The industry looks very different from two years ago, let alone a decade ago when APA Group was first listed on the Australian Stock Exchange. While the industry may be seen as predictable, market changes mean that new transmission infrastructure and services are being introduced to assist gas shippers to respond to these market developments.
Australia has seen growth in both the supply of and demand for natural gas. The significant growth in Australian gas reserves gives the market confidence of sufficient gas supply availability in the medium to long term. This is particularly on the back of coal seam gas developments, and potential new tight gas and shale gas supplies.
The demand for energy, and hence natural gas, is also increasing. The Australian Bureau of Agricultural and Resource Economics’ (ABARE) Australian energy use projections 2029-30 report, released in March 2010, states that natural gas consumption is expected to double over the next 20 years, particularly in the use of gas for power generation.
APA General Manager Commercial Rob Wheals says “The pricing of gas, combined with state and federal governments’ carbon policies, will be a key determinant on how much gas can displace coal in power generation, and the resultant demand for new pipeline capacity. We are already seeing significant new investment in peaking power stations by the vertically integrated gas retailers.
“Most importantly, it is the requirements of our customers in meeting this growth in demand that is driving our pipeline growth, and APA is working hard to provide the services that satisfy our customers’ needs.”
Pipeline development in Australia
In the first 25 years of the natural gas industry, approximately 10,500 km of transmission pipelines were built across the mainland, predominantly by government-owned utilities. These were relatively simple point-to-point pipelines, with point-to-point haulage tariffs.
Many of Australia’s pipelines have been constructed in the last 15 years, since the privatisation of the industry. These pipelines brought gas to new markets or provided existing markets access to new gas sources. Concurrently, capacity on the existing pipelines has also been increasing through the addition of new compression facilities and pipeline looping.
The development of new upstream gas sources has led to pipeline development. The access to new end-user markets, combined with government policies, such as Queensland’s support for natural gas use in power generation, has triggered increased upstream exploration to meet the demand.
The pipeline industry has responded to these new multiple sources of natural gas on the east coast by developing an interconnected pipeline grid that benefits producers, shippers and the industry as a whole. Instead of separate point-to-point pipelines, the east coast pipeline grid matches multiple supply options with multiple markets over a number of ownership structures.
Mr Wheals explains that this represents a significant change in the pipeline industry.
“APA’s east coast pipeline grid now delivers gas to the major markets of Brisbane, Sydney, Canberra, Melbourne and Adelaide using gas sourced from all the producing fields across eastern Australia. There is now tremendous choice at both ends of the supply chain, for producers and consumers,” he says.
APA currently transports 70 per cent of the natural gas used in eastern Australia and more than 50 per cent across all Australian markets.
The growing demand for natural gas
Commercial use of natural gas is relatively new in Australia. Over the last
40 years natural gas has grown from zero to 22 per cent of Australia’s primary energy mix. ABARE’s report states that this growth in the use of natural gas is projected to continue, with natural gas expected to provide 33 per cent of Australia’s primary energy by 2030, and double the volume of gas used over the next 20 years.
Growth in gas is influenced by a number of factors, including population and the economy, which effects energy use in general. Mr Wheals says “The major influencing factors in our experience, and supported by government projections, are the mining sector and power generation.”
Government policies aimed at reducing carbon emissions are also positively influencing gas demand, though the Federal Government’s Carbon Pollution Reduction Scheme (CPRS) has been delayed to at least 2013.
“This delay has created uncertainty for certain power generation developments and energy decisions, yet it does not represent a shift away from reducing carbon, particularly while state-based carbon reducing policies and incentives remain in place,” Mr Wheals states.
“We are currently seeing investments in new gas-fired peaking power stations, and when the CPRS is implemented it is estimated that investment will increase in baseload gas-fired generation.”
According to the Australian Energy Resource Assessment report released this year by the Federal Department of Resources, Energy and Tourism, Geoscience Australia and ABARE, 19 per cent of electricity generation is currently fuelled by gas, and this is forecast to increase to 37 per cent by 2030, primarily by displacing coal. The two-year delay in CPRS implementation is not expected to significantly change these forecasts.
Gas-fired generation is used to manage peak electricity demand, and in the future will be installed to provide firm “˜back-up’ power for intermittent wind generation. “This adds up to significant new investment in gas-fired power generation, and will in turn be the principal driver in the growth of pipeline infrastructure – whether greenfield pipelines or brownfield expansions” Mr Wheals says.
Managing variable demand with storage
A further shift in how the pipeline industry is engaging with shippers is a consequence of how producers are now contracting to sell their gas. Producers are less likely to absorb the additional cost of providing variable rates of production, and instead are rewarding buyers for contracting at a 100 per cent load factor, that is, at a constant rate. Similarly, pipeline investments are more efficient if pipelines are configured to deliver at a constant rate.
However, against this, the use of gas remains variable due to the time of day, the weather conditions, industry production patterns, and peak electricity needs. So there is a market for gas storage as shippers manage the disparity between the supply and use of gas. Other factors influencing customer demand for storage is managing security of supply and also the growing trend toward “˜take or pay’ supply contracts.
The greater variability and peaking nature of gas generation means that the storage capacity required to deliver the same volumes of gas has increased. The increased capacity will be found from either the pipeline itself or new storage infrastructure attached to the pipeline. This means that pipeline organisations are key participants in these investments.
Mr Wheals explains how APA is providing storage. “APA has investments in three of the main forms of storage infrastructure. The company has an investment in underground storage development at Mondarra in Western Australia, which it plans to expand significantly. This expanded facility will provide storage services to shippers on APA’s Parmelia Pipeline and DBP’s Dampier to Bunbury Natural Gas Pipeline.
“In Victoria, APA has increased the flexibility of our Dandenong-based LNG storage service, and continues to look for further expansion opportunities for these storage services, which feed the Victorian Transmission System. The LNG storage service is contracted with all major shippers to provide peak and short-term emergency supply. APA has developed services supplying LNG as an alternative fuel for the heavy vehicle trucking market.
“Long and large interconnected pipelines in the east coast are ideally suited to provide line-pack services for short-term and intra-week balancing. It is APA’s objective to further invest in new storage infrastructure to service each of the major storage markets,” says Mr Wheals.
Developing the east coast grid
A key response needed for all shippers, from the large retailers to smaller end users, is the commitment to creating and enhancing the east coast gas grid in order to provide not only efficiently priced tariffs but also the flexibility and tailored services that each shipper requires.
Mr Wheals explains the benefits that flow from the east coast gas grid. “It allows shippers a greater choice in developing their gas portfolio and enhances real-producer-on producer competition. Importantly, it provides greater system security, reducing the impact of interruptions from production fields.”
This new found flexibility means that shippers face greater complexity in contracting with multiple pipeline counterparties as well as multiple producers. To ensure that small and larger shippers get access to these benefits, it is important that the pipeline industry provides efficient commercial mechanisms.
“APA no longer structures itself around individual pipelines in the system, but has moved to a national structure so that shippers can have a one-stop shop. We are in an advanced planning stage to introduce much more seamless contracting across multiple pipelines,” Mr Wheals says.
Another benefit relates to longer term certainty of gas supply, which is a prerequisite for large investments such as power stations. The development of the east coast gas grid provides greater flexibility and choice for shippers when contracting for gas at the expiry of a gas contract or for new projects.
Mr Wheals says “A shipper or end user will not be limited to one producer to renegotiate the contract but have a choice of multiple producers. With the abundance of current gas reserves, and the prospect of further gas reserves being proved, it is certainly a different scenario than if the shipper was relying on a single producer at the time of contract renegotiation. This should provide more certainty of supply as well as a competitive pricing outcome.”
Mr Wheals explains further “APA’s vision is for a seamless sales and service experience for all our customers across all our assets, focused on servicing competition in the gas markets. APA’s goal is to have a single commercial and operations interaction with shippers to co-ordinate transport quickly and seamlessly, including transport on a third-party asset.
“APA is investing significant capital expenditure to make this a reality through expansions on its Moomba to Sydney Pipeline and the interconnection between its New South Wales and Victorian pipeline systems. With Epic Energy’s expansion of the South West Queensland Pipeline, the infrastructure layer is in place.
“The service layer will be a combination of technology, process change and commercial arrangements to provide this seamless service across the various pipeline systems that will deliver on APA’s vision of seamless service to shippers,” Mr Wheals says.
An exciting evolution
Australia’s pipeline industry has evolved and developed in response to a dynamic and growing natural gas and energy market. In particular, APA is enhancing its pipelines to meet the growth in gas demand, and changing its operations to facilitate competition in the market place, and provide the flexibility and security that is required by shippers in a much more complex environment.
The east coast market reflects the evolution of the pipeline industry. The pipeline and storage infrastructure is in place to deliver gas to all major markets from all major production areas, and commercial arrangements between market participants are continuing to create the services required by shippers and drive expanded pipeline capacity in an efficient manner.