An in-depth analysis of the re-emerging case for a west-east gas pipeline, which could provide a demand source for projects like Equus.
A long-time proponent of big infrastructure projects, former premier Colin Barnett believes the case for a gas pipeline linking Western Australia to the east coast is clear.
And while the proposed $5 billion-plus project has its share of skeptics, advocates say it will help activate otherwise undeveloped gas fields in Western Australia.
Mr Barnett told Business News the aftermath of the COVID-19 recession was the right time to embrace a visionary project.
“People look for something that’s bold and visionary and stimulates confidence,” he said.
“I’ve thought for a long time, in this situation, where is the iconic, nation-building project?”
The plans could force a major hurdle with the state government’s revised domestic gas policy restricting interstate shipments, although at a federal level the COVID-19 commission has signalled possible support.
Undeterred, Mr Barnett is confident a pipeline could be built by private investors, if the Commonwealth government took the lead by opening expressions of interest.
It could supply WA gas into an east coast market that has been drained as exports surge and new projects face social licence and environmental hurdles.
The government would need to provide the mandate, run the process, provide an easement on which to build the line, and regulate the tariff (price) for use of the pipeline, he said.
That easement could run alongside the existing Goldfields Gas Pipeline, and head east next to the Indian Pacific’s rail corridor.
The regulated tariff would be a key factor, Mr Barnett said, which should be fixed for five years.
A price of about $2.50 to $3 per gigajoule might be sufficient, he said.
That compares to about $1.70/ GJ for the older and shorter Dampier to Bunbury Pipeline, as at 2018.
“[Confidence and certainty] are more important than the government throwing money in,” Mr Barnett said.
“If the price needs to be lower, the government could invest, not take a return and sell out.
“But the financial assistance is less important than the certainty.”
He said the easement should stay in the ownership of the WA and South Australian governments, and the successful bidder should have the right to build a second pipeline in future.
The Goldfields Gas Pipeline, which was built when Mr Barnett was energy and resources minister in the 1990s, was an example of a government-led development built and funded by the private sector, he said.
“Goldfields is a classic case study in government and private enterprise, government ran the process … and the pipeline was built by the private sector,” Mr Barnett said.
The Goldfields pipeline was constructed in about a year, he said, and a transcontinental pipeline could take three, he said.
He said there was interest from the private sector, and fund managers, to pursue the west-east project.
The market had changed in the two years since a feasibility study by economics consultancy ACIL Allen poured cold water on a previous push for the pipeline, Mr Barnett said.
One industry executive agreed that numerous businesses were assessing a potential pipeline, saying the stars were aligning.
International
Growth opportunities internationally for gas may have dried up. Qatar is considering lifting production capacity by 50 million tonnes per annum to about 125mtpa in the decade ahead, and has been sealing new contracts at cut prices (see story, pp14-15).
On the other side of the ledger, demand from Japan, Australia’s biggest LNG export destination, has been cooling.
WA could be squeezed, with some producers hoping to open new markets.
The Equus field, owned by Western Gas, could be one option to underpin supply for a transcontinental pipeline.
“We see a real opportunity right now to grow the Australian gas market beyond current levels,” Western Gas executive director Andrew Leibovitch said.
“This can be achieved by increasing gas supply to the WA market to support new value-adding, energy-intensive industries, by increasing supply to east coast customers via a west-east pipeline or both, given the right conditions.
“To make a transcontinental gas pipeline work, the market needs an independent dedicated gas resource that can provide long-term supply at an affordable price; we see an opportunity for Equus to be a part of the solution.”
Other fields named as potential sources have included Santos’s Dorado, Woodside’s Scarborough and Chevron’s Clio and Acme.
Mr Barnett said a pipeline would open up a new market for smaller fields that might not otherwise be used for LNG.
“There’s plenty of gas out there,” he said.
It would support competition among producers and among users, too, Mr Barnett said.
Numbers game
Among those opposed to the project, Energy Quest founder Graeme Bethune is blunt in his assessment of the potential of a transcontinental pipeline.
“The economics would be appalling … it’s much easier to ship LNG from the west coast to the east coast,” Mr Bethune told Business News.
He took a different view of the ACIL Allen study, mentioned above by Mr Barnett, believing the project would still be uneconomic.
Speaking at a recent Business News breakfast, Woodside Petroleum chief executive Peter Coleman said a transcontinental pipeline may not be profitable for a private enterprise to construct.
“The key on the pipeline, to be able to get into that market [the east coast] and be affordable, you’re going to have to charge a zero tariff,” he said.
Mr Coleman said it was unclear how it could be underwritten, or how an offtake source could be guaranteed. Institute for Energy Economics and Financial Analysis analyst Bruce Robertson said the idea was generally dismissed as not being economic.
“It’s more economic to put it in an LNG carrier and ship it over,” Mr Robertson said.
He expected the project could only proceed with government support, whether through a guarantee, direct subsidy, cheap money or offtake deal.
Experience from the Northern Territory, where the government agreed an offtake deal to support development of a gas field, had ended in disaster, Mr Robertson said.
“We’re seeing gas demand decline on the east coast … it’s too expensive,” he said.
“We’re [Australians] paying more than our global customers.”
Peter Coleman says a zero tariff will be needed to make the project worthwhile. Photo: Matt Jelonek
On this front, AGL Energy has explored building a regasification terminal at Cribb Point in Victoria, while Squadron Energy is pursuing one at Port Kembla.
A terminal would take LNG cargoes from international markets, transition the liquid back into gas, and pump it into the local market.
Mr Barnett believes that fails the pub test.
“It’s not logical to take gas, freeze it … ship it and regasify in your own country,” he said.
The move would also lock domestic prices in to the prevailing international price,” Mr Barnett warned.
A further variable depends on how the gas is sourced.
If existing LNG operators commit the full capacity of their plants to international markets, that would imply new liquefaction capacity is needed to feed a regas terminal, increasing the capital cost of such a plan.
For example, Woodside’s Scarborough project and Pluto Train 2 brownfields development have been estimated to cost $15 billion.
Woodside’s Mr Coleman told a Business News Success and Leadership event in September the company would have no problem supplying gas into a pipeline, including by dialling down use of its existing Karratha processing trains.
“It’s another outlet for us, another set of customers,” Mr Coleman said.
ACIL Allen’s report estimated a pipeline tariff of between $2.90 and $5, depending on capacity.
“The economics of the project would be severely impacted by pre-emptive investment in the pipeline ahead of the establishment of a firm foundation customer tariff revenue stream,” the report also warned.
While pipeline transmission has a cost, so does liquefaction.
For context, work by the Oxford Institute for Energy Studies in 2018 suggested liquefaction plant costs at four recent west coast projects were above $US6.70/mmbtu ($US7/GJ), and forecast brownfield expansion costs of about $US4.70/mmbtu ($US4.90/GJ).
Prices look set to rise on the east coast. The spot price of gas in Sydney averaged $6.23/GJ over summer 2020, according to the Australian Energy Council.
By comparison, the Henry Hub price in the US averaged $2.30 per million British Thermal Units in August, roughly $2.40/GJ.
But the gas price on the east coast could lift by $4/GJ across the next decade, according to work by Core Energy & Resources for the Australian Energy Market Operator in July 2019.
Another pipeline has also been flagged from the Northern Territory.
Domestic market
The direction the gas flows will have big political and economic impacts.
Liquefaction and shipment into Asia has historically produced the highest economic value for WA, but the industry is keen to develop new markets.
The second use case is to keep the gas for local industry in the hope of supporting manufacturing.
A transcontinental pipeline would bring a third option.
Premier Mark McGowan staked out his ground strongly in an August announcement, which said gas in WA’s local pipeline network could not be exported or pumped interstate.
Interstate sales would also not be covered under the domestic gas reservation scheme.
One exemption was granted, for Mitsui and Beach Energy’s Waitsia project.
The policy does not apply to offshore fields, and there is a possibility a future government may reconsider it or further exemptions could be granted.
A parade of WA hopefuls are lining up to use local gas.
Vikas Rambal’s Perdaman Industries appointed construction contractors for a $4.5 billion urea plant to be built in the Burrup, with an investment decision intended next year.
Perdaman has contracted with Woodside Petroleum to use Scarborough gas to feed the fertiliser plant.
Other big industrial users in the mix include Coogee, which Business News reported in January needed gas for a $1 billion Burrup methanol plant.
Wesfarmers may be running the rule over a chemicals project of its own, while two other potential customers are said to be reviewing a petrochemical and a magnetite project, respectively.
Alumina exporter Alcoa signed deals in September with Warrego Energy and Chevron for a combined 192 petajoules of gas.
In the Perth Basin, Warrego Energy is pursuing the West Erregulla gas development with Strike Energy.
Warrego’s Australian chief executive David Biggs said more potential markets would always be welcomed, although he was unsure a transcontinental pipeline would stack up without government underwriting.
Mr Biggs said he expected much more gas would be discovered in the basin, with Warrego and partner Strike Energy drilling more exploration wells.
Strike Energy chief executive Stuart Nicholls said the new domestic gas ruling in WA had possibly scuttled hopes of a pipeline, although the WA market provided plenty of opportunity anyway.
“We see a hole emerging in the WA gas market; it starts in about 2022 and gets much larger by 2027,” he said.
Domgas Alliance WA spokesperson Richard Harris said the alliance supported Mr McGowan’s rule clarification.
Mr Harris said while there was a shortage of gas on the east coast, industry could move west to WA.
And there were plenty of businesses exploring developments that may use gas, he said.
Mr Barnett warned the state’s policy could face a constitutional problem, with free trade between states guaranteed.
Gas power represents about 18 per cent of generation capacity in the east coast’s National Electricity Market, and about 8.5 per cent of production, according to the Australian Energy Regulator.
Unlike coal, the fuel can be used for baseload, mid merit and peaking generation, meaning it can be used to firm up intermittent renewable power.
Pipeline gas also has about 50 per cent lower emissions than coal.
However, there’s a strong mood against the gas industry in the east, with onshore projects banned in some jurisdictions.
Nationally, Prime Minister Scott Morrison has elevated gas to be a centrepiece of his energy policy in recent weeks, as the government adopts an increasingly interventionist stance.
Government-owned Snowy Hydro will assess options for gas-fired electricity generation in the Hunter Valley if private businesses don’t press go on 1,000 megawatts of new dispatchable capacity by April 2021, Mr Morrison threatened.
The announcement also included moves to unlock gas basins on the east coast, a pricing hub and a gas pipeline infrastructure plan.
That infrastructure plan could include a book build, the government said, opening the door to offtake deals to underwrite new investment.
