Future investment in natural gas pipelines

I am very firmly of the view that a price on carbon is going to create a huge growth opportunity for gas. [Gas] is really the only viable form of alternative clean energy in Australia at the moment – it’s reliable, and it’s lower emitting…clearly there will be significant need for the private sector to continue to invest in supporting pipeline infrastructure.”

Martin Ferguson, Federal Minister for Resources and Energy, July 2011

“We don’t want to give gas a long-term future because you will lock out the renewables.”

Christine Milne, Greens Senator for Tasmania, July 2011

Based on the above two statements, there are divergent views in government circles on the future of gas in Australia, which may make it difficult to develop strong and supportive policies for the gas sector. This is a pity, because we are at a point in time when we have a tremendous opportunity to develop a thriving gas sector. Consistent and clear policy settings will enable the market to deliver the infrastructure required to effectively support the gas sector.

The International Energy Agency’s report Are We Entering a Golden Age Of Gas? makes the case that globally, demand and supply drivers are converging in a way that will make gas the most prominent energy source. It states that some of the global uncertainties afflicting the energy sector can be seen as opportunities for natural gas. When replacing other fossil fuels, natural gas can lead to lower emissions of greenhouse gases and local pollutants. It can help to diversify energy supply and therefore improve energy security. Gas can provide the flexibility and back-up capacity needed as more variable capacity (from renewable sources such as wind generation) comes online in power generation.

Gas demand in Australia

Gas-fired electricity generation in Australia is growing at approximately five per cent per annum. The Australian Bureau of Agricultural and Resource Economics predicts that gas’s share of the total generation mix will increase from 19 per cent (2007-08) to over 37 per cent in 2029-30.

Natural gas is the cleanest fossil fuel energy source available, with around 40 per cent of the carbon dioxide emissions of black coal. Gas generation’s quick-start flexibility makes it suitable for managing peak demand and providing back up for intermittent wind generation. Gas generation is a mature technology with proven performance, which can be provided at a competitive capital cost and within manageable construction lead times.

In general, the characteristics of gas generation make it a compelling choice as a very important stepping stone towards carbon reduction. Even if, and when, sufficient renewable sources can be brought online to meet base load requirements, it is likely that significant gas generation will still be needed to back up intermittent wind and solar sources.

The increased use of gas, partially as a substitute for electricity, could also help to contain further rises in energy prices. The delivered cost of electricity in Australia has risen approximately 30 per cent over the last three to four years. Increases in network costs (transmission and distribution poles and wires) have been the main driver of these increases.

A significant amount of network expenditure is required to meet peak demand, which occurs only for a relatively short time. In the National Electricity Market as a whole, network expenditure is estimated at around $11 billion, and is needed on average for only four days in the year, or less than 1 per cent of the time.

Gas end-use substitution, either through direct use of gas for heating and cooking or from embedded gas-fired generation, can reduce peak electricity demand and help to save some of the massive network expenditure needed to meet peak demand.

LNG exports will also drive and shape future pipeline investment. LNG is a safe and convenient form of energy and its ease of transport to overseas markets makes it a prime candidate for rapid global growth. Australia’s LNG business is in the midst of an unprecedented period of expansion, with a number of liquefaction plants – many of them larger than any previously built – due to be commissioned in the next few years.

Maintaining domestic gas supply

The global natural gas resource base is vast and widely dispersed geographically. Conventional recoverable resources are equivalent to more than 120 years of current global consumption, while total recoverable resources could sustain today’s production for over 250 years.

In addition, unconventional natural gas resources are now estimated to be as large as conventional resources. Australia’s coal seam gas (CSG) reserves are significant. In Queensland alone, GeoScience Australia estimates CSG resources quantity at around 150 Tcf, enough to power the whole state for more than 500 years. Future pipeline expansions will be heavily influenced by the location of CSG reserves.

Investor appetite

There are strong drivers for future pipeline investment in Australia. There are also large pools of private capital available, built up in superannuation, pension and investment funds. Towers Watson research shows that in 2011, total assets of the world’s largest 300 pension funds grew to a record high of $US12.5 trillion, up by around $US1.2 trillion from the previous year. These funds are looking for secure, long-term investments that provide reasonable and stable returns.

However, it is important to remember three things:

  • Pipelines compete for capital with similar infrastructure projects;
  • Infrastructure, in turn, competes with other classes of alternative assets, such as property, hedge funds and private equity; and,
  • Alternative assets compete for capital on a global geographic basis.

Proponents of pipeline projects will only successfully compete in this tight market for capital if they are cognisant of investors’ requirements and strategic intent. Pipeline projects require large-scale capital commitments and deliver returns over a long period. Investors, therefore, look for revenue security from regulation or from long-term contracts.

Policy and regulation

Investment decisions are easier to make in a cohesive and supportive policy and regulatory environment. There is a danger that divergent views within government on the future of gas will create policy confusion.

In recent years, the focus has been on the enactment of the National Gas Law (NGL), the establishment of the Australian Energy Regulator (AER) as regulator, the Australian Energy Market Commission as rule maker and Australian Energy Market Operator as the market manager.

A key feature of the NGL is that it anticipates the potential for market conditions to evolve. The gas pipeline coverage process has led to the whole or partial lifting of economic regulation from several major pipelines over recent years. Only one pipeline, APA Group’s Central Ranges Pipeline, which was constructed in the last decade, is covered.

The NGL contains strong incentives for investment in greenfield pipelines. A “˜no coverage’ period can be applied for, during which pipelines are not subject to price regulation and the AER does not approve access arrangements or make access determinations.

Overall, the regulatory framework is market driven and has evolved to be supportive of investment, but there are areas where improvements can be made. In particular, governments should clarify energy policy on the future use of gas and its place in the energy mix, and gas and electricity planning should be co-ordinated to the extent possible.

For a full copy of Mr van Jaarsveldt’s presentation, please contact APIA or visit www.apia.net.au

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