The great gas conundrum

Instead of uniting in a common cause to identify and implement solutions, governments and industry have embarked on an unedifying blame game.

The federal government, enmeshed in negotiations with exporters over domestic obligations, points to the states for more supply. Queensland criticises Victoria and NSW for failing to find their own gas, and Victoria wants domestic priority for coal seam gas extracted with fracking technology that it will not countenance in its own backyard.

And the gas supply industry refuses to recognise that governments could not countenance huge increases in domestic energy prices while the gas companies enjoyed war-based windfall profits.

Unpicking the details can help to identify the possible ways forward.

From a high level, the problem is simple and clear. Victorian-based gas production, enough for the state to be a net exporter for the past 50 years, is forecast to decline by about 50 per cent over the next five years.

Because Victorian households dominate the state’s gas usage, mainly for heating, seasonal shortfalls could emerge as early as this winter, and the risk will increase in coming years.

An annual shortfall in the domestic market will be avoided through the federal government’s agreement (via the Australian Domestic Gas Security Mechanism, or ADGSM) with Queensland LNG producers, who can meet domestic demand by producing gas above their export contract obligations.

However, this capacity will be exhausted by 2027 and annual shortfalls are projected from then.

A range of possible solutions exists.

Australia meeting its legislated emissions-reduction targets will require eliminating current uses of natural gas over the next three decades or sooner.

Yet-to-be-legislated revisions to the so-called safeguard mechanism will mean emissions from large gas users will decline from 2024. But there are no policies or incentives to reduce gas usage by homes and commercial businesses. And gas generation will be needed to balance high levels of renewable electricity for some time yet.

It feels like a mangled version of St Augustine’s prayer: Give me clean energy, but not yet.

Potential sources of more gas are small, expensive or uncertain. There are several small offshore projects in Victoria, but new onshore development is either prevented in the case of unconventional gas or not considered prospective by the industry.

Development of the Narrabri project in NSW has been drawn out and its future remains uncertain, despite support from the federal and current NSW governments.

Gas from further afield, such as the Northern Territory, is even less likely, and in any event, additional pipeline capacity would be needed to get that gas to the south-east.

Turning to Queensland, beyond the above-contract production mentioned above, the revised ADGSM protects long-term, foundational export contracts, despite calls for the federal government to do otherwise.

It is unclear whether coal seam gas production could be further expanded.

LNG import terminals could be built in NSW and Victoria to bring gas from Queensland, Western Australia, or overseas. Although expensive, they could provide a more flexible and ultimately cheaper alternative to new pipelines in a world of diminishing demand.

The Australian Energy Market Operator’s projections show such terminals are the most likely solution, although none yet exists, and several have been either abandoned or failed to secure environmental approvals.

The upshot is clear: Australia needs to get off gas because it is an expensive fossil fuel, but we are not yet able to do so. It feels like a mangled version of St Augustine’s prayer: Give me clean energy, but not yet.

The way forward is messy but workable, requiring the best efforts of policymakers and the industry.

Over the next five years, the revised ADGSM should be complemented by introducing flexibility mechanisms into the gas market like the demand-side mechanisms in the electricity market.

In addition to the revised safeguard mechanism, policies should be planned and implemented to drive degasification for households and small businesses. An example could be a revamped version of the existing Energy Efficiency Grants scheme to help small businesses to move off gas.

The Albanese government could do worse than follow its predecessor’s National Gas Infrastructure Plan, but in a form that deals with the challenges of a net-zero world.

There is no single path forward, and the barriers are many. Denial and blame-shifting won’t cut it.

AEMO’s east coast gas market report identifies an opportunity for good government – it must be grasped.