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Key Findings

The largest importer of LNG globally is Europe, followed by Japan. Both markets are shrinking and have been for a number of years as these markets look increasingly to energy efficiency measures and renewables. 

The Australian Energy Market Operator (AEMO), the only agency to model a future electricity grid in its Integrated Systems Plan, has shown that in a renewables rich grid, by 2040, the role of gas is smaller than it is today.

Executive Summary

Australia is subsidising a losing industry that is experiencing export market declines.

The gas industry in Australia suffered $25 billion in write-offs in the first six months of 2020. Australian gas companies have lost between 58% and 69% of value since January 2011.

Australian Gas Write-Offs Total $25 Billion

Since January 2011 the Australian Stock Market (as represented by the All Ordinaries index) has risen by 26% whilst oil and gas stocks have fallen heavily. The oil and gas industry has proven to be a wealth destructive sector on the stock market.

The oil and gas industry has proven to be a wealth destructive sector on the stock market.

Australia’s core export markets, Japan, China and Korea have given firm net zero emissions commitments by 2050 for Japan and Korea and 2060 for China. Net Zero emissions by 2050 effectively means that LNG demand will fall. Primary energy demand falls by 17% by 2030 under net zero emissions commitments according to the International Energy Agency. They will get more energy from renewables, nuclear, batteries and through demand reduction via efficiency gains, electrification and behavioural changes.

The first rule of business is to listen to your customer. Australia is flatly ignoring its customers and failure to acknowledge the future is leading our economic policy up a dead end. Australia’s thoughts on climate policies or science are irrelevant. Our core customers are moving to import less coal and LNG and we must acknowledge these bald facts and adjust our policies accordingly.

Gas is no longer serving a role as a transition fuel either domestically or internationally. Grid scale batteries are now cost competitive with gas, eating into gas’ market share for peaking power.

The clear established global trend is towards more renewable power in electricity systems with grid scale batteries, and less gas.

For the next ten years, the world has too much gas

There is a global supply glut of gas that will continue until late this decade. The factors that led to this were in place prior to 2020. Overbuilding of LNG plants and over-production of uneconomic shale and coal seam gas (CSG) has occurred for years. The COVID–19 demand depression has merely accelerated the process.

Australian Gas Drillers Lose Shareholder Value

Globally the LNG industry is in a deep depression. The U.S. shale fracking industry has imploded with multiple bankruptcies and a severe depression in activity. Cargo ships carrying LNG are circling oceans searching for a buyer.

Despite this, Qatar is expanding LNG production by 64% by 2027. Expanding production into a weak market will extend the length of the global gas glut and pose significant competition to gas exporting countries like Australia, as Qatar is a lowcost producer.

Globally, gas prices are very depressed. There is no place for high cost gas in this market.

In Australia, gas usage has shrunk; It simply costs too much

Domestically, gas usage overall has shrunk by 21% since 2014, primarily because gas is too expensive as an energy source.

Gas use in industry has fallen 12% since 2014. High domestic prices for gas have left industry uncompetitive. Opening up further supplies of gas under the government’s gas-fired recovery will increase the cost of gas to Australian consumers and industry, further depressing industrial gas usage.

Gas usage in gas-fired power plants has declined by 58% since 2014, whilst renewables have increased to produce 25% of the energy in the National Electricity Market.

The Australian Energy Market Operator, the only agency to model a future electricity grid for Australia, has shown that by 2040 the role of gas in a renewable rich grid is smaller than today.

Gladstone, A financial failure

The coal seam gas to liquefied natural gas projects at Gladstone, Queensland are a financial failure.

The three lead companies in the consortium that own the three export CSG to LNG plants at Gladstone have written off $24bn since 2014 on their failed investments. Santos’ CSG to LNG Gladstone experiment has nearly written off $7 billion. Its latest $1.1 billion write-off was announced in July 2020.

Opening up new supply at Narrabri will increase the price of gas

East coast gas consumers already pay too much for gas. The Australian Competition and Consumer Commission’s gas price enquiry (2017-2025) repeatedly shows that the Australian domestic consumer pays too much for gas, and has been doing so since the Gladstone export plants opened in 2014.

The Narrabri coal seam gas project will not bring down the cost of gas, but rather, it will place upward pressure on prices.

Unconventional gas (coal seam gas and shale gas) is high cost gas, which means it is very expensive to extract from the ground. Producing high cost gas in a low-cost gas world is not economic.

The Narrabri gas project will embed high cost coal seam gas into the domestic system. Meanwhile, cheaper sources of gas will be exported. Selling high cost coal seam gas to the domestic consumer will force up the price of gas.

Opening Narrabri, expected sometime between 2024 and 2027, will not stimulate the Australian economy. The only benefits to this new supply will be in lining gas companies’ pockets.

The only measure that will bring down the high cost of Narrabri gas is the massive subsidies being proposed by the federal government for the gas companies, not the consumers.

Australia’s east coast gas is controlled by a handful of producers

The east coast gas industry is controlled by only a handful of players that have consistently price gouged the Australian domestic consumer and our governments have allowed them to. This ‘cartel’ has socialised its losses on the export markets at the expense of the Australian energy consumer.

The Western Australian gas market operates differently. In Western Australia, the state government has put in place a gas reservation policy, which reserves the necessary quantities of gas for cheap domestic consumption. Consumers in Western Australia pay a lot less for gas than their east coast neighbours.

The east coast of Australia needs a domestic gas reservation policy. A domestic gas reservation on existing and prospective fields at $4/gigajoule is the only way to ensure low prices and assured supply for Australian east coast domestic consumers.

If not gas, then what?

Gas use in residential and commercial applications can largely be substituted with cheaper electrical heating in the form of air conditioners, induction cooking and heat pumps for hot water.

Switching from gas would unfetter up to 190 petajoules per annum, and dwarf the suggested contribution of, at best, 70 petajoules from Narrabri.

Gas is heating up the climate faster than coal

Gas is predominantly methane, a greenhouse gas which displaces oxygen and warms up the atmosphere.

Methane emissions from unconventional gas fields are high, and when burned in peaking plants and used for export, are no better for the climate than coal. LNG is a higher emitting fuel than piped gas as it takes large amounts of energy to liquefy and then ship the gas.

In September, President Xi Jinping announced that China is aiming to hit peak emissions before 2030, and to be carbon neutral before 2060. It is likely that any new plans will increase reliance on domestic production and piped gas rather than LNG.

Every State and Territory in Australia has a ‘net zero’ emissions target by 2050. Producing and consuming more gas is fundamentally opposed to each government’s policies on emissions.

Even if Australia refuses to implement greenhouse gas targets, it looks as if China, Europe, and even possibly the U.S. will force its hand.

Press release: Australia’s energy crisis can be solved with a focus on renewables, not a capacity market that locks in high emissions electricity

Please view full report PDF for references and sources.

Bruce Robertson

Bruce Robertson has been an investment analyst, fund manager and professional investor for over 36 years. He has worked with Perpetual Trustees, UBS, Nippon Life Insurance and BT.

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