tip off

Gas shortage? Tapping the bubbling wells of spin and self-interest

Australia’s not on the brink of a gas shortage — but the industry is running out of new ways to spin. In part one of a Crikey investigation, we debunk the self-interested case of suppliers and governments.

New South Wales is about to run out of gas, so says the scare campaign. It’s bully-boy tactics by Australia’s powerful oil and gas industry, designed to pressure the state government into quickly approving contentious coal seam gas projects proposed by Santos at Narrabri and AGL at Gloucester.

Federal Industry Minister Ian Macfarlane is on board, warning last year NSW would “run short of gas by 2016” and moving to knock heads together on the issue straight after the election. For months we have been hearing the same lines trotted out: how NSW is “running on empty”, suddenly needs “energy security”, and how developing its own “indigenous” gas supplies will ease prices.

Former John Howard industrial relations minister Peter Reith — whose recommendation to lift fracking bans was ignored by the Victorian government last year — used his column in Fairfax papers yesterday to accuse the O’Farrell government of abandoning the CSG debate, warning “there is a real prospect Sydney could suffer gas shortages”. Reith failed to disclose his consultancy with construction giant Bechtel, a major contractor to the CSG industry.

Former federal energy minister Martin Ferguson was appointed chair of new advisory group APPEA (“the voice of Australia’s oil and gas industry”) in October, barely six months after he stepped down from his cabinet post and only weeks after retiring from Parliament — flouting the 18-month cooling-off period required of ex-ministers under the lobbying code of conduct. Ferguson had a dig at his erstwhile NSW Labor colleagues for “parroting the lines of the Greens and showing itself to be completely irrelevant to the debate”, urging Premier Barry O’Farrell to break “the impasse preventing the development of the state’s abundant gas resources to put downward pressure on rising prices”.

The ABC’s fact checkers concluded Macfarlane’s alarming claims about a NSW gas shortage were “unverifiable”. They were way too generous. The claims are rubbish, designed to confuse the public. Here’s what they’re not telling you:

  1. No one is going to run out of gas;
  2. Developing CSG in NSW won’t lower rising gas prices;
  3. It’s too late anyway for NSW CSG to ease the current uncertainty affecting gas markets; and
  4. There are plenty of alternative sources of supply for NSW.

Australia has an incredible amount of gas; we’re about to overtake Qatar to become the world’s largest exporter of liquefied natural gas. Between Western Australia, the Northern Territory and Queensland, seven LNG projects worth more than $200 billion are on the go.

The chart above shows three seriously big gas resources that supply the southern and eastern states: the massive coal seam gas in Queensland’s Bowen and Surat basins (41620PJ), plus conventional gas in the Gippsland Basin (3890PJ) and the Cooper Basin (1835PJ). Not shown but certainly exercising the mind of investors is a vast potential resource of tight and shale gas in the Cooper Basin — which may turn out to be bigger than CSG in Queensland, and which oil majors like Chevron and BG Group are scrambling to invest in. By comparison, the coal seam gas discovered in NSW is significant, but no game-changer: Santos has 1426PJ in the Gunnedah Basin, which accounts for half the state’s known reserves.

Overall, there is no doubt Australia has enough gas in the ground to supply both the domestic and export markets. As a country we can afford to think strategically, pick and choose which gas fields we develop, and in what order.

As the Australian Energy Market Operator found last year, if there’s one place in Australia susceptible to shortage it’s Gladstone in Queensland. That’s where three massive LNG export projects operated by BG, Santos and Origin Energy are about to treble gas demand in eastern Australia — ultimately representing some 80% of total gas demand in the eastern market — once they begin to come online later this year. By exposing the domestic market to higher international LNG prices of around $14-15 a gigajoule (which are geared to the oil price), the LNG projects are going to double domestic wholesale gas prices, from around $3-4/GJ to $8-10/GJ and higher, inevitably pushing up retail prices (as NSW saw last week).

The three big projects in Gladstone were approved quickly in 2010 and 2011 — without any strategic consideration of the impact on the domestic gas market — in a rush to sign lucrative contracts with buyers in Asia. It’s a bold experiment; the world’s first attempt to convert coal seam gas into LNG for export. Nobody knows yet if the thousands of CSG wells required to feed the six big LNG liquefaction units (or “trains”) under construction — each one consuming roughly as much gas each year as say Queensland or Victoria, so adding six new states’ worth of demand to the network — can be drilled fast enough, and will flow enough gas for long enough, to fulfil those contractual commitments.

The federal Bureau of Resources and Energy Economics described this as the key “information asymmetry” in the eastern Australia gas market — “whether or not CSG production associated with LNG exports will fall short” — and says we won’t really know the answer until the plants get up and running, from late-2014 to 2016.

With almost $70 billion on the line to develop these projects, it’s nerve-wracking to say the least for CSG-LNG operators — particularly Santos, which last Friday rattled investors by again downgrading its gas resource estimates. Santos insists it has enough gas to supply its Gladstone LNG project, but AEMO predicts shortages of 83 terajoules a day from 2018 — and they’ve been the biggest buyer of gas in the wholesale market in the past few years. AGL describes Santos’ project as “materially short” of gas over the longer term.

Not that Santos is alone trying to shore up supply. Projects that were originally planned to rely on CSG from Queensland’s Bowen and Surat basins are now sucking up more and more conventional gas resources. The operators are moving to shore up gas supply from each other, from interstate, from everywhere. BG and Santos have both bought gas from Origin, which has the best CSG acreage in Queensland. Santos and Origin are buying in gas from the Cooper Basin. Origin has bought extra gas from as far away as Bass Strait.

Gas-fired power stations will be closed to make sure those LNG trains at Gladstone are kept full. Queensland’s Swanbank gas-fired power station has just announced it will shut for the next three years — with gas prices rising it was more lucrative to sell the gas to LNG operators than to burn it for electricity. Swanbank’s owner, Stanwell, will fire up the mothballed coal-fired Tarong power station instead. Others will follow suit. It’s bad news for Australia’s greenhouse gas emissions.

Pipeline operators have already felt the pull from the new centre of gravity in Gladstone. The biggest operator, APA Trust, is upgrading its Victorian interconnect, so it can bring more gas north. Jemena is likely to do the same, last year announcing feasibility work on upgrading the Eastern Gas Pipeline that runs up the east coast from Esso’s Longford plant and already supplies more than half of the gas needs of NSW. These upgrades are comparatively cheap; generally a bit more compression is all that’s needed — no new pipe, no new corridor.

APA operates the Moomba-Sydney pipeline and also the connecting South West Queensland pipeline to Wallumbilla that has brought Queensland’s coal seam gas into NSW. APA is set to reverse the flow of that pipe, from east-west to west-east, so Cooper Basin gas can flow to Gladstone. Last week APA announced it would conduct feasibility on a pipeline to bring gas from the Northern Territory and even the Timor Sea, all the way east.

Critically for NSW, the flow of APA’s Moomba-Sydney pipeline could ultimately be reversed. Does that mean Sydney runs out of gas? No. Gas will flow up augmented pipelines from Bass Strait, which is not running out any time soon. Esso and BHP are spending $4.5 billion on developing the Kipper Tuna Turrum project to maintain production there and the partners do not reveal reserve numbers. In an outburst of honesty then BHP petroleum chief Mike Yeager told the APPEA conference in Adelaide in 2012 that Bass Strait could supply east coast markets “indefinitely”.

AEMO estimated a shortfall of between at least 150-250TJ/day in Gladstone between 2015 and 2018. By contrast, AEMO forecasts a much smaller shortfall of some 50-100TJ/day in NSW — but not until 2018 — and this only on peak days in winter. Even without new CSG projects in NSW, there are other ways to manage these peaks: up to 150TJ/day can be stored in the Moomba-Sydney pipeline — by increasing the pressure, known as “linepack” — and another 120TJ/day will be available on a short-term basis from the gas storage facility which AGL has under construction in Newcastle.

NSW may not need new CSG projects at all.

*Paddy Manning is author of What the Frack: Everything You Need to Know About Coal Seam Gas. Tomorrow: will the Narrabri and Gloucester CSG projects ever be developed, and will they lower gas prices?

7
  • 1
    JohnB
    Posted Wednesday, 26 February 2014 at 1:57 pm | Permalink

    Quite an education. Thanks.

  • 2
    klewso
    Posted Wednesday, 26 February 2014 at 2:25 pm | Permalink

    Macfarlane another “prevaricator for political effect” but still a prevaricator.

  • 3
    MJPC
    Posted Wednesday, 26 February 2014 at 2:34 pm | Permalink

    Thank you Paddy for filling in the blanks in this environmental disaster in the offing. We look forward to the inflammable water and destruction of water resources in the areas; environmental vandalism!
    As for Reith and Ferguson; no two greater corporate whores could be found on either side of the political divide.
    Reith’s comments in the SMH says it all. When speaking of Alan Jones support for the anti-CSG forces “He (Jones) supported me and Chris Corrigan over the waterfront dispute and he has been a strong voice for many good causes”, what, like the waterfront dispute? What a tosser!

  • 4
    leon knight
    Posted Wednesday, 26 February 2014 at 5:14 pm | Permalink

    Paddy - how about delving into what royalties and taxes Australia will get from this gas bonanza/disaster…seems like the big players will make a mozza from these export contracts and aussie tax-payers will get close to zilch while the country is plundered.
    Agree with MJPC on Reith and Ferguson, although Ferguson is a newcomer, Reith is an old hand. I despise Jones, but at least on the CSG front he has some value as a human being.

  • 5
    Mardon Chris
    Posted Wednesday, 26 February 2014 at 9:14 pm | Permalink

    In comparing the value of alternative sources of gas, it is important to use the NET cost! There is no way that CSG producers will be paid anything like the price of $14-15/GJ suggested above. After subtracting the gas used for processing and the billions of dollars of capital needed to build the LNG processing plant, the net value of the raw gas supplied to the plant (known as ‘netback’) is typically $1/GJ or less.

    Also, the cost of producing CSG (or more especially shale gas) is more than the cost of producing conventional natural gas. Hence the profit depends on the difference between the ‘netback’ and the production cost. There has been so much hype about US shale gas, but that is not ‘cheap’ unless it is associated with oil or condensate. The US gas glut has reduced the value of the gas to such an extent that dry gas wells (containing no associated liquids) are being shut in because they are uneconomic.

  • 6
    AR
    Posted Thursday, 27 February 2014 at 6:08 pm | Permalink

    If anyone is (still) interested in ancient history, have a look at Iran under Mossadeq. The Iranians were, in the early 1950s, paying more for petrol, gas & diesel than british consumers, despite all of it coming from beneath their sands.
    The first attempt at a proto-OPEC was subsumed by CIA/MI6 subversion which brought forth the puppet who became known as Reza Palahvi (aka the Shit of Iran)and really became the initiator (for reasons that are another story entirely) of the akshal OPEC so beloved of the 1970s.
    So what, are we about to become yet another satrap of the Hegemon, selling our lifeblood howsoever it suits the megacorps?
    yeh, probably.

  • 7
    Katherine Marchment
    Posted Wednesday, 12 March 2014 at 6:32 pm | Permalink

    There may be no gas shortage but politicians of all major parties are still doing everything they can to ram the CSG industry down our throats - whether it be by media spin, ineffectual environmental policing, legislation that favours miners over land holders, harsher laws for protesters. The question is WHY when this is unquestionably a toxic industry that puts the lives of our children and grandchildren at risk as well as our water systems and agricultural land. As shown from the American and Queensland experience, complaints of contamination are in the thousands and growing daily and more and more science is coming to light proving the industry is unsafe.I have yet to view in my lengthy internet searches any science that proves that the industry is safe as stated by Peter Reith et al. Even economists such as Deborah Rogers and Ross Gittens have exposed the folly of this industry. A ten minute search of the internet is enough to convince most people that this industry is a bad idea in this country and that its supposed benefits (jobs, royalties) have been grossly exaggerated. So WHY are our governments both state and Federal under both Liberal and Labor pushing to “fast track” the CSG industry in this country? Is it because our own governments have heavily invested in the CSG industry and stupidly signed forward contracts for export that will bankrupt the country if we break them; based on overstated recoverable reserves given to them by big oil and gas? (They could have done a little research into the American experience before signing, but no, that would have been prudent - not something our self important pollies are renowned for). Are we going to have a gas shortage because domestic gas supplies will have to be used to fulfill forward export contracts that go how far into the future? Just how much are we in for if we break these contracts? What are our politicians personal investments in the CSG industry? How much do these people stand to lose personally if it is banned in this country as in France? Just how much of their clients money has the NSW Trustee and Guardian invested in the CSG industry? What will happen to their clients whose capital and incomes are managed by the NSW Trustee and Guardian if the industry is banned? Personally I would rather go bankrupt than engage in an activity which risks killing my children and grandchildren as it is possible to recover from bankruptsy - but from permenently contaminated land and water? Maybe like me, fighting this CSG scurge in Australia, the politicians and CSG company CEO’s are also fighting for their lives. Without money, I am still loved, can still work, can still get a feed and a bed all over Australia from said loved ones or just grow/kill my own food. I could ride it out and eventually work my way up again. But who is Gina Reinhardt without money - does she have the skills to fend for herself? Would anyone open their hearts and homes to her? Would anyone piss on her if she was on fire? Like us however she will be affected by climate change and the toxic results of her industry as will her kids and grandkids. If she goes bankrupt the rest of us will be OK but she will die a bad death. Unfortunately she is being propped up by our pollies right up to our Prime Minister so when she goes down, she is going to take the rest of us with her.

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