Natural gas: Keep the Home Fires Burning

This announcement, made during a joint press conference with Hu Jintao, President of the Peoples Republic of China, signalled a continuation of the significant growth in Australia’s LNG exports to Asia.

The fact that such a prestigious and high profile forum was chosen for the announcement – APEC and a meeting between the Australian Prime Minister and the leader of the world’s emerging economic powerhouse – also confirmed, if confirmation was needed, the importance of natural gas in the global energy scene.

September’s APEC announcement also prompts some ponderings on the role of gas in Australia’s domestic energy balance, and on the juxtaposition of global and local energy priorities.

Energy Balance

Australia is estimated to have total proven1 natural gas reserves of approximately 50,000 petajoules2,3, including coal seam methane. If “probable”? reserves are taken into account, this figure would approximately double4.

We currently export about 40 per cent5 of our total natural gas production in the form of liquefied natural gas (LNG).

These reserves compare with current annual Australian production of around 1700 PJ6, meaning that Australia’s reserves equate to somewhere between 25 (proven) and 50 (proven + probable) years.

Additional discoveries would boost these figures, and additional major export commitments would trim them.

Australia’s proven indigenous crude oil reserves are estimated at approximately 2,000 million barrels7,8. Once again, this figure would roughly double9 if “probable”? reserves were taken into account.

These figures compare to Australian domestic crude oil production of 170 million barrels, and supplementary oil imports of around 130 million barrels – measuring Australia’s current total annual “thirst”? for oil at around 300 million barrels. On this basis, Australia’s total oil reserves equate to between 7 and 14 years when compared to total real demand.

The Australian Bureau of Agricultural and Resource Economics (ABARE) estimates Australia’s LPG reserves at 210 gigalitres10, or approximately 125 million tonnes. The Australian LPG Association (ALPGA) estimates11 that LPG production in Australia will average approximately 4 million tonnes per annum over the period to 2020, of which about half will flow to the Australian domestic market (65 per cent of this transport use), and the other half (primarily butane) will be exported.

Based on the quantity of LPG consumed domestically (primarily the propane fraction) these LPG reserves equate to approximately 30 years supply.

As always in exercises of this sort, the varying units used by different sectors of the energy industry can lead to confusion.

For convenience, the natural gas, crude oil and LPG figures presented above have been expressed as PJ in the following summary table.

Resource Prices versus Resource Value

The August 2007 edition of the EnergyQuarterly Report, produced by EnergyQuest, reports a range of prices for natural gas sales made by Australian gas producers. These prices range from a low of $A1.98/GJ to a high of $A5.48 for the June quarter 2007, and represent an average price of $A3.73/GJ.

The recent announcement of a single, new $A35 billion LNG export contract is interesting in the context of these figures. At a price of $A4/GJ, which is purely a guess based on the range of known prices discussed above, this single export contract would involve a total of approximately 8,750 PJ of gas.

On that basis, this single export deal would amount to approximately 16 per cent of Australia’s proven natural gas reserves, and 8 per cent of the more optimistic, and perhaps more realistic, “proven plus probable”? total. Either way, it represents a significant slice of Australia’s indigenous natural gas resource.

Global demand for energy is increasing rapidly. The supply of conventional fossil fuels is finite, and in the case of crude oil is widely considered to at or approaching peak levels. In this context, international demand for Australia’s natural gas reserves will inevitably continue to increase.

In these circumstances, LNG exports could easily grow to represent a dominant percentage of Australia’s total natural gas production, and total natural gas reserves.

Implications for the Australian Energy Market

Australia is already a net importer of crude oil, and of products such as petrol and diesel that are derived from crude oil. Our current level of dependence on such imports has reached almost fifty percent of total local demand, and is increasing. Our indigenous reserves of crude oil are low in absolute terms, and in comparison with our reserves of natural gas.

One barrel of crude oil contains approximately 5.9 GJs of energy. At the prevailing international crude price of around $US80 – or $A90 – per barrel, this equates to around $A15/GJ, or four times the average gas price ($A3.73/GJ) currently applicable.

On this basis, the cost of crude oil imports currently represents an annual entry of approximately $A12 billion in the wrong column of our national balance of trade ledger. The increased use of indigenous natural gas to offset oil imports would appear sensible.

Transport Energy Considerations

Recent international experience has demonstrated the value and efficacy of natural gas, in both compressed and liquefied forms, as a transport fuel.

Australian trials have shown natural gas to be a viable fuel for cars and trucks, and of course natural gas has been used with great success in a number of government bus fleets throughout Australia. In Sydney alone, more than 500 buses currently operate on natural gas.

Exhaust emissions from natural gas fuelled vehicles are “clean”? compared to those from petrol and diesel powered vehicles, and greenhouse gas emissions from vehicles operating on natural gas have been shown13 to be up to twenty per cent lower, on an equivalent energy basis, than those produced by petrol and diesel powered vehicles.

Natural gas produces virtually none of the fine airborne particulates that are generated by petrol, and particularly diesel, and that have been the focus of increasing public health concern over recent years.

The more widespread use of natural gas as a transport fuel in Australia is constrained by policy and political and commercial will, and not by operational efficacy, or economics.

In the face of increasing global concerns regarding both the price and security of crude oil and products such as petrol and diesel that are derived from it, the use of natural gas as a transport fuel internationally, in contrast to the Australian experience, has grown in an almost exponential fashion14,15 in recent times.

Ironically, countries such as China and Japan – among the major importers of Australian LNG – are at the forefront in this use of natural gas as a transport fuel.

The Transport Fuel Challenge

Australia relies to a very large extent, perhaps to too great an extent, on road transport for the movement of both people and goods. In turn, at the present time, our road transport systems continue to rely very heavily on fuels derived from crude oil.

Fuels derived from crude oil, such as petrol and diesel, continue to dominate Australia’s transport fuel slate. Available and potential alternative fuels and technologies, other than natural gas, appear limited.

Figures presented earlier in this analysis indicate that LPG plays an important but relatively minor role in our overall transport energy balance. Available LPG reserves suggest that this position is unlikely to change.

Bio-fuels such as ethanol and biodiesel have been strongly promoted in recent years, and have an undoubted role to play in the overall transport energy balance. But the apparent impact of global warming in reducing the quantum of available, arable, farming land must have an impact on the proportion of that land that can be given over from food crop production to fuel crop production.

While new technologies based around fuel cells and hydrogen are under very active development, and will emerge, demand urgency may emerge before the technical and economic delivery of these longer term solutions.

Some Conclusions, a Challenge and an Opportunity

The conclusions are clear. As a country, Australia is relatively “short”? on crude oil, and relatively “long”? on natural gas. Supply and operational realities suggest that natural gas has a very significant role to play, at least in a bridging sense, in Australia’s medium to long term transport fuel balance.

At the present time, Australia appears to be on a path of increasing natural gas exports, and increasing crude oil imports – with the price of our gas exports significantly short falling the price of our oil imports. Unchecked, this scenario would see Australia in the invidious position of exporting a clean, and secure indigenous transport energy resource (natural gas) at a low price, and importing a less clean and less secure replacement (crude oil) at a potentially very significantly higher price.

These factors present both a great national challenge and an exciting national opportunity.

The challenge is to balance the very real and legitimate benefits of LNG exports, with the national and economic benefits that will flow from the further development of the natural gas transport fuel market in this country.

The opportunity is to contribute to a more sustainable economic and transport future for Australia.

References

Definition from EnergyQuest Energy Quarterly report, August 2007
PJ, Petajoules; unit of energy; 1015 joules
Gas reserves based on natural gas plus coal seam methane per Energy Quarterly Report, August 2007
BP Statistical Review of World Energy, 2007
EnergyQuarterly, August 2007
Energy Quarterly, August 2007
BP Statistical Review of World Energy, 2007; EnergyQuarterly Report August 2007
One barrel = 159 litres, and contains approximately 5.9 GJs of energy
BP Statistical Review of World Energy, 2007, proven + probable reserves of 4,000 million barrels
ABARE, 2007
ALPGA website; October 2007
Annual demand based on local production, adjusted for exports and imports
Australian Greenhouse Office, 2007
IANGV (International Associations for Natural Gas Vehicles), October 2007
ANGVA (Asia Pacific Natural Gas Vehicles Association), October 2007
Natural Gas: Keep the Home Fires Burning?

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