Drill, baby, drill?

The US president’s rationale is that more, cheaper gas will power a manufacturing renaissance and reduce electricity bills in the US. Any consideration that Australia should do the same thing needs to be tempered with a dose of reality.
The energy systems of both Australia and the US have changed dramatically this century. As recently as 2007, BHP was working on a proposal to export liquefied natural gas to California. Today, the US has the biggest LNG export capacity of any country worldwide – it was the largest LNG exporter in 2023, followed by Qatar and Australia. The key driver was an increase in shipments to Europe linked to the ongoing war in Ukraine.

Australia’s LNG exports, primarily to Asia, increased nearly 10 times between 2002 and 2022, and we achieved the export leadership position briefly in 2021.

Similar dramatic changes over the past 20 years have had quite different drivers and outcomes. For both countries, the century began with coal as the dominant source of electricity generation – 80 per cent for Australia and 51 per cent for the US. The US has since seen a shift such that gas now provides more than 40 per cent of generation and coal less than 20 per cent. Australia has seen a much greater shift to renewables (32 per cent), with gas growing much less (18 per cent), and coal retaining its dominant share (46 per cent).

In terms of politics, despite promises of a coal recovery, the first Trump presidency saw a continuation of coal’s decline already established during the terms of his predecessors. In Australia, the major factor has been renewables supported by the Renewable Electricity Target, a policy that survived several changes of government.

The shift from coal has helped both countries to make significant progress since 2005 in reducing emissions. Australia remains committed to net zero by 2050, while policy in the US is, once again, highly uncertain.

The story of gas has been an important one for both countries. The colder weather in the US explains the greater use of gas in homes and commercial buildings there. The cost of gas in the US has remained low and stable due to the highly favourable economics of shale oil drilling and an oversupplied market.

On the other hand, delivered gas costs have increased in Australia for two reasons: production from traditional resources close to markets has declined, and our domestic prices are linked to exports, which have dominated our market and attracted high prices.

The lower cost of gas in the US also meant that the economics of using it for more than a backup role to renewables has been viable. Meanwhile, plans for Australian gas generators that would run as much as 50 per cent of the time, with emissions somewhat lower than coal, have not materialised.

The last Coalition government looked to a gas-led recovery as part of its plan for a post-COVID recovery. At the time, it became clear that government policy was not going to make gas cheaper, and even if it did, less expensive gas would not stimulate a new era in manufacturing. The former followed from the basic geology and economics of gas exploration and production, the latter because gas has been a material cost for only a very small number of manufacturing activities.

In the time since then, gas prices in Australia have stayed high, and a further problem, evident for more than a decade, has now crystallised – south-east Australia, most acutely Victoria, is running out of gas.

Existing, committed or additional domestic gas projects are too small to close the increasing supply gap, and other projects are at very early stages of development with significant technical, financial and/or regulatory risks. Aligning moves by governments and businesses to find a solution is proving to be hard, and the efforts so far have not delivered.

What’s needed is clear and comprehensive action across government and industry, and that seems beyond them.

Australia must stay the course of our energy transformation and avoid chasing false promises. The use of gas will continue to change, and exports will be strong for a while yet. We must solve the immediate shortfall risk and be clear on the role of gas in the transition to a net zero economy.

During this period, gas will, and should be, a critical partner to renewable generation and a valuable export commodity for some years to come. But no one in Australia should give in to the temptation to adopt the “drill, baby, drill” mantra.