Dare to be bold: Australia’s East Coast gas market

The recent federal election on 3 May once again thrust energy policy into the spotlight, highlighting the complex interplay of factors affecting the market. 

Governments worldwide are grappling with the energy transition trilemma, the need to balance security, affordability and sustainability. Australia, however, faces an additional complication: how to balance domestic energy needs while exporting significant gas volumes to meet Asia's growing LNG demand. The three Queensland coal seam gas (CSG) to LNG export projects have seen constantly shifting goalposts, with regulations constantly changing. 

Managing the East Coast gas market presents a formidable array of challenges for the Australian government. It must balance energy security for households and industries against affordability concerns, particularly in the face of volatile global energy prices and rising gas extraction costs. Simultaneously, Australia's ambitious climate change targets necessitate a transition away from fossil fuels, creating tension with policies that might encourage long-term gas infrastructure investment. 

The market's complexity is compounded by diverse stakeholder interests. Gas producers favour investment certainty and market-based pricing, while energy consumers demand affordability and reliability. Environmental groups advocate for an accelerated shift to renewable energy and oppose any expansion of gas production. 

Early policy moves and their lasting impact

Fears of gas shortages have persisted for over half a decade, with one of the key drivers tracing back to early last decade when drilling and exploration bans were implemented in New South Wales and Victoria. This historical context adds another layer of complexity to an already challenging situation. 

Australia's East Coast gas market presents a multifaceted challenge with no easy solutions. Balancing the needs of various stakeholders, addressing climate concerns, and ensuring energy security will require careful navigation and innovative approaches in the years to come. So how did we get here?   

The market is structurally short 

Our supply-demand forecasts predict the market will be tight in Australian winter going forwards. But gas supply becomes a year-round concern early next decade. Domestic gas demand continues to remain steady, but market intervention and an increasingly sensitive regulatory environment has deterred investment in new sources of supply. 

The Australian political debate often oversimplifies the energy transition, with headlines suggesting renewables can meet all energy needs. This view ignores the significant gas demand from residential, commercial, and industrial sectors that cannot be easily replaced by renewable sources. 

Industrial gas demand, particularly for high-heat processes and feedstock, remains a critical component of the energy mix. Any reduction in gas supply to this sector could lead to industry demand destruction, potentially resulting in job losses. Key industrial players warning of this shortfall are becoming increasingly vocal. This economic impact is a crucial consideration for policymakers.   

The rollout of renewable energy and the electrification of residential and commercial sectors is progressing. But the transition requires significant investment in infrastructure and appliances, costs that are often borne by consumers.  

Moreover, gas continues to play a vital role in the power mix, supporting the rollout of renewables and facilitating coal retirement. Gas is a dispatchable source of power generation alongside non-dispatchable renewable energy.  

Despite the continued importance of gas in Australia’s energy mix, and higher prices, new gas supply and exploration projects have been delayed. The following chart illustrates the shift in exploration activity. 

The slowdown in activity reflects a challenging investment for Australia's gas sector. The government's preference for intervention has created a vicious cycle, further deterring potential investors. This situation poses a significant challenge to ensuring long-term energy security and affordability. 

So, what are the options?  

In this intricate landscape, the government finds itself navigating a tightrope. Every policy option, from price controls and export restrictions to incentives for new gas projects, carries a unique set of potential benefits and considerable risks. 

Price caps offer immediate consumer relief but risk deterring investment and exacerbating future supply issues. Lower prices could also increase demand, further tightening the market. There were also unintended consequences, with the ministerial exemptions, the recent price cap effectively set a floor price for the market with sellers anchoring prices towards the level of the price cap. 

Diverting exports might prioritise domestic needs but would damage Australia's reputation as a reliable trading partner and undermine LNG project economics. These projects were sanctioned based on longer initial contracts without domestic market obligations, and global LNG demand is forecast to grow beyond 2050. Diverting exports may also require infrastructure investment as a significant portion of East Coast demand is in the south.  

Activists argue that diverting Australian exports will reduce global LNG demand. However, Asian LNG demand is robust driven by declining local supply, coal to gas switching and both population and economic growth.  

Less Australian LNG does not mean less global LNG consumption. Realistically, demand from diverted Australian would be met from new supply projects that has longer shipping routes and higher emission intensity.  

A reduction in LNG exports from Australia could see Asian energy needs met by higher emissions intensity LNG from further afield, or a slower transition from coal-fired power, resulting in signficantly higher combustion emissions. 

Australia could balance its market by importing LNG. This would be done by adding new regasification infrastructure. But FSRUs are in high demand following the Russian invasion of Ukraine and won’t be cheap. Someone, possibly the government, will also have to take on the commercial risk of a facility.  

Importing LNG further exposes Australia to international prices which are expected to be higher longer term and have always been volatile. If Australia starts importing LNG, the local price will move towards the cost of LNG plus the fee for using the regasification facility and then transportation to the end market. This price has the potential to be materially higher than LNG netback.   

The measures above are interim solutions that would still see local gas prices rise long-term. The biggest opportunity to reduce emissions and lower domestic energy prices would be investment in new gas supply. 

Closing the predicted supply shortfall next decade will need clear government support, timely project approvals and efforts to reinvigorate exploration. New acreage releases and supporting seismic could help exploration activity rebound; other countries are looking to attract explorers and capital through fiscal incentives.  

We know there is future gas available on the East Coast. But it won’t happen unless the recent government inaction on new supply is reversed. The government must show a willingness to make difficult choices that may not be universally popular. It must illustrate that the resulting impact can be positive with power supply secured and coal being retired.  

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