Today a toilet paper shortage, tomorrow gas

Australians have recently become accustomed to shortages: toilet paper, pasta and hand sanitiser. When the short-term shock of COVID-19 is over, households and business face a new and more substantial supply crunch: gas.

The latest gas forecast by the Australian Energy Market Operator (AEMO) is predicting gas supply shortages for the world’s biggest LNG exporter by 2024 unless new sources of supply are found. The 2020 Gas Statement of Opportunities (GSOO) and Victorian Gas Planning Report (updates) warn of shortages ranging from 13TJ to 374TJ are possible in winter 2024 as supply declines from southern gas fields while demand is expected to remain relatively flat.

Smaller new gas supply projects coming on line in southern Australia won’t be enough to cover the sustained decline in existing production, expected to fall by around 35 per cent from 2020 to 2024.

In the face of this persistent supply crunch, the Victorian Government has announced it will lift its ban on conventional on-shore gas exploration and development from July next year, although fracking remains banned.

Forecasting gas supply and demand has been made more challenging by the impact of the global oil price war between Saudi Arabia, Russia and the US, with a tactical oversupply by Russia and the Saudis designed to cripple US shale oil gas producers. Oil and gas prices have more than halved in response, with no end to the price war in sight.

While falling gas prices deliver short term price relief to consumers, the longer term intent of the strategy is to short oil and gas supply, pushing long term prices higher. Higher cost producers, including some in Australia, may be forced to halt production if the price war persists. Sustained low prices will almost certainly defer investment in new gas developments.

This would be offset in the short term by shrinking demand in the face of the global response to the COVID-19 pandemic.

AEMO’s GSOO gas demand forecasts assume that gas demand for electricity generation will decline faster than previously predicted, because of accelerated uptake of renewable generation and storage to replace exiting coal generation.

It may be a heroic assumption given the rate of renewable generation approvals is falling, and gas demand for electricity generation has been increasing in Victoria. 20 PJ of gas was burnt in Victorian power stations in 2019 to cover offline units at ageing brown coal power stations. Few believe the massive $5.1 billion Snowy 2.0 pumped hydro project will get remotely close to its proposed end of 2024 completion target.

Market uncertainty makes identifying the problem and solutions more difficult. AGL is persisting with its $250 million LNG import terminal proposal into Victoria, although the feasibility of such an investment will be disrupted by current uncertainty along with other supply options.