RESEARCH PAPER SERIES, 2020-21   20 JuLY 2020

Australian electricity options: natural gas

Ian Cronshaw

Visiting Fellow, Crawford School, Australian National University

1 Executive summary

• Natural gas is chiefly methane, the simplest hydrocarbon. It is a versatile, clean-burning fuel, with applications in industry, households and the power sector, although use in the transport sector is small. The widespread adoption of efficient, flexible combined cycle electricity generation in the 1990s saw gas emerge as the fuel of choice in this sector in many OECD countries. Used this way, gas-fired electricity has the lowest greenhouse gas signature of any fossil fuel, around half that of coal. Australia’s ample gas resources have supported major developments for both local use and a rapidly expanding gas export industry.

Australian electricity options are short briefings on the principal energy sources and storage options being debated in Australia, including: coal, natural gas, wind, nuclear, photovoltaics (PV) and pumped hydro energy storage (PHES).

The global COVID-19 pandemic and its economic consequences mean that statements and projections about future demand and pricing of energy options may no longer be reliable. Readers should note that some figures quoted in these briefings may pre-date the pandemic.

Gas is widely available globally, and used in a multitude of applications. The clean burning properties of gas are useful in industries such as glass manufacturing. Gas is also an important feedstock in the chemical industry. In households, it is often the preferred option for space and water heating, as well as cooking.

Gas is also widely traded, both by long distance pipeline and in liquefied form as LNG (Liquefied Natural Gas), generally in dedicated ships. Pipelines are fixed in location, and tend to be inflexible if demand or supply change. LNG can be more flexible, as ships carrying it can change destination, although in practice, contract rigidities have limited the application of this potential advantage. Russia is the world’s largest natural gas exporter, mainly via pipelines, while Qatar and Australia are currently the largest LNG exporters; the US is rapidly expanding exports since they began in 2016.

In the past, gas was seen as something of a premium fuel, and its use in the electricity sector regulated or even prohibited in countries such as the United States, or generally confined to meeting peak electricity needs. The introduction of more modern generation technologies, which combined high performance gas turbines with steam turbines (so-called combined cycle) saw
gas-fired generation emerge as the new technology of choice, especially in many OECD countries from the mid-1990s. Its flexibility, short lead times and relatively low capital cost were key advantages, while its lower carbon footprint relative to coal and oil fired power is an added benefit wherever carbon is priced.

The second major and more recent development in natural gas is the rise of unconventional gas production, in which gas is extracted from low permeability rock formations, hitherto not accessible by conventional extraction technologies. Such source rocks include shales, sandstones and coal beds. Extraction techniques include horizontal drilling, hydraulic fracturing and dewatering. The rapid growth of such unconventional gas production has been most marked in North America, transforming the United States from a potentially large-scale importer into a large and increasingly important gas exporter over the course of the last decade.

Australia

Gas provides around a quarter of national primary energy needs, with a fast growing role in electricity generation, where the share of gas-fired electricity generation has doubled in the last decade to around one-fifth.

Gas has predominantly been produced from the Cooper Basin (in northern South Australia), Bass Strait and more recently from offshore Western Australia, for use both in Western Australia, and to support a growing export industry, as LNG.

Figure 1: Remaining gas resources and cumulative production (to 2014; Petajoules)

Source: Figure 1, Geoscience Australia, Gas, Australian Energy Resources Assessment, 2018.

The years 2008–2010 saw decisions taken to invest more than $200 billion to dramatically expand Australian LNG exports, based not only on remote ‘stranded’ gas in offshore northern and western Australia, but also from coal seam gas (CSG) fields in Queensland. These latter developments have connected Australia’s east coast gas markets to global gas markets for the first time. Gas in these markets is generally priced on the basis of an oil indexation formula, so as these export projects have come online, Australian gas prices have risen sharply, and have been volatile, as producers have struggled to cope with a tripling in demand. As gas is generally the highest cost and marginal fuel for electricity generation, wholesale electricity prices (already under pressure from other factors) have risen as well.

Australia’s gas production is based on both conventional gas and unconventional sources, the latter mostly CSG. The regulation of unconventional gas production remains controversial almost everywhere, and while there are major differences between shale gas and CSG, some common features can be discerned. The number of production wells is generally much larger than in conventional gas, putting a premium on well integrity and controlling accidental methane emissions throughout the production chain. Regulation must be performed on an area wide, or basin wide basis. Water issues are a major concern everywhere, both from potential contamination of underground water resources in hydraulic fracturing (used widely in North America), or through treatment and disposal of extracted water, seen in CSG production.

These concerns have led to widely differing regulatory approaches often in adjacent areas. For example, in New York State, hydraulic fracturing is prohibited, while in neighbouring Pennsylvania, it is widely practised, making that state one of the largest gas producing areas globally. Similar differences can be seen in Australian states, where Victoria has banned hydraulic fracturing, and indeed onshore gas exploration,¹ while Queensland has developed a purpose built, area wide regulatory regime, with strong emphasis on underground water issues. The International Energy Agency (IEA) considers that unconventional gas can be properly regulated, provided certain key approaches are adopted. The IEA has noted that where gas production is restricted, higher prices and less secure supplies result.

Australia’s LNG export industry is rapidly emerging as a major export earner, as massive projects started some years ago come online. Each of the seven projects is now operating and export revenues have increased from $18 billion in 2016 to around $50 billion in 2018–19. In 2019, Australia’s LNG exports reached 77 million tonnes, with some further growth possible. The massive Gorgon project in Western Australia is one of the largest resource projects in the world, and also one of the largest carbon capture and storage projects. Australia overtook Qatar as the world’s largest LNG exporter for 2019, although the United States will likely overtake Australia in coming years.

Pros and cons

Using natural gas to generate electricity has a number of advantages over other fossil fuels such as coal and oil. Emissions of carbon dioxide are lower per unit of electricity generation, as are other greenhouse gases and particulate matter. Gas-fired generators can be designed to respond quickly to changes in electricity demand and are therefore useful if additional supply is required at short notice—this ‘dispatchability’ can enable them to function as peaking power plants and to complement supply from variable renewable energy generators. Natural gas is also relatively abundant in Australia.

Major disadvantages of natural gas relate to it being a fossil fuel (its combustion produces carbon dioxide), with limited supply over the long term. Its extraction can create environmental issues, such as the generation of fugitive emissions from the gas well during extraction and industrial emissions during processing, and may require intensive use of water. Other concerns are that emissions from natural gas are still relatively high compared with renewable electricity generation. Gas and gas transportation is also expensive compared with other fuels, particularly in Australia’s south-east.

2 Further reading

R. Quentin Grafton (Editor), Ian G. Cronshaw (Editor), Michal C. Moore (Editor), Risks, Rewards and Regulation of Unconventional Gas: A Global Perspective, Cambridge University Press, 2017.

Department of Industry, Innovation and Science, Resources and Energy Quarterly

International Energy Agency, Gas 2019

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Notes

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Victoria has maintained a moratorium on onshore conventional gas exploration since 2017. The moratorium is due to end on 30 June 2021 (Petroleum Legislation Amendment Act 2020 (Vic)).