Some experts predict the domestic price of this increasingly relevant energy source could triple in coming years.

  • Some experts predict the domestic price of this increasingly relevant energy  source could triple in coming years.<p>

Natural gas was little more than sideshow when hardy souls first started  probing the seabed between Tasmania and the Australian mainland in the  1960s.

Five of the world’s biggest oil nations had just formed a restrictive cartel,  and Australia’s dependence on imported petroleum products was both a concern and  an entrepreneurial opportunity for those willing to join the fur seals in the  high seas of Bass Strait.

Unable to extract the lucrative black liquid without also bringing up  flammable gas, the pioneers struck a deal to hand the gas over to the Victorian  government for a pittance as soon as it travelled the 77 kilometres  to  shore.

30 May 2012.  AFR.  The Hon. Peter Reith.<br /><br /><br />
Photograph by Arsineh Houspian.  +(61) 401 320 173.  arsineh@arsineh.com

Use it or lose it: Former Howard government minister Peter Reith conducted a  lengthy review of the gas sector. Photo: Arsineh Houspian

But almost 50 years and a few bouts of privatisation later, gas has risen to  become very much front of mind in Bass Strait, and is at the centre of a new  rush to secure energy supplies before prices soar.

In the past few months  billions of dollars worth of deals have been struck  by energy retailers, manufacturing companies and pipeline operators eager to  increase their exposure to a province that is shaking off its reputation as an  industry backwater.

The forces behind Bass Strait’s return to the spotlight are economic, rather  than because of any major new resource discovery or  technological  breakthrough.

Plans to export huge amounts of gas from Queensland to north Asia later this  decade are having flow-on effects for the entire eastern seaboard, where a  single gas grid connects NSW, Victoria, Tasmania, South Australia and  Queensland.

Exporting gas is more attractive for companies because it can be sold for  higher prices than the $3 to $4 per gigajoule paid by consumers in the domestic  market.

The price pressure has been exacerbated by the growing realisation that some  of Queensland’s big gas export plants – particularly the one being built by  Santos – don’t have quite as much coal-seam gas coming down the pipeline as   first thought.

That combination of factors is likely to drag domestic consumers  into a  bidding war with foreign buyers, and UBS energy analyst Nik Burns believes gas  prices could triple as a result.

”Our view is that gas prices will peak around the $10 to $12 per gigajoule  mark in Queensland from 2015 to 2019. Given the distance from the LNG projects  in Queensland, other states will be sheltered from these prices to a certain  degree, but we still anticipate gas prices there to nearly double from about $4  to as high as $8 per gigajoule,” he said.

A squabble for gas would be ironic for a nation heavily endowed with the  resource, but that is the likely outcome so long as Australia remains an  exporter, and some of the nation’s logical gas production zones continue to shun  the industry.

NSW – which imports more than 90 per cent of its gas from other states – has  tight restrictions on onshore gas production, which allow only a small number of  gas developments to operate at the present time.

Victoria has also shunned coal-seam and shale gas, with the Napthine  government extending its ban on unconventional extraction for at least  two  years.

Queensland remains open to the industry, but any further production there  will be needed to help the state meet its own export and consumption needs, and  in all states, long development times mean that a gas shortage may be  inevitable, at least for a few years at the end of this decade.

”As of today, prices are already going up. They will go higher than they are  now, and the big issue for policymakers is whether the transition comes to an  end and prices slip or they stay high more permanently,” says former Howard  government minister Peter Reith, whose view of the unconventional gas sector was  recently sought, then overlooked, by the Victorian government.

While governments in Australia’s two most populous states do not appear to be  concerned by the prospect of soaring household gas bills, the companies that  consume or retail large amounts of gas on the east coast certainly are. The  result has been a flurry of corporate activity in the two places that can  reliably deliver gas to the nation’s south-east: the Cooper Basin in South  Australia, and Bass Strait.

With a direct pipe into Queensland, pundits expect any extra gas produced in  the Cooper Basin to join the Queensland export route, leaving Bass Strait as the  best hope for the future gas needs of NSW and Victoria in particular.

Chemical and explosives manufacturer Orica has been particularly quick to  lock down its future gas supplies, taking its chequebook on recent visits to  both the Cooper Basin and Bass Strait. In July, Orica struck a speculative deal  with ASX-listed junior Strike Energy for a slice of the unconventional gas it  hopes to produce from its embryonic and unproven project in the Cooper Basin. If  the punt pays off, Orica could pay as much as $52.5 million and be entitled to  as much as 150 petajoules of Strike’s gas over 20 years.

By comparison, Australia consumed just more than 1000 petajoules in each of  the past few years, according to the Australian Energy Regulator.

By November, it was clear the dabble in Strike’s uncertain future was just an  appetiser, with a major Bass Strait deal next on Orica’s menu.

Orica agreed to pay ExxonMobil and BHP Billiton – the biggest players in Bass  Strait – an undisclosed sum in return for 14 petajoules of gas each year for  three years, starting in 2017.

Unlike the creative Strike deal, the Bass Strait purchase has a high degree  of certainty, and would have likely cost Orica several hundred million  dollars.

Origin Energy is another big company to take matters into its own hands by  directly purchasing long-term gas supplies from Bass Strait.

In September, Origin agreed to buy 432 petajoules from Exxon and BHP over a  nine-year period, starting in 2014. Once again, the price paid was not  disclosed, but analysts estimate it to be worth several billion dollars.

Both those deals will mean significantly more gas flowing north from Bass  Strait into NSW, and pipeline operator APA has announced a $65 million upgrade  of the pipeline to ensure there is room to carry it all.

There is just one issue with the nation shifting a significant portion of its  energy needs onto Bass Strait once more – large sections of the province have  been in decline for decades, and the true size of its remaining gas reserves are  known  to  few people, who have little reason to share the secret.

”Given most of the gas is being sourced from a joint venture of Exxon and  BHP, there isn’t necessarily the granularity that investors and key stakeholders  would like around how much gas is there, how much is remaining, how long would  that last and how much more potential there is,” Mr Burns said.

Forty-nine years since they drilled those first wells in Bass Strait, Exxon  and BHP’s long-standing joint venture now boasts 23 platform rigs in Bass  Strait.

The fur seals now congregate in large numbers on the struts beneath the  platforms, seizing on a rare opportunity to rest in the sun above the strait’s  chilly waters.

Exxon estimates that 7 trillion cubic feet of gas –  equivalent to about 7600  petajoules – remains in the most prospective zone of Bass Strait, known as the  Gippsland Basin.

But the company’s Australian manager of public and government affairs Chris  Welberry suggests it would be optimistic to expect all of that to be  developed.

”A fair amount of that number is undiscovered – it is what we believe might  be out there, based on our knowledge of the basin,” he said.

The remaining gasfields also contain different quality gas, with higher  levels of carbon and mercury an emerging trend.

The joint venture will soon bring three new fields – the $US4.5 billion ($4.9  billion) Kipper Tuna Turrum project – into production, and work to build a $US1  billion carbon-reduction plant for those fields will begin next week.

”It’s not as simple as turning on the tap; it is going to be a lot more  difficult to get the remaining gas out than it has been to date, and it  increasingly becomes economically challenged as you go down that path,” Mr  Welberry said.

”It’s one of those things that really depends on the market and whether we  are able to make economically viable new discoveries.”

Others in the industry note that with gas prices almost certain to rise over  the next decade, there is also little incentive for BHP and Exxon to move  quickly.

”If you were BHP and Exxon, you would look at the undiscovered gas resources  and wonder, ‘Why explore for it now?’ What’s the point of spending that money  now when in the meantime gas prices keep going up and any gas discovered won’t  be needed for a number of years anyway,” Mr Burns said. ”It can work to their  advantage to actually wait for two or three years before they go and further  appraise and expand their gas resources.”

Of course, BHP and Exxon are not the only ones working in Bass Strait, with  other companies such as Santos, WHL Energy, Nexus, AWE and Origin all having  smaller operations in Bass Strait’s lower-profile basins – the Otway and the  Bass.

Several of those companies are mulling expansions or exploration campaigns,  and micro-cap company WHL has a seismic vessel plying Bass Strait’s high seas at  the moment.

WHL boss David Rowbottom said the changing economics of gas meant the amount  remaining in the region could yet fluctuate beyond the conventional wisdom.

”The industry is re-examining what is in the Bass Strait to see if they  can’t make economic sense out of things that previously have been considered  marginal or too high-risk,” he said. ”I don’t think this seismic program by  ourselves will be the last one shot in that area; there is still exploration  potential.”

But he cautioned against the notion of significant upside from exploration:  ”When you look at the undeveloped gas off the coast of Victoria, there are  really only three or four fields that can be brought in, but the cost of  developing this gas is quite high, so it only works as backfill into existing  infrastructure.”

The recent gas report by Peter  Reith contained estimates from a range of  regulators and consultants, which found there might be just 10 years of gas left  in Victorian waters, if demand is strong and production of new fields remains  modest.

Mr Burns is slightly more bearish: ”At a very high level, there is about  five to eight years of gas supply in Victoria remaining to supply the needs of  Victoria, NSW and South Australia.

”With more gas flowing interstate, we expect there to be increasing pressure  on Exxon and BHP to disclose more information about their gas resources. This  will help alleviate some of the concerns over their ability to maintain gas  supplies over the coming years.”

For his part, Mr Reith has revealed that concerns about so-called ”use it or  lose it” provisions were raised with him while he was conducting his  review of  the gas sector.

”There is no doubt that there are some problems with existing  arrangements,” he wrote in his cover letter for the report. ”The market lacks  transparency in upstream information, there is a lack of transparency on  short-term production, and there are information asymmetries between sellers and  buyers.

”It is easy to map out market reforms in theory and the reality of a new,  much bigger market suggests that a review of the market could be  warranted.”

Speaking to Business Day this week, Mr Reith did not back away from the ”use  it or lose it” debate.

”It is an ongoing issue and the Productivity Commission would clearly be the  best place for that issue to be properly reviewed, and for the Productivity  Commission to also undertake a cost-benefit analysis of any proposals to also  make changes in that area,” he said.

Further insights into Bass Strait’s future could come in December, when BHP  updates the market on its broader petroleum strategy. But one thing is  clear –  Bass Strait will be making waves in the energy sector for a while yet.

Read more: http://www.smh.com.au/business/gas-comes-off-the-backburner-with-soaring-exports-and-prices-20131129-2yh6f.html#ixzz2mAJ0N4PC

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2 comments on “Some experts predict the domestic price of this increasingly relevant energy source could triple in coming years.

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