Gas Statement of Opportunities 2022: The Uncertain Future of Natural Gas in our Market
Fast Facts
On 29 March 2022, AEMO published the 2022 Gas Statement of Opportunities (GSOO) to provide it’s forecast of annual gas consumption and maximum gas demand, reporting on the adequacy of eastern and south-eastern Australian gas markets to supply forecast demand over a 20-year outlook period.
Some key messages from GSOO 2022:
Future gas needs are highly uncertain across all of AEMO's four gas outlook scenarios;
Natural gas will continue to have a role in the integrated energy transition including a critical role in electricity generation during extreme demand conditions;
In the short-term, greenfield infrastructure will not meet supply gaps (e.g. winter 2023) as traditional gas supply in south-east Australia declines, major pipeline constraints remain and LNG import terminals are yet to be commissioned; and
In the long-term, due to electrification and the shift to zero-emission fuels, apart from supply gaps on severe winter days, gas consumption largely declines up to 2033 (beyond this point, future increases in demand come from increased electrification). The gas demand that remains, displays extreme peakiness and volatility. This will require flexible and scaleable gas supply to meet the significant but infrequent need for gas on a cost efficient basis.
Key Issues
Why gas continues to be a polarising issue in our market
World-wide efforts to limit global warming to no more than 1.5 degrees above pre-industrial levels are materially under threat. Reducing or eliminating our reliance on an emissions-intensive fuel source like natural gas over time would help to decarbonise over 20% of our primary energy consumption (Department of Industry, Science, Energy and Resources, 2020). Against this backdrop, the role of natural gas in the energy transition remains unresolved, due to a myriad of mixed signals.
The short to medium-term price outlook for natural gas has nearly doubled from 12-18 months ago, largely as a result of geopolitical uncertainty, contributing to perverse investment signals for new and existing projects;
Secondly, some jurisdictions, including parts of the EU, seem to have adopted a two-step transition from coal to partial gas use on the path to full decarbonisation;
Thirdly, in Australia, Federal Government funding (including for gas pipeline upgrades, refining and Basin development) and legislation relating to natural gas continue to provide some support for the ongoing development of gas assets; and
Finally, natural gas Reserves (over 32,000PJ) and Resources (over 58,000PJ) on company balance sheets signal potential future value that companies (and financiers) in the sector expect to continue to derive from future exploration and exploitation of natural gas over coming years. (Reserves and Resource estimates from GSOO 2022)
With a known (even if uncertain) role as an important source of firming for variable renewables, at least in the near-mid term, natural gas is here to stay, notwithstanding its significant carbon footprint.
Our Insights
What this means for investors and energy market participants
AEMO’s GSOO 2022 emphasises the material uncertainty in the future role of gas across the Australian Eastern seaboard. While investors and energy market participants are now accustomed to the significant short-term volatility of gas prices over the past couple of years, the uncertain longer-term outlook for gas in our market highlights a number of questions such as the following, for critical reflection by the sector:
While the best case 20-year demand outlook in the GSOO is for gas consumption to remain flat (‘Low Gas Price’ sensitivity case) and the worst case is for a 25% decline (‘Hydrogen Superpower’ scenario), the demand/supply equation over the 20 years changes significantly year on year. Which gas assets are best placed to provide flexible and scalable supply on an economic basis in this rapidly changing environment?
Domestic gas prices may not always converge with netback LNG export prices, with the gap between those markers varying over time from a few cents to well over $10/GJ (as is currently evident). What is the marginal price that a gas project seeking to remain viable must achieve over its remaining life in this volatile market?
Green and blue hydrogen markets are growing rapidly across the Eastern seaboard. While there is a relatively greater role for gas in producing blue hydrogen (using steam methane reformation), the future of blue hydrogen is also uncertain. There are some early investigations into the blending of hydrogen within natural gas supplies (e.g. Canberra household gas/green hydrogen trial) and potential co-firing of green hydrogen with gas powered generation (e.g. Energy Australia’s Tallawarra B will trial 5% hydrogen co-firing). What are the technical limits from commercial-scale precedents for hydrogen blending and/or co-firing with natural gas? Will this require gas infrastructure to be repurposed? What long-term risk-adjusted economic outcomes will investors require from such projects?
Renewable gas and low emissions gas alternatives are gaining some momentum, albeit starting from a small base. What is the probability, timing, scale and cost at which those projects will eventually displace natural gas supply volumes in existing demand centres? Will the location of those projects facilitate ongoing beneficial use of the existing gas network infrastructure and pipelines?
Gas powered generation will continue to provide firming during extreme weather conditions and in periods of wind/solar droughts in the National Electricity Market. These incidents will occur at an unpredictable frequency and potentially require significant levels of gas powered generation over a short period of time. For some market participants, there is a trade-off between this uncertainty and potential retailer reliability obligations. What specific parameters (including, for example, price signals, regulatory instruments, contractual arrangements) would facilitate ongoing/new investment in gas powered generation based on this outlook?
Read AEMO’s Gas Statement of Opportunities 2022: https://aemo.com.au/en/energy-systems/gas/gas-forecasting-and-planning/gas-statement-of-opportunities-gsoo
For more information, contact Simone Rennie at srennie@renniepartners.com.au
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