Can Santos avert the crisis in NSW's pipeline?

Last week Santos began what may be the last attempt to develop a gas resource within New South Wales in time to help avert what might otherwise be a nasty and destructive energy shortfall in the state in the middle of this decade.

On Friday Santos announced that it had sought approval from the federal and NSW governments for a "more focussed" exploration program within the Pilliga Forest region at Narrabri in NSW, saying that the program was designed to determine the commercial and technical viability of a gas development project.

Santos believes the Narrabri gas project could supply over 25 per cent of the state's natural gas demand, with first gas output probably as early as 2017.

Development of NSW’s coal seam gas reserves has, of course, effectively been shut down by opposition from environmental and community groups and the responses of the state and federal government to their campaigns.

Santos says the program proposed doesn’t impact on the strategic agricultural land or "critical industry clusters" which the state government has protected from CSG development and doesn’t, at this stage, require federal approval, even though that approval will be sought.

The NSW government’s approach to development of its coal seam gas resources – and the federal government’s 'water trigger' amendments overlay, which creates a second set of environmental hurdles – has meant there has been virtually no development of the state’s CSG resources despite the fact that the state has the largest uncommitted resources of CSG on the eastern seaboard.

That hasn’t been a problem in the past, as it has been able to source gas from South Australia’s Cooper Basin, from Queensland and from Victoria. It is going to be a problem in the future.

From next year, but more dramatically in 2015 and 2016, the three big export LNG plants at Gladstone in Queensland will begin operating, liquefying and exporting coal seam gas sourced from Queensland and South Australia. Demand for gas will triple by 2016.

That massive diversion of gas to the export market (which has seen a related massive increase in CSG resources in those states) coincides with the falling away of 20-year contracts with producers in those states to supply NSW.

The NSW gas companies had, it appears, bet on there being a surplus of cheap gas in the lead-up to the start of LNG exports. But that hasn’t eventuated, and with the state importing 95 per cent of its gas requirements, that creates a looming energy crisis.

Today gas accounts for about 30 per cent of eastern Australia’s energy supply, but that is rising as the impact of carbon pricing displaces coal as a source of power generation. It would probably rise further if it weren’t for the scale of the mandatory renewable energy schemes.

With rising demand, declining resources, and processing and pipeline capacity that would be insufficient to meet NSW’s shortfall, Victoria isn’t a solution to the state's looming energy crunch.

The answer, given that NSW has the largest uncommitted gas resources, is obvious – but the politics of coal seam gas development makes that a problematic option. Time is running out. It takes time to develop new resources and infrastructure to bring gas into the market, and the window between now and 2016 is closing rapidly.

Longer term, the price signal created by LNG exports might increase the level of economic reserves of unconventional gas in eastern Australia – domestic gas prices will rise to reflect the international price, less the costs of liquefaction, transport and re-gasification – but in the near term, without development of its own resources, NSW faces even steeper price rises (which will impact industries and households), and probably a greater reliance on coal-fired generation. Perhaps it could even experience peak period brown-outs.

There has been a lot of talk about 'reserving' gas for domestic use but given that NSW has virtually no production of its own, and that much of Queensland and South Australia’s surplus gas is contracted to the LNG plants, that’s not a solution.

The obvious response to the predicament the state faces is to find a path to reconcile the genuine community and environmental concerns about coal seam gas developments with exploitation of sufficient resources to add NSW-sourced gas to the eastern Australian supply-demand equation.

Time is running out if NSW is to find that pathway in time to avert the energy shock in the pipeline.