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VIC

Sep 5, 2014

Cooking with gas: LNG pipeline proposed to supply east coast

APA wants to build a billion-dollar pipeline to connect the gas supply in the Northern Territory with the east coast. And that might not be such a bad idea ...

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On the face of it, a billion-dollar gas pipeline linking the Northern Territory to the east coast makes a lot of sense. It will put paid to arguments about a looming gas supply shortfall and ease pressure for rapid development of contentious coal seam gas (CSG) fields in Queensland, New South Wales and Victoria.

Australia is in the middle of a remarkable $200 billion-plus liquefied natural gas (LNG) boom, and will soon leapfrog Qatar to become the world’s largest exporter. To have created such a massive, dependable source of national income within five years is, overall, a good thing — especially if the coal market slump proves permanent.

But the oil and gas industry has over-reached with the development of six new LNG trains all at once in Gladstone, at a cost of $70 billion, fed by CSG from Queensland. In ballpark terms each train has the same annual gas demand as the state of Victoria, and the world-first experiment of converting CSG to LNG has been fraught, to say the least: gas well decline rates appear steeper than expected, access to land has been tough going, and gas is being bought from as far away as Bass Strait to shore up supply before the LNG plants switch on from next year.

If the industry was counting on CSG supply from NSW to Gladstone it counted wrong. CSG development in NSW, where land is generally more valuable, has been bogged down in local opposition. Amazingly in hindsight, the Queensland CSG-LNG projects were approved without any real consideration of the knock-on economic impacts once east coast gas buyers were forced to compete with energy-hungry Asian buyers. The inevitable huge domestic gas price hikes are only beginning. Wholesale gas prices are expected to reach $10 a gigajoule or higher — double or even triple the $3-$4/GJ paid historically. Federal and state governments appear wholly unwilling to fix the problem by doing what Western Australia and the United States do and reserve some gas for the domestic market.

The upshot: suddenly, gas is cripplingly expensive, and there’s not enough of it to go around. Crikey has previously criticised the oil and gas lobby’s argument that NSW faces a gas supply shortfall in 2016 and should develop its own CSG fields ASAP to put “downward pressure” on gas prices (you can almost hear “Rabbits” Warren calling “TRY!”). Among the counter-arguments are: a) any shortage is in Gladstone, not NSW; b) there’s plenty of gas in Bass Strait; c) NSW has always “imported” its gas from interstate; d) more supply won’t lower prices anyway because the price is set by the export market; and e) the public should not be held hostage by an industry that is completely opaque about gas reserves, wholesale prices and contracts. NSW Resources and Energy Minister Anthony Roberts is all over this last point, telling a recent budget estimates hearing that policymakers were being left “in the dark”.

Of course there is another possible response to rising prices — falling demand — as we have seen already in the electricity market. Manning Valley farmer and fund manager Bruce Robertson, who successfully campaigned against a new transmission line and is passionately opposed to AGL’s Gloucester project, is leery of industry gas demand forecasts. AGL’s recent profit results presentation, he says, shows business demand falling by 10% last year, while consumer demand fell 8%. “We are facing a demand cliff,” he said. Australians are too ready to accept high energy prices. “We should demand a domestic reservation policy.”

But with six big LNG trains in Gladstone pulling awfully hard, eventually, if no new source of gas supply is found and the standoff over contentious CSG projects in NSW continues (with Victoria the next battleground), a shortage will bite. Australia’s biggest pipeline owner-operator, ASX-listed APA Group, estimates there is enough gas on proven and probable reserves on the east coast to supply existing domestic demand plus six LNG trains at Gladstone for 20 years. That’s not enough.

APA proposes a short-circuit: hook the east coast up to the NT, where existing pipelines could transport gas from both massive offshore conventional gas fields and promising onshore unconventional gas fields.

The piped gas would not be cheap, as this piece in The Australian Financial Review pointed out, but cheap gas on the east coast is a thing of the past now anyway. Gas from NT could be competitive if we assume a gas production cost in Darwin of $4-$5/GJ, and a cost of $2-$3/GJ — which by the way includes the cost of upgrading existing infrastructure — to transport the gas. So at a wholesale price above $6-$8/GJ, the pipeline could undercut prices otherwise rising to $10/GJ or higher.

APA’s group executive transmission, Rob Wheals, told Crikey that given gas was already being transported from Victoria to Queensland, it was “not really a stretch” to bring gas all the way from the NT.

But it’s a delicate balance. APA, which does not buy or sell gas but charges for transport, is not going to build a huge new pipeline unless it is sure it will be used. That means contracting volumes from 2020 onwards. APA can’t make those contracts happen. “We can’t lead the market, but we can try and do a bit of matchmaking,” Wheals said. But matchmaking is tricky when you’re trying to connect rivals. On the supply side, if enough gas were discovered in the Timor Sea, a second LNG train would be built at Darwin, potentially starving APA’s pipeline. On the demand side, among the east coast gas buyers needed to make the pipeline stack up are the very companies, such as Santos and AGL, whose projects may be devalued by it. On the other hand, if they continue to face obstacles and run short of gas, they may have no choice.

On one view, APA’s pipeline could be seen as a bet that more LNG export capacity won’t be built in Darwin and the contentious NSW CSG projects will remain stalled. It also assumes unconventional gas development in the Cooper Basin, right next to Moomba, won’t take off in a big way. As Wheals says, “there’s no doubt the Cooper Basin is well placed. If tight or shale gas can be developed there in the right timeframe and at the right price, there’s no doubt that’s the best option for all parties.”

Federal Industry Minister Ian Macfarlane supports the APA proposal and has left the door open to government funding. APA says public funding is unnecessary but does hope for major project status and streamlined approval. Bring it on.

Paddy Manning —

Paddy Manning

Crikey business editor

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