IEEFA's position on potential WA gas reservation carve-out

Quotes from Josh Runciman, IEEFA’s Lead Analyst for Australian Gas:

“There are growing calls for Western Australia to be carved out of the upcoming federal gas reservation scheme given it has its own framework in place, but the reality is WA’s framework has serious limitations that has the Australian Energy Market Operator (AEMO) forecasting shortfalls. The Australian government should retain the ability to intervene if needed to protect domestic gas-using industries.”

“Extending the federal gas reservation policy to WA is the state’s best hope to avoid shortfalls in the coming years while keeping gas prices down.”

Below is some information which explains why this is the case:

• WA’s gas reservation policy has limitations which could be addressed by the federal policy
  • LNG exporters are well behind on their domestic gas supply obligations, supplying just over half of the required volumes by 2023. Woodside’s Pluto project, for example, has reportedly supplied less than 4% of its gas production from its Pluto facility, well below the 15% requirement.
  • This is because there are no requirements on when companies should provide gas to the domestic market – they can do it at any time during the project’s lifetime. The federal gas reservation policy could specify how much gas needs to be provided each year, which would complement rather than duplicate the state policy.
• WA is forecast to see gas shortfalls which the federal policy could fix
  • Despite the WA reservation scheme, AEMO forecasts gas shortfalls as soon as 2028.
  • However, IEEFA analysis shows that diverting small amounts of gas that would otherwise be exported as spot LNG (i.e. not to meet existing LNG contracts) would be enough to avert shortfalls.
  • This could be done within the current WA supply requirements, if the federal domestic gas reservation policy required them to be supplied in  shortfall years.
• Woodside’s Browse gas project is expensive and uncertain
  • Relying on the Browse gas project to avert shortfalls is inherently risky given the project has not been sanctioned (meaning a final investment decision has not yet been made) and remains uncertain.

The Browse project is likely to be highly expensive, raising material questions about its competitiveness in both domestic and LNG markets. It is estimated as more expensive than 70% of the world’s undeveloped gas resources. The project being sanctioned will rely on there being sufficient demand (see below).

• The Browse project has seven different joint venture (JV) partners spread across a range of countries, meaning alignment may be a challenge to the project proceeding. For instance, China’s LNG contract surplus might influence Browse JV partner PetroChina’s position on approving the project.
• Gas from Browse is likely to be four times more expensive than existing domestic gas when delivered to Perth and could depress industrial demand by raising domestic prices. Diverting gas from existing fields would be much more cost-effective for WA gas users.
• Relying on fracking the Kimberley is also highly risky
  • WA Premier Roger Cook highlighted the risks when he argued that without the Browse gas project, WA could be forced to frack the Canning Basin in the Kimberley.
  • There have not yet been any commercially recoverable reserves booked by any company, and the only company actively focusing on fracking is still waiting on approval to undertake the initial appraisal drilling, which is crucial to determining commercial viability. Other companies have previously looked at the basin but subsequently walked away.
  • Proving up this resource is likely to take years and require many millions of dollars in investment, with hundreds of millions needed for physical infrastructure to connect to WA’s broader gas network.

Below is more information on why relying on new LNG projects developments in WA represents a risk for the state:

• The future of LNG markets remains highly uncertain
  •  A wave of new supply from the United States, Qatar and other suppliers will see an unprecedented increase in LNG capacity in coming years. IEEFA estimates that almost 280 million tonnes of new capacity will come online by 2031. Canada LNG’s recent expansion decision will add to this.
  • Meanwhile, the second global LNG shock in less than five years has impacted on LNG demand growth in Asian markets that are widely viewed as the key growth opportunities for the sector.
  • An IEEFA review of planned LNG power and import projects in key markets found that the majority of projects were cancelled or have stalled. The volatility and high cost of LNG, and the high cost of gas generation, has been a driver of cancellations, but so have falling renewable costs.
  • Industry consultant Wood Mackenzie now finds that four-hour battery storage is cheaper than gas peaking in all of the countries they assessed, raising questions about the demand for LNG power generation. Recent analysis highlights that renewables are displacing and minimising the role for LNG in the power sector, and that coal displacement is occurring without increased LNG demand.
• Australia’s largest LNG buyers are reselling large LNG volumes
  • Japan, historically Australia’s largest LNG buyer, is selling large volumes of Australian LNG into other markets as domestic demand falls. While Japanese interests argue this reselling is intended to bolster energy security, statements from major Japanese LNG buyers reveal the commercial opportunities. Japan’s LNG imports have fallen materially over the past decade.
  • China has emerged as a major source of LNG resales as company contract portfolios outmatch weak Chinese LNG demand. Rising domestic gas production and pipeline imports, both of which are cheaper than LNG, have impacted on LNG demand. Chinese resales could worsen the effects of a looming LNG supply glut, and undermine returns to LNG exporters

Media contact: Eloise Lane, [email protected] or [email protected]  

About IEEFA: The Institute for Energy Economics and Financial Analysis (IEEFA) examines issues related to energy markets, trends, and policies. The Institute's mission is to accelerate the transition to a diverse, sustainable and profitable energy economy. (ieefa.org)