EXPLAINER: The long, cold winter may be retreating in memory, but the pain of epic gas bills lingers for households, businesses and industry. Why the blowout?
Gas is a commodity we take for granted, and much of the business of its production - from drilling to piping to processing - remains a mystery to consumers. It’s invisible, right up until the prospect that it might fail to flow, or until the winter heating bill blows out the household or business budget.
And so it is that burning questions around the reliability, longevity and surging costs of our gas supply now preoccupy consumers, industry and politics. The dynamics of production and supply, matters usually buried in business reports, are front page news.
Gas producers have seized on the moment to push back against state restrictions and community concerns around onshore drilling. Earlier this month the Australian Petroleum Production and Exploration Association (APPEA) spokesperson, Malcolm Roberts, congratulated the Victorian Opposition for abandoning its “nonsensical” opposition to onshore gas development to address the state’s gas supply problem, taking a swipe at continuing “unscientific” opposition to hydraulic fracturing, or fracking, along the way.
For decades, media reports have variously claimed Australia was awash with gas, or was running out of it. Truth is, even the Federal Government couldn’t say just how much gas the country might have. But it has recently attempted to find out, commissioning a report into offshore reserves to resolve this multi-billion-dollar question. Resources Minister Barnaby Joyce received the report in August, but has not released it. Martin Bowerman, spokesman for the Minister, told The Citizen the Government was still considering the findings and a document for publication.
What’s clear is that south-east Australia is facing a substantial shortfall in gas supplies, as detailed in an interim report released by the Australian Competition and Consumer Commission late last month, and that this is translating into huge spikes in prices. This comes on the heels of warnings of just such a surge by the Australian Energy Market Operator (AEMO) back in March.
The murkier question is - why?
The AEMO report blames a “finely balanced” supply and demand market, and “geological challenges in accessing and releasing gas … at a time when low cost reserves in eastern Australia are in decline.” The ACCC notes nose-diving production in 2018 from the Gippsland Basin Joint Venture (GBJV), by far the biggest producer in the Southern states. It’s report also points out that Queensland is producing enough gas to plug the domestic hole, but that for reasons the ACCC described as “unclear” producers preferred selling it on low-priced global spot markets. After wrangling an eleventh-hour deal with the gas companies to keep enough gas to meet domestic needs over the next couple of years, the Turnbull Government put the New South Wales and Victorian Governments in the gun for bans on the exploration of new onshore gas fields.
Some experts have claimed that the situation is the consequence of deliberate manipulation - that an “Australian gas cartel is restricting supply to the domestic market in order to force up the price”. The ACCC is currently investigating if gas companies are engaging in cartel behaviour.
So how much of this is hot air and - drilling into the state of play in Victoria - how worried should we be?
Ian Howarth, a gas investor and speculator and formerly resources editor for the Australian Financial Review, and Dylan McConnell, a researcher for the University of Melbourne’s Climate and Energy College, both question claims that Victoria is running out of gas. They argue there’s enough gas to keep the state cooking for at least 20 years, and that we don’t need to be drilling onshore to get it.
“It’s difficult to know how much gas Victoria has in total, but offshore there’s around 7 trillion cubic feet (roughly equal to 7,400 petrojoules) of proven gas reserves,” says Howarth, who reported on the resources industry for decades.
The state only produces 0.4 trillion cubic feet of gas every year - less than one eighteenth of that capacity. “There’s at the very least 20 years of proven gas there if you also count probable and possible reserves,” says Howarth.
“If high prices continue they’ll likely drill for more and find more, so you can’t definitely say that we have a definite amount of gas.”
So, why the crisis? Let’s take a walk through the vernacular of gas and try to get a little perspective.
Proven reserves refer to known quantities of gas that companies feel confident of being able to commercially extract at a profit. Probable and possible reserves refer to reserves where the industry is less sure about how much gas is present, and whether extraction is economically feasible.
Gas reserves are often initially labelled as possible or probable, and then relabelled as proven as companies begin to determine how much gas is present and how easy it will be to extract.
Howarth believes much of Victoria’s possible and probable reserves are yet to be fully explored, and if gas is found, the amount of proven gas reserves will grow, meaning predictions of peak gas are likely to be premature.
“You’re already seeing companies like ESSO and BHP expanding exploration off the coast of Victoria, so don’t be surprised if they find more gas,” he says.
In a report released in March, AEMO raised concerns that south-eastern and eastern Australia were running out of gas. By September, it was predicting that demand would outstrip production by as much as 107 petrojoules in 2018, and 102 petrojoules in 2019.
The March report also stated that from 2014 to 2015, rates of exploration and development of gas wells drilled in Australia dropped by nearly half, and production in offshore Victoria is expected to drop by 38 per cent over the next four years.
Responding to questions from The Citizen, APPEA cites the ACCC and AMEO reports as evidence that gas reserves are facing a shortfall, and also points to a 2016 report by EnergyQuest, an energy consultancy firm, which claimed “the natural gas reserves of the Gippsland Basin Joint Venture have fallen by nearly 20 per cent in the past three years”.
The EnergyQuest report quotes CEO Dr Graeme Bethune saying that Gippsland’s gas supplies would “not last forever”. At current production rates, he expands, “there are only sufficient GBJV reserves for 10.5 years and without exploration, these reserves cannot be replenished”.
The ACCC’s states that production from Gippsland’s gas fields is expected to drop by more than one quarter 26 in 2018 as a result of “both natural decline in legacy fields and investment decisions”.
Dylan McConnell, researcher for the Climate and Energy College, rejects AEMO and APPEA’s concerns about a drop in supply in Victoria and other states. He argues Australia has a gas price crisis, not a gas supply crisis, blaming the price blowout squarely on declining production rather than vanishing natural flows.
“Victoria has enough offshore gas reserves to supply the states for the next 20 years, and if you include all the prospective reserves which is the most uncertain category of reserves, you have 40 years. The real issue is how much gas is being exported, and how much is produced,” says McConnell.
He points to figures in AEMO’s March report which anticipated gas production in eastern and South-Eastern Australia of 1949 petrojoules. By September, this figure had dropped to 1891 petrojoules.
“We’ve seen a drop-off of production of around 58 petrojoules of gas in six months,” says Mr McConnell. “The gas is there, but production has been scaled back.”
This goes to the heart of concerns that producers are manipulating the market - allegations the gas companies reject. But Tim Forcey, a former BHP engineer who worked on BHP and Esso’s joint gas venture in the Bass Straight for a decade up to 2010, told The Age earlier this month that the ACCC would need the advice of many independent chemical or reservoir engineers to know for certain where the truth lies. Forcey co-authored a University of Melbourne paper with McConnell earlier this year spelling out the argument that a gas supply crisis in south-eastern Australia was very unlikely.
McConnell thinks it’s unlikely gas companies are colluding to drive up gas prices, but argues that since the gas industry is so opaque, it’s impossible to know. He says governments should be taking steps to ensure cartel behavior never happens in the first place.
“If regulators forced the gas companies to be more transparent with how it operated and where it got its figures from, it’d be a lot more competitive. It would reduce the threat of the gas companies working together to drive up prices in the future.”
Howarth also dismisses claims gas companies are engaging in cartel behaviour, pointing to new exploration in Victoria’s offshore gas fields which he predicts will lower the gas price.
But he does acknowledge economic factors determine whether companies explore gas reserves. “Just because a company stops drilling for gas doesn’t mean it’s not there. Companies will only explore for gas or drill for it if they feel like they can make money. When oil was $US 30-40 ESSO and BHP stopped drilling for oil. And in the early 2000s the same companies stopped drilling for gas.”
McConnell also blames increasing gas exports for a lack of domestic supply, and predicts local gas prices could come down if more gas is diverted towards local markets. Western Australia has been exporting LNG for decades, but eastern Australia only began to export gas in 2012-2013, and now exports over 1,300 petrojoules of LNG each year.
His claims have been echoed by Lily D’Ambrosio, the Victorian energy minister, who has rejected claims Victoria has a supply crisis, and blames gas exports for the shortfall.
The Andrews Government has called for the Federal Government to put an export cap on exporters, arguing that “Australian gas should be reserved for Australian families and businesses first – something that Malcolm Turnbull can control, but refuses to.”
(Graph below: From AMEO Gas Statement of Opportunities September 2017.)