May 12, 2022

Australian gas sector update: Federal investment to tackle growing insecurity in global markets

The Australian Government recently announced, as part of the Federal budget 2022-2023 that it will invest $50.3 million in seven domestic gas storage and supply projects.

The announcement comes at least in part in response to heightened uncertainty in the international gas market caused by the ongoing conflict in Ukraine and the emerging effects of associated embargoes against Russian gas exports.

The investment also coincides with the Australian Energy Market Operator (AEMO) of 2022 Gas Opportunities Statement (GSOO), which reiterates projections of a tight gas supply-demand balance in south-east Australia over the next few years and notes that new gas projects will be required to meet domestic and export needs at more long term.

Concerns over predicted gas shortages escalate due to conflict in Ukraine

The international gas market has plunged further into a state of volatility and uncertainty as major oil and gas companies withdraw from Russian gas projects following the conflict in Ukraine.

Moreover, as part of a series of economic sanctions, the United States announced a total ban on the import of Russian oil and gas. Europe, which gets about 30% of its natural gas from Russia, has also pledged to reduce its dependence substantially in the decade.

From an Australian perspective, in addition to the imminent extra 35% tariff on Russian imports and the obligation to freeze the assets of certain individuals and entities identified as strategically or economically important for Russia, the federal government has also announcement it will no longer import Russian oil, refined petroleum products, gas and coal. Ultimately, this is unlikely to have a significant impact on domestic gas supply prospects, since Australia does not import energy products in large quantities from Russia.

Overall, the sanctions are likely to signal a sea change in the architecture of the global gas market. In addition to potentially accelerating the efforts of major gas importers to switch to renewable energy alternatives, demand from other major gas exporters, such as the United States and Qatar, could increase.

Prime Minister Scott Morrison previously suggested that Australia, as the current major exporter of liquefied natural gas (LNG), could help address shortages in Europe. However, sanctions against Russia are unlikely to represent an opportunity for Australia to expand its share of the international gas market, at least in the short term. This is due to the fact about 75 percent of Australia’s export supply is already contracted under long-term private contracts and, as Corrs explained in our previous postAustralia’s east coast anticipates its own gas shortages as early as 2024.

Australian government pledges additional A$50.3 million in grants for natural gas projects

The Australian Government’s 2022-2023 Federal Budget allocated A$50.3 million to seven national gas storage and supply projects identified as priorities under the National gas infrastructure plan (NGIP) and Framework for future investment in gas infrastructure (Frame) released in late 2021 and discussed in our previous post. The investment is part of a total of A$2.4 billion allocated to industry, energy and emissions reduction initiatives over the next year.

Angus Taylor, Federal Minister for Industry, Energy and Emission Reduction, mentioned that a key factor requiring significant investment is the “unacceptable risk to global gas security” and the volatility of international prices caused by the conflict in Ukraine.

The seven projects selected to support the initial work are:

  • Southwest Pipeline Expansion (SWP) to manage excess supply from the Iona storage facility in Victoria (APA Group);
  • the Heytesbury Underground Gas Storage (CUDDLES) project to use depleted underground gas fields to expand gas storage in Victoria (Lochard Energy);
  • Project scopeto increase contingent gas supply to the Surat Basin in Queensland (APA Group);
  • the Surat Hub project, which will increase the capacity of existing pipelines from Berwyndale to Wallumbilla in Queensland (APA Group);
  • the development of a new gas infrastructure center to drain and harvest gas from existing mines in the Bowen Basin in Queensland (Transition Energy Corporation Pty Ltd);
  • the second stage of the East Coast Gas Network Extension, making progress towards the ultimate goal of increasing gas transportation capacity on the East Coast by 25% (APA Group); and
  • a feasibility study on the most efficient infrastructure to bring natural gas from the Beetaloo sub-basin in the Northern Territory to the East Coast gas market. The Federal and Northern Territory governments recently signed an A$872 million joint funding agreement to ramp up gas production in the Beetaloo Basin.

The plans broadly focus on increasing domestic supply and improving transport capacity to target projected shortages in southeastern Australia.

Some of the funding will also be allocated to feasibility studies and pipeline options to transport carbon dioxide from major gas and industrial centers to potential carbon capture and storage sites.

This investment is in addition to the Australian Government’s recent A program$32 million commercial loan for the development of the Golden Beach Gas Generation and Storage Project offshore Victoria and A$30 million grant to support early work on the Port Kembla gas project in New South Wales as the final investment decision nears.

AEMO reiterates uncertainty in gas supply and demand

In accordance with his Draft Integrated System Plan 2022which Corrs talked about in our recent postthe AEMO identifies a number of possible future scenarios for the gas supply-demand balance in its 2022 GSOO.

The AEMO observes that the gas supply outlook has improved since its previous GSOO, but notes that the future position may vary depending on the pace of transformation of the energy sector on the path to net zero emissions. Regardless, AEMO recognizes the continued role of gas in supporting and enhancing variable renewables (VRE) in the national electricity market as coal generation resources continue to withdraw, and highlights the need to manage the risk of gas supply shortages in the years to come.

Indeed, the GSOO echoes the concerns expressed by the Australian Competition and Consumer Commission (ACCC) in his January 2022 Gas Inquiry Interim Report that gas supply could be insufficient to meet peak demand in southeastern Australia as early as next year.

In the near term, to 2026, AEMO predicts that the timely completion of committed and planned gas infrastructure projects could alleviate shortages as Southeast supply dwindles. However, the need to carefully manage demand during peak periods will remain, as supply is likely to be tight. To this end, the AEMO stresses the importance of “sector coupling”, i.e. the coordination of demand response between the gas, electricity and emerging hydrogen sectors.

In the longer term, regardless of the energy supply and demand scenario, the AEMO identifies the need to bring new gas resources to the market in order to meet the expected domestic demand as early as 2026. scale of the new supply required will depend on the rate of introduction of VRE generation and variable changes in consumer behavior. Notwithstanding domestic needs, significant additional supply beyond committed and planned projects will be required to support projected LNG exports.

Next steps

The Australian government will now undertake a negotiation process to develop grant agreements and finalize the distribution of the A$50.3 million among the selected projects. The progress of the projects will be reported in the next NGIP, which is expected to be published later this year.

The new NGIP will also provide up-to-date information on the rapidly changing East Coast gas market, as will the ACCC’s next interim report on the gas investigation, which is due in July this year.