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Australia’s gas sector says more supply is the answer. Probably not

The Australian natural gas sector believes it has the solution to warnings of a shortfall in domestic supplies in coming years. Produce more.

While that may seem an obvious answer, it’s also the solution that is likely to be the hardest to deliver, and even if it could be achieved, it’s likely to result in gas at prices many customers will deem too high to be economic.

It seems ironic that Australia, which vies with Qatar and the United States as the world’s biggest exporter of liquefied natural gas (LNG), is facing a shortage of the fuel in the populated eastern states of New South Wales and Victoria.

But a recent report from the Australian Energy Market Operator (AMEO) warned the domestic market may have insufficient supplies from this year out to 2025.

The industry was united at last week’s Australian Domestic Gas Outlook conference in Sydney with producers and consumers agreeing that more supply was needed, not only to ensure demand could be met, but also keep prices from surging.

It’s not that Australia doesn’t have gas on its east coast, it’s that the majority, about 85%, is exported from three LNG plants in Queensland state.

The owners of these LNG plants, which include majors such as Shell SHEL.L and ConocoPhillips COP.N as well domestic producer Santos STO.AX, would prefer to keep shipping LNG rather than divert supplies to the domestic market.

There are several reasons for this, but two stand out.

First, the LNG producers generally receive a higher price in Asia than they do in Australia’s domestic market, especially since LNG prices have shifted structurally higher in the wake of increased demand for the super-chilled fuel after Russia’s invasion of Ukraine curbed pipeline supplies into Europe.

The second is that if the LNG producers are forced by legislation to satisfy the domestic market first, they risk undermining Australia’s reputation in Asia as one of the most reliable suppliers of energy.

In turn, this could undermine confidence in investing in Australia.

The federal Labor government of Prime Minister Anthony Albanese shocked the gas industry in December by imposing a price cap on gas of A$12 ($8) a gigajoule in a bid to rein in surging prices for domestic customers.

While the price cap was relatively high by historic standards, it sent a chill through the industry, which warned of slumping investment and ultimately higher prices.

Since then the industry and the federal government have been talking to each other about changes to rules that require supplies to be offered to the domestic market, but these still have to be finalised.

WISH LIST

In some ways all participants in the market are seeking a magic pudding solution, one where there is enough gas to meet domestic demand and export requirements, the price is low enough the ease the pain being felt by manufacturers and consumers, but still high enough to incentivise investment.

However, there are several issues when it comes to boosting supply.

Victoria state, home to Australia’s second-biggest city of Melbourne, has imposed a ban on onshore gas production, and the chances of this being lifted are small given the increasing environmental focus of many voters.

New South Wales, home to the biggest city of Sydney, no longer produces gas, and the major development in planning in the state is facing public opposition that may make it difficult to build.

Santos’ A$3.6 billion Narrabri project would be capable of supplying half of New South Wales’ demand, but is facing several court challenges, and even if these are successfully overcome it’s likely public protests will continue.

That leaves Queensland and frontier basins in the remote Northern Territory as the best chances of boosting domestic supply, but this will be more expensive gas given the need to build pipeline infrastructure to transport it thousands of kilometres (miles) from the fields to the southeastern cities.

There is also a time factor, with it likely to take far longer to explore, develop and build the infrastructure than is available to avoid shortfalls in the domestic market.

The possibility of LNG import terminals being developed near Sydney and Melbourne is also a potential solution, but these will also face multiple challenges including environmental opposition and high costs.

While the industry, both producers and consumers, see increased supply as the best solution, the reality is this will be hard to deliver.

This leaves some uncomfortable choices for the gas sector and government.

The first is to risk Australia’s reputation as an energy supplier and future investment by forcing the LNG producers to supply the domestic market and curtail exports.
The second is to allow prices to rise to the point where demand destruction does the job, forcing businesses to close and consumers to shift to electricity.
Source: Reuters (Editing by Christian Schmollinger)

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