Dealing with the Golden Age of Gas

According to the International Energy Agency we are in a “golden age of gas”. Affordable ways of getting shale gas out of the ground has been the game-changer turning the US into a net energy exporter, as it comes to terms with its “social licence to operate”. Virtually non-existent ten years ago, the US expects shale to dominate production by 2040.

In the short to medium term, growth will be steady rather than spectacular. The International Energy Agency’s new Medium-Term Gas Market Report said natural gas would grow at 2.4% a year to 2018. While this is down on last year’s forecast of 2.7% due to the weakness of the European economy and upstream production difficulties in the Middle East and Africa, gas will become more a more significant transport fuel with abundant shale gas in America and more stringent environmental policies in China.

IEA executive director Maria van der Hoeven said the next five years would be important for the world gas economy. “Gas has already arrived as a major fuel in power generation, but the next five years will see it emerging as a significant transportation fuel as well, driven by abundant supplies, and infrastructure investment, as well as oil dependency and air pollution concerns,” van der Hoeven said. “During this period natural gas vehicles will have a bigger impact in reducing oil demand than biofuels and electric cars combined.”

Australia is an increasing large player of this massive industry, though not currently in shale gas. Australia’s ‘proven and probable’ reserves of coal seam gas and conventional gas are around 140,000 petajoules, enough to meet 70 years of gas demand at current rates of production. The potential in-ground resource of coal seam and shale gas could be four times as large as known reserves.

CSG and shale gas are chemically the same as conventional gas (99% methane) but are unconventional because they are not directly released from empty underground chambers but instead extracted from coal (CSG) or sandstone (shale gas). Australia leads the world with CSG extraction technology but drilling for shale gas has a bonus CSG doesn’t have: liquid hydrocarbons or shale oil. These liquids have a re-sale value that makes shale gas more of a profitable proposition.  Australia does have recoverable shale and waiting for cheaper sources might be the reason Korean giant KOGAS withdrew from negotiations with Chevron to buy $29b of gas from its Gorgon project in WA.

But for now Australia is riding on the back of coal seam gas. High gas prices in Asia have supported enormous investment in gas infrastructure in Australia, despite high construction costs relative to other countries. On the east coast, $50 billion has been committed to developing LNG export facilities and a further $116b development is underway in WA. They represent 13 new LNG trains (a train cools and compresses the gas into LNG) making the industry an economic driving force over the next decade and beyond. In 2014 the first Liquefied Natural Gas carrier ships will dock off Gladstone, ready to ship LNG to Asian markets. Already the fifth largest exporter of gas thanks to WA LNG, by 2015 Australia could be second only to Qatar. By 2017 it could have the world’s largest gas export industry worth by Grattan Institute’s measure $58 billion a year.

But as Grattan also found out, in their “Getting Gas right” report, that does not mean good news for everyone. Domestic prices will be higher and the government will need to intervene to ensure fair market outcomes. Over 93% of Australia’s coal seam gas reserves are in Queensland and the industry has a large footprint here in the Roma region, with lots of gaswells, compressor stations, camps and the Wallumbilla Hub.

The Hub, some 52km south-east of Roma, is little known outside the region but it is crucial topic of conversation at Council Of Australian Government meetings. The Wallumbilla hub is a perfectly positioned traffic cop of pipelines linking the Queensland gasfields with Brisbane, Sydney, Newcastle, Gladstone and Adelaide. Like COAG’s Standing Council on Energy and Resources, Grattan Institute promotes its importance as a new trading hub to drive a more transparent market.

In 2012 SCER commissioned work on the possible design of a gas trading market at Wallumbilla. The hub is a major pipeline interconnection point for the Surat−Bowen Basin and in December SCER agreed to the ‘brokerage hub’ concept, with a view to launching a voluntary market from early 2014. The ‘brokerage’ hub is an exchange, to match and clear trades using existing physical infrastructure. Given physical limitations, separate trading nodes would be created for each of the major pipelines connected to the hub. The introduction of services to assist gas trading between nodes may follow and the market model is intended to be capable of replication in other locations.

The Wallumbilla Hub was among three government initiatives Grattan sees as crucial for the industry, along with fixing the NSW mess and the ability to trade pipeline capacity. NSW does not have a proper social licence to operate and the strong anti-gas lobby has led to State Government restrictions. The impasse could lead to a statewide gas shortage by 2016. The stalemate caused by community concerns and a poor regulatory regime could be solved by ramping up CSG production under the co-operative model of the US Center for Sustainable Shale Development or by increasing interstate pipeline capacity.

Grattan sees a role for Government to address supply-side failures, particularly as the east coast moves towards a short-term trading market. Wallumbilla Hub will join the Australian Energy Market Operator, the Victorian gas wholesale market and the national gas market bulletin board in providing price transparency and giving customers a chance to benchmark prices. A gas price index, as discussed in the Government’s energy white paper 2012, is on hold.

But the Grattan Institute is against the Western Australian government’s policy on reserving gas for domestic use (despite what the DomGas alliance thinks). They said protectionism might provide some short-term price relief for targeted industries, but ultimately led to higher prices and damaged the economy. Gas is dearer in the west than in the east coast and introducing it the east would make it more expensive, affect existing investments and damage Australia’s business reputation. Protectionism also funds lobby groups at the expense of more worthwhile investments.

Protectionism is warranted only for infant industries, says Grattan, and only according to the Mill-Bastable test (that is they will eventually survive without protection and future benefits outweigh current costs). Though clear and intuitive, the Mill-Bastable Test is hard to apply in practice: the benefits and costs of protection change over time as learning progresses.

But protectionism or no, prices in Australia will rise. High gas prices in Asia are driving the export industry, but it eventually means higher gas prices at home too as the industry finds equilibrium. The biggest losers will be Victorian domestic customers (who use two thirds of the domestic gas) and WA manufacturers (who use the lion’s share of industrial gas). Governments need to grasp the nettle of this crucial industry in the coming decade. Gas-fired power generation is likely to be an increasingly strong part of the energy mix in a carbon-constrained world.


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