The International Energy Agency (IEA) has recently released its analysis of the global gas market and outlook to 2024. The IEA described 2018 as a “golden year for natural gas” because of the strongest growth in demand in nearly a decade (4.6%), driven by the economic growth in the USA and China. It is also influenced by the decision from USA and China to switch from coal to gas. Annual growth in gas consumption through to 2024 is expected to average 1.6%. China is expected to account for 40% of that growth as the Chinese Government strives to improve air quality.
The IEA expects the USA to be the world’s largest liquefied natural gas (LNG) exporter by 2024 and China the largest LNG importer. The IEA anticipates that the global market will tighten after 2020 and this should pull through final investment decisions for new export capacity in the USA, Qatar, Mozambique and Russia.
Gas exploration and development in Eastern Australia looks set to be dominated by continuing user and regulator concerns about domestic gas supplies and prices. LNG producers in Queensland will continue to try and balance those domestic supply concerns against export market opportunities. This was further enabled by the limitations on federal intervention in the gas market.
In its latest Gas Inquiry interim report, the ACCC noted that gas prices are two to three times higher than historical prices and that a number of commercial and industrial gas users “are facing challenging long-term investment decisions”. In June, the Queensland Government announced a three year gas supply agreement between APLNG and Incitec Pivot that will secure the near term future for their Gibson Island manufacturing plant in Brisbane.
In its March 2019 Gas Statement of Opportunities, the Australian Energy Market Operator (AEMO) forecasts that a supply gap will emerge in the Southern States from 2024, due to a continued decline in production from existing gas fields and lower than expected production from as yet undeveloped gas fields. AEMO considers that additional investment in infrastructure to transport gas from Queensland, or to import via LNG import terminals, will likely be needed to avoid those Southern State shortfalls.
To date the LNG producers have been able to convince Federal authorities to stay their hand on invoking powers under the Australian Domestic Gas Security Mechanism (ADGSM) which came into effect on 1 July 2017. The ADGSM gives the Federal Resources Minister powers to invoke restrictions on LNG exports.
Notwithstanding the ADGSM export control ‘stick’ and continuing close scrutiny of the gas market by the ACCC, the Federal Government has limited sway in the gas market. As such, the States and Territories continue to have the direct say on whether onshore gas exploration and development can occur in their jurisdiction.
A look around the country
In Queensland, the Department of Natural Resources, Mines and Energy (DNRME) has foreshadowed an active program of petroleum and gas area releases for 2019, with several areas to involve a condition of any gas produced having to be supplied to the Australian domestic gas market. The first such tender was won by Senex Energy back in 2017 and the company says it is on track to deliver gas to the domestic market from that acreage during 2019. In May 2019, the Queensland Government announced that Senex Energy had also been awarded an area of land near Miles to explore for gas with an Australian-only supply condition.
Other successful tenderers include Galilee Energy, a Santos/Shell joint venture, and newcomer Sajawin. In early June, the Queensland Government announced the award of a gas exploration permit to an Armour Energy/APLNG joint venture, with a condition that gas can only be supplied to Australian manufacturing businesses. Currently there is a competitive tender process for a further 11 areas, with tenders to close in August. Pipeline gas infrastructure company APA has signed a memorandum of understanding (MOU) with gas development companies Comet Ridge and Vintage Energy to select a pipeline route to connect Galilee Basin gas resources with the east coast gas market.
The Queensland Government recently surprised the gas sector with a 2.5% royalty rate rise with the stated purpose of ensuring a ‘reasonable return’ to the Queensland community. While this has been viewed by some as counter-productive (particularly given gas shortages), generally speaking, the gas sector in Queensland continues to enjoy bi-partisan support, something lacking in some other States.
In Victoria, the State Government has persisted with its position of permanently banning all onshore unconventional gas exploration and development, including hydraulic fracturing (‘fracking’) and coal seam gas. This position includes a moratorium on conventional onshore gas exploration and development through to 30 June 2020. While the Victorian Government did initially support a proposed LNG import terminal near Melbourne, the Government has just recently announced that any such project must be the subject of a full environmental impact assessment.
In New South Wales, the State Government has maintained its ‘go slow’ approach to onshore gas exploration and development, despite the State’s 95% dependence on imported gas. The most prominent gas project in NSW is the Santos Narrabri Gas Project, which continues to make its way through the State’s planning system. Recent media suggests increasing support for the project, particularly from unions and potentially within the NSW Liberal Party.
Most other gas developers have exited NSW. There is a proposal from the Australian Industrial Energy consortium for an LNG import terminal at Port Kembla, NSW, with project proponents saying a decision on a final investment decision will be made in coming months. In addition, Energy Projects and Infrastructure Korea (EPIK) signed a project development option agreement with the Port of Newcastle for an LNG import terminal. Many observers suggest that the fate of the import terminal projects is very much tied to an outcome on the Santos Narrabri Project.
In the Northern Territory, Jemena’s Northern Gas Pipeline, linking NT gas to the East Coast market, began to deliver gas in early 2019. The pipeline has a current capacity of 90 TJ per day, but Jemena has flagged that the pipeline capacity could be expanded to 700 TJ per day if sufficient gas were produced in the NT. In that respect, a positive development has been that the lifting of the NT Government’s moratorium on unconventional gas fracking.
NT has considerable gas potential such as in the Beetaloo Basin. Realistically, there will be a considerable lag before this change in fracking policy results in new supply, however, Federal Resources Minister, Matt Canavan, has renewed a push to accelerate development in the Basin.
In South Australia, the State Government has evidenced its support for renewed interest in offshore exploration in the Great Australian Bight, despite a strong community backlash. The State Government also remains very supportive of onshore gas exploration and development in certain areas and has initiated a competitive tender process for acreage in the Cooper-Eromanga Basin and the Otway Basin. The SA Government has, however, initiated a 10 year fracking ban across the Limestone Coast region.
In Western Australia there is no shortage of gas but a feasibility study into connecting WA gas supply to the East Coast market showed that such a project had questionable economics and would take six to seven years to design and build. Again, Federal Minister for Resources, Matt Canavan, has specifically targeted the Browse gas fields as requiring accelerated development, with media reports suggesting he may even consider calling in alternative developers if existing owners are not ready to proceed when renewal of the leases is up next year.
The future for gas explorers
AEMO and ACCC are pointing to a tight east coast gas market from 2024 in southern states. While jurisdictions like Queensland and South Australia are actively promoting new gas supply, including for the domestic market, other jurisdictions seem to be relying on LNG import terminals to bail them out of a looming gas shortage.
While the end of the fracking ban in the Northern Territory is welcome, that ban has come at a cost of delay in the development of Northern Territory gas resources and their contribution to the East Coast gas supply. While the welcome mat has been removed in Victoria for onshore gas explorers (or at least pending a decision on the moratorium post in 2020), it is well and truly out for gas explorers, big and small, in Queensland and South Australia.
We will wait to see if the solution to the looming gas shortages in southern states will be the LNG import terminals, which many would view as an extraordinary outcome for a nation that has emerged in recent years as a major global LNG exporter.