In the second part of our series Future Power, we explain why the government wants more gas, and we ask, how clean is natural gas – and what is its future in Australia?

The Tomago aluminium smelter outside Newcastle received a special visitor in September. Prime Minister Scott Morrison wanted to outline how he would use affordable and reliable energy to supercharge Australia’s post-COVID economic recovery. As the single biggest user of energy in the country, the Tomago smelter was an ideal backdrop.

Morrison explained that his government’s JobKeeper and JobSeeker payments had helped support millions of Australians. Now, the government’s JobMaker plan would help create new jobs – and, to do so, it would be necessary to “get more gas, more often and more reliably”.

Getting more gas would be achieved “by resetting our east-coast gas market, unlocking additional gas to drive recovery; paving the way, ultimately, for a world-leading Australian gas hub to support high-wage jobs, including and especially in manufacturing.”

In his speech, Morrison mentioned gas 55 times.

The government believes that increasing gas supply and use in Australia is key to rebuilding an economy that has been battered badly by the COVID-19 pandemic but as it champions the fuel and its industry, critics of gas are growing louder, questioning long-held claims about gas's credentials as a cheap and cleaner source of energy.

Why does the government want more gas? How clean is natural gas, really? And what’s next for its future in Australia?

Credit:Artwork: Matthew Absalom-Wong

Why does the federal government want more gas?

Gas been used in Australia for decades in power generation, heating and manufacturing. The gas that flows into your stove is a fossil fuel, primarily methane, formed over millions of years by the breakdown of micro-organisms. In Australia, large stores of it are found onshore and offshore, bound up in sedimentary basins capped by impermeable rock as well as in shale and coal seams. For domestic use, it is typically extracted by drilling then treated, piped to distribution hubs near cities and industrial centres, and plumbed into homes.

The Coalition backs the expansion of the gas industry for two main reasons.

The first is economic: more gas, the government says, means more affordable and reliable energy to domestic manufacturers that rely on it – thereby boosting employment. A three-fold increase in east-coast gas prices in recent years has been pushing manufacturing firms to breaking point. Energy often counts as one of their big operating costs, and big businesses have been feeling the heat. In 2019, chemical giant Dow announced the shutdown of its plant in Melbourne's west, citing rising gas prices as a major driver. Sydney-based RemaPak collapsed into administration the same year, saying its gas costs had rocketed from $4 to $16 a gigajoule. Increasing supply and competition by opening up more sources of gas is intended to put downward pressure on prices.

The second is to smooth the electrical grid’s transition from coal. The Coalition and many large companies in the energy industry promote gas as the “transitional” energy source, one that emits far fewer greenhouse gasses than coal but is still capable of dispatching the around-the-clock energy needed to support the growing use of weather-reliant wind and solar generators. The government says it is focused on ensuring that electricity remains reliable and affordable as the market transitions from coal and, for this reason, it is touting gas as the key plank of its plan.

The problem, however, is natural gas also faces some big challenges.

Gas is a heavy source of emissions. While it is a cleaner-burning fossil fuel than coal, it is a fossil fuel nonetheless, and Australia needs to reduce its reliance on all fossil fuels over time in order to achieve its climate targets.

And gas is expensive. Despite the pleas from the manufacturing sector and the government’s best efforts, there is a growing realisation in the industry that the price is unlikely to return to the “good old days” of $4 a gigajoule that eastern Australia has traditionally enjoyed.

The first LNG cargo is shipped to Japan from Chevron's Gorgon LNG project in Western Australia in 2016.

Why are prices so high, and will government measures drive them down?

That depends on who you ask.

Gas prices began sharply rising on the east coast in 2017, when commercial and industrial buyers started receiving new contracts offered at above $10 a gigajoule, much higher than the historic levels of between $4-$6 a gigajoule.

This price rise coincided with Australia deciding to sell natural gas in its super-chilled form, known as liquefied natural gas (LNG), overseas. The construction of six new LNG export facilities at Gladstone in Queensland increased overseas demand for Australian gas – our top LNG export destinations are Japan, South Korea and China – and required producers to tap more expensive gas fields to meet their obligations. This linked the east-coast gas market to international LNG prices, pushing up domestic prices.

Australia has become the world’s number one exporter of LNG. In 2019, cargoes of LNG accounted for about $50 billion in export earnings, sealing its position as the country’s second-biggest commodity export after iron ore ($100 billion a year).

Paradoxically, Victoria, NSW and South Australia are facing the danger of winter gas shortages as early as 2023, warns the Australian Energy Market Operator. This is because most gas now being produced in Australia is in Western Australia and Queensland – far from the domestic demand centres that need gas the most in the south-east – while gas output from fields in the south-east such as ExxonMobil's and BHP’s Bass Strait gas fields, which have traditionally supplied up to 40 per cent of east coast demand – have been in rapid decline.

As Australian Competition and Consumer Commission (ACCC) chair Rod Sims explains, when you boost the supply of a product, it should drive down the cost, and this applies to domestic gas. “If we really want permanently lower prices in the south, we need more gas in the south,” he said.

Much of the federal government’s efforts to rein in runaway prices has been focused on increasing availability of supply, including incentives to encourage the opening of new gas fields, support gas production and invest in pipeline infrastructure.

But there are doubts about whether the government’s interventions in the gas market will succeed in lowering prices or if they are “swimming against the tide”. As energy experts at the Grattan Institute think tank explain, the cost of producing gas in Australia has been steadily increasing over time, and the cost of supply has increased as low-cost sources have become depleted. Gas could once be provided for $4 per gigajoule or less, but today eastern Australian gas fields will struggle to supply gas for less than double that amount.

“Eastern Australia still has plenty of gas, but it does not have a lot of cheap gas – especially in the southern states,” the Grattan Institute says. “Large new resources exist, but are either relatively expensive – such as Santos’ Narrabri coal seam gas field in NSW – or far from major markets – such as the NT’s Beetaloo Basin shale gas fields.”

At energy giant Santos’ massive coal-seam gas development planned at Narrabri, for instance, analysts are projecting that the cost of delivered gas will not be lower than $8 a gigajoule.

Australia's biggest gas producers say new east-coast projects have production costs of up to $8.25 per gigajoule, and that's before transport, distribution and other commercial costs are factored in, according to the Australian Petroleum Production and Exploration Association.

“At $4 a gigajoule most Australian natural gas would stay in the ground and less production would place upwards, not downwards, pressure on prices,” the industry group says.

Other investors are betting on a different means of lifting supply: proposing floating terminals to import and re-gasify LNG from elsewhere in the world to reduce the risk of shortfalls and boost competition.

Prime Minister Scott Morrison (centre) visits the Tomago aluminium smelter near Newcastle with Angus Taylor, the Minister for Energy and Emissions Reduction (second from left), in September.Credit:Tomago Aluminium

Whatever the cost, will using gas help reduce Australian greenhouse gas emissions?

The Morrison government and many of the nation’s biggest energy companies believe it will. "There is no credible energy transition plan, for an economy like Australia in particular, that does not involve the greater use of gas as an important transition fuel," Morrison said in January 2020, arguing that switching from coal to gas had helped other nations reduce their greenhouse gas emissions.

When it comes to electricity, this is true: burning gas releases fewer emissions than coal, and using gas to displace coal in power stations around the world has contributed to lower emissions.

Gas is also touted for its role in supporting the power grid’s transition away from coal to a greater uptake of renewable energy by helping to ensure reliability of supply and keeping a lid on price spikes. Because gas-fired power plants can ramp up and down and dispatch “baseload” energy into the grid whenever needed, many believe gas must play a key role in supporting the shift to renewable energy for those cloudy and windless days when conditions for generating solar or wind energy are unfavourable.

But gas has an Achilles’ heel: it is still a global-heating fossil fuel. An estimated 19 per cent of Australia’s greenhouse gas emissions are caused by gas.

But gas has an Achilles’ heel, the Grattan Institute says: it is still a global-heating fossil fuel. An estimated 19 per cent of Australia’s greenhouse gas emissions are caused by gas and its long-term use must be reduced over time in order for the world to meet the goals of the Paris agreement to limit global warming.

There are also growing questions among scientists about the extent of unmeasured methane emission leaks, known as “fugitive emissions”, which escape during drilling and processing. If the methane escapes unburnt into the atmosphere, in its first two decades it is a devastating 84 times more potent a greenhouse gas than carbon dioxide.

One new study in the US estimates that 2.3 per cent of gas eventually leaks, either at the point of extraction or at some stage during its processing and transport. In some areas, the figure could be far higher. And nearly 10 per cent of gas for export is burnt in the process of liquefying it for shipping.

In August, a group of 25 scientists became so concerned about the support offered to the government’s gas plan by Australia's chief scientist, Alan Finkel, that they took the unorthodox step of writing a public letter to him to voice their opposition.

“The combustion of natural gas is now the fastest-growing source of carbon dioxide to the atmosphere, the most important greenhouse gas driving climate change,” they wrote.

“On a decadal time frame, methane is a far more potent greenhouse gas than carbon dioxide.

“In Australia, the rapid rise in methane emissions is due to the expansion of the natural gas industry. The rate of methane leakage from the full gas economy, from exploration through to end use, has far exceeded earlier estimates.”

Finkel responded that he believed gas would benefit the environment by aiding in the integration of renewables.

ExxonMobil is still extracting gas from Bass Strait.

What’s next for gas?

So far, there is no sign that any Australian governments have had their enthusiasm for gas dampened.

Conventional onshore gas exploration will soon be allowed in Victoria when a moratorium lifts mid-year. Scientists have been studying the geological conditions in parts of the state they believe could hold large amounts of gas, which could be used for commercial operators and households. In their third progress report, scientists found the geology of the Otway Basin has the potential to hold a substantial amount of conventional gas but it was too early to be sure. The Otway Basin covers 155,000 square kilometres with 80 per cent located offshore.

The government agency Geological Survey of Victoria has also been assessing the Gippsland Basin for its gas potential. The Gippsland Basin covers 46,000 square kilometres and is also both onshore and offshore.

The onshore sections of both basins seem the most likely sites to be explored for gas. In the Otway Basin, it’s too early to say how many wells would be created in the event the moratorium is lifted. The gas industry considers it highly unlikely that any drilling or wells would be permitted in national park areas. As was the case when the NT partially lifted its moratorium, wells would most likely be limited to private farmland.

The earliest sources of new gas that will help shore up supply in the tight south-east market, however, are likely to be from imported LNG. There are several LNG import terminals being proposed in Victoria and NSW, including power giant AGL's proposed facility in Western Port, Viva Energy's plans for an "energy hub" at the site of the Geelong oil refinery and the Port Kembla Gas Terminal, which is being developed by mining billionaire Andrew "Twiggy" Forrest's private company Squadron Energy.

Analysts expect the Port Kembla terminal to be the first, forecasting a final investment decision to be reached as early as the first quarter of the year. Squadron is aiming for gas imports to start flowing by 2022, ahead of potential winter supply shortfalls from as early as 2023.

How much does the world still want gas? Globally, demand went into free fall during last year's COVID-19 disruptions, and remains volatile. But a freezing winter in the northern hemisphere and an acute shortage of gas have sent demand soaring, and sent prices, briefly, to unprecedented levels.

As the fleet of big batteries expands and the technology behind them improves, renewables will continue to eat into the gas market.

Still, longer-term, the economic drivers behind gas are rapidly changing as the world focuses on the climate crisis. China, Japan, South Korea – Australia's three biggest LNG customers – and Europe have committed to mid-century net-zero targets (China’s in 2060) with the United States, under new president Joe Biden, expected to do the same, as well as to encourage more ambitious global climate action. This will require fewer fossil fuels in their energy mix, including gas.

Meanwhile, the costs of gas’s competitors keep falling, with the IEA recently declaring solar to be the cheapest energy source in history. As the fleet of big batteries expands and the technology behind them improves, renewables will continue to eat into the gas market.

Investment funds, banks and insurance companies are also declaring policies that would bring their lending and financial practices in line with Paris targets, which is seeing them increasingly questioning and sometimes abandoning gas along with coal, says analyst Tim Buckley at the Institute for Energy Economics and Financial Analysis.

“Two years ago [financial institutions] were looking at coal and tossing it under the bus, hoping that that would satisfy everyone. But this year they are looking at all the fossil fuel industry. They are throwing gas under the bus too.”

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