On July 1, 2021, conventional onshore gas business was allowed to resume in Victoria, Australia. Victoria’s state government had previously banned onshore conventional drilling in 2014 and extended the moratorium in 2017. The decision to open up again is part of Prime Minister Scott Morrison’s broader ‘gas-fired recovery’. He wants to reduce expensive gas prices for Australian consumers.
But will the federal government’s plans help to bring some stability to Australia’s volatile gas prices? The Grattan Institute describes their intentions as “misplaced”. It is highly unlikely that gas prices will return to pre-2015 low price levels. Many different factors suggest that gas price volatility will only increase in the coming years.
Why are Australian natural gas prices so changeable?
Natural gas is Australia’s third-largest energy resource. Traditionally, gas fields in the southeast of the country supplied the fuel to households and businesses at an inexpensive rate. For example, ExxonMobil’s and BHP’s Bass Strait gas fields off Victoria were able to provide as much as 40 per cent of the east coast’s demand.
However, these supplies are now in rapid decline. Today, most of Australia’s gas comes from Western Australia and Queensland. This is far from domestic demand centres in Victoria, New South Wales and South Australia. It puts gas users in these states at risk of winter gas shortages as soon as 2023, according to the Australian Energy Market Operator.
Natural gas exports
Therefore, it seems ironic that Australia is also the world’s largest exporter of liquified natural gas (LNG). LNG is natural gas, cooled down to liquid form at -160°C. This transformation makes it easier to transport by ship in thermally insulated LNG tankers. Japan, South Korea and China are Australia’s top LNG export destinations. Australia’s total LNG shipments hit 77.5 million tonnes and were worth about AUD $49 billion in 2019.
However, these exports come at a steep price for both domestic consumers and the environment. Gas bills for Australians on the east coast have been linked to LNG export prices since 2015. Local gas producers have the option to sell the fossil fuel abroad or to the domestic market. This has made Australian gas prices increasingly volatile as they follow international boom-and-bust market cycles.
How much have natural gas prices fluctuated in Australia this decade?
Historically, gas prices on Australia’s east coast have been between AUD $4 and $6 a gigajoule (GJ). But exporting so much of the product abroad forced domestic prices up above AUD $10/GJ. Producers had no incentive to sell cheaply to the home market once they had the option of more expensive foreign customers. They also began to tap more expensive sources of gas to meet the new demand.
In the years 2011 to 2014, east coast domestic gas prices averaged just under AUD $4/GJ. However, from around 2015, the cost of natural gas doubled. Between 2016 and 2019, the average price was just over AUD $8/GJ. At times it was as high as AUD $10/GJ.
However, in 2020, gas prices fell to their lowest level since 2015. This drop to below AUD $6/GJ in all markets is partially attributed to the COVID-19 pandemic, which reduced demand. It is also connected to record low oil prices, the result of both COVID-19 and a price war between Saudi Arabia and Russia. Nevertheless, domestic prices remained higher than export parity. This demonstrates the effect that LNG exports have on Australian gas prices.
Gas prices in 2021
Unfortunately for gas consumers, the price decrease did not last for long. On the contrary, spot gas prices in Victoria reached AUD $20/GJ on July 6, 2021. That is the highest rate since June 27, 2016.
Other east coast states report similarly extortionate rates. For instance, AUD $18.20/GJ at the Wallumbilla hub, Queensland, AUD $15.44/GJ in Sydney, AUD $14.79/GJ in Adelaide and AUD $14.39/GJ in Brisbane. Various factors are responsible, including a high winter gas demand and a spike in international gas prices.
Electricity and gas: How has this affected gas usage in Australia?
Since 2014, Australia’s use of gas-generated electricity has fallen by 21 per cent. It is now cheaper to use electricity to heat homes, heat water and cook food. This has led to a rapid decline in gas usage in gas-fired power plants by 58 per cent since 2014. Renewables are replacing fossil fuels’ contribution to the National Electricity Market.
What are the repercussions of gas price volatility?
As Australia’s gas usage plummeted, this has had significant repercussions for the industry and those that work in it. The price drop in 2020 resulted in the oil and gas industry cutting more jobs than any other area of the economy. 40 per cent of its employees lost their livelihoods between March and April 2020.
Other areas of Australia’s economy have also been affected by high gas prices and less gas usage. For example, in 2019, multinational chemical corporation Dow shut down its plant in Melbourne. The rising price of gas was a key factor behind the closure. Likewise, RemaPak, a Sydney-based company, went bankrupt in the same year. It blamed a tripling in the price of gas for its insolvency.
What else affects the volatility of Australian gas prices?
Another key issue facing Australia’s natural gas industry is the harm their product has on the environment. Energy providers have marketed natural gas as a ‘cleaner’ energy source than coal and oil. They highlight its 45 to 55 per cent lower greenhouse gas emissions than coal when used for electricity generation. Fossil fuel giant Shell also emphasises that replacing coal with gas results in significantly less air pollution.
However, natural gas is still a fossil fuel. It releases some carbon dioxide (CO2) when it is burned. Moreover, the extraction, production and use of natural gas also release methane, another greenhouse gas.
Methane is actually over 80 times more potent at warming our planet than CO2 over the first 20 years it is in the atmosphere. Over a period of 100 years, methane has 28 to 36 times the global warming potential of CO2. It is thought to be responsible for at least a quarter of today’s global warming.
In recognition of the harm fossil fuels are causing to our planet, many countries around the world are committing to reducing their greenhouse emissions. Australia’s three biggest LNG customers – China, Japan and South Korea – have all agreed to achieve net-zero emissions by 2060 or 2050. This will reduce demand for Australia’s LNG and risks making investments into the gas industry stranded assets. Indeed, 65 per cent of Australian investors say that they will increase investment in renewables over the next couple of years.
Renewables: The new energy provider?
Renewables now produce 28 per cent of the energy in Australia’s National Electricity Market. Meanwhile, gas usage in power plants has declined by 58 per cent since 2014. The Australian government may want to return to the ‘good old days’ of AUD $4/GJ. But even the gas industry realises that this is a fantasy.
A massive new coal seam gas project is under development in Narrabri, New South Wales. Analysts forecast that the cost of its gas will not fall below AUD $8/GJ. Meanwhile, renewable energy is cheaper than electricity from new-build coal or gas-fired power stations in Australia. Electricity from a new wind farm costs AUD $80 per megawatt-hour (MWh), significantly less than AUD $116/MWh from a new baseload gas plant. Even without a carbon tax, energy from wind is 14 per cent cheaper than new coal and 18 per cent cheaper than new gas.
Overall, there is a growing and long overdue trend towards replacing fossil fuels with renewables. Investment funds, banks and insurance companies are all declaring environmentally friendly policies that will see them “increasingly questioning and sometimes abandoning gas along with coal”. Why would anyone invest in volatile fossil fuels like gas when cheaper, cleaner and renewable energy sources are available?