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While the government continues to push for a gas-led recovery from the coronavirus-induced recession, the ACCC has another message – that Australia pays far too much for domestic gas. By Mike Seccombe.

Hopes of a gas boom fizzle

Energy and Emissions Reduction Minister Angus Taylor and Prime Minister Scott Morrison greet each other on a visit to the Snowy 2.0 Polo Flat segment factory in Cooma, NSW, in June.
Credit: AAP Image / Lukas Coch

If only saying something over and over again could make it true the Australian economy would by now be well on its way to a gas-fired recovery.

Prime Minister Scott Morrison, and even more notably his minister for Energy and Emissions Reduction, Angus Taylor, have been using the phrase “gas-fired recovery” ad nauseam for many months now.

As has Neville Power, the mining executive hand-picked by Morrison in March to head the opaque National Covid-19 Coordination Commission, subsequently renamed the National Covid-19 Commission (NCC). Power and his fellow NCC members, many of them business leaders, were tasked with mapping Australia’s way out of the deep virus-induced recession.

We have not yet seen much in the way of a plan from the NCC. However, early indications, including a leaked interim report from one of the commission’s taskforces, suggest that gas is being positioned as our economy’s saviour.

While environmentalists and scientists have long dismissed the need for gas as a “transition fuel” as we move to renewables, increasingly the economic rationale for gas is failing to stack up.

Leaving aside for a moment the environmental consequences of increasing the use of “natural” gas, which is primarily made up of the powerful greenhouse gas methane, and the big question of whether Australia even needs more gas to have energy security, there are already signs of trouble for the government’s hope of a gas boom.

In a media release on Friday last week, Angus Taylor emphasised that “Australia’s competitive advantage has always been based on cheap energy”.

“Affordable gas has never been more important – particularly as the Australian economy recovers from the impact of the Covid-19 pandemic,” he said. “This is why the Australian government believes a gas-fired recovery will drive jobs and economic growth.”

But on Monday, a release from the Australian Competition and Consumer Commission suggested this plank of the gas-fired recovery was not going at all well, revealing Australian users were paying up to twice as much for Australian gas as overseas buyers of Australian gas.

“The ACCC is very concerned with the widening gap between domestic and export parity prices, which will have an inevitable impact on Australia’s industrial sector during what is already a difficult economic period,” said ACCC chair Rod Sims.

While gas prices for domestic users had come down a little during the past year, the ACCC found that since May so-called “netback” prices for exported liquefied natural gas had come down faster, and so overseas gas buyers were now paying almost half of what domestic buyers were for Australian gas.

“I am yet to hear a compelling reason from LNG producers as to why domestic users are paying substantially higher prices than buyers in international markets,” Sims said. “When we have lower gas prices around the world, and the Australian market linked to world gas markets, it is vital that Australian gas users get the benefit.”

The tone was almost plaintive, and Bruce Robertson, gas finance analyst with the think tank the Institute for Energy Economics and Financial Analysis, thinks he knows why.

Monday’s release by the ACCC was the ninth interim report of its long-running inquiry into gas prices in eastern Australia.

“And,” says Robertson, “they have taken several hundred thousand words to say the same thing each time. We pay too much for gas. And the government is doing bugger all about it.

“The ACCC knows there’s a gas cartel. The government knows there’s a gas cartel. The only way to fix this is a domestic gas reservation policy on all fields, existing and future fields, at a [lower] price.”

Many places around the world do this, including Western Australia. Federal Labor supports the idea, as do some gas-dependent industry sectors.

The shadow minister for Climate Change and Energy, Mark Butler, seized upon the ACCC findings to renew Labor’s calls for gas reservation.

“For seven years, the Liberal government has dismally failed to ensure Australian users have access to affordable gas. This at the same time as Australia becoming the world’s largest gas exporter.”

And that is the great irony – there is no shortage of gas. It is just that most of Australia’s supply is being exported at knockdown prices.

But, as the pandemic has taken hold, the gas export business is not going well either, with gas prices tanking around the world. Indeed, for a while this year, they were negative.

In the United States the boom in “unconventional” gas mining, commonly known as fracking, has turned to spectacular bust. So far this year, 19 major oil and gas companies have failed, including the “grandfather of fracking”, Chesapeake Energy. In 2008, Chesapeake was worth $US38 billion, but last month its market capitalisation was just $US115 million, and it filed for bankruptcy.

Australia’s gas industry is also facing trouble.

“At present there’s $11 billion worth of Australian gas and LNG assets for sale,” says Robertson as he ticks off the big players looking to sell down their gas assets: Shell, Chevron.

Proposed developments worth as much as $80 billion have been put on hold.

Robertson cites Woodside’s mega project, the Burrup Hub expansion, “which was to build two new … entire gas fields, and a whole lot of onshore infrastructure including some more LNG plant trains”.

Santos has also put on hold its $7 billion Barossa offshore development in the Northern Territory. This comes after the gas giant wrote off a further $950 million from its coal seam gas to liquefied natural investments in Australia in July, bringing its total write-downs since 2014 to nearly $8 billion.

Robertson says the bottom line is that “right the way around Australia, oil and gas companies are basically withdrawing from investment, they’re cutting development budgets, they’re cutting exploration budgets”.

There is a glut of gas around the world, exacerbated by Covid-19, which according to some reputable analysts is not expected to clear for the better part of a decade.

And yet the Morrison government continues to press for more gas mining.

Which brings us to the hot development issue of the moment: the proposal by Santos to mine coal seam gas near Narrabri in northern New South Wales. The project, now in the final stages of the assessment process by the NSW Independent Planning Commission (IPC), would involve drilling up to 850 wells over 20 years. Santos claimed it would generate 700 jobs.

To call the Narrabri project controversial would be an understatement.

Conservationists oppose it because 60 per cent of the project is located in the Pilliga forest, the largest remnant woodland in the state, home to various threatened species, including koalas. Many local farmers also are fiercely opposed, citing scientific assessments of potential contamination of aquifers – on which they rely for water – from leaking gas and chemicals from the mining process.

Since the then state Department of Planning and Environment invited submissions on the project in 2017, it has received a record number – more than 23,000. They were overwhelmingly hostile – 97 per cent, reportedly – to the Santos project.

Among the submissions was one from Australia’s former chief scientist Professor Penny Sackett, now with the Australian National University’s Climate Change Institute, who argued that the development would undermine Australia’s greenhouse gas reduction commitments.

The Narrabri project, Sackett wrote, would add about five million tonnes of greenhouse gases to Australia’s emissions at a time when the country needs to be cutting at least 7.5 million tonnes a year to meet its 2030 emissions reduction targets.

In order to keep warming below two degrees Celsius, “about 50 per cent of Australian gas reserves must remain in the ground”, Sackett wrote. “Thus, approval of new fossil fuel development or expansion is incompatible with keeping global warming to 2°C and will ‘lock in’ emissions and warming far beyond the end of mining operations.”

The former chief scientist warned that the Narrabri Gas Project alone would eat up 11 per cent of NSW’s carbon budget if Australia is to meet Paris climate targets.

The IPC was due to deliver its decision on the Narrabri project on September 4. That has now been shifted to September 30, following a demand from the progressive think tank The Australia Institute prompted by a last-minute submission from Santos, radically altering its economic forecasts for the Narrabri project.

The new Santos submission modelling estimated the project would produce gas far more cheaply than previously estimated – at only $6.40 a gigajoule, compared with previous estimates, which ranged from $7.28 to $9.36.

This remains far more expensive than prevailing world prices, and the suggestion from Neville Power that we might aim for $4 a gigajoule.

Exactly how Australia would manage to hit Power’s cheap price target is unclear. Based on leaks from the NCC, it appears such a drop would rely on the removal of environmental safeguards and massive government subsidies.

Bob Carr, former premier of NSW, now industry professor of business and climate change at the University of Technology Sydney, suggests that what the government and its commission are planning is not a recovery plan for the national economy but one solely for the fossil fuel industry.

“It requires a government contribution to the development of gas fields, and the government underwriting – that means buying the government purchase of gas. Stripped of its confusing language it represents a huge request for a government-controlled market to de-risk the gas industry at a time when it can’t compete with renewables,” says Carr.

“Gas has lost its moment. It’s not a transition fuel. It’s been overtaken.”

That is not the way the Morrison government is spinning it, although its line has changed a lot in recent times. Where once the government blamed renewables for high power prices, it now portrays gas power as being vital to the shift to renewables.

“There is no credible plan to lower emissions and keep electricity prices down that does not involve the greater use of gas as an important transition fuel,” the prime minister said in a media release on January 21.

But that statement bears some analysis. In the first place, it is not gas that has brought electricity prices down. What has – as attested by the Australian Energy Market Operator (AEMO) – is increasing amounts of renewable energy.

The basis of Morrison’s argument is this: as coal-fired power plants are progressively replaced by renewable sources of electricity – solar and wind – there will be a greater need for back-up on those occasions when, as they say, the sun doesn’t shine and the wind doesn’t blow. And that back-up is gas-fired generation, which, unlike coal, can be quickly ramped up to meet demand.

But, as Bruce Robertson notes: “To run the renewables-rich grid, you need gas-powered stations, but you don’t need much gas to run them.” This is because these stations will operate infrequently.

In fairness to the prime minister, some of the advice coming from agencies such as the ACCC and AEMO supports the line that gas could provide back-up power. But in AEMO’s case at least, this comes with a caveat: that other forms of back-up – or “firming”, as they call it – such as batteries and other ways of storing power could become a cheaper alternative.

On that front, things are progressing quickly. Just this month, the power company AGL announced its intention to add 850 megawatts of battery storage to its business by 2024. In a subsequent interview with the website Reneweconomy, AGL’s chief operating officer, Markus Brokhof, said there is a clear business case for big batteries and that they already were becoming competitive with gas.

Since 2014, says Robertson, gas power generation is down almost 60 per cent. “It’s just too expensive.”

He says a second big area of demand for gas is domestic and commercial supply, which accounts for more than a third of consumption. But most of it is utterly unnecessary.

“It’s cheaper to use reverse cycle air-conditioning for home heating, and heat pumps for hot water, and electric instead of gas for cooking,” Robertson says.

He argues a government that was “serious about climate policy” would adopt measures to get gas out of people’s homes.

Indeed, one government in Australia is already moving on that front. Earlier this year in the ACT, which runs on 100 per cent renewable electricity, the government removed a requirement that new housing developments be connected to gas supplies. It is retrofitting public housing with electric rather than gas appliances. As part of its plan to be carbon neutral by 2045, it aims to phase all gas out of the system by 2045.

There remain areas, though, where it is not yet feasible to move away from gas, says Bruce Robertson: things such as the manufacture of bricks, fertiliser and explosives. But in relative terms, these are not big users.

Not coincidentally, when Neville Power talks about the gas-fired recovery, he, too, frequently mentions fertiliser. Back in May, Sydney’s Daily Telegraph reported that a planned fertiliser plant, using gas from the yet-unapproved Narrabri project, topped the list of projects endorsed by Power’s commission.

But as yet the fertiliser plant is little more than a thought bubble. As Guardian Australia subsequently, snippily noted, the project had “not yet sought planning approval of the $1.9bn project and the only tangible signs are press releases promising 700 jobs and a non-binding agreement with the coal seam gas project’s owner, Santos”.

In the Telegraph though, Angus Taylor was quoted calling it a “cracking idea”.

“I like to think of the other side of Covid-19 as being a gas-fired recovery,” he repeated, for the umpteenth time.

It does sound much better than a fertiliser-led recovery.

This article was first published in the print edition of The Saturday Paper on Aug 22, 2020 as "Stepping on the gas".

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Mike Seccombe is The Saturday Paper’s national correspondent.