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Gas shortfall forecast for Australia’s east coast in 2018

26th September 2017

By: Esmarie Iannucci

Creamer Media Senior Deputy Editor: Australasia

     

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PERTH (miningweekly.com) – An interim report by the Australian Competition and Consumer Commission (ACCC) has predicted a substantial shortfall in gas for the east coast by 2018.

“The interim report projects a supply shortfall in the east coast gas market of up to 55 petajoules (PJ) in 2018, which could be as high as 108 PJ if domestic demand is higher than expected,” ACCC chairperson Rod Sims said.

“One PJ is enough gas to supply the residential needs of Warrnambool, Wollongong or Penrith, or a large industrial user for a full year. The significant shortfall is reflected in prices being offered to commercial and industrial customers for 2018 supply, which are multiples of historical price levels of A$3/GJ to A$4/GJ.”

“The effect of higher gas prices is felt right across the economy, from households to big business. Gas and gas-powered generators are also an important part of electricity generation, so higher gas prices feed into higher electricity prices, leading to a double hit for many.”

Sims said that more than one-third of the commercial and industrial users the ACCC interviewed were considering either reducing production or closure owing to high gas prices. For many of these users, gas is a feedstock to production or an essentially irreplaceable source of energy, and with the products they make often supplied on international markets, higher gas costs cannot be passed on.

The ACCC reported last year in its East Coast Gas Inquiry that the Queensland liquefied natural gas (LNG) projects caused a significant disruption to the market and the supply-demand balance.

In 2018, the LNG projects will together produce over 70% of the east coast’s gas and account for two-thirds of the east coast’s gas demand.

“The expected shortfall could be reduced to a significant extent if the expected sales on international LNG spot markets were instead redirected to the domestic market,” Sims said.

“It is unclear why we are not seeing more steps being taken by the LNG projects to supply more gas into the domestic market. Although we accept some additional coordination costs would be likely and agreement of the joint venture parties of the LNG projects is required.”

“This situation on the east coast is in stark contrast with the situation in Western Australia, which is not connected to the east coast gas market. The west is expected to be well supplied in the short to medium term. For C&I users in the west, there are five suppliers competing for their business and prices are low, in the region of $6/GJ. On the east coast, particularly the southern states, users generally have only one supplier, and price offers in 2017 have generally been in the range of $10-16/GJ,” Sims pointed out.

“The situation in the east coast gas market is serious and options to address the problems in the immediate term are limited,” he said.

Sims added that the export controls proposed by the federal government through the Australian Domestic Gas Security Mechanism (ADGSM) might go some way to addressing this shortage in the short term.

However, further steps are needed to address the underlying problems of lack of gas supply and lack of diversity of suppliers in the east coast gas market, he added, noting that supply-side solutions are needed to bring more supply and suppliers into the domestic market, particularly in the southern states.

“Blanket moratoria and other restrictions on developing new supply should be replaced by case-by-case assessments to allow for new sources of supply to respond to high domestic prices.”

A new report by the Australia Energy Market Operator (AEMO) has also found that gas supply in eastern and south-eastern Australia will remain tight in 2018 and 2019, and that there remained a risk of a supply shortfall.

“In real terms and based on no further response to today’s information, the projected shortfall risk for 2018 is between 54 PJ to 107 PJ, and in 2019 between 48 PJ to 102 PJ. To put this into context, total projected demand for domestic gas is expected to be approximately 642 PJ in 2018, and 598 PJ in 2019,” AEMO MD and CEO Audrey Zibelman said.

“The results of AEMO’s recent analysis and the ever-tighter integration of the electricity and gas markets, together with the increasingly dynamic character of Australia’s energy system, suggest there is a need to look at reforms to improve predictability and stability in energy markets to the benefit of consumers,” said Zibelman.

The Australian Petroleum Production and Exploration Association (Appea) said on Tuesday that it was concerning that AEMO’s latest forecast was more pessimistic about the supply-demand balance than its March 2017 forecast. 

“Appea needs to see more information to understand these forecasts, especially the data behind the huge change in forecast demand,” said CEO Malcolm Roberts.

“Over recent months, the industry has increased substantially the flow of gas to the domestic market.  As the ACCC notes, the LNG projects will contribute more gas to the domestic market in 2018 than they ‘take out’. Queensland is now meeting its domestic and export demand almost entirely from local supply. Queensland gas is being sold in southern markets.

“Looking ahead to 2018, there is a large supply of uncontracted gas available for domestic customers. The industry has made it clear that it will ensure that sufficient gas is available for the domestic market.

“Despite these moves expanding local supply, Appea is very concerned that AEMO has now produced a much more pessimistic forecast than six months ago,” Roberts said.

He noted that comparing the most recent reports with AEMO’s March 2017 Gas Statement of Opportunities shows that it was not a lack of gas production or demand for gas from the LNG projects producing the forecast shortfall, but rather AEMO’s forecast of sharp increases in demand from the electricity generation and industrial sectors.

“AEMO is now predicting a dip of 58 PJ in gas production in 2018, but this fall in production is more than offset by a larger drop in demand for gas from the LNG projects (73 PJ). If no other element of the March 2017 forecast had changed, there would be no shortfall forecast for 2018.

“However, AEMO is now forecasting two new demand scenarios – an ‘expected’ scenario and an ‘uncertainty’ scenario.  Both forecast surges in demand from the electricity generation and industrial sectors. In the case of electricity generation, AEMO forecasts as much as a 76% increase in demand.

“AEMO is clearly worried that wind, hydroelectric and coal generation output may fall. One-third of the shortfall in AEMO’s uncertainty scenario stems from concerns that wind and hydro-electricity production may be too low. Another 10% or so stems from concerns of lower coal output.

“Adding to this demand surge, AEMO is also forecasting a lift in demand from the industrial sector. This analysis reinforces how vital it is for all governments to support developing new gas supplies as quickly and as cheaply as possible.”

Roberts said that for its part, the gas industry was striving to lift production, often in the face of regulatory barriers and escalating costs. 

“More gas supply and more gas suppliers is the only sustainable way to meet long-term demand and to put downward pressure on prices,” he added.

Edited by Mariaan Webb
Creamer Media Senior Deputy Editor Online

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