Origin Energy Executive General Manager, Integrated Gas, Andrew Thornton’s speech to the Australian Domestic Gas Outlook 2022 Conference, 23 March, 2022.
*Check against delivery
My name is Andrew Thornton, and I’m the Executive General Manager of Integrated Gas at Origin Energy, where I’m responsible for Origin’s investments in Australia Pacific LNG, the Beetaloo, Cooper and Canning Basins, along with investment activity in renewable fuels and carbon.
I’d like to begin by acknowledging the traditional owners of the land where those at today’s conference are gathered in Sydney, the Gadigal People of the Eora nation – and pay my respect to their elders past, present and emerging.
A year ago, at this conference, in a similar address Origin spoke about the opportunities ahead for Australia to become a leader in low carbon and zero emissions gas – emphasising the point that industry can’t rest on its laurels given the critical role gas will play in the future energy mix.
There was a phrase in that address that today feels almost prophetic – that was – “But the world is changing, fast”. Twelve months on and the world we live in today has fundamentally changed and we are grappling with what many are calling a global energy crisis.
It is commonly accepted that affordability, security and sustainability are the key pillars of any modern energy system. These three pillars must remain in balance and in harmony with each other, and this can be a complex challenge where a particular objective is being addressed in isolation from the rest.
For example, over recent years policy makers and ESG investors around the world have rightly continued to ramp up the focus on decarbonisation via long-dated milestones to address climate change. But this has not always been pursued with policies that also consider the reliability and affordability impacts of those choices.
So, despite most scenarios showing a requirement for increased mid-term supply of gas even under 1.5 degree aligned outcomes, the current narrative of the energy transition has created significant ambiguity over the role of gas – how long it remains in the energy mix, and how much is needed. And as those in this room know all too well, it can be incredibly challenging to progress any gas development in this environment.
This has contributed to record-low levels of investment in oil and gas capacity, which was already being reflected in historic high gas and LNG prices, as demand recovered in line with easing pandemic restrictions. This supply imbalance has of course now been made more acute by the disruptions caused by the conflict in Ukraine.
Russian isolation from the global economic system is potentially a game changer for global gas. Russia currently supplies >30% of European gas and 7% of global gas. Any disruptions to these exports from potential future sanctions or other events, even if met with a level of rebalancing between markets, could meaningfully impact global energy supply, adding to already tight market conditions for oil and gas. And as we have already seen will almost certainly create a stronger focus on energy security for consumers of gas and other fuels.
Governments, economies, and investors are all juggling energy security with the transition to net zero, and increasing inflationary pressures. Today as the world experiences these historic energy price shocks, the importance of natural gas has never been clearer.
What I will submit to you today is that a commitment to a successful energy transition, requires a commitment to gas. Not only has gas an important role in the transition to net zero emissions by 2050, but Australia should be well positioned to be a primary supplier of gas domestically and to growing Asian LNG markets. Our industry needs to continue to invest in affordable, and also low emissions, gas supply to facilitate that energy transition.
To start, why does gas need to play a role in the energy transition? There are a few drivers:
- First, gas is often the most affordable and reliable feedstock for critical industrial processes such as smelting, refining metals, textiles and fertilisers where electrification can’t create the required heat. Hydrogen is likely the ultimate solution, but these processes cannot be undertaken economically using hydrogen today.
- Second, there is still substantial opportunity for coal to gas switching where ~1,300 GWs of installed coal fired generation capacity exists in Asia today, underpinning future potential LNG demand growth. Lack of affordable gas supply slows down that replacement or worse, sees coal get run harder and therefore emissions increase. This is what we are currently seeing this in Europe, where coal fired power generation output increased 18% in 2021 due to lack of available and affordable gas supply.
- And finally, gas is required as a partner to firm variable renewable supply. Batteries play an important role here supporting the market over shorter periods of time, as does pumped hydro, however gas is still needed in situations where firming is need over longer periods of and where the economics of long duration battery firming capacity are insufficient to meet overall system needs.
The situation in Europe today provides a good case study of the opportunity and necessity for gas to support the energy transition. An incremental 40 TWh per annum of electricity to 2030 is needed to phase down coal to targeted levels, which still provides ~15% of Europe’s electricity today. Europe also requires an additional 40 TWh per annum of incremental electricity for transportation (EVs) and heat pumps. Wind and solar additions are only rising at 50-70 TWh per annum. Indigenous gas supply in Europe is declining at ~5% per year, LNG imports must fill the gap. This implies Europe’s LNG imports increasing from 75 mtpa in 2019 to up to 140 mtpa by 2030, and this is before any consideration of the replacement of Russian pipeline gas.
So clearly what’s needed to support is the investment in and new supply of low cost and low emissions gas. Natural decline of existing sources of gas supply means globally we need > 180 mtpa of new LNG capacity (or 20 APLNGs) just to meet flat demand by 2030.
But despite this strong outlook for demand, there has been material underinvestment in gas supply, with projects of greater than 70 mtpa deferring FID over the last several years.
As a result, we are already seeing record LNG spot prices, with the current market solving the supply-demand imbalance through a price that rations energy consumption rather than incentivises the dispatch of new energy supplies. This is not healthy either for the consumer and the producer.
What is interesting is that in times gone by, the higher commodity prices we are experiencing would have led to a supply response to balance the market, thereby creating the cycles that we are all used to witnessing. But to date this hasn’t yet happened to any meaningful extent.
While there are likely a range of contributing factors, clearly the ambiguity over policy and the role of gas in the transition to net zero is a significant factor in capital allocation decisions.
What’s the impact – the potential consequences of high gas prices could be disastrous for successful execution of the energy transition:
- We could see a slower transition away from coal and more frequent usage of oil in temporary power setups (as seen recently with Japan and Korea, but also in Europe);
- There could be a slower adoption of renewables if access to gas firming becomes uneconomic; and
- Most troublingly of all could be high energy prices leading to a loss of public support for the transition overall. We don’t want to create a choice between decarbonisation and reliability and affordability – this is a false choice and not a good outcome for society overall, which is why these three pillars of our energy system must be kept in balance.
In response to the current energy crisis, we must recognise as a society that investments in gas supply over the coming decade will support an affordable and equitable energy transition – both domestically and in the international context.
I’d like to focus the remainder of this session on what else can be done in Australia to support new investment in gas.
Firstly, we need to be low cost and low emissions.
And Australia does have the potential to create a compelling low cost and low emissions supply offering for domestic gas and LNG customers in Asia.
While historic project construction won’t win awards on cost, the reality is that now, Australian East Coast LNG projects have existing pipeline and processing infrastructure, which together with supportive policy to streamline existing regulations, can support additional low cost gas supply through brownfield investments that can be competitive with any North American greenfield development.
Australia also has some of the best undeveloped unconventional resources globally and together with supportive policy and incentives to support new infrastructure build, we can create a competitive gas supply into Asia. For example in the Beetaloo Basin, we have the opportunity to create a world class natural gas hub, with potentially 10’s of TCF of recoverable resources ideally positioned to supply Asia. We are excited by the recent well testing results coming out of the basin and the sheer enormity of the resource means if the basin proves commercial we will only be constrained in scale by market not the resource itself. And when you look at how strong the market is looking for LNG in Asia – this could be an extremely valuable and privileged asset.
From an emissions perspective, Australian gas is also well placed. With relatively newer upstream infrastructure, Australian gas has lower overall methane leakages and lower upstream emissions intensity than many other jurisdictions. Importantly,
Australia will also see a tailwind from a greening of the electrification grid enabling producer scope 2 emissions reductions over the coming decade as Australia’s competitive advantage in renewables takes hold.
By way of example, Australia Pacific LNG continues to take measures to lower emissions by exploring a series of levers on the marginal abatement cost curve for carbon reduction from our assets. This includes identifying and eliminating methane leaks and reducing flaring. To date this has already led to a ~30% reduction in upstream scope 1 emissions intensity over the last several years.
For new developments, the expectation is likely to quickly become net zero emissions on scope 1 and 2, and working with customers on carbon capture at the point of consumption for scope 3. In the Beetaloo, the fact that it is a greenfield development means we can design the development to be low carbon from the outset by, for example, using renewable energy to power our facilities.
Second, we need to regain and maintain stakeholder support.
Today, momentum for natural gas via policy change and institutional catalysts is gaining momentum. The European Commission has updated its taxonomy to include natural gas within its clean energy framework. The European Commission’s policy is likely to influence other government’s that are updating their net zero pathways.
And Blackrock, the world’s largest asset manager, has also stated that it will continue to invest in natural gas – given its vital role in the energy transition. This is likely to influence other asset managers, and more broadly, support the flow of capital into new gas supply.
While maintaining capital investment discipline, the current high price environment is an opportunity for gas producers to deploy capital into high quality assets with low breakeven costs while actively pursuing decarbonisation pathways for their assets.
Finally, from a policy perspective, Origin supports federal and state gas policy that encourages investment in new supply and new basins to meet domestic and international demand. AEMO projects that additional gas supply is required in the Southern states by 2026. The IEA 1.5 degree scenario forecasts international demand for gas in 2050 at around 40% of what it is today, a level that will require substantial additional supply.
Specifically, we need new supply and new basins to be opened up in a timely and responsible manner, and we welcome the Federal Government’s focus on these priorities and note the additional support announced by the Federal Energy Minister at this conference yesterday.
We need Geological and Bioregional Basin Assessments to be used to fast track EPBC assessments. We also need EPBC and environmental approvals to be streamlined and co-ordinated across state and federal jurisdictions. To support development of the prospective Beetaloo Basin, we need the remaining 100 recommendations from the Northern Territory scientific inquiry into onshore development to be expedited. Governments have a key role in facilitating the timely coordination and investment in getting new sources of gas to market.
It is also important that we maintain and build public support for our industry by explaining the role of gas in the energy transition and continuing to demonstrate progress in the decarbonisation of gas supply.
If we communicate that decarbonisation progress to investors, financiers, policy makers, governments, customers and the community at large, they will clearly be more likely to support the continuing role of gas in the energy transition and acknowledge the overall benefits it provides.
I’ll finish by saying that gas has a critical role in the transition to net zero emissions by 2050 and Australia is well positioned to supply gas to growing Asian markets. We need to continue to invest in affordable and low emissions gas supply to facilitate the energy transition in Australia and globally.
As a large producer of competitively priced and relatively lower-carbon gas, combined with proximity to Asian markets, Australia is very well placed to be a supplier of much-needed additional gas supply that can support the energy transition, if the will is there.
At Origin we believe in this continuing important role for gas in the energy mix and we will continue investing in gas supply. This will enable Origin to meet our customer’s needs, while also supporting our gas power generation assets and wholesale gas portfolio and being part of the net zero emissions solution.