Gas supply is in decline, and shortfalls could be disastrous
The consequences of shortfalls in supply will be substantial business and domestic disruption, yet the urgency to find solutions appears lacking.
Among the cacophony of loudly voiced opinions on the costs and viability of an Australian nuclear industry on Wednesday evening, the Australian Energy Market Operator (AEMO) quietly published an alarming update, an “East Coast Gas System Risk or Threat Notice”, warning that “ … the supply of gas in … the east coast gas system may be inadequate to meet demand”.
The cold weather, gas supply and storage interruptions, and ongoing lower wind power contribution have coincided to create an imminent risk of gas shortages.
Gas supply has been increasingly discussed in the last month since the publication of federal Labor’s Future Gas Strategy or FGS and Victoria’s first gas production approval in a decade, which together flushed out innumerable gas market “experts”; ready to opine on these perceived grave missteps.
The AEMO notice puts paid to any misconceived notion that Australia doesn’t need an FGS and demonstrates that even with new production coming online the structural problems are not resolved with a single Victorian gas project coming online.
Following the more informed commentary on the FGS over the past month, it’s clear there are some who understand electricity markets, many who understand the risk of climate change on biodiversity and human flourishing, but very few who deeply understand the supply, transport, storage and usage of natural gas.
The natural production decline of gas fields is poorly understood by commentators. Put simply, all oil and gas fields suffer from ever-decreasing production rates over their lifespan.
Since the 1960s, Victoria has benefited from world-class oil and gas production from the offshore Gippsland Basin. By the end of 2023 around 13,000 petajoules of gas and around five billion barrels of oil had been produced, both of which are globally significant.
This and the weather explains the much greater use of gas in Victoria for domestic heating and cooking as well as a hitherto healthy gas-using industrial sector.
Gippsland Basin fields are in decline and this is critically important to understand. There are not enough Victorian projects to replace the lost production in the near term, even with the recent approval of Beach’s Enterprise Project in the Otway Basin.
The AEMO Gas Statement of Opportunities (GSOO) is very clear that as existing gas production capacity decreases, the seasonal maximum daily demand will increase substantially; to double current levels in a decade, then threefold in the next decade to 2044 as all coal retirements are finalised.
The peak demand day requirements will increase even as the overall aggregate contribution needed from gas decreases.
And although overall gas demand is declining, gas supply is in much faster decline.
The GSOO forecasts gas shortages from as soon as 2026, but under the types of conditions outlined in the AEMO Threat Notice from Wednesday it is clear that shortages are a risk already. It is a very short list of difficult options that can help prevent these shortages.
A reservation policy won’t help unless new pipeline capacity from Queensland to the southern states is also added or substantial gas storage is constructed in the southern states.
The risk of gas shortages is greatest on peak demand days in the southern states, which will generally occur during regional “renewable droughts”; (or “dunkelflaute”; as the Germans poetically call them), in the winter months. But AEMO also forecast annual supply gaps from 2028 in all their scenarios.
The consequences of these shortfalls will be substantial business and domestic disruption, yet the urgency to find solutions appears lacking.
In addition to the near-term peak day and seasonal gas supply risks, AEMO’s Draft 2024 Integrated Systems Plan (ISP) identifies longer-term structural risks in the National Electricity Market or NEM associated with renewable droughts, particularly in a post-coal NEM.
Although gas powered generation is forecast to make up only around 5 per cent or less of aggregate electricity generation it is an important “shock absorber” in the system. But, substantial investment will be needed to deliver the 16.2 gigawatts of “Flexible Gas” supply, transport and generation capacity that is forecast in large quantities for day to multi-day durations.
This amount of gas generation capacity is huge compared to the outlook for around 3.2 gigawatts capacity once likely plant retirements are accounted for. The short story is, the NEM is forecast to need substantial investment in gas-powered generation and needs secure gas supply feedstock.
The FGS is about trying to prevent catastrophic outcomes from production declines and ensure access to affordable and secure gas supply to support the retirement of baseload coal power and increased penetration of variable renewable energy. The FGS is not the call to arms to expand the industry suggested by some commentators, but rather looks at the context of the role for Australian gas in Australia and overseas, and also Australia’s role as a dependable trading partner, which is critical for renewable energy and critical mineral investments and trade.
Even with the FGS it is going to take unprecedented collaboration between commonwealth and state governments and industry to avoid damaging gas and electricity shortages in the southern states in coming years.
The utopian vision of instantly constructed wind and solar farms, matched with extensive, robust new transmission and battery storage on a grid scale that dwarfs the last seven years’ worth of battery construction, and material renewable gas supply and storage is being up-ended in the real world.
We should do all we can to get our environmental approvals, planning and financing abilities into a war footing to increase the speed of rollout of firmed renewables. But in the meantime, without a change in trajectory, Australia will be running short of gas where it is needed and when it is needed.
This will happen before renewable gases or other long-duration energy storage replacements are proven at scale let alone in place, which is not good for the economy or the energy transition. It’s a recipe for state governments to continue to fund coal generation for longer.
The overwhelming scientific understanding on climate change can be considered a consensus and imprimatur for action and the overwhelming understanding on long duration energy storage is that gas is, as it stands, is the only option for renewable droughts and large scale, flexible back-up.
A functioning gas market, which can only realistically be underpinned by a functioning gas export market, is critical to the simultaneous objective of high renewables penetration and the closure of high emissions baseload generation – and a functioning market needs supply that declines less quickly than demand.
David Close is a director at UQ Gas & Energy Transition Research Centre.
