Is Australia really headed for a gas shortage?

The spectre of oil and gas continues to haunt the minds of renewables advocates everywhere.

By now, you’re probably familiar with the general plotline of our current era: the energy sector was seen as an unfashionable choice about four years ago, and then, a modern plague hit the world.

How quickly things can change.

In the early days of the 2020 pandemic panic, oil prices actually went negative – they dipped below US$0.00 a barrel. As the New York Times covered in April that year, this was the first time in history it had ever happened.

Then came the crunch. In response to negative oil prices, the US mothballed offshore rigs in the Gulf of Mexico (GOM). The GOM can’t be understated when looking at its importance for global supply. Shutdowns complicated operations offshore in Europe and Australia too.

The problem is, when you mothball an offshore oil and gas platform, you can’t just switch it back on with the click of a finger. It takes months to get things rolling again, and depending on technicalities, it can take nearly a year.

With that problem rolling out onto the floor, international oil demand came back stronger than expected, but while the appetite for oil bounced back – there was still a greatly reduced rig count.

Then came the boom

This disparity between supply and demand was the beginning of the great energy resurgence.

Energy prices went wild in 2021, and then in 2022, Russia invaded Ukraine – complicating the then-extant logistics of supply tenfold, as well as leading to geopolitical tampering with commodity prices.

This was particularly true for the price of gas in Europe which hit unsustainable record highs. Russia’s Gazprom, an absolute behemoth, was no longer exporting as much gas to Europe over onshore pipelines.

By February 2023, prices had fallen 77 per cent from their all-time high in August 2022, as shown in the chart below from Trading Economics.

At the peak of the energy crisis, not only oil and gas were at record highs. Firewood went up too as Europeans scrambled for heating solutions in winter. And so did coal.

Rise of coal underlines volatility of opinion

Coal’s rise was an interesting one. It facilitated the comeback of Whitehaven Coal (WHC), which before COVID, you’d be hard-pressed to find a bullish analyst for. Then, in 2022, it was one of the hottest stocks to own.

And that poses an issue for renewables advocates everywhere: the world realised it still needed oil and gas – particularly gas in Australia, where gas-fired electricity generation is still an established practice.

And that’s why COVID has thrown off the planet’s enthusiasm for Environmental Social Governance (ESG) objectives. During the pandemic and during the energy crisis that lasted for two years, Germany actually scrapped its plan to ban petroleum vehicles.

Before COVID, Germany was seen as one of the EU constituents most bullish on ESG outcomes.

While things are heading back to normal – the World Bank noted in April this year that commodity prices had fallen by 32 per cent versus June 2022 – we aren’t quite out of the woods yet.

Gas prices have forced Europe into a situation where it simply produces less at the industrial scale as EU gas consumption falls up to 15 per cent compared with the decade before Russia invaded Ukraine.

So what about Australia?

And Australia has its own issues too which reflect these global trends, and, more local factors.

All in all, Australia’s Albanese-led ALP government appears more ESG and renewable-friendly than the former Abbott-Turnbull-Morrison government. At least, it does on paper.

In reality, the ALP says one thing and does another – oil and gas production in Australia hasn’t gone anywhere, and Australian energy majors are posting bumper profits in line with their global peers.

The thing is, Australia’s power grids are still largely dependent on gas. That’s especially true for the east coast grid (unsurprisingly, the east coast and west coast grids don’t connect across the desert.)

Overview of Australia’s gas-producing regions

The east coast has several key gas fields: the Gippsland and Otway Basins in Victoria; the Cooper Basin which spreads from the northeast corner of South Australia into the southwest corner of Queensland, the onshore Surat-Bowen basin across New South Wales and Queensland, and finally, the lesser tapped offshore Bass basin which extends from southern Victoria to north Tasmania.

The west coast, meanwhile, has the Perth and Carnarvon Basins respectively.

Then there’s the new player on the block, the Beetaloo Basin in the Northern Territory – expected to become Australia’s next major gasfield. The undeveloped asset is expected to contain up to a hard-to-conceptualise 500 trillion cubic feet of gas on a low-to-mid level of confidence.

And here’s the thing: enthusiasm for Australian gas exploration and production is in place for a sensible reason. Australia is reportedly heading for a gas shortage.

An Australian gas shortage?

By some accounts, the country is expected to hit a gas shortage nationwide by 2027.

This goes for both the east and west coasts for different reasons, but on the whole, the macro driver is the same – not enough renewables yet to wean off oil and gas.

The Australian consumer watchdog expects southern states to see the first effects of shortfalls by as early as next year.

While WA might have high penetration rates of solar power for households, industry can’t use it – the Dampier pipeline to Bunbury supplies gas to an industrial corridor all the way down the urban southwest corridor.

In this national context, east coast gas explorers have now found themselves in the middle of a storm. As the renewables versus hydrocarbons debate rages on, the reality is, Australian appetite for gas hasn’t gone anywhere.

Mixed stances on the shortage

Shell Australia says the government needs to invest more into gas production (surprise, surprise.) It also scolds the Albanese government every time it tries to introduce new regulations.

Meanwhile, progressive-leaning groups like the Australia Institute balk at the suggestion Australia faces a gas shortage. Its stance relies on data from the Australian Energy Market Operator which finds Australian gas production set aside for export greatly outnumbers forecast domestic demand growth.

While this is a good point worth interrogating, much of this gas is already locked up in long-term off-take contracts. Japan, for one, takes huge volumes of gas from Australia – and any move by Australia to restrict gas for export for domestic markets will threaten the partnerships we have with import markets.

This situation remains fluid. And if there is much gas in the Beetaloo Basin as predicted, the implications are obvious – explaining why the NT state and Federal governments are both keen to get that Basin perforated as quickly as possible.

But in the meantime, Australian explorers continue to take a stab.

Black Mountain Energy a standout example

Take Black Mountain Energy (BME) for example.

Just this year, the company began fracking a well in the USA’s highly prolific energy extraction province that is the onshore Permian Basin, which stretches between Texas and New Mexico.

After 8 months, it would sell the asset, with a return of approximately 100 per cent, to redirect its focus back on the Australian market.

Black Mountain is active in WA’s Canning Basin, in the Kimberley region of Western Australia – a pro-mining region with a lot of industrial applications needing ready supplies of power.

The WA Valhalla project is located in the Fitzroy Trough in the state’s north, roughly 2500 kilometres from Perth. BME’s overall acreage footprint is eye-catching: its permit area covers 3660 square kilometres atop a global top ten “undeveloped” gas reservoir.

The permit, EP371, was previously held by Buru Energy and Mitsubishi.

With access to eastern Australian customers, potential offtake routes for Asian exports, and proximity to domestic supply infrastructure, Black Mountain Energy is betting big it can flow profit-making volumes long before Australia is ready to make the full switch to renewables.

The big kicker? One expert suggested there could be up to 11 trillion cubic feet of gas reserves underground – though keep in mind, that’s on a prospective basis.