NSW will pay a high price for stalling on gas (Australian Financial Review 14 May 2012)

Domestic gas development is not likely to get much of a look-in at this week’s APPEA Conference. The focus is likely to be on Australia’s progress towards becoming the world’s largest LNG exporter.

However one domestic issue that is clearly on the mind of APPEA Chairman and Santos CEO David Knox, and Michael Fraser AGL CEO, is barriers to coal seam gas (CSG) development in NSW. Both are experiencing delays due to community opposition and have warned that NSW will run into gas supply problems unless things speed up.

What’s the problem? NSW hardly produces any gas anyway.  For years NSW has been importing almost all its gas from the Cooper Basin in South Australia and fields offshore Victoria.

The problem is that these fields are increasingly mature. The Cooper Basin has been supplying NSW since 1975 and most of its reserves are fully contracted. The contract to supply NSW runs out in 2016-17.

Bass Strait has been supplying NSW since 2000 (as well as Victoria since the 1969) and still has uncontracted reserves. However Victoria’s other supply source, the offshore Otway Basin, is also maturing and, as Otway contracts come to an end, the demands on Bass Strait are likely to increase.

When NSW gas contracts last came up for renewal in 2002, gas was a buyers’ market, with sellers from as far away as Papua New Guinea competing to sell gas to NSW. Now it’s different. Gas is a sellers’ market, leaving NSW with more limited options.

However NSW now also has the option of developing its own gas. After years as the Cinderella of Australian gas production, NSW has the opportunity to go to the ball, courtesy of increasing CSG success.

NSW still only produces around 6 petajoules (PJ) of gas a year (4% of what it consumes), but it now has reserves and resources of nearly 15,000 PJ, more than either the Cooper Basin or offshore Victoria. Added to remaining Cooper Basin and Victorian reserves, that’s more than enough to supply the southern states for at least the next 20 years.

Moreover, NSW gas is not only plentiful but also relatively cheap to develop compared with other east coast basins, particularly offshore.

As a result Santos, AGL and other companies have been active in starting to develop NSW reserves to ensure that current interstate contracts can be replaced.

However they have encountered continuing community opposition to the point where AGL has said that its development has ground to a halt. Federal environmental approval for its Gloucester project has recently been delayed from March 2012 to January 2013. Santos has also experienced delays.

Opposition in NSW is significantly greater than in Queensland, notwithstanding the much larger scale of Queensland CSG development.

Why is this?

There are differences in land-use and population density. NSW is more heavily populated and has tourism and vineyards (although the struggling grape growers I know would love to have gas under their vineyards).

History also plays a part. Sydney Gas, the company that originally developed the Camden project near Sydney, created a bad reputation very quickly with its aggressive approach to land access. There are still signs around the Hunter telling Sydney Gas where to go. The record of some other junior companies more recently hasn’t helped either.

There is also the challenge of the unknown. Queensland has had an oil and gas industry since the 1960s whereas this is a new industry for NSW, both for existing landowners and the government.

There are also differences in economic circumstances. NSW clearly has more well-off NIMBYs who are not interested in compensation and don’t want change.

Finally of course there is also pure anti-development politics by groups opposed to any fossil fuel development.

Much of this opposition is reflected in the recent report of the NSW Legislative Council inquiry into CSG established by the NSW Greens.

The Committee correctly recognised that, “Gas plays an important role in meeting energy needs in New South Wales, and demand is projected to triple in the next twenty years. Given that New South Wales is reliant on depleting gas supplies from interstate, the Committee considers that New South Wales must develop its own coal seam gas reserves if it is to enhance its energy security and contain gas price increases”. The Committee does not support a moratorium on exploration, though it does support tougher regulation before any further production approvals are issued.

The 352 page report itself however devotes 330 pages to “concerns” (whether objective or completely subjective) but less than 20 pages to economic benefits and issues of energy demand, security and prices. Arguments for and against a particular point are given equal weight, regardless of how sound or not the evidence.

While the report does not advocate stopping CSG development, the thrust of its recommendations would, if adopted, be to slow and limit the scope of development.

This would have negative consequences for NSW economic development, energy security and environmental sustainability.

The economic benefits of CSG development have been well documented in independent modelling by ACIL Tasman and Allen Consulting. The economic impact of a fully-developed coal seam gas industry in north-western NSW alone would provide approximately 3,000 ongoing full-time jobs, with many based in regional communities. We estimate that this development could generate over $3 billion in royalties to 2035. There is a substantial opportunity cost of limiting development.

Limiting development also has negative implications for gas supply security. The less gas NSW is able to produce itself, the more it is likely to have to rely on a single and increasingly expensive interstate supply source, You don’t reduce gas prices by leaving it in the ground. Bass Strait will also need to meet the needs for increased gas-fired power to reduce Victorian brown coal dependence. 

Finally, there are also negative environmental consequences. Just over ninety percent of NSW electricity is generated from coal, with only 5% from gas, 2% from hydro, 1% from wind and 0.8% from solar PV. Limiting gas development for environmental reasons would also limit the state’s ability to switch power generation to cleaner fuels.

While the APPEA Conference is focussed on LNG, Macquarie Street has some hard work to do on domestic gas.

Dr Graeme Bethune is CEO of EnergyQuest, an independent economics consultancy specialising in oil and gas and author of “Australian Coal Seam Gas 2011: From Well to Wharf”.