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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 …

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.

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  • 1
    Mali Edon
    Posted Friday, 5 September 2014 at 1:46 pm | Permalink

    I always find it remarkable that Australia does so little in terms of strategic planning, whether for energy, critical industries, critical infrastructure, next generation employment, future living standards, …

    Perhaps it is all too hard to think about and we should leave our future to the tax-oriented decisions of multi-nationals.

  • 2
    Dogs breakfast
    Posted Friday, 5 September 2014 at 1:51 pm | Permalink

    I think Michael West(?) of SMH beeled the cat on this one last weekend.

    An industry with demand not rising as expected, unwilling to impart information to governments, looking for the public purse to build the infrastructure so that they can walk off with the profits.

    I wonder how much of this brilliant resource gold mine will actually end up in Australian coffers.

    It looks like more corporate welfare for the biggest end of town, the multi-national resources sector.

    The policy of holding off a percentage of gas supplies for local use needs to be considered. Paying export prices seems to just send our resource wealth offshore to non-tax paying corporates.

    I doubt that OPEC countries are paying export prices for their own oil.

  • 3
    paddy
    Posted Friday, 5 September 2014 at 2:00 pm | Permalink

    I guess mentioning the words “fossil fuel” would be like farting in church.

    Not as smelly as coal perhaps… But ,combined with all those embarrassing methane emissions, still a bit whiffy.

  • 4
    Duncan Gilbey
    Posted Friday, 5 September 2014 at 3:47 pm | Permalink

    Wasn’t Rex Conner ridden out of town on a rail for suggesting something like this about 40 years ago?

  • 5
    Matt Hardin
    Posted Friday, 5 September 2014 at 4:13 pm | Permalink

    I was reminded of the same thing, Duncan.

    Also, Government funding for the pipeline? Talk about subsidies for energy industries? Over to you Tamas Calderwood after your comment earlier this week on subsidies for renewables!

  • 6
    Professor Tournesol
    Posted Friday, 5 September 2014 at 5:51 pm | Permalink

    Yeah, great idea, lets increase our greenhouse gas emissions even more, there’s a quick buck to be made.

  • 7
    Professor Tournesol
    Posted Friday, 5 September 2014 at 9:50 pm | Permalink

    Mali Edon, we don’t need ‘strategic planning’, these days its known as ‘Government picking winners’ and its apparently a bad thing. Instead we have this wonderful thing called ‘the market’ that makes all decisions for us based on political lobbying and maximising profits and that’s apparently a good thing. At least it is of you are part of the 1%

  • 8
    Posted Friday, 5 September 2014 at 10:15 pm | Permalink

    How would reserving gas for domestic consumption ‘fix’ any problem? Reservation seems to me a subsidy for inefficient and environmentally damaging consumption.

  • 9
    David Hand
    Posted Saturday, 6 September 2014 at 4:40 pm | Permalink

    It’s great to see all these warriors for the environment opposing everything anyone comes up with to supply the southeast with the energy it needs. No NSW produced gas because Fracking will cause all the water to disappear. No piping it from NT. It’s dirty and polluting anyway.

    Here’s an idea, line up an array of cycles made of hemp at the local Balmain and Fitzroy craft markets where people can do their bit for the community by peddling for an hour or so.

    Of course someone needs to invent a hemp bicycle but hey! Necessity is the mother of invention. After all, we can’t use evil and dirty steel can we?

  • 10
    Professor Tournesol
    Posted Saturday, 6 September 2014 at 5:36 pm | Permalink

    David Hand, here’s another idea, try to imagine that it is possible to care for the future and for the environment without either wholeheartedly embracing unfettered fossil fuel use or being a hemp wearing feral hippie using candles for lighting. There are many other alternatives you might wish to consider.

  • 11
    David Hand
    Posted Saturday, 6 September 2014 at 10:23 pm | Permalink

    Hey prof,
    I think the shift to gas in the USA and gas / nuclear in China is a sign that devotion to fossil fuel is not unfettered and certainly not wholeheartedly embraced.

    There are alternatives the Greens might consider. I just haven’t heard of any that don’t cost the taxpayer an arm and a leg. The forecasts of doom should the RET be abandoned is belling the cat on just how uneconomic renewables are as they simply cannot compete with other forms. But gas can. But the Greens don’t want it.

    It’s up to them to suggest an alternative other than the downtrodden taxpayer who in their mind is the answer to every problem.

  • 12
    Brian Melbourne
    Posted Monday, 8 September 2014 at 10:20 am | Permalink

    Allowing foreign multinationals to charge us international prices for our own gas and pocket the profits makes no sense. Victoria is wired for gas due to government policies. If gas goes up now, the price will cause it to be replaced by the dirtiest electricity in the world. Lots of industry will shut down. Doesn’t sound like a good outcome for the environment. Of course gas has to be phased out over the long term but it should be done by a carbon price - like we used to have - with the government getting the excess.

  • 13
    Posted Monday, 8 September 2014 at 10:25 am | Permalink

    The surplus value of local gas should be recovered by a resource rent tax.

    If the real goal is to protect the environment then there should be a price on carbon, not domestic reservation and thus an indirect subsidy for domestic consumption of a slightly less damaging carbon fuel.

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