Can NSW save itself from a gas implosion?

As essential gas supply contracts expire, and with staunch public opposition to coal seam gas, something has to give if the O'Farrell government is to deliver on its economic promises.

One thing Barry O’Farrell and his New South Wales government can be sure about in 2013 is that they are caught between a rock and several hard places on the state’s gas supply.

The rock is the expiry of contracts for delivery from interstate to meet 95 per cent of the needs of New South Wales' 1.04 million household and business gas customers.

Some in the energy industry expect the problem to start manifesting itself as early as next year.

EnergyAustralia chief executive Richard McIndoe graphically highlighted the challenge last year. "In 2014-15,” he said, "it’s going to be like someone took the plug out.”

AGL Energy's managing director, Michael Fraser, has warned that "the clock is ticking on energy issues” for New South Wales.

The hard places include the ongoing campaign against coal seam gas development in the state from the environmental movement and more than a few farmers – and the high likelihood that gas prices are going to spike as the decade wears on.

As well, with manufacturing continuing to decline, O’Farrell & Co are confronted by a vocal factory sector demanding reservation of gas to meet its needs while the LNG export industry hoovers up existing east coast resources.

The New South Wales and federal governments are at one in saying no.

Meanwhile, where domestic demand is going is open to question.

As with electricity, consumption has fallen back in difficult economic times.

Predictions from two to three years ago that New South Wales gas demand will triple in 20 years may now seem over the top, but the expectation remains that they will be substantially higher than today.

For decades, New South Wales governments haven’t felt the need to worry about gas despite occasional short-term hiccups in delivery.

Ample supplies have been available from South Australia’s Cooper Basin and Victoria’s offshore Gippsland basin – and more recently from Queensland.

When contracts were last negotiated in 2002, sellers chased the market from all directions, including far-off Papua New Guinea (via a pipeline that hasn’t eventuated).

Back in late 2005, Bob Carr, then state premier and now foreign minister, put out a New South Wales green paper on energy that specifically pointed to the risk of Cooper Basin gas becoming scarce – but neither he nor the three Labor leaders who followed him made any attempt to address the issue.

Now sellers are top dog and "mind the gap” is a serious warning.

The key Cooper Basin contract runs out in 2016-17 and most of remaining reserves there are already contracted elsewhere.

How much gas is available from the offshore Gippsland Basin is a point of debate – the Greens insist the region can meet New South Wales needs so CSG exploitation is unnecessary – but ExxonMobil and BHP Billiton, the sellers, have plenty of market options, including sending gas to the north-east coast for export.

For the upstream petroleum industry, the best New South Wales move is clear: exploit the 15,000 petajoules of coal seam gas resources that have been identified in the state, more than either the Cooper Basin or the Victorian fields can offer, 250 years worth of supply at present demand levels.

CSG attracts what many in the energy industry see as a disproportionate level of angst in some parts of the community, fuelled not just by city media but also by rural papers, the ABC’s rural news team and activists with strong social media skills.

AGL Energy, the main gas retailer, wants to see CSG development in the Gloucester region of New South Wales as well as in the Upper Hunter, aiming to top up what it needs from Bass Strait.

The petroleum industry argues that the benefits of CSG are obvious: the gas will be relatively cheap to bring to market, exploitation will provide about 3,000 full-time jobs in New South Wales, many in regional communities, and development will be a cash cow for taxpayers, delivering about $3 billion to the state Treasury over the next two decades.

The O’Farrell government would love to go along for the ride, but the opposition to development is a real hurdle, not least because it affects the Liberals’ partners, the Nationals, and because an important chunk of the NIMBYs are not wild-eyed nature lovers.

Late last year I sat at dinner on a farmhouse porch overlooking Gloucester in the foothills of the Barrington Tops while one of the local luminaries, the polar opposite of a greenie, told me grimly that "this valley will be a desert in 40 years” if CSG development goes ahead.

He fears the impact on aquifers and agricultural productivity.

The valleys and hills of Gloucester shire are well-populated by his ilk, many of them tree-changers from Sydney. They are happy to accept tourists but strongly oppose both the CSG and coal mining industries.

The petroleum industry retort is that he and hundreds of others like him in north-west New South Wales are falling prey to mis-information, some of it deliberately misleading.

Gas suppliers are adamant that, with the drilling practices used in Australia, there will be no material impact on agricultural water supplies.

The industry is hanging out for 'honest conversation' on the issue, 'not scare-mongering, suggestion, hearsay and mischief'.

While Team O’Farrell contemplates how to break the impasse, it is soon to get a harbinger of what lies ahead.

The state’s Independent Pricing & Regulatory Tribunal will deliver decisions on consumer gas prices as well as household power bills by May.

IPART has bids before it for a 10.4 per cent gas bill increase for metropolitan areas and between 5 and 6 per cent for rural and regional areas.

If the wholesale price of gas doubles over the next five years, as it easily could, end-user bills in New South Wales will rise by another 33 per cent.

Stalling until the March 2015 state election is behind it will not work for O’Farrell’s government in its premier role as guardian of the economy.

Objectively, the government has to drive the CSG developments but there is a political price to pay. Just how big a price is the bottom line for O’Farrell.