Dutton’s cheap gas plan is not sustainable in the long term, says energy research company

The Coalition’s proposal to deliver gas from Queensland into Victoria for less than $10 a gigajoule is not sustainable, says an independent energy research company.

A worker walks past a gas pipe marked "Methane" at the Curtis Island liquefied natural gas (LNG) plant, a part of the Queensland Curtis Liquefied Natural Gas (QCLNG) project site operated by QGC Pty, a unit of Royal Dutch Shell Plc, in Gladstone, Australia, on Wednesday, June 15, 2016. Gas from more than 2,500 wells travels hundreds of miles by pipeline to the project, where it's chilled and pumped into 10-story-high tanks before being loaded onto massive ships. Photographer: Patrick Hamilton/Bloomberg

The Coalition’s proposal to deliver gas from Queensland into Victoria for less than $10 a gigajoule is not sustainable in the long term due to pipeline constraints and the difficulty of redirecting LNG spot cargoes, independent research company Rystad Energy says.

Peter Dutton has pledged the controversial move would deliver a major price cut from more than $14 a gigajoule to $10GJ for gas delivered into Melbourne.

However, the plan has faced criticism from market experts who have raised concern over the difficulty of both diverting gas and achieving lower domestic prices as a solution to a looming east coast gas crunch.

“While the Coalition’s recent proposal – redirecting Queensland LNG spot cargoes domestically to achieve prices below A$10/GJ – may offer temporary relief, it’s not sustainable in the long run due to the inflexible nature of coal seam gas production and existing pipeline constraints,” Rystad Energy analyst Krishnan Pal Birda said.

“In contrast, developing new gas supplies and expanding pipelines presents a more enduring solution.”

The Coalition road-tested elements of its gas plan with industry players, including big industrial users and producers, and received a mixed reception over some of its assumptions.

Among those involved in an early discussion with the Coalition about the gas market was former Senex Energy chief executive Ian Davies, who stepped down from the Queensland gas producer last year.

Prospective gas exploration areas such as the Beetaloo could offer an alternative supply option but would rely heavily on offtake agreements from Queensland LNG exporters in order to be competitive on price, Rystad said.

“If Beetaloo Basin can reduce well costs and achieve full-scale production, it could supply gas at around $6-7/GJ, compared to current pilot costs of about $9/GJ, enabling deliveries to Wallumbilla at approximately $10-11/GJ via new pipelines,” Rystad said.

“Such developments, however, would likely require Queensland LNG offtake commitments to underpin pipeline utilisation and maintain affordable transport tariffs.”

The role of gas is shaping up as a critical election issue, with Mr Dutton pledging to prevent between 50 and 100 petajoules from being exported in order to lower domestic prices for manufacturing and households.

The plan wedges Australia’s LNG industry – primarily Australia Pacific LNG, of which Origin Energy owns nearly a third, and Shell’s Queensland Curtis LNG.

Santos, which operates the third LNG export facility on the east coast, will escape a clampdown as all of its gas is contracted. The Coalition has promised to impose domestic reservation limits only on uncontracted gas.

The Opposition Leader has committed to halving approval times for gas projects, fast-tracking the decision on the $30bn North West Shelf off Western Australia and immediately auditing development-ready projects with a focus on the southern states, including Victoria, where the state Labor government has imposed anti-gas policies.

Mr Dutton has said his gas plan would lower wholesale gas prices across the economy and provide energy certainty as the Coalition “secures our nation’s energy security for decades to come” through the construction of seven zero-emission nuclear power plants.

Rystad said the rapid decline of legacy offshore gas fields in Victoria’s Bass Strait along with “the inherent inflexibility and infrastructure constraints of Queensland’s coal-seam gas production” signals an era of heightened market volatility and uncertain gas supplies.

“Ultimately, safeguarding Australia’s energy future requires co-ordinated, sustained investment across all these solutions. Policymakers and stakeholders must embrace the complexity of this challenge – it’s not one or the other, it’s all or nothing,” Rystad said in a research note.

Shell’s Australian boss Cecile Wake said on Tuesday Australia should focus on bolstering much-needed gas production rather than carving off supplies.

Originally published as Dutton’s cheap gas plan is not sustainable in the long term, says energy research company