Gas supply warning clouds reality, analysis says

Gas burner alight with blue flames (supply)
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In its latest analysis, the Institute of Energy Economic and Financial Analysis (IEEFA) says new gas supplies are not needed in the long term, and more can be done on the demand side to further reduce domestic gas consumption.

AEMO flagged possible supply shortages on peak demand days in Victoria until the end of September due to tight market conditions caused by cold weather and production issues at Longford gas plant, which in turn have depleted storage levels in eastern Australia. The market operator called for new gas supplies to address supply gap risks.

Related article: ACCC: Gas shortfall less likely as supply outlook improves

However, IEEFA’s analysis suggests that there is no need for the development of additional gas supplies, either to meet export demand or to address supply gaps. Further, the analysis shows that there are profitable options to reduce gas demand in the southern states that would not only address the risks of supply gaps but would also reduce household energy bills. These would add further momentum to already declining gas demand on the east coast.

Average daily gas consumption on the east coast dropped 13% from FY2012-13 to FY2022-23 (to 1,483TJ/d), and has fallen further in the first nine months of FY2023-24 (to 1,257TJ/d). Declining use of gas for power generation has dragged overall gas consumption in eastern Australia down over the same period (Figure 1).

“While AEMO forecast supply gaps, in reality there is no shortage of gas on the east coast given that about 80% of gas produced in eastern Australia is either exported via the LNG plants in Queensland or used to freeze that gas for export,” says the report’s author Kevin Morrison, IEEFA energy finance analyst, Australian LNG/gas.

Figure 1: Eastern Australia gas consumption

Graph showing Eastern Australia gas consumption
Source: AER Average daily regional demand

Most of the LNG produced in eastern Australia is supplied under long-term LNG export contracts, which are set to expire in the mid-2030s.

Geoscience Australia estimates that 2P reserves at Queensland’s coal-seam gas (CSG) fields are sufficient to cover the existing LNG contracts for the three Gladstone plants and beyond, until 2040, when operators such as Santos aim to be net zero in their upstream operations.

Declining southern gas production explains the tightness in eastern Australia’s gas market given most domestic demand is in Victoria. Tight market conditions have been exacerbated by unplanned maintenance this year at the Longford gas plant, which processes gas from the Gippsland Basin.

Production in Queensland, which has emerged as a major gas supply source over the past decade due to development of its CSG fields, is starting to plateau. Output at three of the five largest CSG fields in the state has fallen by 20-34% since 2019.

“The decline in three of Queensland’s largest CSG fields means new supply is unlikely to be as prolific as the most profitable fields tend to be developed first, followed by the less economic fields,” Morrison says.

The Australian government estimates that new supplies from undeveloped CSG fields in Queensland’s Surat Basin would cost A$11.64/GJ delivered to Melbourne, well above historical price levels.

Other areas hailed as potential new sources of gas by the industry will be even more expensive. Gas from the undeveloped Narrabri fields northern NSW would cost an estimated A$13.50/GJ delivered to Melbourne, and A$14.97/GJ from the Northern Territory’s undeveloped fields.

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“These new sources of gas will push up gas prices, further contributing to already challenging market conditions for commercial and industrial gas users,” Morrison says.

“At these price levels, we are likely to see further demand destruction and offshoring of Australian manufacturing.”

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