Leaky gas progress could lead to a NSW exodus

Late last Wednesday, at the Australian domestic gas outlook conference in Sydney, I said to Mike Moraza, group general manager of upstream energy at AGL Energy, “Look, today’s discussion has gone a number of times to this issue of problems of gas supply for New South Wales – my question is whether this is a crisis still to come or is it already a crisis?”

Moraza’s reply was: “This is a crisis now. That’s a fact. We have run out of time (in New South Wales). We are not going to be able to fill the supply gaps that will emerge at the end of 2016.”

Also sitting on the panel, Robbert de Weijer, chief executive of Dart Energy’s Australian operations until its decision to suspend its NSW operations, added that he believed the state’s end-user gas prices will be very high as a result of the supply problems and a number of large users, not able to afford them, will be “driven out of the state".

More support for the 'crisis now' perspective can be sourced to a comment NSW Resources and Energy Minister Chris Hartcher made in question time at the 'Energy State of the Nation' conference organised by the Energy Policy Institute of Australia in late March.

Hartcher volunteered the fact that he was in negotiation with a large industrial company, “with 500 employees and thousands more indirectly employed as a result of its activities”, that was considering relocating overseas because of the prospect of much higher gas prices.

At last week’s gas outlook conference, Hartcher grasped the lifeline offered by Santos, whose senior executive James Baulderstone told participants that his company could produce a quarter of what NSW needs each year from its licence area in the Pilliga forest near Narrabri.

Three points need to be made about the Pilliga opportunity.

The first is that it is a critical resource for New South Wales gas users in this supply environment.

The second is that the 'Lock the Gate' movement is already hastening to attack development in the Pilliga. The activists threaten a “massive community backlash” against the Santos plan.

The third is the time it will take to bring the Pilliga resources to market.

In this latter context, AGL’s Moraza said talk of 2016 production from the field is “a very ambitious timetable”.

Hartcher, when he spoke at the conference, said his government welcomes Santos’s plans but the proposal has yet to be put forward formally.

The Pilliga development will need hundreds of wells and a new pipeline to link the field to the Moomba-to-Sydney line that brings gas from the Cooper Basin to New South Wales.

Moraza’s remarks and the broad tenor of discussions at the domestic gas outlook conference drive home that the state government and the state’s 450 large business users of gas – as well as the million-plus households and small businesses consuming the fuel – are now between a rock and a hard place.

The rock is the cessation of a large part of the contracts for supply of gas from interstate – representing 95 per cent of demand with 77 petajoules a year coming from Victoria up the eastern gas pipeline and 69 PJ from South Australia and Queensland via the Moomba line – at the end of 2016 and 2017.

The hard place is the price for supplies that retailers like AGL will have to pay to meet customers’ needs.

The company has acknowledged publicly that it is already engaged in legal arm-wrestling with existing major contract holders over their proposals to double the price of wholesale gas.

Media reports claim that suppliers are looking for prices of $6 to $9 a gigajoule versus the average of about $4 of the past three years.

There has also been media speculation that the recently-announced deal between Origin Energy, a major AGL retail rival, and Beach Energy for supply of gas from the Cooper Basin is at the upper end of the $9 ballpark.

The “crisis now” atmosphere will very likely thicken when the NSW Independent Pricing & Regulatory Tribunal announces its draft determination later this month for gas prices from mid-2013 to June 2016 – or perhaps only for next financial year because of the market uncertainty.

I frequently make the point in commentaries and presentations that three four-letter words lie at the core of the energy debate: risk, cost and time.

The current brouhaha over the cancellation of the onshore development of the Browse basin LNG project in Western Australia by Woodside and its partners is a classic example of this:  the time taken to sort out the official approvals for this project, the rising costs and the greater risk as the global market changes have led to the 'shock' decision, which will not have surprised many professional observers of the local LNG scene.

Time, cost and risk are the key factors in the New South Wales coal seam gas imbroglio, too.

Apart from the Pillaga development, it may well be possible, for example, to bring new gas supplies from Victoria by 'looping' – ie doubling – the coastal pipeline. But over what time and at what cost for a delivered product? And what risk does this impose for retailers and consumers?

Business angst over the situation has again been expressed by the Australian Industry Group (which has 60,000 corporate members nationally, many of them in New South Wales). 

AiG, in its recent statement, notes that “Many industries depend on gas. It is an essential feedstock for many basic chemical products that underpin other industries and everyday life.”

Gas supply, says the lobby group, is “far more fragile and important than many people realise”.

Which is why the crisis that is now enveloping New South Wales is no minor matter – and what is bad for New South Wales will be bad for the country as the impacts ripple out through the economy.

Our prime minister was extraordinarily vocal about power prices late last year but she is notably mute about the gas issue today – except for approving her environment minister adding to the problem by playing with the Environmental Protection and Biodiversity Conservation Act.

Is she likely, one wonders, to have a chat about the issue with other first ministers when she chairs the Council of Australian Governments at the end of the week?