What is the role of gas in a green economy?

The government believes that increasing gas supply and use in Australia is key to rebuilding an economy that has been battered badly by the COVID-19 pandemic but as it champions the fuel and its industry, critics of gas are growing louder, questioning long-held claims about gas’s credentials as a cheap and cleaner source of energy.

Why does the government want more gas? How clean is natural gas, really? And what’s next for its future in Australia?

Why does the federal government want more gas?

The Coalition backs the expansion of the gas industry for two main reasons.

The first is economic: more gas, the government says, means more affordable and reliable energy to domestic manufacturers that rely on it – thereby boosting employment. A three-fold increase in east-coast gas prices in recent years has been pushing manufacturing firms to breaking point. Energy often counts as one of their big operating costs, and big businesses have been feeling the heat.

The second is to smooth the electrical grid’s transition from coal. The Coalition and many large companies in the energy industry promote gas as the “transitional” energy source, one that emits far fewer greenhouse gasses than coal but is still capable of dispatching the around-the-clock energy needed to support the growing use of weather-reliant wind and solar generators. The government says it is focused on ensuring that electricity remains reliable and affordable as the market transitions from coal and, for this reason, it is touting gas as the key plank of its plan.

The problem, however, is natural gas also faces some big challenges.

Gas is a heavy source of emissions. While it is a cleaner-burning fossil fuel than coal, it is a fossil fuel nonetheless, and Australia needs to reduce its reliance on all fossil fuels over time in order to achieve its climate targets.

And gas is expensive. Despite the pleas from the manufacturing sector and the government’s best efforts, there is a growing realisation in the industry that the price is unlikely to return to the “good old days” of $4 a gigajoule that eastern Australia has traditionally enjoyed.

Why are prices so high, and will government measures drive them down?

Gas prices began sharply rising on the east coast in 2017, when commercial and industrial buyers started receiving new contracts offered at above $10 a gigajoule, much higher than the historic levels of between $4-$6 a gigajoule.

This price rise coincided with Australia deciding to sell natural gas in its super-chilled form, known as liquefied natural gas (LNG), overseas. The construction of six new LNG export facilities at Gladstone in Queensland increased overseas demand for Australian gas – our top LNG export destinations are Japan, South Korea and China – and required producers to tap more expensive gas fields to meet their obligations. This linked the east-coast gas market to international LNG prices, pushing up domestic prices.

Australia has become the world’s number one exporter of LNG. In 2019, cargoes of LNG accounted for about $50 billion in export earnings, sealing its position as the country’s second-biggest commodity export after iron ore ($100 billion a year).

Paradoxically, Victoria, NSW and South Australia are facing the danger of winter gas shortages as early as 2023, warns the Australian Energy Market Operator. This is because most gas now being produced in Australia is in Western Australia and Queensland – far from the domestic demand centres that need gas the most in the south-east – while gas output from fields in the south-east such as ExxonMobil’s and BHP’s Bass Strait gas fields, which have traditionally supplied up to 40 per cent of east coast demand – have been in rapid decline.

As Australian Competition and Consumer Commission (ACCC) chair Rod Sims explains, when you boost the supply of a product, it should drive down the cost, and this applies to domestic gas. “If we really want permanently lower prices in the south, we need more gas in the south,” he said.

Much of the federal government’s efforts to rein in runaway prices has been focused on increasing availability of supply, including incentives to encourage the opening of new gas fields, support gas production and invest in pipeline infrastructure.

But there are doubts about whether the government’s interventions in the gas market will succeed in lowering prices or if they are “swimming against the tide”. As energy experts at the Grattan Institute think tank explain, the cost of producing gas in Australia has been steadily increasing over time, and the cost of supply has increased as low-cost sources have become depleted. Gas could once be provided for $4 per gigajoule or less, but today eastern Australian gas fields will struggle to supply gas for less than double that amount.

Whatever the cost, will using gas help reduce Australian greenhouse gas emissions?

he Morrison government and many of the nation’s biggest energy companies believe it will. “There is no credible energy transition plan, for an economy like Australia in particular, that does not involve the greater use of gas as an important transition fuel,” Morrison said in January 2020, arguing that switching from coal to gas had helped other nations reduce their greenhouse gas emissions.

When it comes to electricity, this is true: burning gas releases fewer emissions than coal, and using gas to displace coal in power stations around the world has contributed to lower emissions.

But gas has an Achilles’ heel, the Grattan Institute says: it is still a global-heating fossil fuel. An estimated 19 per cent of Australia’s greenhouse gas emissions are caused by gas and its long-term use must be reduced over time in order for the world to meet the goals of the Paris agreement to limit global warming.

There are also growing questions among scientists about the extent of unmeasured methane emission leaks, known as “fugitive emissions”, which escape during drilling and processing. If the methane escapes unburnt into the atmosphere, in its first two decades it is a devastating 84 times more potent a greenhouse gas than carbon dioxide.

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