EnergyQuest: What’s in store for Australia’s gas industry?

In the aftermath of the energy crisis, nations around the world started burning the midnight oil to boost their energy security. As the dust over the potential gas crunch settled down, COP28 attempted to bring more climate action to the fore, threatening to derail the development of multiple planned fossil fuel projects. Are potential energy woes and gas shortage worries truly a thing of the past for Australia? EnergyQuest, an energy consultancy, has provided its take on Australia’s gas outlook, shedding more light on what awaits the country in the future.

Australian Energy Producers’ recent report highlighted that Australia would need substantial gas production over the following 26 years to ensure the security of the energy supply in 2050, even under a net-zero scenario. As a result, it was concluded that further investment in gas supply was needed to maintain production levels from operating fields to offset the decline, as investment in new supply options would help meet projected demand. The report also underlined that more LNG would bring “significant export revenue opportunity.”

Bearing in mind all the challenges energy markets are facing on the global scene, EnergyQuest has released the fifth edition of its East Coast Gas Outlook 2023: A Roller Coaster Ride along with its new West Coast Gas Outlook 2023: Getting the Balance Right. Within its outlook for the east coast gas industry, the report paints a future of “great uncertainty,” due to the potential for large swings from balanced supply/demand, to tight supply, and the long-term possibility of oversupply.

EnergyQuest claims that this foretells an industry roller coaster ride up ahead, as legacy fields in Gippsland, as well as the Otway and Cooper Basins are in decline, with gas supply anticipated to run short by 2028. As the exploration expenditure is at some of the lowest levels seen, the prospect of adding material gas in the short term is low in this outlook.

According to EnergyQuest, gas supply is not expected to meet demand beginning from 2028 without LNG imports to the east coast or aggressively diverting LNG foundation contract feedstock gas, even with the long-term decline in gas demand by as much as 60% to 2042. In this outlook, New South Wales (NSW) is predicted to become entirely dependent on gas from LNG imports and the currently unsanctioned Narrabri field.

The 314-page report, supported by 48 worksheets of models and data, forecasts that Victoria will have an even more difficult time, with up to 91% of its gas demand to be met from LNG imports by 2034, driving gas prices up to LNG import levels.

However, the remaining coal seam gas in Queensland, which is no longer required to meet lapsed foundation LNG contracts, could be diverted to the southern states from 2036, possibly driving the market into oversupply, which would force gas prices down, and potentially strand assets – pipelines, storage, LNG import terminals –  as the industry pivots to a new low point at speed.

EnergyQuest’s 186-page report examining west coast gas industry brings forth an image of an opaque Western Australian (WA) domestic gas market, which has been accustomed to low prices and plentiful supply but is now seeing the opposite.

While assessing the path forward for gas suppliers and gas users, alongside a range of scenarios for supply, demand, and pricing, the report states that the domestic supply from the Scarborough gas field and Perth Basin is needed to balance “a tight domestic gas market.”

The outlook also emphasizes that this will likely not be enough in the longer term, thus, changes to the WA domestic gas reservation may be on the cards. Since the prices reached record highs in 2023, the proportion of LNG volumes supplied to the domestic market has fallen over time.

Based on this report, WA will have significant ongoing gas demand from gas-fired power generation, and large industrial operations that are unable to readily substitute gas for other energy sources. As the region already has a domestic gas shortage, this is anticipated to get worse unless production from the Scarborough gas field and the Perth Basin comes online on schedule in 2026.

Furthermore, EnergyQuest is forecasting material supply shortages within a decade at which point increased supply to the domestic market from LNG projects may be needed.

EnergyQuest’s findings are in line with claims from Samantha McCulloch, Australian Energy Producers’ Chief Executive, about the oil and gas sector being a key driver of investment in Australia’s economy, as the country will be relying on gas in the long term, consistent with net zero goals. During an interview with Sky News, McCulloch highlighted “the immense uncertainty” that had befallen the policy and investment environment in Australia over the last 12 months. 

While addressing the projected gas shortages, Australian Energy Producers’ Chief Executive explained: “The first thing that we can do to address these shortages is actually fix the environmental approval system.

“So many of these projects, particularly on the west coast and particularly offshore, have been stuck in long-term regulatory approvals that are taking years at a time when we urgently need that new gas supply, and we urgently need that new gas supply because of this important role that gas is playing across the economy, processing critical minerals, mining and manufacturing, but also backing up renewables and power generation.”

Set against the backdrop of rising geopolitical challenges, global inflation, and energy security woes, the final text of the COP28 climate talks brings into play the importance of tackling methane emissions and other non-CO2 emissions in this decade along with the need to do much more to meet the goals of the Paris Agreement.

Closer scrutiny of the outcome has sparked concerns that the text keeps the doors wide open for more natural gas and LNG, however, it also mentions transitioning away from all fossil fuels, which could put plans for the development of some oil and gas projects at risk.

While mentioning the regulatory approval backlog and explaining that Australia’s energy future would depend on natural gas, Kevin Gallagher, Santos’ Managing Director and Chief Executive Officer, pointed out that shutting down traditional energy industries was bound to drive energy prices up and drag energy security down while slowing the pace of the energy transition engine.

Therefore, he urged governments to engage with oil and gas companies to drive the energy transformation forward.