At a glance
- most of Australia's east-coast gas fields are in decline and aren't being replaced by new production
- large long-term export contracts have reduced domestic supply and linked the price for exported gas and domestic price
- demand for gas is increasing as old coal-fired power stations like Hazelwood close
- importing gas is likely to be the lowest cost solution despite Australia's significant gas reserves
Despite Australia’s considerable gas reserves, significant long-term export contracts, together with restrictions on onshore drilling and development of unconventional gas reserves mean that we now face a potential gas shortage over coming years on the east-coast. The export market has also led to a link between the price for exported gas and the domestic price.
Some have suggested a gas pipeline from WA to the east-coast as a solution, however our analysis suggests the cheapest solution, albeit counter-intuitive, is to import gas at global LNG prices by developing a Floating Storage Regasification Unit (FSRU). The project would use liquefied natural gas or ‘LNG’. Natural gas is chilled to -162oC to make LNG, which shrinks the volume of the gas to 1/600th of its original volume. Even with regasification and transport costs, the efficiency of delivering gas long distances by ship means this project would deliver competitively priced gas to the domestic market and put downwards pressure on prices.
Many of Australia’s east-coast gas fields are in decline and not being replaced by new production. At the same time, demand for gas is increasing as old coal-fired power stations like Hazelwood are closed and electricity production shifts to renewables backed up by gas-fired power generation, AGL’s import jetty project could help fill the looming supply gap.
Historically gas prices on the east-coast have been around $3-4 per GJ, but one to two year wholesale contract pricing is now reported to be as much as $10-12 per GJ. Building a pipeline from WA to Victoria is technically feasible but Credit Suisse has estimated this would add around $7.50 per GJ in transportation costs, which is much higher than the cost to import and re-gasify LNG.
Given these costs, an import terminal, as proposed for Victoria’s Crib Point may not be that crazy after all and could play a critical role in bringing Australian gas prices into line with lower international prices.