10 April 2013

The role of gas in Australia's energy future

Presented by Frank Calabria, Chief Executive Officer, Energy Markets, at the Australian Domestic Gas Outlook Conference.

INTRODUCTION

Good morning everyone, and thank you for the opportunity to speak today about the important role gas has to play in our energy future – Australia’s and the world’s.

Origin is a leading player in the gas supply chain:

  • we are a major energy retailer;
  • we are a major gas user ourselves through our gas powered generation fleet;
  • we have upstream development activities and operations; and
  • we are jointly developing the APLNG project.

We are therefore well placed to contribute to the debate around the market settings required to facilitate the development of gas resources in Australia. Today I will cover:

  • the tremendous opportunities for natural gas and the strong position that Australia finds itself in;
  • the dynamics of the United States gas market over the last decade; and
  • learnings for how we can manage the transition ahead – including the need for stable and market-encouraging policy and regulation

The Opportunity

The world’s population will grow from today’s 7 billion to 9 billion by 2050.

And China and India will become pre-eminent economic markets.

Energy drives growth, provides manufacturing and processing capability, and enables technological, scientific and social advancement.

The world, particularly the developing world, is hungry for fuel that is safe, cleaner than coal, abundant and transportable.

Which is where natural gas, in particular as LNG, comes in. For these reasons, the 21st century has been referred to as the Asian century, and the first part of this century as “the golden age of gas”.

Australia has a role to play here, and an enormous opportunity. We have vast gas supplies; technology is enabling us to access more and more gas; and we are located where we can provide gas conveniently to Asian markets.

The development of Queensland’s gas reserves into a major export industry is undoubtedly in the category of nation building change, and I feel privileged that Origin is one of the partners in the Australia Pacific LNG project. When looked at in conjunction with the two other largescale LNG projects being built in Queensland at Gladstone, there is committed capital spend of around $70 billion, with the projects currently providing new and direct employment for around 30,000 people.

The benefits through direct investment, employment and use of local suppliers, and government taxes and royalties, are huge for Queensland and for Australia.

Eastern Australian gas consumption is around 700 PJ per annum – and is predicted to grow to more than 2,000 PJ per annum when the six LNG trains currently under construction on Curtis Island are producing.

We should note that a production figure of 2,000 PJ per annum is in the context of an east coast 2P reserve base of around 50,000 PJ – with this reserve base having increased by 40,000 PJ (a five-fold increase) in just the last ten years. As technology enables us to access more and more marginal reserves, that capacity will continue to grow.

Let’s take a moment though to look at the market where gas capacity has grown the most dramatically in the last decade – the United States. 

The United States experience

At the moment, we have many people pointing to the US market and drawing comparisons with the Australian gas market.

Today, I want to take some time to look at the US experience.

We can start by looking at the US Henry Hub spot price - while price is more complex than just looking at a spot price, examination of Henry Hub data still provides a useful guide to how production and supply respond to price signals.

For a period from 2000, the United States experienced declining conventional supply coupled with rising gas demand – which resulted in a sustained increase in prices, with spot prices moving from an average of around US$2.15/GJ in 1999 to around US$12/GJ in mid 2008.

There was such concern over supply availability that LNG import terminals were proposed - and there was active opposition campaigning when an import terminal was proposed off Malibu in California.

Fast forward to 2013, and the average Henry Hub spot price is around US$3.60/GJ, and we now see planning underway for US LNG export projects.

In response to price signals, the US gas market has been transformed by technological breakthroughs that have led to significant investment. 

Spot prices above US$10/GJ sent clear signals to the market for the need to invest in increased production – and we have seen the supply response.

In looking at the current US spot price, it is important to remember where prices were five years ago – thus driving the investment in supply leading to the current situation.

Furthermore, there are important differences between the shale gas being produced in the US and Australia’s CSG reserves.

US gas tends to be richer in liquids than Australian CSG – and US gas producers can earn a return by selling products such as ethane, propane and butane into the market.

The revenue arising from these liquids reduces the gas price required to make a development economic.

Concurrent with investment in developing gas resources, the US is also going through a shale oil investment boom.

Gas produced as a by-product from shale oil production is therefore coming into the market, which is further suppressing price.

It is unlikely that current low US spot gas prices will continue forever, and over time it is expected that these prices will trend up.

Australia’s geological make-up is quite different to the US, meaning the forces at play currently depressing US gas prices don’t exist here.

We therefore need to be careful in making short term price comparisons when there are different factors driving these outcomes.

There are however important lessons we can learn from the US experience.

Managing the transition ahead

Let us now come back to the transition currently underway in Australia’s gas market.

The east coast Australian gas market is currently going through a step change increase in demand as production triples to support the six CSG to LNG trains under construction at Gladstone.

Current East Coast demand comprises roughly 43% industrial demand, 30% power generation, with 27% being used by residential and other small customers.

At the same time, we currently have soft electricity demand growth and capacity being brought into the market by the mandated Renewable Energy Target, which is suppressing gas demand from the baseload power generation sector. 

After these six trains are producing, LNG will dwarf east coast domestic demand by a ratio of two to one.

However, Australia has sufficient east coast gas reserves to meet both export commitments and domestic needs.

And we recognise the important needs of our customers – both large and small.

With respect to gas prices and the interplay between demand and supply, it is important to note that new supply coming on-line is more expensive than historical supply sources.

We need to be clear that gas prices in the period ahead will be above historical levels.

In this context, the concept of reserving gas or artificially holding prices below their market level has received attention and public debate recently.

Such an approach is flawed and a key lesson to take away from the US experience is that supply will respond to price signals when markets are allowed to work.

Just like market prices for products such as aluminium and fertiliser are set by market forces. 

Conclusion

I am confident that gas has a huge role to play in Australia’s energy future – and will provide thousands of jobs and billions of dollars of royalty and tax payments over the decades ahead.

We have seen the co-operative role that industry and governments have played to develop our gas industry to meet demand to date.

Investment in capital intensive assets such as these requires investor confidence – and there is an important role for Government policy settings to provide this confidence.

Our current east coast gas market reflects the cooperative relationship between investors and government over many decades, which – through sound market settings – has delivered investor confidence and investment to meet demand.

While the period ahead – involving a tripling of production – will be an unprecedented transition for our east coast gas market, we can learn from history and experiences in the US.

Industry has invested tens of billions of dollars in our energy future – and will continue to invest as long as policy stability is provided.

In conclusion, we are in the business of selling energy. Like most, we are keen to see a strong manufacturing base in this country, so we have customers to sell energy to. But just like those manufacturers, we cannot be expected to sell our product at an unsustainable price.

I would go one step further, to say that the greatest economic benefits for Australians will be realised by allowing all resources including natural gas to flow to their highest value use. Despite the transition ahead - if these lessons are heeded, we will see continued investment in gas supply to meet demand.

Thank you

Frank Calabria
Chief Executive Officer, Energy Markets