Australian gas sector update: federal investment to address increasing insecurity in global markets

The Australian Government recently announced as part of the 2022-23 Federal Budget that it will invest $50.3 million towards seven domestic gas storage and supply projects.

The announcement comes at least partially in response to increased uncertainty in the international gas market brought on by the ongoing conflict in Ukraine and emerging effects of associated embargos against Russian gas exports.

The investment also coincides with the Australian Energy Market Operator (AEMO)’s 2022 Gas Statement of Opportunities (GSOO), which reiterates projections of a tight gas supply-demand balance in Australia’s southeast over the coming years and notes that new gas projects will be required to meet domestic and export needs in the longer term.

Concerns over anticipated gas shortages intensify due to conflict in Ukraine

The international gas market has plunged further into a state of volatility and uncertainty as major oil and gas companies withdraw from Russian gas projects in the wake of the Ukraine conflict.  

Also, as part of a suite of economic sanctions, the United States announced a total ban on the import of Russian oil and gas. Europe, which obtains around 30 per cent of its natural gas from Russia, has also pledged to decrease its substantial reliance within the decade.  

From an Australian perspective, in addition to the imminent extra 35 per cent tariff on Russian imports and the requirement to freeze the assets of certain individuals and entities identified as strategically or economically significant to Russia, the Federal Government also announced it will no longer import Russian oil, refined petroleum products, gas and coal. Ultimately, this is unlikely to have a material impact on the domestic gas supply outlook, since Australia does not import energy products in large quantities from Russia.  

Overall, the sanctions are likely to signal a drastic shift in the architecture of the global gas market. In addition to potentially accelerating major gas importers’ efforts to transition to renewable energy alternatives, demand on other major gas exporters, such as the United States and Qatar, could be set to increase.  

Prime Minister Scott Morrison previously suggested that Australia, as an existing major exporter of liquefied natural gas (LNG), could help address shortages in Europe. However, it is unlikely that the sanctions against Russia represent an opportunity for Australia to expand its international gas market share, at least in the short term. This is because around 75 per cent of Australia's export supply is already spoken for under private long-term contracts, and, as Corrs discussed in our previous article, the Australian east coast is anticipating its own gas shortfalls as soon as 2024.

Australian Government pledges an additional A$50.3 million in natural gas project subsidies

The Australian Government’s 2022-23 Federal Budget has allocated A$50.3 million to seven domestic gas storage and supply projects identified as priorities in line with the National Gas Infrastructure Plan (NGIP) and Future Gas Infrastructure Investment Framework (Framework) released in late 2021 and discussed in our previous article. The investment forms part of a total A$2.4 billion allocated to industry, energy and emissions reduction initiatives over the next year.

Federal Minister for Industry, Energy and Emissions Reduction, Angus Taylor, said that a key factor necessitating the significant investment is the ‘unacceptable risk to global gas security’ and international price volatility brought on by the conflict in Ukraine.  

The seven projects selected for early works support are: 

• the expansion of the South West Pipeline (SWP) to handle excess supply from the Iona storage facility in Victoria (APA Group);
  
  
• the Heytesbury Underground Gas Storage (HUGS) project, aimed at utilising depleted underground gas fields to expand gas storage in Victoria (Lochard Energy);
  
  
• Project Range, aimed at increasing contingent gas supply from the Surat basin in Queensland (APA Group);
  
  
• the Surat Hub Project, which will increase capacity in the existing Berwyndale to Wallumbilla pipelines in Queensland (APA Group);
  
  
• the development of a new Gas Infrastructure Hub to drain and harvest gas from existing mines in the Bowen Basin in Queensland (Transition Energy Corporation Pty Ltd);
  
  
• the second stage of the East Coast Gas Grid Expansion, progressing towards the eventual goal of increasing east coast gas transportation capacity by 25 per cent (APA Group); and
  
  
• a feasibility study into the most efficient infrastructure to deliver natural gas from the Beetaloo sub-basin in the Northern Territory to the east coast gas market. The Federal and Northern Territory Governments recently signed a A$872 million joint funding deal to accelerate gas production in the Beetaloo Basin.

The projects broadly focus on increasing domestic supply and enhancing transportation capacity to target projected shortfalls in southeast Australia.

Part of the funding will also be allocated to feasibility studies and options for pipelines to transport carbon dioxide from major gas and industrial hubs to prospective sites for carbon capture and storage.

This investment is in addition to the Australian Government’s recent A$32 million commercial loan for the development of the Golden Beach gas production and storage project in offshore Victoria and A$30 million grant to support early works on the Port Kembla gas project in New South Wales as it approaches final investment decision.

AEMO reiterates gas supply-demand uncertainty

In line with its 2022 Draft Integrated System Plan, which Corrs discussed in our recent article, AEMO identifies a number of possible future scenarios for the gas supply-demand balance in its 2022 GSOO.   

AEMO observes that the gas supply outlook has improved since its previous GSOO, but notes the future position may vary based on the pace of the transformation of the energy sector on the path to net zero emissions. Regardless, AEMO acknowledges the continued role of gas in supporting and firming variable renewable energy (VRE) in the National Electricity Market as coal generation resources continue to retire, and emphasises the need to manage the risk of gas supply shortfall in the coming years.

Indeed, the GSOO echoes concerns voiced by the Australian Competition and Consumer Commission (ACCC) in its January 2022 Gas Inquiry Interim Report that gas supply may be insufficient to meet peak demand in Australia’s southeast as early as next year.

In the short term, up until 2026, AEMO predicts that the timely completion of committed and anticipated gas infrastructure projects could mitigate shortfalls as south-eastern supply drops off. However, the need to carefully manage demand during peak periods will remain, as supply is likely to be tight. To this end AEMO stresses the importance of ‘sector coupling’, ie coordinating demand response between the gas, electricity, and emerging hydrogen sectors.

In the longer term, regardless of which energy supply-demand scenario eventuates, AEMO identifies the need to bring new gas resources to market in order to meet forecast domestic demand from as early as 2026. The extent of new supply needed will depend on the pace of introduction of VRE generation and variable trends in consumption behaviour.  Notwithstanding domestic needs, significant additional supply beyond committed and anticipated projects will be necessary to sustain projected LNG exports.

Next steps

The Australian Government will now undertake a negotiation process to develop grant agreements and finalise how the A$50.3 million will be distributed between the selected projects. The progress of the projects will be reported on in the next NGIP, which is due to be released later this year.

The new NGIP will also provide updated information on the rapidly changing state of the east coast gas market, as will the ACCC’s next Gas Inquiry Interim Report, which is expected in July this year.