All around the world, buyers are scrambling for it. Europe is building special shipping ports just to get more of it. Australian exporters are making record profits selling it. Andrew Forrest, the nation’s richest man, wants to import it.
Natural gas, by almost any measure, has had a bumper year. Demand for the fossil fuel roared back to life after coronavirus lockdowns, just as Russia’s invasion of Ukraine choked supply flows and unleashed a frantic race to soak up any spare gas to keep the world’s lights and heaters on, pushing commodity prices to unseen highs.
An estimated 40 per cent of institutional investors in Australia are already applying some level of exclusion to new oil and gas projects.Credit: Getty
Australia’s exports of liquefied natural gas (LNG) – gas that has been super-chilled to minus 162 degrees and turned into liquid – are set to rake in $91 billion this financial year, three times more than in 2020-21. The two largest Australian gas companies – Woodside and Santos – made more money in 2022 than in any year in their history.
Yet, paradoxically, the outlook for gas in Australia has never been less certain.
“Over recent months, we have seen projects on hold and investments pause,” says Samantha McCulloch, head of the Australian Petroleum Production and Exploration Association, an industry group.
“The call on gas is increasing, but the investment environment to bring on new supply to meet that demand hasn’t been there.”
The gas sector is no stranger to facing questions about its future. Proponents bill gas as the necessary “transition” fuel in the shift to clean energy – a power source with half the typical life-cycle emissions of coal, that can still be reliably called on to back up renewables when the wind isn’t blowing and the sun isn’t shining.
‘Gas mightn’t be as bad as coal, but it’s not clean, put it that way.’
Andrew Stock, former board member of the Clean Energy Finance Corporation
But others increasingly see it not as a transition enabler but as a “dead end” – sceptical about its role in a world that’s getting serious about ratcheting up climate action, electrifying everything and phasing out the consumption of all fossil fuels. An estimated 40 per cent of institutional investors in Australia are already applying some level of exclusion to new oil and gas projects.
“Gas mightn’t be as bad as coal, but it’s not clean, put it that way,” says Andrew Stock, a former Origin Energy executive and founding board member of the Clean Energy Finance Corporation. “If we are going to reduce emissions in the world … gas is not part of the solution.”
This year, however, the gas sector here is confronting what it sees as a more immediate existential threat: a federal government intent on launching a series of market interventions that companies say has been destabilising and will inhibit their ability to sanction new projects to expand production.
“The call on gas is increasing, but the investment environment to bring on new supply to meet that demand hasn’t been there,” says Samantha McCulloch, head of the Australian Petroleum Production and Exploration Association.Credit: Oscar Colman
After years of cosy ties with the Coalition, which famously led an unsuccessful push for a “gas-fired” economic recovery from COVID-19, Prime Minister Anthony Albanese’s Labor government has been tightening the screws on gas producers. Since December, it has unveiled significant reforms: temporary wholesale price caps to stop energy bills rising as high as feared, tax changes to fund cost-of-living relief, stronger greenhouse gas emissions limits, and expanded powers to redirect export gas to the domestic market if there’s a risk of shortfalls.
Tony Nunan, the outgoing boss of global energy major Shell’s operations in Australia, says the company will remain committed to both its LNG and growing renewable energy businesses here. But he is frank about the risk of regulatory uncertainty and the “cumulative” effect that so many interventions could have for companies like his, with a global footprint, as they consider where to deploy capital.
“If we really boil it down, investment decisions are ones that we make where we’ve got confidence we’ll see returns or reward, and we have an understanding of the risks that we think we can mitigate,” Nunan says.
“What happens when we see significant interventions, particularly when you have many of them in a short period of time, is you start to see a cumulative impact.”
If investment in local gas projects ultimately slows, the stakes may well be high.
It might seem bizarre that gas-rich Australia, an LNG exporter, could possibly be at risk of domestic shortfalls. But two agencies that monitor supplies – the Australian Competition and Consumer Commission and the Australian Energy Market Operator – are worried about the outlook for south-eastern Australia later this decade as long-running gas fields in the Bass Strait enter rapid decline, without new projects or LNG-import terminals to replace them.
Unlike in WA, there are no east-coast rules for producers to set aside certain gas volumes for local buyers only, and massive volumes of production from Queensland are locked into long-term export agreements with customers in Asia.
Conservationists and renewable advocates insist more supply is not the answer. Rather, they say, the projection of shortfalls from 2027 leaves ample time to develop strategies to reduce gas demand, such as switching appliances from gas to electric and prohibiting new residential gas connections.
Victoria, the biggest gas user, is planning initiatives to encourage people to switch out their gas heaters and stoves. The federal government is studying a similar strategy. But they face a ticking clock, and it remains to be seen how long it may take for such programs to make a meaningful dent in gas demand.
Santos CEO Kevin Gallagher believes Australia can be a “carbon storage superpower”.Credit: Roy Van Der Vegt
As more than 2000 delegates and exhibitors gathered in Adelaide for an annual gas industry conference this week, there was a prevailing sense that they are losing the public relations battle – failing to tell their story. Public polls across the past several months suggest gas companies are not popular, and point to enormous voter support for government efforts to clamp down on them.
Woodside chief Meg O’Neill declared the industry must double down on its message: that it is not just a “passive observer – or worse, a casualty” – of the race to net-zero. Gas provides “firming” capacity to replace coal and support renewables, she says, and is an irreplaceable feedstock in manufacturing processes that are essential to everyday life but have no viable green alternatives. For instance, O’Neill says, the food at the conference would have been produced using fertiliser, made from gas.
“If we have a bit more understanding, we’ll have a bit more public support,” she believes.
Another focus was the sector’s potential to scale up technology to mitigate emissions, such as carbon capture and storage, which traps and buries emissions before they are released into the atmosphere and buries them underground.
Supporters, including the International Energy Agency, say reaching net-zero without it will be virtually impossible. Santos boss Kevin Gallagher argues Australia can be a “carbon storage superpower” due to our vast pastoral and cropping land and depleted oil and gas reservoirs.
“The industry is ready to invest, and we are anxious to work with the government as a matter of urgency,” he says.
Critics write off carbon capture as “largely spin” and a desperate attempt by the industry to retain its “licence to pollute”.
It’s opposed by the Greens and other climate advocates, who say it diverts focus and funds from shifting to cleaner energy, and could be used to prolong the use of harmful fossil fuels. Questions also remain about the technology functioning at scale, given the underperformance of Chevron’s flagship Gorgon carbon capture and storage plant in WA, which is still running at just one-third of intended capacity.
“All they are trying to do now is ameliorate their product’s impact to a small degree, and by doing that, hope to gain support from governments and money from taxpayers to allow them to continue to produce their products,” says Stock.
“I think the industry understands that it’s up against the wall – that they have the wrong product for this century.”
Big batteries, although presently capable of providing only bursts of just one to four hours to fill urgent supply gaps or stabilise grid frequency, are already squeezing gas out of the short-term market, he adds. “The only market left for gas now is the multi-hour through to multi-day period, and I think we will see that become less and less of an opportunity as time goes on,” Stock says.
Government leaders, however, are not so dismissive, instead giving full-throated support this week for the industry’s role in a net-zero world. Resources Minister Madeleine King describes carbon capture as possibly the “single biggest opportunity” to bring down emissions in the energy sector. South Australian Energy Minister Tom Koutsantonis goes further, calling gas as a key pillar of decarbonisation, without which the state’s switch to renewable energy would be impossible.
Resources Minister Madeleine King has given full support for the gas industry’s role in a net-zero world.Credit: Trevor Collens
“The truth is, this state produces more renewable energy than any other jurisdiction in the world, yet the only way we can deliver 70, 80, 90 per cent renewables is knowing that I have Santos and Beach Energy standing behind the SA government providing that gas to our generators to firm that renewable energy for the remaining 10 per cent.”
While the political tide has turned forcefully against gas, there are signs of tensions thawing. Labor backed away from a plan to permanently force gas supply deals to reflect a “reasonable” rate of return. It also landed on a set of tax changes that most companies found acceptable. Santos’s Gallagher believes the federal government might be on a similar learning trajectory to that of US President Joe Biden, who shot to office in 2021 with policies seen as anti-oil and gas.
“Then they sort of worked out over the next 18 months that we need this stuff, and it’s going to be part of the solution,” he says.
But with the sector’s deep unpopularity, rising public support for getting off fossil fuels, and Greens and climate-minded independents wielding significant power in Parliament, Gallagher is under no illusion: “I don’t think we can ever think we are out of the woods,” he says.
The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.