Australia’s Liquefied Natural Gas – Export Wealth and Domestic Crisis

9 August 2017 Matthew Meagher, Research Assistant, Northern Australia and Land Care Research Programme

Background

Liquefied natural gas (LNG) is natural gas that has been cooled to161°C, making it non-flammable, and reducing it to 1/600th of its original volume. While still a fossil fuel, electricity from natural gas produces on average from 50% to 70% less greenhouse gasses than coal generated electricity. It is considered a “transitional fuel”, reducing the dependence on traditional fossil fuels while renewable technologies are developed and implemented.

Australia is set to overtake Qatar as the world’s largest exporter of LNG by the end of the decade, with a projected 76.6 million tonnes to be sent overseas in 2019. In the domestic market, however, the country faces an energy crisis where a shortage of LNG is driving up gas prices, negatively affecting local industry and leading to power shortages in South Australia. According to the Australian Energy Market Operator, government inaction will lead to further supply shortfalls and blackouts.

Analysis

Although it is one of the largest exporters of LNG in the world, Australia faces domestic shortages of natural gas in Victoria, New South Wales, and South Australia in the coming years. This crisis is the result of a series of market factors as well as poor policy planning. The scarcity of domestic gas supply is the effect of high demand for LNG by Australia’s trading partners in Asia, regulatory uncertainty, and an unexpectedly large drop in the price of crude oil.

Over the 2016-2017 financial year, Australia exported approximately 51 MMt (million metric tonnes) of LNG, the estimated sales value totalling $23 billion Australian Dollars. Over this time, Australia was Japan and China’s largest supplier of LNG and Korea’s second-largest. Due to an increase in supply, spot prices in the Asian market fell from US$14.80 MBtu (million British thermal units) in 2014 to as low as US$4 MBtu in 2016. LNG prices in Japan are indexed to the Japanese crude oil import price, which fell after the crude oil price collapsed in late 2014, decreasing the expected revenue of Australian exporters.

Strict regulation of development and exploration has also exacerbated the problem, with some states implementing bans on unconventional gas development (including coal seam gas and fracking) and moratoriums on conventional development until 2020. The introduction of export restrictions on gas by the Australian government, the possibility of further regulation, and the future of the Petroleum Resources Rent Tax has fostered uncertainty in the industry.

The governments planned export restrictions on LNG – the Australian Domestic Gas Security Mechanism (ADGSM) gives them the power to cap the export of LNG in an effort to ensure that domestic demand is met in the face of a potential shortfall, and to reduce prices to export parity. The ADGSM has been criticised by industry insiders as misguided policy targeting supply, when pricing is the key issue, potentially leading to market distortions.

There have been several short and medium-term reforms proposed to counter the country’s energy crisis. In the current system, electricity generators bid to supply power to the National Energy Market in five-minute intervals, and prices are determined as the average of the five-minute bids over half an hour. Generators can game the system and increase wholesale prices by initially placing high bids and gradually decreasing them over the five-minute intervals. Changing the price interval to match the bid interval will bring in new competitors more suited to short term supply, smoothing out price spikes. Other quick fixes include the implementation of software systems that aggregate consumers into ‘virtual peak plants’, reducing load safely and competitively, and introducing new markets into the system to account for changes in demand and technology suited to the 21st century.

In the long-term, there are proposed solutions to counter a crisis. Lifting state-wide moratoriums and bans on the exploitation of unconventional reserves such as coal-seam gas and shale gas via fracking will increase domestic supply, but will face strong opposition due to the potential for high environmental impact. The governments planned export restrictions will increase domestic supply in the short-term, but in the long run they may deter investment and lower supply. State governments have sought to improve the reliability of the grid by implementing battery storage technology.

Australian Federal and State governments may well be courting a domestic energy disaster, where a single unforeseen event could have nationally significant consequences. Careful policy planning is required, with input from the industry, regulatory bodies, and other involved stakeholders needed to establish a set of solutions that can combat the crisis in both the short-term and long-term.

Any opinions or views expressed in this paper are those of the individual author, unless stated to be those of Future Directions International.

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