Australian gas-led recovery faces 1st-year growing pain

Australia's gas-led recovery is a year old today and is showing signs of growing pains as it has far from ushered in the private-sector stimulus the government had thought.

The first year has been marked by contestable government financial handouts and Canberra's commitment to build a gas-fired peaking plant, which will only operate for around 2pc of the time.

One of the multiple subsidy programmes to the gas sector has come under legal scrutiny, with legal authorities examining the lawfulness of the A$50mn ($37mn) funding for upstream exploration firms working in the onshore Beetaloo basin in the Northern Territory (NT).

The gas-led recovery plan was released with little reference to reducing greenhouse gas (GHG) emissions and in the lead-up to the 26th UN Climate Change Conference of the Parties (COP26) in Glasgow, which starts at the end of October.

Australia is coming under further scrutiny from its trading partners about its lack of ambition on making steep cuts to GHG emissions to prevent global temperatures from rising more than 1.5°C from pre-industrial levels. Australia has maintained its original emission reduction targets made under the Paris climate agreement in 2015 for 2030 while the US, UK, Canada, Japan and the European Union have all deepened their reduction targets.

Little economic impact from gas-led plan

The gas-led recovery was an economic plan to reboot the Australian economy from the economic downturn caused by the Covid-19 virus last year.

It was devised by the National Covid-19 Commission Advisory board, which was populated by members with ties to the oil and gas sector such as Saudi Aramco director Andrew Liveris and Nev Power, a non-executive director of Australian independent Strike Energy, and was disbanded in May.

The gas-led plan was unveiled before Australia had secured any vaccines against the coronavirus or any roadmap to vaccinating its citizens.

The gas-led recovery has had negligible impact in terms of an economic stimulus thus far. Latest data showed that the economic value of Australia's resources industry fell during the 2020-21 fiscal year to 30 June for the first time in 10 years, largely due to weaker economic output of the coal and oil and gas sectors.

Market-focused government becomes state gas plant owner

The policy has led to the government funding up to A$600mn and building through its state-controlled utility Snowy Hydro a 660MW open cycle gas-fired power plant at Kurri Kurri in the Hunter valley region of New South Wales (NSW), with it to be operational in the 2023-24 fiscal year to 30 June.

The Kurri Kurri plant, together with the go-ahead for the construction of the 316MW Tallawarra B power plant in the Illawarra region of NSW by Australian utility and gas group EnergyAustralia, are the only two gas-fired plants to be sanctioned since the launch of the gas-led recovery. A third gas plant, the 635MW gas and hydrogen power plant at Port Kembla south of Sydney, has received planning approval.

But the Australian Energy Market Operator, which oversees the planning for the country's electricity and gas markets, said there was no need for an additional 1,000MW of gas-fired peaking plants even after the proposed closure of NSW's 1,680MW Liddell black coal-fired plant in 2023.

The plan to build more gas-fired plants comes as the fuel recorded its lowest output in the 2020-21 fiscal year to 30 June since at least 2008-09 and as more utilities have stepped up investment in battery storage plants that will provide further competition to gas peaking plants.

State gas funding comes under scrutiny

The other major arm of the gas-fired recovery has been Canberra's funding to encourage more gas exploration in undeveloped basins such as the Beetaloo basin with A$220mn in government funding for the construction of new roads around the Beetaloo.

This was followed by the A$50mn grant to explorers in the Beetaloo where more than 40pc of it was paid to a firm that does not appear to have the financial capacity to fund a significant drilling programme to warrant whether a lightly explored hydrocarbon basin is ready for commercial development in the coming years. The programme is subject to a senate inquiry and a legal case against the programme is being heard this week in the Federal Court in NSW.

Australian upstream firms are more reluctant to spend on exploration than Canberra would have hoped through its gas-led recovery plan. Oil and gas exploration spending in Australia dropped to a 17-year low in 2020-21 as firms tightened their budgets as they face greater reluctance by investors to fund new oil and gas projects due to a focus on lower emission-intensive energy sources.

Around two-thirds of Australia's gas production is used as feedstock for LNG exports and the economics of any development of the Beetaloo would be largely dependent on gas exports in the coming decades. In the past year, Australia's three largest LNG customers Japan, China and South Korea have all committed to reaching net-zero emissions by 2050, and 2060 for China. This has put a question mark over future LNG demand particularly leading up to mid-century.

By Kevin Morrison