Australia / Analyst Insights
Energy crisis looms over eastern seaboard

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by Jason Aravanis
Sep 21 2017

Australia is endowed with abundant natural gas and coal resources. Coal seam gas (CSG) reserves in Queensland are considerable and significantly larger than conventional gas reserves. Over the past five years, investor interest in accessing these CSG resources resulted in three consortiums investing a combined $63.6 billion in wells, pipelines, liquefied natural gas (LNG) conversion facilities and LNG export facilities located on Curtis Island, near Gladstone, QLD. As these facilities have become operational since 2014-15, LNG export volumes have increased from approximately 25.0 million tonnes to 67.6 million tonnes in 2017-18, and are expected to grow to 77.0 million tonnes by 2021-22. The primary market for LNG exports is Japan, which has increasingly relied on LNG following the scaling down of nuclear power facilities after the 2011 Fukushima nuclear disaster.

This staggering increase in LNG exports has heightened competition for gas supply in the domestic market. Household gas bills have begun to increase across the eastern seaboard. Australians are now competing with overseas economies for the supply of Australian-produced gas. Western Australia has been relatively immune to this problem. This has been due to regulation that imposes a minimum share of gas production in the state that must be allocated to the domestic market. By artificially preserving supply, domestic gas prices in Western Australia have remained low relative to those on the eastern seaboard.

Federal and state governments have identified different approaches to preventing further rises in household gas bills. The Federal Government has called on state governments to facilitate access to untapped CSG resources to increase supply and lower gas prices. However, controversy regarding CSG fracking has largely prevented this. Victoria currently bans all CSG extraction and New South Wales has imposed a ban on new CSG projects.

As a short-term solution, the Turnbull Government drafted an Australian Domestic Gas Security Mechanism (ADGSM) that came into effect in July 2017. This regulation allows the government to impose controls on LNG exports when the domestic gas supply has a shortfall. This regulation only applies to gas projects that are not net contributors to the domestic market. The Gladstone LNG plant, operated by Santos, is currently the only non-net contributor. The two other LNG gas exporters, Queensland Curtis LNG and Australia Pacific LNG, are safe from this regulation. The ADGSM has a lifespan of five years, as it is a temporary measure designed to put downward pressure on gas retail prices.

Rising gas prices are likely to benefit some industries and harm others. Many manufacturers are large consumers of energy, and rising energy prices can threaten the viability of firms across the manufacturing sector. Rising household gas bills have also negatively affected discretionary income, which fell in 2016-17 and is expected to fall further in 2017-18. This trend is likely to put downward pressure on retail industries’ revenue.

However, some industries stand to benefit from rising gas prices. Petroleum exploration has been in significant decline since 2012-13, but an imminent need for new gas resources is anticipated to revive this industry. Rising gas prices are also likely to prompt the adoption of alternative energy sources. Solar panel installation is one area set to benefit from this trend.

Related industries:

Petroleum Exploration

Solar Panel Installation

Coal Seam Gas Extraction