Australia’s deepening gas market turmoil

Gas-rich, commercially attractive resources, a stable investment environment and a trusted LNG supplier – Australia’s reputation across the global gas industry has rarely been rivalled for decades.

Yet today, the country finds itself amid an energy crisis. Across eastern Australia, power demand growth has slammed up against under-performing coal-fired generation, nowhere near enough renewables and a gas supply crunch that could be seen coming over the horizon for years. Gas prices already spiked 400% above normal levels in 2022, and this year’s winter is just around the corner.

The government’s response is intervention. Blaming rising energy bills on the conflict in Ukraine, the Albanese administration last month announced “responsible and meaningful action on gas prices” across eastern Australia. What this means is a temporary price cap set at A$12/GJ (US$7.70/mmbtu) for the next 12 months for uncontracted gas in the wholesale market.

Nobody likes high energy prices, and the price cap has been welcomed by gas buyers and consumer groups. But markets exist for a reason. Rushed legislation risks souring investor sentiment and stalling new gas supply. This will exacerbate future gas shortages and likely drive prices up rather than have the opposite effect. The previously unthinkable spectre of energy rationing is now thinkable.

Australia’s major trade partners are looking on nervously. Northeast Asian LNG buyers will be having sleepless nights over the prospect of Australia’s Gas Supply Guarantee Mechanism morphing into a more concrete domestic market obligation. Japan has already sought reassurance this will not happen.

But the finger can’t just be pointed at government. While the gas price cap has been met with derision from the gas industry, this is a crisis long in the making. Stymied by a decade of energy policy blunders and increasingly hemmed-in by rising activism, domestic producers themselves have struggled to find solutions, passively shouldering the blame for rising prices.

Where next for Australia’s east coast gas market? Can a lasting solution to the crisis be found? I spoke to my colleague Dan Toleman.

How did eastern Australia get into this crisis?

It’s no secret that the east coast market is structurally short of gas supply (though not resource). And unlike in Europe where high prices and demand-side management efforts have helped reduce non-power demand, east coast gas demand is sticky. New supply is still needed in power generation and industry.

But this supply is thin on the ground. For east coast producers such as Santos, Beach Energy, Cooper Energy and Arrow Energy this isn’t about the resource, it’s about overcoming stringent ESG requirements and rising activism to access capital. In simpler times, more than a tcf of new east coast supply would be sanctioned over the next few years. But this looks challenging without far more visible government support.

What does this mean for future prices?

We’ve already seen prices spike last winter due to gas supply tightness and coal outages, but the worse may be yet to come. If LNG imports ultimately determine the domestic gas price, longer term gas prices will be well above the A$12/GJ cap – and more volatile – unless material new supply is sanctioned.

Although the price cap excludes new supply from undeveloped fields, this doesn’t mean things can’t change. Pre-FID projects like Narrabri and those in the Beetaloo and Gippsland basins would look increasingly marginal with the prospect of further market intervention.

Can’t eastern Australia just power on with less gas?

It’s important to understand both the current role of gas in the east coast and its importance to the region’s energy transition.

Australia requires gas for power generation as well as other industrial uses including mineral processing, mining, chemical production and fertiliser. Gas is also critical to reducing coal demand in power and as a back-up for intermittent renewables. Simply adding more wind and solar won’t change this.

With LNG imports now likely delayed until at least the mid-2020s as Europe draws on uncontracted supply, underinvestment in domestic supply could also mean higher emissions as less gas equals more coal. There’s just no immediate alternative.

Is the price cap a taste of what’s to come?

Across the industry, sentiment is clear that gas price caps will reduce investment – a cost-plus system doesn’t work for the risk profile of gas projects. And the fear of many is that an interventionist approach sows the seeds of greater crisis down the track – to which policymakers see the solution being even more intervention. Australia was already a difficult place to sanction gas projects, further eroding market forces won’t improve this.

How will this impact Australia’s image as a reliable gas partner?

For many foreign partners and investors, the Australian government’s willingness to intervene in the domestic gas market with minimal industry consultation is unsettling. Some may re-evaluate the country’s risk profile, not least Australia’s major LNG buyers.

And this isn’t only about gas. If Australia is to secure the huge levels of investment it will need to decarbonise its energy network, including renewables, hydrogen and the grid, knee-jerk policy responses won’t help. Many of the companies now considering these investments are those being impacted by moving goal posts in the gas market.

What needs to happen next?

Due to the build time of gas projects, there will not be significant additional gas supply in the next few years. Despite this, government can work with suppliers to show that gas has a role in Australia’s energy transition. Removing hurdles for new gas projects to ensure there is sufficient gas for heating, power and industry will help reduce energy prices in the longer term.

It should also allow emissions to be reduced if coal power plants are shut down and industry moves from higher emission sources like gasoil/diesel to gas. The alternative is to subsidise Australians to move away from cooking and heating with natural gas. Neither policy will be politically easy as opposition to any new oil and gas projects continues to rise and subsidising residential moves away from gas will not be cheap.  

But this isn’t only about government. We believe gas consumers need to clearly articulate their requirements for gas until 2050. And producers must act in concert, emphasising to government and the wider public that it is precisely the shortfall in investment that is causing prices to rise. If producers want less short-term intervention, then doing nothing isn’t an option.

What happens over the next 12 months and beyond remains uncertain. But misalignment between government, producers and consumers is stark and it would be incredible if all required future investment survives unscathed. The sky isn’t yet falling in on the east coast gas market, but unless the key stakeholders address the underlying structural causes of high prices, Australia’s energy crisis will have further to run. 

APAC Energy Buzz is a weekly blog by Wood Mackenzie Asia Pacific Vice Chair, Gavin Thompson. In his blog, Gavin shares the sights and sounds of what’s trending in the region and what’s weighing on business leaders’ minds.