Some people love it, some people hate it. But whatever you feel about gas, Australia urgently needs a gas strategy.
Listen to our energy experts Alison Reeve and Tony Wood discuss the highly contested role of gas as Australia strives for net zero.
Transcript
Kat Clay: Gas, love it, or hate it. Gas defenders will spruik it as an essential part of Australia’s energy mix. After all, it’s better cooking with gas. Environmentalists demand we get off gas now pulling the plug to switch to renewables immediately. And there’s an uncertain middle ground for those wondering where gas actually sits as we strive for net zero emissions.
Regardless of whether you love, hate or feel indifferently to gas, there’s no question it’s been in the news of late. The ACCC has launched court action against Australian Gas Networks about its advertising campaign. The life of the Northwest Shelf Project, a Western Australian gas facility, will be extended to 2070, while critics of the decision claim it will increase emissions. The government must also make a decision on a proposal for a foreign takeover of Santos, one of Australia’s oldest oil and gas companies. Meanwhile, consumers are getting off gas and those left on the network are facing increasing prices.
But there’s a thread that links all these disparate issues together, and that’s a lack of a unified gas strategy. The government has announced a review of gas markets, but with a December reporting date, it’s unlikely to have the time to go deep into all the issues.
I’m Kat Clay, and I’m delighted to be back hosting the podcast again. I’ve got two of Grattan’s energy experts, Alison Reeve, and Tony Wood to cut through to the core of what’s going on with Australian gas policy. But first, some exciting news at Grattan. Alison, you’ve got yourself a bit of a promotion.
Alison Reeve: Thanks Kat. Um, look, people who’ve been listening to the podcast for a while will know that I’ve been at Grattan for about four years now, and we’ve recently made some arran rearrangements of our people in our energy team. So I will be stepping up to be the Program Director and Tony Wood, who people have probably been listening to on the podcast since the beginning um, will be staying with the team and becoming the Senior Fellow on our program to allow him to focus a little bit more on the stuff that he really wants to work on while I do the Program Directing part of the role.
Kat Clay: It’s very exciting news and we also just wanna thank you, Tony, for everything you’ve done so far as Program Director at Grattan. You have been here for so long and um, we really appreciate everything you’ve done so far.
Tony Wood: Now I’m gonna really annoy people by doing all the stuff I’d like to have done before, right? So
Kat Clay: So, it feels like Australian governments are giving mixed messages about gas use. Can you explain to us why gas facilities are being expanded in a time where we are meant to be heading to net zero?
Alison Reeve: So, there’s a couple of things going on here, Kat. The first one is that most of the gas that we produce in this country is sent overseas. And overseas buyers aren’t heading to net zero on the same pathway as us, and so that means that their gas use is not necessarily falling at the same rate that ours is, and so they’re still buying gas from us.
The other part of it is what I think of as the running to stand still problem. Because gas isn’t a renewable resource, it gets used up. And so, this means that even if demand for gas stays where it is, it’s possible that you might need to open new gas fields or expand existing ones just to meet the demand that we’ve got now.
And even though that demand is falling in the future, we know that suppliers are actually running down faster than what demand is doing. And so that means there is a need for new supply to close that gap.
Kat Clay: So, I love that term of phrase that it’s a running to stand still problem, and yet gas is being phased out in Victoria with potential gas shortages on the horizon while gas is being exported. It’s a concern for both consumers who are worried about the price and availability of gas and the Greens who are worried that this is shifting emissions from Australia to other countries.
Tony, what do you make of this complex situation?
Tony Wood: For almost 200 years we’ve used gas in this country far more than electricity and it’s been our friend for most of that period of time. We used to make gas from coal. One of the Australian oldest companies, AGL, Australian Gaslight Company. I’m not too sure many people in Australia still have gas lights. That’s the history, right?
And that gas is contributing to climate change. Uh, I don’t think that’s questioned in too many quarters these days.
And so, we have this interesting challenge. We’ve got to move away from burning gas, producing greenhouse gas emissions in our homes, in our businesses, in our power stations, in our industrial factories. That is a big challenge because we’ve known this friend for so long, and so as we do that, planning to move away from all those various uses of gas is really hard.
You know, we’ve got 2 million people in Victoria who use gas for heating and cooking and hot water. That’s gotta be the challenge, and that’s why it’s hard because you can’t do it overnight. But equally we have to do it. So, we have to maintain a reliable system while we shut it down. That is not a trivial thing to do.
The people who own this in the infrastructure will don’t like it, not surprisingly, and to consumers who like to cook with gas, like to heat their home with gas aren’t too keen either until maybe they work it out, that there are equally good ways. Many of them will be cheaper, and some of them could even be better for their health.
Kat Clay: I mean, Alison, what actually is happening in Victoria right now with gas?
Alison Reeve: Yeah, so Victoria has been the jurisdiction where people have been most worried, um, about potential shortages. And a lot of this shortage is about logistics, not about supply.
What the Victorian government has announced in the past couple of weeks is that well they’ve had a longer-term plan to phase out the use of gas, particularly in homes. And they’ve made an announcement in the past couple of weeks as part of that transition away from using gas in homes. So first of all, they’re going to ban new connections for residential and commercial properties.
So, if you build a new home in Victoria, you won’t be able to connect it to gas. They’ve also announced minimum standards for rental properties that when the gas appliances that are in those break, they have to be replaced with electric ones.
They’ve also announced for all homes that when water heaters break, they have to be replaced with electric ones. Now, that’s not the biggest use of gas. The biggest use of gas we have in our homes is heating. But it is reasonably significant, and it is the one where in the Victorian government’s opinion, the industry is best placed to be able to make that shift fairly easily.
The reason that Victoria’s done this is kind of, it’s kind of for two reasons, right? One is that they have this long-term goal, which is linked to their climate goal of getting out of gas, but it’s also hoped that by reducing the amount of gas, they’ll be able to delay potential shortages of gas further until they can either figure out that logistics supply, um, or make larger moves to start shifting other uses of gas in the state.
Kat Clay: Thanks Alison. I mean that does lead quite nicely into the question that I did wanna talk about, and I might direct this to you, Tony. Should we be reserving Australian gas for Australian use?
Tony Wood: It’s an interesting question, isn’t it? Because as Alison explained, we already export 80% of our gas. We’ve got so much, why do we need to reserve any of it? The trick is that this has been an interesting equation in Australia. In Western Australia they began by stimulating a local domestic gas industry to try and create a market.
Then they exported gas from the Northwest shelf and that worked pretty well, provided they made sure that some of that gas was still left in Western Australia. In Australia, on the East coast for many, many years, we’ve had plenty of gas for local supply. It’s not been a big deal, but only a few years ago now big companies discovered that we could export a lot of gas coming from coal seams in Queensland, extracting gas from those coal seams in huge volumes, and that resulted in this very, very large export facilities in Gladstone. So suddenly a domestic market, which was more or less in balance where supply and demand were pretty well keeping in keeping up with each other.
Suddenly we had this huge vacuum cleaner sucking gas out of the east coast of Australia for exports. And not surprisingly, people became very nervous that maybe we wouldn’t have enough gas left in Australia for that modest amount of supply we needed. And so, the government started to introduce ways of trying to make sure that would happen.
There’s been various policies tried. Western Australia, as I said, has a reservation policy, which says, look, if you’re gonna develop gas, 15% of that has to be allocated to the domestic market. On the East coast of Australia about eight years ago now, Prime Minister Malcolm Turnbull introduced a program which basically says, look, you have to make sure if you are exporting, that’s fine, but also make sure you meet domestic demand with supply.
And if you do that, that’s fine, but if you don’t, we will give the minister the uh, ability and the powers to force you to do that. And that mechanism so far has worked. Now we’re getting concerned that as the southeast of Australia, the southeast as Victoria, where I’m living, is running out of those traditional sources of gas.
We don’t even have local sources of gas to even reserve. So how do we do that? This whole question of matching up supply and demand through a system which is logistics. Basically, how do we move gas around this country, this big country where the gas is no longer where we want to use it is a big challenge and it’s creating sometimes an accurate, but sometimes a very misleading debate about whether we should be reserving gas and if so, for whom?
And if so, how and at what price? Very complex issue. It’s the one that go governments are really grappling with right now.
Alison Reeve: I think one of the things to remember about gas reservations Kat, is it doesn’t mean that we just put a whole lot of gas aside in a warehouse until we need it. A gas reservation is usually means that as the gas is extracted, the person who’s extracting it has to offer it to the domestic market, and if the domestic market can’t take it they then can export that gas and they just have to make sure that they, um, are doing a certain percentage being offered at any one time over, you know, say over a year. If you think you’ve got a problem with shortages, it doesn’t necessarily always solve that. Because the, that comes down to how much is being extracted and how much is being offered.
The other thing about reservations is, um, you sort of have to make a decision if, if you’re worried about price or you are worried about volume. One of the reasons people like reservation policies is because if you have way more gas being offered to the domestic market than the domestic market can take, that tends to depress the price.
But if what you are worried about is volume and shortages, then as Tony was saying before, we don’t have a volume problem, we’ve got a logistics problem and a reservation’s not necessarily the right way to solve that.
Kat Clay: And I think that’s not the first thing that comes to mind when you’re thinking about gas shortages is it’s actually quite difficult to transport this around what is a very big country. Um, so the places that might have lots of gas. You know, you can’t necessarily get that straight to Victoria or wherever that needs it.
Um, we’ve talked a little bit about Western Australia and Victoria. I mean, each state seems to have its own policies on gas, and then we’ve got the federal level at the same time. Is this a matter of state and federal priorities not lining up or is something different at play here?
Tony Wood: Our federal system doesn’t help sometimes because when push comes to shove, the state ministers tend to think about themselves first, and so you can get that tension where, you know, Victoria says the problem is that Queensland is exporting all of our gas. And the Queensland premier says, wait a second, it’s my gas, not your gas.
And so, you get that somewhat ugly debate going on, right? But the reality, as you said, Kat, is that this is a big country and we’ve got plenty of gas. The real challenge here is that if we, if it wasn’t for the only, the absolute certainty, almost in my view of climate change, this debate wouldn’t be happening.
We’d just go and build a big pipeline from Queensland or even from the Northern Territory to Victoria, and we’d transport the gas that way. There’s plenty of gas in in that part of Australia and would, life would go on, but that’s not the world we live in. So, one of the things that’s causing a real tension here is that investors are concerned that if they did build that sort of infrastructure.
So, I think that, you know, the federal system can work but requires, um, the ministers to work together to agree what’s the best way to achieve that. We may see. The next meeting of the Ministerial Council of Energy Ministers, which will occur sometime in August, making some decisions about some of these tricky issues.
Kat Clay: You’ve hit the nail on the head here where we don’t want a gas pipe going to nowhere that’s used for, you know, a few years and then has no purpose. And I mean, it’s not a great investment for the industry either, who obviously wanna spend their money in the most effective way as possible and invest in things that are going to have a long lifespan.
Alison is uncertainty the key issue for the industry as in uncertainty about government policy and uncertainty about how long we will need gas for.
Alison Reeve: Definitely, I mean, at the fundamental level, we don’t really have a clear direction from any of the state governments except maybe the ACT or the Commonwealth as to exactly what role they expect gas to play in the transition. We sort of end up with these two slogans of gas will be really important for a long time and no new gas.
But actually the reality is somewhere in the middle in that uncertain space and that makes it hard to, solve problems like that logistics problem, for example, because you need to sort of trade-off between, do you build, expanded pipelines to bring gas from Queensland? Do you bring it down via LNG?
Do you try and push a bit harder on demand reduction instead, how do you trade all of those off against each other and the thing that we’ve also got here is that the assets that people invest in in the gas market are very long lived assets and politics runs on very short cycles.
The federal political cycle is three years. The state government one is four years. When they brought in the legislation to effectively cap the price of gas on the eastern market at $12 a gigajoule that was in place for, I think a year. And then was reviewed and then was reviewed and renewed again. It’s very hard when you own an asset that you are trying to operate and recoup capital on over 40 years to deal with a situation where things change every, you know, year on, year, on year in terms of what you’re allowed to sell that gas at.
And like when I say certainty for government, I don’t mean they have to like carve the laws on a, on a stone tablet and not change them, but giving a lot more certainty about the direction and the milestones would actually make the whole situation a lot easier for everybody because it would mean that governments can make more sensible policy decisions, but it would also mean that industry can make the appropriate amount of investment.
Kat Clay: And with that, I mean, we did think that maybe the government had been listening into our podcast planning. Um, we’re gonna talk a little bit about their current plans, but with the re-election of the Albanese government. Have we seen any movement on gas policy? And I’m pretty sure the answer to that this week is yes.
Tony Wood: It almost, I think, uh, the week after the government was announced and, uh, minister Watt was nominated as the, uh, Minister for the Environment, he moved to extend the life of the Karratha gas processing plant um, to 2070. Now people are concerned about that. Oh my god. Gas for 2070, right?
If someone offered me the lease on my apartment building for another 50 years, I’d say thank you very much. The probability I’ll be living in that apartment, I can assure you right now in 50 years’ time is very low. And so, this is, it’s not really extending the life of gas production, but time in what we’re talking about is really important. You can’t really specify exactly by what time something’s gonna happen, but as Alison said, you can set the broad direction.
We can have some targets which tell about what we have to get, do we know what the destination is, and that is we are going to stop burning gas. The, we call fossil methane in this country to meet our net zero targets. Some of these, some changes will happen quickly. And some will happen more slowly, and that’s why the policies have to address that sort of thing because there are consequences.
You can’t do this without consequences. And so, for example, if we are gonna move away from gas in 2 million homes in Victoria, 5 million homes nationally, we’ve gotta take that process in some cases quickly, in some gently, because for many people it will not be a simple transition. For others, it will be.
All that’s gonna have to be taken into account, which why we need clear policy direction and then we can start making decisions. What are we gonna do about moving homes away from gas? What are we gonna do about moving business? Particularly when the alternatives for gas in some of us applications are very expensive. Right now, hydrogen is a very expensive alternative to replace natural gas in the manufacture of certain commodities like fertilizers and explosives. That’s not gonna happen anytime soon.
We also, in our numbers, believe that gas will be around for a while yet to support a high renewables electricity system. It may be not many gaskets used, but it will be a very important to be backup um, wind and solar.
So, all those things have to be thought about in providing policy direction, and then you can start to answer the important questions that consumers are interested in.
Alison Reeve: The review that the government announced this week, Kat sort of goes to some of these things. So, they’re going to have a look at the role of the price cap, or it’s called the code of conduct. But effectively what it does is puts a cap on prices in the East coast market. That’s also going to look at what’s called the domestic gas security mechanism, which Tony mentioned at the top of the podcast, which is what allows the resources minister to stop exports if there’s a shortage. And they’re also going to look at their, what’s called the heads of agreement, which is the agreement between the large exporters and the government that they will supply adequate gas to the domestic market on the East coast.
There’s a couple of things that are sort of left out of that. So, some of the things that are left out is, you know, what is exactly the role, of gas in the net zero transition? The role of the petroleum resource rent tax, which is the way that the federal government makes revenue out of gas.
And I think also whether there’s need, a need for more transparency in the gas market itself is not really specifically covered in the review. Nevertheless, it’s good that they’re looking at all of these things together, but it’s going to be difficult to answer those questions if they haven’t actually answered the fundamental question first, which is exactly how long do we expect to keep using gas for and how much.
Kat Clay: Yeah, and, and obviously setting that kind of deadline would give a little bit more certainty in the gas market itself to say, this is the deadline, this is what we’re working towards. Alison, I’m interested, I mean, you covered off a little bit of what you think should have been covered in this, um, you know, gas policy review.
What should governments do in the near term?
Alison Reeve: Really what we need is much more of a sense about where we’re going with our climate policy. So, in the previous term of government the federal government kicked off a process of what they called sector plans, which was sort of looking at each sector of the economy and what its transitions pathway will be.
We haven’t seen those plans yet, but when those are released, I think that starts to give us some of that information about. Who’s going to need gas and when are they going to need it? Um, but then we also need a better strategy about making sure that we have the right amount of gas available and that we can get it to people at the price that is reasonable for them to pay.
Because one of the things about the market declining a lot is that the nature of that market is gonna change as well. Particularly if we move to a market where, as Tony was saying before, you are using gas to support a high renewables electricity grid, which means that you are only using gas sporadically.
And we can’t assume that the market that we’ve got at the moment is the right market to support a sort of a sporadic but extremely important use of gas rather than a constant use of gas, which, which is what we have right now. So, it’s really, I think about getting a much more detailed sense of where we want to go on climate policy and then allowing that to give you some boundaries around what you can then do with sensible gas policy.
Kat Clay: Just throwing to both of you, I’d like to hear both of you talk about this. Um, and maybe Tony, you could answer this for me first, what would you like to see in Australia’s long-term gas strategy?
Tony Wood: All of the debate we’re having around energy is driven by climate change, and what we do know is that no part of our lives, our economy is gonna be untouched by the changing climate or how we address it. And one of those important things that are contributing to this is the way we use natural gas or methane.
It contributes somewhere between 15 and 20% of our emissions. It’s significant in some parts of the country, like Victoria, where we use it for home eating. It’s very big for homes and so forth. So, providing the long-term objective. Now, I don’t I, I’m not saying this a specific date in mind that we’re gonna stop.
But we do need to have some clear direction, and that’s why things like net zero by 2050 are important. If it’s net zero by 2051, does it matter all that much? Not too sure. Maybe 49 will be better, but having that long-term direction, very clear. And the trick here is gonna be also important. I think, Kat, because of the timescale, I’d like to see policies that move towards some sort of bipartisan support. We cannot have the flip-flopping on this sort of stuff we’ve seen in recent years. We did have a, a weird debate in the last election about the role of gas and the opposition had a, as Alison said before, a form of reservation policy. It didn’t work very well for them politically, but being clear that this is both sides of politics, net zero by 2050, what does that really mean in terms of the broad policy framework to achieve that?
We’ll see more about that when the government makes its commitment to the 2035 target and how we’re gonna achieve that. It’s having that broad picture because then we’ll know where we have to go, and then you can start filling in the detail and I’d like to see that at the same time, of course, as we solve some of the short-term problems.
Alison Reeve: I mean, I think fundamentally, unless we figure out who needs gas? Where are they? How much do they want, and how long are they going to need it for? It’s going to continue to be very hard to make sensible policy. So, I would like to see much more, I think, granular detail about getting much more of a handle on exactly what level of demand we can expect and where that’s going to be. And for which parts of the economy, um, because then I think you actually have something that is a real strategy because it’s informed by data as well as by targets.
Kat Clay: I think that’s a really great place to start. Data-driven, really clear goals and explicit goals that are set so that everyone has some clarity on what is actually happening in the gas market. Now our Grattan reports, we have prepared so many reports on these particular topics on climate change. We’ve got Getting Off Gas. If you’d like industry specific recommendations, we’ve got a whole series called Towards Net Zero. You can find these all on our website, grattan.edu.au, and they’re all there for free. We’d love you to go and read and engage with them.
If you’d like to engage with us on social media, please do find us at Grattan Institute on all our social media networks, and please do consider making a donation to Grattan. As always, please do take care and thanks so much for listening.