Demand for gas is not only affected by prices but also by all the government policies affecting the fuel mix for power generation. Domestic supply is not only affected by the Gladstone LNG projects, but also the outlook for production from the Cooper Basin, Victoria, Queensland and New South Wales.
EnergyQuest’s recent 255-page report, Australian Coal Seam Gas 2013: All Aboard the LNG Train, aims to bring all these factors together.
On the demand side, rather than gas demand continuing to grow, EnergyQuest believes it is more likely to fall, possibly by around 15 per cent by the end of the decade. This will be driven primarily by lower gas use for base-load power generation. Electricity demand is falling, gas prices are rising and government policies are increasingly favouring coal and renewables over gas. The Queensland Gas Scheme terminates at the end of this year, carbon prices are probably going to be so low as to be irrelevant for the fuel mix and the effective target for renewables is now more like 25 per cent rather than 20 per cent of electricity generation. None of this is good news for gas-use for base-load generation. Demand destruction is likely to be particularly evident in Queensland, which currently uses nearly 100 petajoules (PJ) of gas per annum for power generation – 14 per cent of total east coast gas consumption.
On the supply side, the industry knows that the Gladstone LNG projects are likely to put pressure on domestic supplies. However, there are other factors at work too, some positive and some negative.
Victoria’s Bass Strait remains a powerhouse of gas supply, however distance and infrastructure constraints make large-scale supply of gas from Gippsland to Gladstone unlikely. Furthermore, with rising levels of CO2 and the presence of mercury, costs are increasing. Another important source of gas for Victoria and South Australia is the offshore Otway Basin, which currently produces as much gas as the Cooper Basin. There has not been a significant Otway discovery now for over a decade and the outlook is for natural field decline. Victoria has other potential gas resources, particularly onshore, but the Federal Government’s ban on fraccing has made further exploration problematic.
The outlook for the Cooper Basin is good. Already there has been considerable success in increasing oil production to the point where last quarter the Cooper Basin produced more oil than the North West Shelf. Now Santos, Beach, Drillsearch, Senex and their partners are aiming to do the same for gas, with increasing support from majors such as Chevron and BG Group. Based on a detailed technical assessment, EnergyQuest believes that Cooper Basin production could double by the end of the decade, initially from conventional gas but followed by unconventional production.
A significant volume of Cooper Basin gas will go east for LNG but the net amount available for the domestic market should also increase over time. However there is a timing issue here. It takes time to increase production, while first Cooper Basin supplies for LNG commence two years from now.
There is also longer term potential to increase domestic gas supply in Queensland. There is considerable exploration acreage outside the current LNG projects, particularly in the north Bowen Basin. There is also continuing exploration in the Galilee Basin. If successfully appraised, some of this gas may go to LNG, but is also likely to supply domestic markets. However, these sources (not included on the chart) are longer term and will need substantial pipeline investment.
The biggest question mark on the supply side remains New South Wales, where the main issues are political rather than geological. EnergyQuest projects that NSW will increase its gas production, but later and by much less than its potential. Under current government policies, the state might be able to produce around 600 PJ of gas over the next 20 years. This is six times its production over the last 20 years but well short of its total reserves and resources of over 14,000 PJ, which is largely locked up.
So, is eastern Australia facing a gas shortage? It certainly appears likely, even with lower gas demand. However this is not due to a shortage of gas but rather restrictions on developing the substantial resources we have available.