By Andrew Main

You wouldn’t read about it, as they say. Australia’s Eastern States are headed for a gas shortage caused partly by the LNG export operations based at Gladstone.

The Federal Government’s had to put the weights on the exporters to guarantee domestic supply, and meanwhile, the two most populous states in the country, New South Wales and Victoria, have pretty well closed the door on onshore exploration.

New South Wales in particular looks like a villain because it imports 95% of its gas from other states, mostly South Australia (Moomba) and Victoria.

And the other 5%, provided by AGL’s Camden project south west of Sydney, will be closing down in 2023, after the company decided not to push ahead with an expansion program because of local objections.

It’s easy to look for people to blame for this, but in reality there’ve been a number of different reasons for the problem.

In no particular order, Gladstone went ahead because at the time of planning the three separate export projects a decade ago, the global price for natural gas was around twice the domestic price, at $12 per gigajoule versus around $6.

It’s now the other way round thanks to the recent drop in global oil prices, plus the new supply coming out of Australia.

And the domestic coal seam gas drilling industry got itself offside with the farmers, because some of the drillers were extremely careless with waste water disposal, groundwater pollution, well casing and methane leaks, to name but a few.

Throw in the fact that in Australia unlike the US, freehold landowners do not own the mineral resources underground, and you have a glimpse of why public opinion has swung so strongly against the onshore gas drilling industry.

It’s worth adding that the then Santos CEO John Ellice-Flint noted a decade ago that there’s enough gas under Eastern Australia to supply domestic demand for around 200 years.

In the last few days, we’ve got to a situation where the Federal Government is making noises about cutting back payment of GST proceeds to the states that aren’t pulling their weight in terms of gas exploration. Given that it’s the States’ gas, and not the Commonwealth’s, you can see another nasty spat coming. It’s not quite blackmail, but it’s close.

Victoria has a more negative political environment than New South Wales, in that there’s a total ban on “fracking”  (hydraulic fracturing of underground coal seams) as well as a moratorium on what’s called conventional onshore gas exploration, until 2020. Note that Lakes Oil is suing the Victorian government for $2.7 billion in damages because of the Andrews government’s decision to freeze onshore permits.

Fortunately there’s still Bass Strait gas coming ashore for the time being, but that’s not infinite.

New South Wales still has one exploration licence that’s been allowed to remain live, over Santos’s very promising Narrabri project, but otherwise it’s been buying back PELs, Petroleum Exploration Licences, since December 2014. Santos got into the Narrabri project by taking over Eastern Star Gas in 2011 but has since had to spend a lot of money remediating and upgrading the project’s infrastructure.

Not only has New South Wales been the site of most public protests about coal seam gas drilling, but it also had one Ian Macdonald as Resources Minister during the Labor government that was voted out in 2011. He is now in jail for corruption, as is former fisheries minister Eddie Obeid, plus there is further legal action looming over both men in relation to a coal exploration licence in the Bylong valley, near Mudgee.

What has to happen now in New South Wales is for the coal seam gas drilling industry to resume exploration under closely monitored conditions. The state doesn’t use much gas for power generation, and won’t ever increase that as renewables take over. Gas’s share of the electricity generation market in NSW fell from 12 per cent in 2012 to 8 per cent in 2016, but industry will have a long lasting need for gas as well as domestic use. Gas plays a big role in wastewater treatment and hospital waste destruction as well as being used as feedstock for fertilisers, pharmaceuticals, plastics, paper and dyes. And how do they bake bread?

Victoria at least has the Bass Strait to fall back on but the untapped offshore gas fields are getting smaller and smaller.

NSW chief scientist Professor Mary O’Kane produced a report in late 2014

Stating that the technical challenges and risks posed by the coal seam gas industry can be safely managed.

That’s the key word, “can”. Clearly in the previous period they weren’t, and the whole concept of “social licence” by which an industry can and should gain the acceptance of society before undertaking a project, went out of the window.

Farmers concluded that because they couldn’t trust drillers to case wells properly and they weren’t being very generously compensated, then the downside for them was much bigger than the upside.

There has been talk, by the way, of legislating to improve compensation but that hasn’t happened yet.

It’s pretty startling to realise that careless Coal Seam Gas exploration in New South Wales achieved the otherwise improbable outcome of allying some of Australia’s most dyed-in-the-wool farmers with the green movement.  

The unfortunate reality for the drilling industry is that having lost the public’s confidence it’s going to take a lot of work to get it back. I’ve spoken to experts who say that a properly cased gas well will have no deleterious effect on the groundwater aquifer it’s drilled through, but try telling that to landholders for whom a reliable aquifer is the only guarantee of their prosperity.

A final point. It’s quite possible to extract gas from coal seams by using relatively new horizontal drilling technology, whereby one well head could substitute for what previously required a dozen. Not only can it be done without fracking, hence the phrase “conventional coal seam gas”, but that means there would be much less disturbance on the surface and most likely a much lower risk of disruption to any aquifer sitting above the seam. The fewer the holes, the lower the risk.

If we want to keep using gas, then both the Victorian and New South Wales state governments will have to absorb the reality that TINA, There Is No Alternative.