Australia’s gas supplies
The natural gas industry has undergone significant change over the past ten years. A decade ago free and fair trade in gas was a government objective, and upstream gas competition was an aspiration in many states and territories. The most typical gas supply arrangement was a single delivery chain via a single intrastate pipeline from a single source to major demand centres with a state. This is no longer the typical case.
Gas now flows from a range of competing basins, natural gas itself competes with coal seam methane, and a pipeline grid connecting eastern Australia is in place. With what has been termed the third global oil shock over the past year, gas is also increasingly being priced as an internationally traded energy source. We have seen the Western Australian Government – with its 15 per cent Domestic Gas Reservation Policy of future gas for domestic gas supply – seeking to impose constraints on that reality, and some of the market impacts of that intervention.
Domestic gas demand growth
The major areas of growth [for the gas industry] are expected to be in power generation, mineral processing and manufacturing demand, as well as residential usage.
There are also a range of potential new sources for gas demand. One possibility that the Energy Networks Association (ENA) has highlighted in the past is the potential for natural gas to be used more widely as a transport fuel, replacing largely imported transport fuels. Another possible niche application is gas cooling. A final potential is the combined use of natural gas and renewables in the process of creating a possible next generation of transport fuel based on hydrogen.
Gas market reform trends
The first significant changes flowing through the late 1990s have been a process of ownership separation of different elements of the gas supply chain.
This has led to a greater number of market players, some focusing on only one or two elements of the gas supply chain. Sometimes this separation was forced by explicit government action, in other cases it has arisen as entities focussed on growing their business horizontally, across their area of specialist expertise.
At the moment we see separation between the ownership of gas production, transmission, distribution and retailing being more common than integration. However, it is arguable that in some areas this trend is beginning to reverse.
Similar trends are occurring in electricity, and this has triggered a broader public debate about whether the reform model is being “˜unwound’ through reintegration, and about the market power of combined generation and retail businesses.
In my view, it is too soon to make that argument, particularly as integration in some areas can increase overall efficiency, promote better risk management and deliver positive outcomes for consumers.
The second trend is privatisation. Only one state, New South Wales, is now in the possession of publicly owned gas infrastructure, through Country Energy. As we have seen, movement on ownership reforms has been a very difficult pursuit for the government.
In the national transmission sector, there is no public ownership, following the sale of a number of significant pipelines through the 1990s.
A third trend is third party access regulation – or regulated access to pipelines and networks by shippers and energy retailing businesses at terms set by state-based regulators.
We are now seeing this change into access regulation by a national regulatory body, in the form of the Australian Energy Regulator.
The fourth trend is retail competition, which in most states and territories has provided consumers with the option of choosing their gas and electricity supplier. Increasingly, we can hope that this competition allows future consumers to benefit from freely operating and competitive markets, rather than relying on regulating final prices.
The fifth trend is convergence, where in the gas supply sector there is a convergence of the ownership of electricity and gas assets, and the joint marketing by a single firm of both gas and electricity services. This represents a steep change from the previous model of gas and electricity focussed businesses directly competing to meet consumer’s energy needs.
Converged energy retailing businesses are now the rule, rather than the exception, competing to offer the best tailored package of energy services to meet an individual consumer’s needs.
Future challenges and issues
The first challenge is the role of natural gas in national policies to reduce greenhouse emissions. Natural gas creates carbon dioxide emissions in the production phase, in the transmission phase by compression requirements and also through distribution losses.
Yet, overwhelmingly, due to its clean-burning qualities, natural gas has a positive greenhouse impact both domestically and internationally. As an example, one tonne of carbon emissions incurred in the development of LNG for export reduces around four tonnes of coal-based emissions in China.
We have recently seen the launch of a gas industry advertising effort around natural gas, its cost and environmental benefits under the branding “˜Natural Gas. The Natural Choice’.
My question is – what is the next step for the gas industry to take to ensure it protects its place as an affordable, realistic bridging fuel in a carbon constrained world? What is the best set of energy policies to achieve the wider use of gas?
The second challenge is the push to establish a national gas wholesale market.
How will a short term trading market in 2010 change the industry? What will be the benefits and who will collect them?
What do a short term trading market and the now functioning gas market bulletin board mean for the practical task of risking capital for investments in gas production, transportation and supply capital?
A third question is how gas will fare in the new national energy arrangements being put in place by the Ministerial Council on Energy.
Gas, in many, ways developed its own model of national regulation. Our own organisation, representing energy networks, has been very active in seeking to recognise and carry forward the best parts of this unique approach to new energy market laws and rules.
It will be important in the future that we don’t – with the goal of some form of lowest common denominator simplicity – just impose inappropriate burdens on the gas industry.
Our regulatory system should have a more flexible and sophisticated premise than pretending not to notice relevant differences between gas and electricity regimes. This is particularly true as we examine options for moving technical and safety regulation to the national level.
The gas supply sector across Australia is a good example of what private investment linked to stable longer term government leadership can deliver. In Australia’s case it has delivered one of the lowest average prices for gas in the world, linked to generally high reliability and security of supply. These advantages mean that this positive story is set to continue.