Australia's chief energy dilemma

Gas is a potential hero to some, a villain to others, but there is no argument that it looms large as the energy issue of today in Australia.

For Martin Ferguson, wrestling with the final version of the federal energy white paper, for Barry O'Farrell in New South Wales, which is being threatened with a gas shortage mid-decade, for Ted Baillieu in Victoria, where replacement capacity is needed when brown coal plants are shut down, and for Campbell Newman, confronted by the need to ensure that the LNG projects succeed as well as by NIMBY farmers and environmentalists angry over the rural impact of drilling, gas is simultaneously a headache and a potential economic hero.

For millions of residential and business energy consumers, and the politicians on the receiving end of their ire, the price of gas looks like being the next big issue to cause budget worries.

For the environmental movement, gas looms as the largest barrier over the next two decades to realising their dreams of a renewable energy nirvana in Australia.

For the gas industry itself, the next 20 years hold out mouth-watering revenue opportunities – not just in terms of LNG exports from the east and west coasts, but also from domestic sales of a fuel that has battled for 30 years to make inroads in to the coal industry's dominance in the eastern states.

The size of the domestic prize is highlighted by the Energy Supply Association of Australia in its submission to Ferguson's energy white paper process.

Cumulative domestic demand by 2030 on the east coast can be 21,000 petajoules, ESAA predicts, of which 10,000 PJ will go to producing electricity.

As a yardstick, east coast gas consumption today stands at 700PJ a year.

Ferguson's Bureau of Resources and Energy Economics, whose modelling work is playing a key role in the preparation of the energy white paper, highlights the risk facing the gas sector in terms of capturing the desired share of the electricity market.

Under the Gillard government's carbon policies, says BREE, gas generators can expect to lift their 2035 share of the national power market (which will be about 42 per cent bigger than it is today) from just 16 per cent of electricity production to 36 per cent, helping, along with the renewable energy target, to slash the coal share from 74 per cent to 38 per cent.

However, warns BREE, if the east coast price of gas soars to the levels now frightening business consumers, then the gas-fired generation national share will fall back to just 22 per cent in 2035, benefitting coal plants, whose share rises to 52 per cent.

Manufacturers have heavy hitters like Andrew Liveris, the Australian global chief executive of Dow Chemical Company, at bat for them. On a brief visit to this country, part of an Asian tour, Liveris asserts that Australia “has no evident energy strategy.”

In particular, Liveris complains that, unlike the US, where he is based and where the shale gas revolution has slashed domestic gas prices, the drive to build up an unconventional gas industry on our east coast “is likely to be accompanied by an increase in base energy costs for local industry.”

Dow expects east coast gas prices to double, a view held by many observers of the Australian energy scene.

Liveris complains that the east coast lacks sufficient infrastructure to take advantage of the emerging gas boom – from coal seam gas in Queensland, potentially CSG in New South Wales and possibly from large shale gas resources in central Australia's Cooper Basin and in Queensland.

He argues that benefits that could accrue to Australian manufacturers from access to huge gas resources will be “over-ridden or at least ignored” in the focus on LNG sales.

For the gas suppliers, the Australian Petroleum Production and Exploration Association retorts that the volume of east coast reserves (ie known to be commercially exploitable) and resources (still being explored and assessed) is “more than enough” to serve a strongly-growing domestic market as well as the voracious LNG export requirement.

The industry, says APPEA, “can supply any reasonable demand/supply scenario with only modest implications for the (domestic) gas price.”

In the short-term, it concedes, changes and uncertainties in the domestic market “may create some near-term challenges for aligning expectations of buyers and sellers for sales of long-term gas.”

As far as politicians are concerned, especially in the state arena, that is a long-winded way of signalling that there is going to be bumpy ride this decade.

APPEA argues that LNG exporters can optimise their risk profiles by taking on a diversified portfolio of domestic sales as well as their overseas business. It asserts this provides a “strong incentive” for them to sell in to the east coast market.

It is pleased with the draft energy white paper's conclusion that the federal government “believes that it is essential to allow domestic gas markets to adjust to new dynamics rather trying to constrain prices through intervention.”

Major users, on the other hand, want action by the federal government to set aside gas sources for domestic supply and they are bothered that, even if this decision is taken today, it will be about seven years before gas from the reserved capacity can flow in to the market.

They want Canberra to ride over the top of state (and Northern Territory) governments and mandate gas reservation for domestic use as a condition of Australia-wide petroleum licences.

Major Energy Users Inc, representing about 20 of the biggest industrial companies, says Ferguson and his department are “far too sanguine” in their approach as set out in the draft white paper. 

MEU says the government attitude appears to support a laissez faire approach to “allow natural resources to be sold at the maximum price to the detriment of value-adding to provide a long term benefit to all Australians.”

Julia Gillard, Wayne Swan and Industry & Climate Change Minister Greg Combet find themselves between a rock and a hard place on this one.

The country badly needs the economic and employment benefits of large LNG sales, the carbon abatement target needs a shift to gas generation but the depressed state of manufacturing is a big problem, too. Meanwhile, the Greens and the environmental movement strongly oppose any suggestion of a “golden age” for gas while demonising coal seam methane development in particular.

How this will play out at the next federal poll, especially in marginal urban seats, is an open question.

The final direction of the energy white paper, of course, is down to the whole, embattled federal cabinet, not just Martin Ferguson.

Keith Orchison, director of consultancy Coolibah Pty Ltd and editor of Powering Australia yearbook, was chief executive of two national energy associations from 1980 to 2003. He was made a Member of the Order of Australia for services to the energy industry in 2004.