and flexible Newcastle GasDock project provides the most attractive solution to NSW and the broader southeast Australian gas market,” James Markham-Hill, Epik director of corporate strategy told Petroleum Economist.

Price paradox

Imported LNG has faced domestic opposition in Australia, with critics pointing to the apparent inefficiency of the world’s largest LNG exporter—it edged out Qatar in 2019 with c.77.5mn t—also importing gas for domestic consumption.

But NSW industry chiefs complain that their biggest problem is a reliance on interstate—not international—transportation. NSW imports more than 95pc of its natural gas from inside the country, and the Australian Competition and Consumer Commission estimates that transporting gas from Queensland adds A$2-A$4/gj to the NSW wholesale price, which is c.A$10/gj.

A$7.40/gj Cost of Narrabi gas

According to an AEMO estimate, the cost at the well head for Narrabri, almost 500km north of Sydney, would be A$7.40/gj. AIE has suggested the price from Port Kembala, just under 100km south of Sydney, would at $10-$12/gj.

“Narrabri gas will always be cheaper for NSW customers than gas imported from other states or overseas, particularly when LNG prices are high in Asia. The cost of transport alone makes those supplies more expensive. The NSW Business Chamber reported in December that a baker in Sydney pays A$26,400 a year more for gas than a similar business in Brisbane,” the Santos spokesperson adds. 

The NSW government, which has set a goal of reducing wholesale electricity prices by 26pc by 2023, is hedging its bets for now. State premier Gladys Berejiklian insists the NSW energy deal does not make approval of the contentious Santos mine a done deal.

“The three options before us include the import terminals at Port Kembla and potentially Newcastle in addition to the Narrabri project… [at least] one of those three things will satisfy our arrangements,” she says.

 

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