Grounds for optimism?

Given the events of 2017, it might seem a little quirky for the Australian Petroleum Production & Exploration Association to pick “Resilient business – success in the new energy market” as the theme for its 2018 annual conference, but optimism has long been the trademark of oil and gas producers.

Thus we see Kevin Gallagher, Santos CEO and lead industry speaker at the APPEA conference in Adelaide next May, opining that the biggest game-changer for the sector in 2018 would be opening new areas for gas development in New South Wales (where the incumbent Coalition government has made footdragging on this issue an art form) and the Northern Territory (where the relatively new Labor government is torn between the competing lures of considerable future economic benefits and the politics of cosying up to the NIMBY movement).

Gallagher says the Macarthur basin in the NT “has the potential to do for Australia what the shale gas revolution has done for America,” which is a pretty big statement when you consider what the US shale oil and gas boom has accomplished in the past decade, turning that country’s energy environment on its head thanks to embracing the new extraction techniques of drilling horizontal wells and hydraulic fracturing.

Gallagher adds in a promotion for the APPEA conference that the opportunities here to find new solutions integrating gas, renewables and energy storage are “limited only by our imagination” – and, one may add, by the toxic quality of the national energy debate.

APPEA chief executive Malcolm Roberts acknowledges that 2017 has been “challenging” but he, too, sees hope in greater recognition of the importance of natural gas for national energy security and a transition to lower carbon emissions.

In a new submission to the CoAG Energy Council, which is due to hold a potentially critical meeting about policy next April, APPEA argues that time is running out for the development of new unconventional gas resources to replace the declining output from existing eastern Australian fields and ward off further east coast supply tightening and higher prices.

Another worm in the apple comes via the Australian Energy Market Operator, in a just-released statement on gas supply and demand, warning of a domestic shortage in Western Australia if new resources are not brought onstream in the next five to seven years. The cause for concern is that WA petroleum exploration is at its lowest level since 1990 – and the new Labor government has imposed a moratorium on hydraulic fracturing, baulking exploitation of large potential onshore shale resources.

The WA government is embarked on the 14th review of fracking in Australia while the 13th, arranged by the new NT government, has just delivered a report which the panel chair, Justice Rachel Pepper, encapsulates as saying: “The overall conclusion of the report is that risk is inherent in all development and that an onshore shale gas industry is no exception. However, if the recommendations made are adopted and implemented in full, those risks may be mitigated or reduced – and in many cases eliminated altogether – to acceptable levels having regard to the totality of the evidence.”

How far it is realistic for the industry to be hopeful that Pepper-style commonsense will prevail in WA, the NT, NSW and even Victoria (where the Labor government seems determined to shoot the State economy and consumers in the feet despite decades of reliance on gas as an essential service) is debatable – and has been debated many times at the APPEA conferences and the Australian Domestic Gas Outlook conferences (the next is in Sydney in February) over the past six years.

APPEA is taking some further cheer from the latest report in to gas supply by the Australian Competition & Consumer Commission and the coincident Shell announcement that will bring the Arrow resource in Queensland (“the largest undeveloped resource on the east coast”) to both domestic and export markets.

APPEA points out that the ACCC report “confirms that the gas industry and Queensland’s LNG industry in particular has secured east coast domestic gas supply for 2018 and 2019,” following heavying of production companies by the Prime Minister earlier this year which in turn followed dire market operator warnings about potential shortfalls lying ahead.

The association takes particular note of the commission saying that “the best way to address the supply shortage in the southern States is to increase production of gas in the southern States.” As Roberts sees it, the ACCC paper “places the blame for higher-than-necessary gas prices at the feet of governments,” and in particular those in NSW and Victoria. To which APPEA adds that further reform of transmission operations will help, given they “can add $2 to $4 a gigajoule to prices in southern States” when gas has to be ferried long distances.

And Roberts tosses in another sharp point, too: the ACCC report, he says, “continues a trend this year of dramatic revisions of demand forecasts,” in this case converting a 55 petajoule east coast shortfall for 2018 predicted in September in to a 20 PJ surplus six weeks later. “Cooler heads,” he suggests, “need to prevail in 2018.” Now that really is optimism.

Speaking of reports, and hasn’t 2017 seen a tsunami of them, there is also a paper just published by BDO, accounting and management consultants, that looks globally and locally at gas markets – and among its observations is that the mooted Australian west-east gas pipeline, now subject to one of the Turnbull government-funded feasibility studies launched this year, should not be dismissed as a pipedream. Local BDO partner Andrew Hillbeck says: “It’s a possible solution and it’s an opportunity for innovation – at the very least it requires more consideration.”

However much optimism producers want to project, business consumers, and especially the manufacturing industry, still view 2018 with trepidation. Their concerns are summed up by ACCC chairman Rod Sims, who says that “despite increased supply providing important short-term improvements in conditions, the market is still not operating as well as it could.” Prices, he asserts, remain higher than they would be in a well-functioning and competitive market.

Prices offered to large commercial and industrial businesses have fallen back from $16 per gigajoule early this year to between $8 and $12 – but, says Sims, “the picture for smaller C&I customers remains bleak.” Some, he adds, are “in a precarious position.”

And because there is always one more thing to consider in the wild ride that is the gas game these days, bear in mind comments by National Australia Bank a fortnight ago, warning that Victoria is in “a tricky position” for electricity supply this summer (owing to generation issues at Loy Yang A and Yallourn power stations) and that this may lead to greater dependence on gas turbines with flow-on impacts on southern fuel availability and on wholesale electricity prices in the NEM.

 

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