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Letter from Australia: Gas-fired recovery hits turbulence

The Australian government’s vision is at risk of unravelling under intense scrutiny

The administration of Australian prime minister Scott Morrison unveiled its ‘gas-led’ recovery plan as recently as May, but it is already under withering and effective fire—from both some expected and some less-familiar foes.

Australian energy minister Angus Taylor has called for greater gas production that is ringfenced for the local market, as well as increased consumption of the fuel within the power sector. At first glance, this sounds exactly the direction the country should be taking, given it is forecast to see a gas supply shortfall within the next five years.

But there is a catch. The minister’s plan, it seems, has not only infuriated the environmental lobby, but also upset the upstream sector. The greens are frustrated by Taylor’s commitment to fossil fuels in the face of a booming renewables market, while the country’s gas producers have railed against the thought of investing in supply subject to an artificial price cap.

Under pressure

The National Covid-19 Coordination Commission (NCCC) has come under sustained attack after its recommendations that the government should underwrite a major expansion of the domestic upstream sector in pursuit of economic growth were leaked.

A collection of environmental organisations – including Greenpeace and the Wilderness Society – submitted a formal complaint to Morrison last month over the manufacturing taskforce’s claims that it had consulted them when putting together its recommendations. The group claims no such consultation took place and called on the government not to commit to “stimulus measures that will exacerbate climate change”.

Upstream actors are also less than thrilled, with the Australian Petroleum Production and Exploration Association (Appea) saying in May that the country did not have a gas shortage and that government interference could upset the applecart by scaring off investors. At the core of Appea’s objections was the NCCC’s suggestion that gas prices could be capped at A$4/GJ ($2.77/GJ) for the foreseeable future.

Beyond these vociferous environmental and operational objections, however, lie questions over the sector’s short- and long-term economic viability. The Australian Energy Regulator (AER) published its State of the energy market 2020 report at the start of July, in which it warned that the economic life of the country’s gas pipeline grid was at risk unless operators adapted quickly as “some jurisdictions move towards a zero-carbon emissions policy”.

Pointing to grid operator Jemena’s ongoing green hydrogen trial at the Western Sydney green gas project in New South Wales, the AER says grids could be repurposed to deliver the renewable fuel to customers. “If not, the economic life of the assets could be limited, raising questions in price reviews about levels of investment, how quickly assets should be depreciated, and the appropriate path of network prices over time.”

The report came just days after the Australian Energy Council (AEC), which represents major electricity and downstream natural gas businesses, endorsed an economy-wide net zero emissions by 2050 target. AEC chief executive Sarah McNamara says the council supports the Paris Agreement and recognises the need for developed countries to transition to net zero emissions by 2050.

These questions over long-term economic viability inevitably raise doubts over whether its gas strategy is the hill on which the government should be planting its flag. Worryingly, the sector is also struggling on the financial front.

Industry-watchers speculate we could be about to see a swathe of upstream asset write-downs as developers release their end-of-quarter financial reports. Local producers have reportedly based their asset valuations on a $70-75/bl oil price point which, given recent international oil price volatility and the subdued forecast for 2021, suggests upstream players will have to follow majors like BP and Shell in writing down their assets.

Smarter alternatives

An argument can be made that the government has better options on which to gamble than a gas production industry working its way up from the bottom of a commodity cycle. The country’s economic recovery will lie in short-term solutions—answers that can be executed over a 12-24-month window.

These are solutions that the upstream will likely struggle to provide, given that it is witnessing sweeping spending rationalisations. Operations will need to remain lean until the global economic recovers, propping up energy demand and­ prices.

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