TE: A number of large industrial consumers of gas are arguing that we need a domestic gas reservation policy because domestic businesses are being neglected in order to service large LNG contracts and some are even saying that New South Wales is about to run out of gas unless action is taken to reserve gas for domestic use. Is this right? Are you and other gas producers reluctant to sign new supply contracts with large domestic customers because you don’t have enough gas to meet overseas contracts?
GK: So, there is no problem. There is no shortage of gas. And, you know, give you a couple of reference points. So, what will happen as… If we go back to that kind of really base level of understanding that when the LNG industry starts up in Queensland, you can only pull to it the amount of gas that’s produced in Queensland and flows through those Moomba to Wallumbilla pipelines. Now, what that means is once those pipelines are full, any gas produced south of that point will stay south of that point. So, you know, certainly Victorian gas, Ottway, Bass, you know, Gippsland Basin will supply those south eastern markets, right. Now, to the extent that that supply is less… and I don’t think it’s a question of being less than demand, but to the extent that demand rose to the point that prices south of Moomba move up and of course what happens once those prices ex Moomba match the Queensland prices, then gas would begin to flow out of Queensland as well. Ok. Because that particular gas was then economically neutral as to where it goes. The sort of question in the middle is what happens if demand is more than supply southeast Australia but less than that, you know, less than what could be moved through the pipeline, this sort of this… this sort of middle range? And I think the important understanding is that what’s actually going to happen is that the first source of supply will be the withdrawal of use of gas for power generation. Ok. So, that’s actually where the first source of gas is going to come from, not a gas field. It’s going to come out of power generation. It’s not going to come out of industry. And, you know, in my view the suggestion that industry is the one that gets sort of shorted by this is not right because it will be power generation that will be shorted by that increase in demand for gas. Now, if you then track that through and say what’s the economic consequence of that statement, the answer is none. You might say that sounds strange, but if you think about gas fired power stations in New South Wales, Victoria and South Australia, you’ve got quite a few bigger ones like Uranquinty, Tallawarra, Laverton, Mortlake, Newport, Jeeralang, Torrens Island, Osborne, Pelican Point, Quarantine, Ladbroke Grove. There are probably a couple I’ve missed. There are lot of gas fired power stations and they use a fair bit of gas. And so, what will happen is that as price rises in southeast Australia if demand is equalling supply, the first application for gas or use of gas that will be surrendered will not be industry and won’t be households, it will be power generation and the reason it’s power generation is that the gas in power generation is only worth the price of coal and in Victoria, for example, it’s only worth the price of brown coal which is very cheap …
TE: I suppose there’s some degree of issues around flexibility and the… with some issues around flexibility of plant and capital intensity.
GK: Yeah. The industry will use gas storage, for example, and pipeline storage to preserve all the peaking flexibility of gas, right, so the gas will still be there at the peak when it’s needed, right, and what happens is that coal runs harder and the increase in the amount of renewables fills the gap. Now, the point about the coal running harder is that… and the reason gas gets pulled out of that segment and has no economic impact is that it is only worth the thermal value of coal in power generation whereas it’s worth the export value in LNG, so gas will go to the highest value use. It will come out of power generation. To the extent that the energy comes out of power generation, not the capacity because the industry will still keep the capacity available, right, through storage and other interruptible agreements, that to the extent that wind under the current or even a reduced RET scheme continues to add energy into the system in SA, VIC and New South Wales, to the extent that that energy is intermittent, gas will still be there to firm it.
TE: Yeah. Yeah. Because it should have a very high value.
TE: Because it should have a very high value.
GK: Yes. market vol [the price cap on wholesale electricity prices] is ten thousand dollars, so it doesn’t matter what the price of gas is when you’re using it for firming. It’s almost irrelevant. But it still wouldn’t really change the price of electricity in the market. Now, the irony of this all is that coal of course is cheap and getting cheaper because under both sides of government the carbon price will fall, you know, theoretically in 2014 and coal actually is getting cheaper. So, the consequence of that rotation of gas out, that’s once it has no economic impact on power prices because the fuel that will substitute for it is cheap, is the reason why it is actually rotating out of generation because it will remain cheap relative to the increase in value of gas. Does that all make sense?
TE: It does. I mean especially when you’ve got a… you don’t have much… you’ve got a large excess of generating capacity and relatively subdued demand growth and you’re injecting a heap of renewables into the supply into the system, then you’d probably think well you’re probably going to get some gas freed up anyway even if the gas price wasn’t going up.
GK: Correct. So, what that means is going back to your core question of all of these notions that there won’t be gas for industry are nonsense, right, because it won’t come out of industry, it’ll come out of power generation, but it won’t make anybody’s power more expensive because the fuel that will replace it is just… is there and it’s already cheap.
TE: Where do you see gas contract prices going in the next five to say ten years in the various eastern states’ markets?
GK: Clearly people expect that the LNG industry in Queensland will connect Australian gas to export markets and therefore we will see export parity pricing. Export parity pricing is linked in the LNG industry to oil price, so the first part of the answer is the oil price will actually determine the gas price in Queensland.
And the question then is to the extent that that price or any particular price exists in Queensland, how does that relate to the price of gas in the rest of eastern Australia? Now, the key point there is that the more the… the gas that will go into the LNG industry in Queensland can only come from one of two places in… even in the next five, six, seven, eight years and that is from within Queensland or through the pipelines from Moomba to Queensland. Ok. So, that’s the only way gas can get into Queensland. So, you would expect that there’ll be one price for gas anywhere inside that piece of geography, so net of transport and it was… if the gas was worth X to Gladstone, it’ll be worth X minus transport anywhere else in Queensland.
But south of Moomba, so for New South Wales, Victoria, South Australia, the price there one would expect to be linked or informed by the price in Queensland was one comment and that is that if more supply was made available south of that Moomba constraint, then there may well be an excess of supply addressing available markets at that point and it is quite conceivable that the price south of Moomba could be lower. But that will depend entirely… And here is why this matter gets so much discussion. It will really I think depend on whether New South Wales can open up its CSG resources.
TE: So, you see that there would be a potential difference in price between… Because at the moment a large proportion of New South Wales supply does come from Moomba and so I suppose the thinking is that New South Wales prices would also be quite strongly linked to the LNG price, but you’re suggesting that that might not be the case if New South Wales were to develop a substantial amount of its own supply.
GK: Yeah. Correct, Tristan. And the point that’s misunderstood is that people tend to make the case for developing CSG in Queensland around the absolute notion that New South Wales won’t have any gas and that’s of course not true because if New South Wales is willing to pay for its gas the same price net back as Japan and China are, then gas would actually move from Queensland to New South Wales. Having said that, if New South Wales opened up its CSG resources, you know, for example, in the Gunnedah Basin and those resources were as substantial as people think they are, then New South Wales or really the whole southeast Australian market, that is the market below Moomba, may well have more gas available to it than it needs and therefore you might get lower prices arising as a result of that situation.
TE: What sort of timeframe would you sort of anticipate though to get yourself in a situation where… Let’s say we remove the environmental concerns and constraints on New South Wales CSG. Pretty out there thing to do, but let’s say we remove that. What sort of timeframes do you think are conceivable? I know you aren’t that heavily involved in New South Wales, but to bring forward a significant amount of supply from New South Wales.
GK: So, Tristan, you’re right. I mean we have no, not a little, we have no CSG assets in New South Wales and I’m not super familiar with the amount of, you know, development of the appraisal activity that’s been undertaken, but assuming there’s, you know, what we call a 2P resource, that is from an exploration it’s reasonably well understood, then I’d say probably it’s about three years to get that into any meaningful level of production.
GK: So, say around three years. Now, as I say, I just don’t have any particularly knowledgeable position on how much of the industry is available resource in New South Wales is in that 2P, that sort of proven category, proven probable category, but if it was, you’d probably still be looking at, you know, I’d say probably reasonably three years to get it into any meaningful level of production.