Australia relies on its gas [NGW Magazine]

Australia’s pursuit of a natural-gas led economic recovery continued in September, with the government unveiling the first definitive steps towards greater domestic production and consumption.

Prime minister Scott Morrison said September 15 that his administration aimed to reset the east coast, trumpeting the goal of a more “competitive and transparent” gas market to justify controversial plans.

Morrison made it clear that while private investors would be encouraged to champion “nation building” gas infrastructure projects, Canberra was not afraid to step in with government funding should they falter.

Talk of state-led investment, while understandable given the current economic climate and projections of a gas supply shortfall by the middle of the decade, has raised some eyebrows. Observers have pointed out that an increasingly robust government presence in gas projects could introduce even more uncertainty and deter investors from taking risks in what is already a fragile economic environment.

Projects that depend on high prices such as peaking plant, for example, will not be built if the investor suspects the government will act non-competitively to stay popular.

Economic crisis management

Talk of a gas-led recovery came as the country officially entered recession with two consecutive quarters of economic decline. GDP shrank 7% in the April-to-June quarter, after falling 0.3% in the first quarter, and the Reserve Bank of Australia (RBA) has warned that the economy faces a “gradual and uneven” recovery.

Australia’s economy is on track to shrink by 4.1% in 2020, the Organisation for Economic Co-operation and Development (OECD) said in its September interim economic outlook, while paring back its growth outlook for 2021 to 2.5%.

The Morrison government believes bolstering supplies of cheap gas for domestic industrial and commercial users will help breathe new life into the country’s economic prospects. It has been a proponent of a gas-led economic recovery since the National Covid-19 Commission Advisory Board’s (NCC) draft recommendations along these lines were first leaked in May.

The NCC envisions a future where A$4/GJ (roughly US$4/mn Btu) gas spurs a manufacturing renaissance, boosting the sector’s share of GDP from around 5% in 2019 to around 11% – similar to that seen in the US and UK.

While the upstream segment has dismissed such prices as fanciful, noting that it costs more to get the gas out of the ground, Morrison remains committed to the idea of cheaper gas supplies. He said: “As we turn to our economic recovery from Covid-19, affordable gas will play a central role in re-establishing the strong economy we need for jobs growth, funding government services and opportunities for all.”

To this end, the prime minister has set out a multi-pronged agenda that extends from the well-head to the burner tip.

Tough love

The government has taken the unusual step of drawing up a number of ultimatum-based scenarios for the different links in the value chain.

Morrison said his administration would work with state and territory government to set and enforce potential “use-it or lose-it” requirements on gas licences. While scant on details, the announcement suggests the prime minister is reluctant to allow developers to sit on undeveloped oil and gas fields as they ride out the industry downturn.

He promised to spend A$28.3mn on drawing up plans to unlock five key gas basins starting with the Northern Territory’s Beetaloo Basin (NGW #17) and Queensland’s North Bowen and Galilee basins.

Morrison highlighted plans to sign new heads of agreements (HoAs) with Queensland’s three LNG export projects that would strengthen their price commitments, while adding that plans for a long-discussed Australian gas reservation policy were still on the table.

In the midstream, the government will spend A$10.9mn on a National Gas Infrastructure Plan (NGIP) that will help identify critical infrastructure projects, which the government has pledged to fund if the private sector does not. Morrison said this could be achieved by streamlining project approvals, underwriting projects or establishing a special purpose vehicle (SPV) with a capped government contribution.

The government wants the private sector to do more to alleviate Australia’s gas supply issues and has justified its top-down approach to the issue by pointing to similar interventions within the power sector.

Power plays

Both Morrison and his energy minister Angus Taylor have decried private sector dawdling over plans to replace New South Wales (NSW)’s ageing coal-fired Liddell thermal power plant (TPP) in the Hunter Valley, which is slated for retirement in 2023.

The prime minister said his administration had instructed state-owned Snowy Hydro to draw up a proposal for a 1-GW gas-fired TPP should private investors fail to reach a final investment decision (FID) by April 2021. Morrison said that after this date it would be too late to guarantee the necessary dispatchable capacity by the summer of 2023-2024.

Echoing these comments, Taylor said: “Over the last decade, the private sector has not built a single new reliable power plant in NSW. The government has always been clear – we need to see life extension or like-for-like replacement of Liddell. If industry steps up, we’ll step back.”

Others are less convinced that handing down ultimatums to the private sector is the way forward. Australian Energy Council chief executive Sarah McNamara has argued that the threat of government intervention is counterproductive. McNamara said: “Government interventions or even discussions and ‘threats’ of intervention act as a deterrent.”

For the manufacturing sector that wants the certainty of low prices and firm supply, however, the government’s new support for its  repeatedly expressed complaints about gas pricing is a breath of fresh air.

Manufacturing solutions

Australian Workers Union (AWU) secretary Daniel Walton not only welcomed Morrison’s agenda: he even argued that Canberra could have gone further still.

He said: “The Morrison government’s plan stops short of the reservation scheme the AWU has been pushing for, but if done properly it could achieve most of the same ends for our manufacturing sector and the quality jobs it should support,” he said, adding that it was the “final chance for multinational gas companies to stop overcharging Australians for their own gas.”

Walton’s frustrations are understandable, given the Australian Competition and Consumer Commission (ACCC) complained in August that the difference between domestic gas prices and those paid by international buyers had grown too wide.

The regulator’s chairman, Rod Sims, said: “I am yet to hear a compelling reason from LNG producers as to why domestic users are paying substantially higher prices than buyers in international markets.”

However, Walton’s suggestion that the federal government should have simply imposed a gas reserve mechanism ignores certain legal realities. While the federal government has authority over the country’s exports, it does not exercise control over onshore gas fields. They fall under the jurisdiction of the state or territory government in which they lie.

With the country’s various governments at loggerheads over what should be the simple matter of opening internal borders, the Morrison government is far from being in a position to unite them behind a national gas reserve policy. Instead, the federal government is doing what it can with limited control over the situation on the ground.

For years Australian governments have largely paid lip service to manufacturing sector complaints over gas pricing. However, the collapse of the global economy and attendant low energy prices have forced a rethink. With the pandemic having hit every industry, Canberra has pinned its hopes firmly on an Australian golden age of gas creating jobs and helping the manufacturing segment drive the rest of economy.