Jay Weatherill’s energy plan involves the construction of a government-owned 250MW gas-fired power plant to provide emergency back-up power and system stability services for South Australians, and power for his resources minister to instruct the owners of Pelican Point to turn it on. Yet his plans for cheaper gas, or any gas, will not work quickly and possibly will not work at all. Laura Tingle in an excellent article published under the title of Power sources: steaming Premiers and Pumped PMs tells us that on the futures market on Wednesday, the June contract for electricity in Victoria hit $147.50 per megawatt hour, compared to a price for the March contract of just $80 as energy traders put a price on the closure of Hazelwood in Victoria at the end of March.
Meanwhile a group of former BHP Billiton and BP executives is consulting with SA to build a private equity funded power station, using gas from a floating regasification plant sourcing gas from the North West Shelf and from Singapore, some of which may actually come from the Cooper Basin in the state’s north via Gladstone.
Is this for real, and how did we get into this ridiculous mess?
First, let’s look at the proposal in an article by Matthew Stevens, which is being assembled under the auspices of Melbourne management consultancy Integrated Global Partners. The proposal is to spend $600 million to build a 350 MW plant, somewhere near Pelican Point. Indications are that they’d need to buy gas at $10 per gigajoule or less and a power price of $100 MWh. Last year at that rate they would have been in the system for 16% of the time. In 2017 so far it would have been 33%.
- Reduced to comprehensible simplicity, the plans is to acquire 7 petajoules of gas annually (which is equivalent of about 10 per cent of Australian domestic demand) and to convert and store that gas on a floating barge that would be sit offshore Port Adelaide and be linked to a 350MW generator sited not too far from Engie’s Point Pelican.
On international gas prices:
- we had a chat on Thursday to Oil Search’s Peter Botten. He is just back from a Houston gabfest. The view there is that the LNG price is going nowhere but south. He reckons 2017-18 could see the price hit $US4GJ. It is currently about orbiting $US7.
At $US4GJ the coal seam gas exporters through Gladstone could be in trouble.
Australian Industry Group chief executive Innes Willcox has suggested that Queensland’s LNG exporters should “get creative” and consider buying cheap LNG on the oversupplied Asian market to fill their sales contracts and make their own gas available for local users.
They did not seem impressed. I suspect they need to make their expensive liquefaction plants in Gladstone work to get a return on capital. For your interest, this is where the gas pipelines in Australia are:
It’s a long way from the Surat Basin in Queensland to any big cities in southern states.
If all goes well a final investment decision on the IG Partners proposal could be made by the end of 2017 with a power plant ready for commissioning by late 2020. Presumably it would be additional to Weatherill’s proposed 250MW gas-fired power station which is conceived as standby power. Weatherill does want to make SA more independent on electricity, and the list of SA power stations contains Torrens Island, a 1280MW gas-fired facility over 50 years old, due for mothballing and which partly failed just before the lights went out in February.
South Australia’s dependency on gas appears to be the greatest of any state. This graph from AEMO in 2015 shows the situation before and after the closure of their only two coal stations:
It includes solar PV, but not power sourced from Victoria. This image from the SA energy plan shows the current situation, minus solar PV and Victoria:
The floating gas hub could stabilise gas prices, and perhaps make the other states think, as well as Dr Finkel and the national plan. I’ll just keep repeating this from Blakers et al in an article of February 7, 2017 where they looked at a 100% renewable energy supply using wind, solar and pumped hydro. They found:
- Using 2016 prices prevailing in Australia, we estimate that the levelised cost of energy in a 100% renewable energy future, including the cost of hourly balancing, is A$93 per MWh. The cost of wind and PV continues to fall rapidly, and so after 2020 this price is likely to be around AU$75 per MWh.
Angela Macdonald-Smith in Cheap gas is a thing of the past and pathetically, insiders knew it was coming gives a brief account of how we got into this mess.
In brief, the coal seam gas industry started out in late 2008, on the eve of the GFC, in a fit of irrational exuberance, ending up with three rival ventures investing a total of $80 billion. A fourth venture between Shell and PetroChina was planned, but pulled out when they saw how things were developing. International gas prices were linked to the price of oil, which everyone knew would keep going up, until it didn’t.
Possibly a bit less than expected was coming out of the ground in Queensland, but the industry did not expect to be stopped at the border by drilling and fracking bans.
Had the companies sold more gas than they had at their disposal?
- Analysts honed in on the volume of gas held within each LNG venture, with Santos’s $US18.5 billion GLNG venture in the spotlight. While Origin’s Australia Pacific LNG project had more than enough, and BG’s Queensland Curtis project would rely on third-party gas for about 5 per cent of its needs, GLNG from the start looked short. Had Santos and its partners, including French oil major Total, [the GLNG joint venture], sold more gas under long-term LNG contracts than they had?
The answer came in October 2010 when:
- Santos announced the sale of 750 petajoules of gas from its core Cooper Basin venture in central Australia to GLNG over 15 years, with then CEO David Knox vaunting the deal as a game changer to unlock the potential of the Cooper and provide “additional strategic advantage” for GLNG.
From that moment today’s predicament became all but inevitable, said one gas industry insider.
- “Over half of Cooper’s uncontracted [proven and probable] reserves at the time – which, along with the Gippsland Basin Joint Venture were the heart of domestic gas supplies – gone, just like that.”
It was around that time the NSW and Victorian governments put the mockers on industry ambitions on their patch.
This is not going to change, although it’s hard to see why the bans extend to conventional gas drilling. However, the world glut in gas is expected to last into the next decade, which would make any new ventures questionable.
In 2012 the Prime Minister’s Manufacturing Taskforce recommended steps to ensure access to gas for domestic users at “fair and competitive prices”. Julia Gillard would have none of it, no doubt advised that the market would take care of everything.
In any case, the bird had flown with the Santos deal. Official denial that anything is amiss has continued until this year, when chief scientist Alan Finkel and the Australian Energy market Operator have announced that we have a problem with gas.
Malcolm Turnbull has said to gas producing executives, fix it or we’ll fix it for you. However, in the commercial world a contract is a contract, and if the government rescinds your ability to fulfill your export contracts, then sovereign risk becomes real.
Meanwhile Ian McAuley, when asked by John Menadue to write about the National Electricity Market, said he found the task difficult because he couldn’t make any sense of the NEM. All split up in bits with chancers able to maximise their profits.
- “Surely it is the worst combination of private and public sector incompetence in Australia’s history,” one jaundiced senior industry executive says.
In these circumstances floating gas hubs and buying gas at international prices may not be the silliest thing to do.
Update: Politicians are cheering because Shell announced that it would sell 10% more gas onto the eastern market, thanks to the development of the new Ruby field in Queensland – $500 million and 350 jobs in construction.
That was in the AFR.
Macrobusiness is not impressed, and called it a “fart” on the market. Shell extra 10% will make a grand total of 75Pj. They say we actually need an extra 160-200Pj. Their solution is:
- We need to hold back a tiny 160Pj of gas to balance the domestic market. That amounts to a fantastically paltry 2.9% of total national demand or 3.6% of total export volumes in 2018. 80% of Australian gas production would still go to Asia.
For legibility I’ve split their pie chart of 2012 and 2018 Australian gas market into two images:
However, the worst is that the whole enterprise was a stuff-up from the outset:
- These same firms and governments lose money on every tonne that they ship offshore. They buggered up their investment metrics so horribly that when you include the cost of capital for building the plants, they are losing money hand over fist. This even includes the west coast LNG plants. As a result they can claim huge depreciation and write-offs on massively inflated investments and they pay no tax.